The enormous sums that are sitting on the sidelines in the US and Europe earning token returns are now flooding into stock and currency markets.
Accordingly, we are seeing strong rises in share prices across the globe, including a 1.3% rise in the Shanghai Composite index to a two-and-a-half-month high, leaving it up 13% on its 2010 low early in July.
As I pointed out last week before this latest share rise, the global mutual funds were overweight in cash by $US1.5 trillion, while US banks have $1.18 trillion in the Federal Reserve.
That money receives almost no return. It was simply being stored in cash because of fear of a double-dip recession, or something worse — another crisis in the global banking system.
However, it’s becoming clear that while US and European economies are not booming, they are making progress. And although China is slipping, the Chinese government seems to have the situation under control and the market hopes that China will ease monetary policy later in the year.
Accordingly, the markets believe the risk of a double-dip recession has abated. And as metal and stock markets start to rise, those with cash on the sidelines have to invest it or be left behind.
If this were to continue then it has a well-proven element of self-fulfilment. Those companies that need equity can raise it. With higher share prices and stronger balance sheets, businesses around the world step out with greater confidence employing people, and so on.
What world markets do not need at this stage is a major reversal such as a bank crisis or a sovereign debt default by Hungary or Greece. And, the longer-term problem of funding the mountains of sovereign and corporate debt — including bank borrowing — remain.
The bulls believe we are at the start of a new upward phase. For them to be right, we have to overcome the enormous future demands of the debt markets, which in time will suck money out of equities via higher interest rates.
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