Fear of falling

Equities: Global equity markets appear to be at a tipping point. Since the cataclysm of early 2009, stocks have risen far on abundant money printing and expectations of economic recovery. But fears that recovery remains distant are now evident in slipping oil prices and a rising dollar as investors opt for the haven of US Treasuries. A panic equity sell off could easily happen.

The lowest close in 15 months in Japan's benchmark Nikkei index is a bearish sign. Japan might be seen as a symbol of one of the threats to global equities: policy exhaustion. Years of fiscal and monetary stimulus have not broken the deflationary stranglehold nor rescued the Nikkei, which is at only a quarter of its bubble peak 20 years ago.

The worst threat facing the United States and the west is the Japanese fate: a failure of stimulus so that economies and companies languish for years. If that happened, the Dow Jones Industrial index would probably return to its sub-7,000 lows of 2009, and could fall even more.

The long-held American belief that stocks, in the end, go up and make new highs, would be disproven. These are the dangers for stocks.

And at present, Japan-like tendencies are all too apparent in the US. Inflation is just 1.2 per cent despite global commodity prices which would once have been judged highly inflationary. The Fed’s abundant money printing has generated annual growth in the M2 money supply of only 2 percent. The question is whether the Fed’s expansion of the monetary base can counteract the damage done to the financial system and to consumers’ balance sheets by the bursting of the property bubble. The odds are that the Fed will succeed and that US growth will pick up in 2011. But fear looks dominant for now. Data today on US housing are likely to be the worst for over a year and won’t reassure. Until the economic figures convincingly show that the world is not heading for a double dip, it may be a case of look out below for global equities.