No really, the news is good. Some of it is hard to understand. Some of may be built on the shakiest of foundations, but some of it really may provide reason to hope.
Let’s start with the shaky foundations. The FTSE 100 closed at 6098.65 yesterday, which is the highest level since the markets flirted with economic Armageddon back in 2008. So that, surely, is good news. Okay, let’s put yesterday’s little peak into perspective. The FTSE 100 has not exactly been as flat as a pancake in recent months, but perhaps it may be more accurate to say it was as flat as some of the voices will turn out to be in the film ‘Les Miserables’, about to hit the cinema. So yes, the index sits at its highest level since May 2008, but you could also say it is just seven points up on the level it reached in February 2011. The index has done well, but its growth has hardly been the stuff of boom.
Then again, maybe that is a good thing. A bit by bit increase is perhaps more sustainable than rises that come in wild daily movements. My doubts relate to why. Yes, I understand that p/e ratios are not especially high. Yes, I understand that dividends have had a fantastic run, and that in terms of providing income, equities currently offer a better return than bonds. And yes, I understand that the FTSE 100 offers exposure to economies outside the poor old UK and Europe.
My cynicism can be summed up pretty easily though. It’s the economy stupid! For as long as inflation outstrips rises in wages, and for as long as the UK’s main export markets look so challenged, I don’t see how such equity growth can be sustained. I can’t help but feel that two letter lie behind it all: QE. If QE is pushing up equity prices, then I repeat what I had said before. Central bankers may be blowing bubbles.
I move to the hard to understand. It is possible we have just had the most encouraging piece of news from China for a very long time. You probably know that the latest data on the Chinese economy, including the PMIs, have been positive. Evidence of recent weeks has suggested China is seeing a pick-up. But cynics say it can’t last. China’s growth is built on unsustainable investment, government spending, and that in any case there is a credit bubble in the making.
It is just that this morning’s good news is a different matter altogether. China’s exports rose by 14.1 in December from a year earlier, which is the highest growth rate since last May and almost three times greater than markets had expected. The growth surely has nothing to do with China’s own internal bubble-like developments. The growth is down to demand from outside China’s borders. This has to be welcomed. Even more encouraging, however, is that imports increased 6 per cent. Maybe the rise in imports is evidence that China’s attempts to put more onus on consumer spending creating growth is working. I can see how the rise in imports has occurred. The jump is after all consistent with what China’s government has been promising. I am so so unclear as to how exports rose so fast, however. My fear is that the surge in exports was actually down to some kind of blip. The hope is that China’s rise in exports is a symptom of strengthening economies elsewhere.
Let me conclude with what I see as the best bit of news. Germany is close to going on strike. And no, I do not welcome this because I am filled with schadenfreude. We are at that point in the economic cycle when we need to see wages increase, especially in the big export economies of Germany and China. According to ‘Spiegel’, the result of union disquiet is likely to be wage increases in Germany. The German paper quoted Frank Bsirske, the head of the Ver.di service workers’ union. He said that he is getting fed up with hearing how well Germany is doing. “That only applies to the well-off,” he said and added: “The gap between rich and poor has never been this wide, and never has the middle class felt this threatened.” See: Germany Gears Up for Big Pay Hikes
Let me finish on a controversial note. The problem of economic growth not leading to higher wages seems to be pretty much a world-wide thing. For individual companies, even countries, cost cutting can be a good thing. Globally it can destroy the means by which consumers can buy the products companies produce.
I am a great believer in the idea that different ideas work at different times. Back in the late 1970s union power got out of control and needed reining in.
Maybe right now, the global economy would benefit from a bit more union militancy.
These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.