The answer to the question why the rally keeps going is contained within the chart above and the chart below. Unprecedented money printing by the world’s central banks has lifted markets throughout the world. When the PBOC attempted to tighten in May and June, look what happened to the rally:
Hungarian unemployment is dropping and so is inflation, but the economy remains weak with six quarters in a row of contraction. Hungary’s fortunes are tied to the Eurozone’s. As long as the Eurocrisis continues, Hungary will struggle to grow its economy.
Turkey is not as reliant as Hungary on the Eurozone for economic growth. Its economy has managed to expand since the Eurozone recession began, but the growth rate has been cut dramatically:
Inflation has remained stubbornly high despite a slowing economy prompting the Turkish central bank to raise its benchmark interest rate to defend the lira. The rate increase will surely crimp future growth, which may lead to further civil unrest.
China’s overnight repo rate is creeping up again, and rose above 4% for the first time since the first week of July. The PBOC attempted to the crack down on shadow banking until it realized that the unintended consequence of its plan was a burgeoning financial panic.
As the new rulers of China begin cracking down on corruption, a real estate bubble and industrial overcapacity, perhaps they should ask what will replace the economic growth caused by these inefficiencies. Like it or not, these dysfunctional practices support economic growth. What sustainable economic practices will replace the unsustainable ones as they are eliminated by the government?
On top of the huge price decreases in Cypriot real estate from the 2009 peak to the end of 2012 as illustrated in the chart, the market is continuing to slump with further decreases through the first and second quarters. The Cypriot economy still has a ways to tumble before growth resumes, which will limit bargain hunting in the sector.
The plunge in real estate prices will affect the bailout. Loans must be marked down as the price of collateral decreases raising the bank’s capital needs. The price tag to bail out the banks is rising, but nothing will be done about this until after German elections.
This article mistakenly attributes the May and June sell-off to Bernanke’s tapering comments on May 22nd, but our handy chart shows that the swoon was well under way by that date. The PBOC’s attempted tightening beginning in early May is what caused the sell off starting with the emerging markets and metastasizing throughout the world by June.
India’s currency is under control for now, but the RBI will be forced to raise rates a few more times between now and the end of the year in order to defend the rupee.
First time buyers are what really drives economic growth from the housing market. People upgrading their old residences already own much of the capital stock required to run a household, but new buyers must purchase lots of furniture and appliances to fill that new home. This is just another factor among the many that will limit the U.S. to sub-2% growth for 2013.