Central bankers mean well. But, of course, good intentions do not guarantee good results.
Their intention since the start of the 2008 crisis has been to boost financial markets. They have therefore provided $tns of liquidity, which has indeed produced record highs in major stock market indices such as the S&P 500 and Dow Jones Industrials. As Ben Bernanke, Chairman of the US Federal Reserve said in January 2011:
“Policies have contributed to a stronger stock market just as they did in March 2009, when we did the last iteration of this. The S&P 500 is up 20%-plus and the Russell 2000, which is about small cap stocks, is up 30%-plus.”
The problem is that there is no clear link between developments in financial markets and the real economy. As the Washington Post notes, only the wealthiest 10% of the population own large amounts of stocks. Their retirement accounts are worth an average $277k. But middle income families have just $23k in their accounts, and poorer people nothing at all.
So record highs in stock markets do nothing to boost consumer spending for the vast majority of people. Whilst on the negative side, of course, record high oil prices actually reduce their spending. People have no choice about paying higher prices to heat their home and fuel their cars. So they have less to spend on everything else.
The chart of benchmark prices shows the result since the start of 2013:
• The Fed’s QE3 liquidity programme has taken the S&P 500 (purple line) up 10%
• But European prices for naphtha (black) and benzene (green) are lower
• China’s prices for PTA (red) are also lower
• And Brent oil prices (blue) are down 8%, as consumers reduce spending
• Only US polyethylene export prices (orange) are up, and by just 2.5%
The break in the correlation between Brent and other financial markets could well prove highly important, and dangerous to company finances, as the blog will discuss tomorrow.
But this is not something that will worry the central banks until it is too late. For the moment, they are popping the champagne corks as their stock market bubble continues to inflate.
Benchmark price movements since the IeC Downturn Monitor’s April 2011 launch, and latest ICIS pricing comments are below:
Naphtha Europe, black, down 26%. “Oversupplied market is finding some relief in what industry players described as a surprising appetite for naphtha in the Asian export market”
PTA China, red, down 23%. “Polyester demand slowed slightly this week because of the 3 day Labour Day holiday”
Brent crude oil, blue, down 18%
HDPE USA export, orange, down 18%. “Traders still waiting for producers to offer lower prices for May.”
Benzene NWE, green, up 4%. “Output had been curtailed throughout Q1 owing to low prices amid weak end user demand.”
S&P 500 stock market index, purple, up 18%