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  1. Wealth
February 27, 2012

Oiling the Wheels

By Spear's

All that is needed now is for growth to resume, and a bull-market will be in full swing

While interest rates are held close to zero as a necessary pre-condition to the various ongoing QE programmes – in the US, UK and EU – the recent returns on the stock markets have been stellar. Amid the ongoing sovereign financial train-crash, corporates (other than banks) have been particularly well-managed on all fronts.

Last year, the dividends paid out by the LSE amounted to £67.5 billion, some 4%+ of UK GDP; but then, nearly 50% of the LSE’s earnings are from overseas. All that is needed now is for growth to resume, and a bull-market will be in full swing, and the markets have even got a strong whiff of US recovery.

The stock-markets have shrugged off all the manifold risks lurking around our planet: they are impossible to quantify, so the markets have decided not to bother to attempt to calculate them, but to charge ahead regardless, in blinkers. It is hard to fault the stance given the negative returns on cash savings, until something nasty specific and quantifiable comes out of left field. The trouble with the “something nasties” is that they tend not to come singly but in battalions. And the dark clouds have got just slightly darker in February.

We begin with the price of oil, now up to $125 per barrel, based entirely on demand from outside the G7. Oil is today the world’s biggest threat to inflation, and a reappearance of inflation will be an end to the QE-era and back to the reality of real interest rates, and unaffordable mortgages for many already struggling.

The real driver of oil prices could be the stand-off between Israel’s bombers and Iran’s centrifuges, where Israel believes the open door on a hit-and-run bombing of the Qom’s facility is this June. Any such offensive action could light a match under the whole Middle East, given the state of Syria, Egypt and Libya.

The reality is that Israel will attack if they perceive a serious threat to their existence and the Americans and the west are powerless to prevent it, even if it were wise to do so, and to avoid being sucked into the consequences. Somewhere, oil could easily and quickly hit $200+ per barrel and put paid to any recovery. Given the erratic nature of Iran’s president, the omens are not good.

The eurozone crisis – the longest-running train crash in history – is far from over: the Greek bail-out may well not prove to be its nadir. The ECB’s sugar-rush of cheap money, about to be repeated, may well backfire, as the euro-banks still haven’t owned up to their losses, and the ECB may well just be financing long-busted assets.

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And the rest of the PIGS are all in the same black hole: no solution to the various structural imbalances within the monetary union has even been mooted. And a higher oil price would tip the whole rotten barrel over, including all the bailout non-arithmetic.

So, all hopeful eyes are on the US, whose federal debt is on cruise control to get to around 110% of GDP before the November election, on the back of Congress’s increased total debt agreement. Come the election, however, there will have to be UK-style cut-backs. The GOP cannot even find a straight white guy who goes to proper church to head up the removal of Obama, whose hold on a second term is slowly rising.

The problems are baked into the pie and will still be there whoever wins, but Obama still in the White House will not be good for the deficit or the economy, as he heads off to build an EU-style welfare economy, on debt. The US economy might well stall within the next year, especially with an unexpected nasty.

Then today’s surging stock markets really will take a tumble, as we find none of the global economic problems have really been sorted, especially the lack of growth, and we’ll be left wondering where and how the New Year euphoria came and went. It won’t matter for long-term equity investors, but the quick-yield seekers will be left knowing what a sucker-punch feels like.

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