Chinese to signal policy tightening and crash markets?

It is astonishing to see global stocks at an 18-month high, as though the banking crisis and credit crunch are history. Oil prices are also bubbling at $87 and copper high.

You can see this as a remarkable recovery, or back to teetering on the brink of a crash as markets stood 18 months ago. Have things really returned to normal? Or is this whole market edifice only sustained by ultra low global interest rates that are widely recognized as dangerous to the maintenance of stable economies?

China crisis?

Australia raised its interest rates this week. Something is definitely about to happen in China as the US backed off from issuing an attack on its currency policy. US bond rates have been moving up. This is Alan Greenspan’s ‘canary in the coalmine’ singing to us that a disaster is coming.

Long-term interest rates are market driven and have only one way to go, and that is up. Interest rates are key drivers for stock markets.

If you take the 18-year period from 1964 to 1982 the T-bond 10-year yield shot up from 4.3 to 14.4 per cent, and the S&P delivered just 42 per cent in almost two decades against high inflation.

That means stocks are likely to carry on disappointing investors as they have since this secular bear market started in 2000. Bonds are also going to be toast, and who could really think current yields are a good investment – you do need a good imagination to believe that.

Higher interest rates will also be very bad news for real estate, again an asset class whose high valuations is only supported by the low interest rates of our times.

Bear market rally

ArabianMoney cannot see how the Great Reflation can actually turn out to be more than a very long bear market rally, unless governments of the world decide to go for a Great Inflation. But having defeated another Great Depression the exit from emergency stimulus measures is very unlikely to be painless as market valuations are back to the dangerously high levels of 18 months ago.

Indeed, how could anybody possibly think that the end of the crash that happened 18 months ago could possibly have started 12 months ago? Markets can only recover that fast under artificial conditions and artificial conditions are by definition unsustainable.

Now comes the hard part. Cash, precious metals and short positions are the place to be, albeit the precise timing of this market event is still a tough call. But actually the longer this goes on the closer the end game must be.