Photo: Bloomberg TV
Economist Gary Shilling sees a disconnect between the slowdown in the global economy and optimistic investors.In his latest Bloomberg View column, Shilling writes that investors are addicted to monetary and fiscal stimulus that governments of weak economies have been rolling out, even though the effectiveness of QE has been questionable:
“Economies and financial markets have become so dependent on monetary and fiscal bailouts — and investors so enamoured of them — that all seem to have forgotten the dire circumstances that continue to make these rescues necessary. Many market participants yearn for conditions that are so troubled that central banks and governments, be it in China, the U.S. or Europe, will be spurred to greater easing, with positive implications for stocks.
‘Conditions are so bad that it’s good for my equity portfolio,’ the thinking seems to be.
This almost total reliance on monetary and fiscal stimulus, with little regard for fundamental economic performance — except to hope that growth will be weak enough to spur more government action — is a new phenomenon. Until quite recently, there was strong faith in government action, but it was coupled with the belief that such measures would quickly re-establish robust economic growth.
…The search for a magic bullet seems to have been abandoned. The emphasis is now almost solely on the opiate of government stimulus, increasing quantities of which will probably be needed to keep investment addicts satisfied. The recent announcements of quantitative easing by the Fed and the European Central Bank have had a diminishing impact on the Standard and Poor’s 500 Index. And recent market actions suggest that QE3 may be a classic case of buy the rumour, sell the news.”
Shilling believes that global growth can only be restored once the private sector has finished deleveraging. He also writes that for now the Federal Reserve has damaged its own credibility.
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