Wednesday, September 19, 2012

The Global Central Banks Keep Markets Buoyant

I've been attending a conference here in Boston sponsored by Citigroup that focuses on companies in the industrial space.

Companies like General Electric; United Technologies; and Danaher are all presenting to members of the investment community. My clients own stock in some of these companies, but even if I am not investing in a particular stock I usually learn from hearing a presentation.

The general mood of the conference is somber.

Many presenters are discussing a marked slowdown in their global business. Interestingly, although the recent attention of the financial community has been on Europe, most of the company managements that I have heard so far are very concerned about the emerging markets, particularly China.

Early this week FedEx chairman Fred Smith was blaming a sharp deceleration in Chinese economic activity as the primary culprit for FedEx's disappointing earnings release.  Here's what Fortune magazine reported:

FORTUNE – FedEx, the world's largest air package shipper, sounded the alarms this week on what many corporate executives have feared: China's slowing growth. The world's second-largest economy helped drive global growth when many other economies, including the U.S. and Europe, were still struggling from the global financial crisis.

FedEx CEO Fred Smith on Tuesday warned economic problems in Europe and the U.S. have slowed trade around the world. And he said the impact on China's economy is far bigger than what most observers have estimated. FedEx is a closely watched economic bellwether, as the volume of its shipments offer a broad glimpse of how economies are doing. Already, the company trimmed the amount of planes carrying shipments into the U.S.

Today, Eaton Corporation CEO Sandy Cutler also discussed the slowdown in China.

Eaton thinks that China's growth rate is only half of what the government is reporting, which would put it in the +3% range.  Not bad compared to the U.S., perhaps, but a far cry from the +9% growth rates of a couple of years ago.

And it's not just China.  Brazil and India are also experiencing massive slowdowns in their growth rates, largely because of government policies aimed both at slowing inflation as well as protecting local jobs.

Normally reports like these would cause moderately bullish investors like me to head to the sidelines.  But not it's not time to head for shelter just yet, in my opinion, because the world's central banks are engaged in probably the most radical experiment in monetary intervention that we have seen in modern times.

Last night the Bank of Japan followed the U.S. Federal Reserve in massively intervening in the credit markets in an effort to try to reinvigorate the local economy.  Here's the New York Times this morning:

TOKYO — The Japanese central bank moved to ease monetary policy Wednesday, saying it would buy larger quantities of government bonds and other assets, following the U.S. Federal Reserve in a show of resolve to shore up a shaky economic recovery. 

The central bank, the Bank of Japan, will expand its asset purchase and loan program by ¥10 trillion, or $126 billion, to ¥80 trillion, the bank announced after a two-day board meeting that ended Wednesday. The purchase program was also extended six months, to the end of 2013. 

The program aims to stimulate stronger economic growth by adding to bank reserves and driving down the cost of lending, prompting more money to flow through the economy.

The fundamentals ain't great, but the world's central banks have unleashed a tsunami of liquidity into the capital markets.

And if central banks want asset prices to go higher, it will be difficult to argue.