Just a few weeks ago, the consensus among money managers seemed to be that better days were ahead. Stocks had doubled off the March 2009 low, U.S. jobs numbers were reasonable, and it looked like the Federal Reserve could finally take its foot off the gas on monetary easing.
What a difference a few headlines can make.
Food prices are through the roof, chaos continues in the Middle East, and the nuclear crisis in Japan is compounding an already horrific quake and tsunami disaster. In the best of times, these are bad economic and news trends. After a surprising bull run for stocks, it’s a flashing “sell” signal to some.
“You’ve got to be myopic if you’re not at least concerned that there might be a major correction,” investing legend Carl Icahn told the Financial Times. Just a week before, Icahn gave back $1.75 billion in investor cash, saying he no long wanted to take risks with other people’s money.
Part of the problem, Icahn said, is the big unknowns ahead. The Federal Reserve this week stood firm on virtually zero interest rates, but an end to the easy money is set. The Fed has said repeatedly that it will let its latest $600 billion bond-buying program expire in June.
Bond giant Pimco pulled out of long Treasurys last week, a signal that fund co-founder Bill Gross figures easing will end on schedule. That also means he thinks that the bond bull market is over and that interest rates simply have to rise.
Icahn seems to agree. “Bernanke has done a brilliant job but he can’t hold interest rates down forever, and, in any event, he stops in June and we don’t know what happens after that,” he told the newspaper.
A reversal in U.S. rates, although perhaps a short-term shock trend for stocks, would be welcome in much of the rest of the world, where inflation already is roaring. Food riots have been common around the globe.
Inflation is finally showing up in the United States, too, at least at the wholesale level; the February producer-price index is up 1.6 percent in a month’s time. Food was up 3.9 percent; energy costs up 3.3 percent, largely on gas prices. It was the biggest gain for food since 1974.
The one-two punch of high oil and costly food risks a repeat of the oil shock of the 1970s in the developed world, says Harvard economic historian Niall Ferguson.
Made worse by overspending and money printing by the world’s central banks, the world now faces a “pretty inflationary scenario," he said.
“Best case, we're about to re-run the 1970s, only with Barack Obama instead of Jimmy Carter in the White House," Ferguson told CNBC.
As the Japanese struggle to contain the rising threat of nuclear disaster amid the humanitarian crisis, banking experts suggest that the effect might not yet be fully seen on financial markets. The Nikkei fell sharply, down 11 percent on the quake, then rebounded 5.7 percent on Wednesday.
However, Friday looms large in the minds of some. Global bank HSBC figures the government will move large sums of yen back into the country to keep liquidity higher, a process that lags by about a week, reports Ambrose Evans-Pritchard, international business editor of The Telegraph.
Losing Japan as a global creditor is a predictable trend that will be a major factor in any new crisis and test the developed world’s ability to escape its recent recession, Evans-Pritchard writes.
"I am afraid we are near (the) tipping point on global recovery," Simon Derrick BNY Mellon told Evans-Pritchard. "The fact has oil has not risen despite the latest events in the Mideast tells you a lot about growth in the second half of this year. All the inflation talk may fade away as in 2008." Oil trades now at $98 a barrel, down from nearly $106 the week before.
It was that week lag, as hugely indebted Japan pulls money home, that Yale University professor Robert Shiller warned of just a few days ago. Shiller told CNBC he wouldn’t be surprised to see an effect like what happened in 1995, after the Kobe earthquake.
“There was a huge worldwide stock-market drop a full week after that earthquake. That’s the kind of thing we have to worry about now,” Shiller said. If history repeats, the real decline in stocks is ahead.
“What happened? I think it was the news stories, the stories of human failure, of mistakes, that the Japanese government couldn’t handle that earthquake. It kind of created a different emotional atmosphere. It brought up reassessments of our general, basic outlook,” Shiller says.
How high does oil have to go to make a dent? Stock bull Bob Doll, chief equity strategist at money management firm BlackRock, figures it would take a near-disaster scenario — a massive crude-price spike.
“Regarding the U.S. economy, we do not believe oil prices have advanced to the point that they will derail the economic recovery. In our analysis, it would take another $20 to $30 a barrel increase before that would happen,” he told investors in a note to investors dated after the Japan quake.
The Fed seems remarkably calm despite it all. There was no mention of Japan in the latest statement, in which the central bank left the benchmark U.S. rate at virtually zero.
The economy is on a “firmer footing,” according to the all-important rate-setting committee of the Fed, the FOMC. Jobs haven't yet appeared, yet household spending was on the rise, a sign that things had improved and that its policies were achieving the intended outcome — confidence enough to fuel a rebound in the economy.
Interestingly, the Fed persists in claiming inflation is “subdued” at home despite rising commodity prices and unrest in the emerging world over food costs. Translation: No rate increase soon.
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