US bears retreat as America recovers

31 Oct 2013 91 month(s) ago

RevivalIndicators of bearish sentiment are low as the US economy sputters back into life. For Australian investors that will probably mean a lower currency, which suggests it is a good time to look offshore for options. But there are risks.

RevivalThe markets are convinced that the Federal Reserve and other central banks will keep pumping up the market. The sentiment in the American market, which spills over to the Australian market, is heavily linked to that. These graphs from FTAlphaville show that bearish sentiment is low:

Reserve Bank governor Glenn Stevens thinks the US is getting its economic act together, which could mean the quantitative easing will be tapered off soon. He told an investment conference in Sydney this week: “The biggest remaining problems are how to put the US budget onto a sustained long-run footing, and how to manage the exit from extraordinary monetary policy settings.”

That is likely to mean a lower $A. It suggests that now is a good time for SMSFs to look at investing offshore, both because of the prospects for the US stock market and the extra return that would come from a falling $A.

Max Walsh in the AFR argues that the high $A can be traced back to spill-over effects from quantitative easing programs in place in the US and Japan.

"Central features of these programs have been the reduction in Japan’s exchange rate and, in the US, domestic interest rates. These policies have increased capital inflows from these countries into Australia in the so-called carry trade.

"We aren’t the only economy affected. Emerging markets, notably India and Indonesia, took a heavy knock when the idea of tapering QE3 was canvassed back in May. However, the US authorities have made it clear that they are not interested in running a “cosmopolitan” policy that would take into account the issues facing other economies."

Stevens told his audience: “The good news is that we have had a dress rehearsal of what the beginning of tapering looks like, so we have a sense of the pressure points, and there is now a window within which to address some of them. It would be wise for policymakers to use that window.”

Walsh quotes Bank of America Merrill Lynch economist Michael Hartnett, who estimates that since US equities bottomed in 2009, central bankers around the globe have boosted liquidity by $US9 trillion. Over that same period the global economy has expanded only $US14 trillion.

That suggests that there is still extreme fragility in the global economic recovery, which is still reeling from the GFC. It will not take much for the fear to return and if it does expect bearish sentiment to start rising sharply.