The blog's 6 monthly review of global stock markets highlights a very unusual pattern since global demand and chemical markets peaked on 29 April 2011, as the chart shows:
• Markets in developed economies have powered ahead with Japan up 24%, the US S&P 500 up 14%, the UK up 8% and Germany up 6%
• Markets in emerging economies have gone in the opposite direction with Russia down 24%, China down 20% and Brazil down 11%, whilst India is up marginally by 3%
• Meanwhile, the US 30-year government bond is up most at 26%
The rationale for this diverse performance seems to be:
• Demand remains very weak in all major economies, so export-orientated countries such as Russia, China and Brazil are suffering badly
• India is a more closed economy, so is less impacted by the loss of exports
• However Western markets have been influenced by the major central bank liquidity programmes, which have provided virtually free cash to investors
• They have therefore chased share prices higher just as in the dot-com and subprime bubbles
• More cautious investors, concerned over return of capital rather than return on capital, have instead gone to the safety of G7 government bonds
The history of Japan since its financial bubble burst in 1989 supports this interpretation. Every few years, a new premier has arrived who has promised to restore growth. This is what has happened recently since Abe was elected in December. Stock markets have routinely rallied 50% or more in response, as between 2003-7 when the Nikkei rose from 8000 to 18000.
But, of course, the political hype cannot hide the fact that Japan is now an ageing society, with the oldest median age in the world at 45 years. 45% of its population is now over 50 years, and so they only need replacement products rather than new. Equally, they have lower incomes as they move into retirement.
This is the same situation as in Germany, which also has a median age of 45 years and 44% of its population over 50 years. Other Western countries have similar age profiles, though not quite so extreme. Thus we can confidently expect the current market bubble to explode in time.
The tragedy is that the politicians, by failing to understand demographics, are creating a vicious circle. The liquidity programmes simply pile up more debt, to be repaid by the younger generation. So they will lose most, as their standard of living suffers in the future.