Joe Chidley: And what will happen when the wolf comes a-knocking?
Hey, look! Goldilocks is back, in the form of an economy that’s running neither too hot nor too cold. Or at least that’s how equity markets seem to be pricing it. Sure, GDP growth is slowing, but the upside of downbeat GDP reads is that inflation is moderate, at worst. And that means central bankers are backing off from their curmudgeonly talk of “normalization” and “gradual rate increases” and all that.
And who said the China slowdown was something to worry about? Not me! Chinese GDP growth beat expectations in the first quarter; retail sales and industrial production both grew by more than 8.5 per cent. Not surprisingly, Chinese stocks are well on their way to recovering everything they lost in a terrible 2018, and are now only three per cent down from the start of last year. All of the recovery has occurred in 2019: the Shanghai composite is up nearly 30 per cent YTD.
And yet, what should be of concern in this environment is the build-up of a kind of moral hazard, which Google helpfully defines as “lack of incentive to guard against risk when one is protected from its consequences.” Because across the board, in all of these recoveries from New York to Shanghai, you can detect the not-so-invisible hand of government backstopping the markets.
Speaking of Japan, the value of stocks and bonds held by its central bank is bigger than the country’s GDP. According to research by Nikkei Asian Review, the Bank of Japan’s exchange-traded fund holdings comprise almost five per cent of market cap on the first section of the Tokyo Stock Exchange, and by 2020 it could become the biggest shareholder in Tokyo-listed companies.
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