The laws of Economics and Finance usually suggest when stock markets are at all time highs (as they are now), that the economy is in expansion; ie it is doing really well. This means unemployment should be at lows, and inflation is probably strong. It also suggests that interest rates are probably high in response to those two measures. But interest rates aren't high... Instead, interest rates are also at all-time lows, or negative in some examples (Switzerland, Europe, Japan).
As you might now see, the usual laws are out of wack - but why?
The following two charts will help explain this unusual phenomena;
This first chart helps explain the amount of extra money in the markets.
Since the Global Financial Crisis, major economies around the world have struggled with recession and fiscal austerity. European nations like Portugal, Italy, Ireland, Greece and Spain had enormous debt levels after decades of bingeing, and the governing European Central Bank put them on a diet. Part of the diet mean't massive spending cuts (fiscal austerity), which impacted on economic growth. The weaker growth flowed through to the diet consicious Germans, French etc... and the ECB had to act. So they cut interest rates, and when that didnt work, they bought bonds... lots of them, around €80b per month. This didn't just happen in Europe, it happend in Japan, the USA, England, and in the chart above - also Switzerland. Since the start of 2017, these central banks have around $15 trillion in assets, with $1.5 trillion bought since January 2017!
This second chart breaks down who has done what. The US Federal Reserve (purple) vs Japan (white), Europe (orange), and China (blue).
The US has by far pumped the most money into the system. They stopped doing so back in 2014, and that’s where Japan and Europe took over the buying. The purple line (US) plateauing just means they still own all those assets, and that money is still in the global financial system.
What's of interest now, is that the US Federal Reserve Chair Janet Yellen has indicated they wish to unwind their ‘enormous’ balance sheet. The purple line, which represents around $3.5 trillion would reduce through either bond sales or letting bonds mature. The effect would be taking the 'extra' money out of the market, which would cause the purple line to head south.
Less money in the market means interest rates would rise... as there is one less (significant) buyer. The next question is what effect this would have on stocks and other markets (like property etc). The Fed has to tread carefully, and start putting markets on a diet.
