The US economy witnessed something that is stranger than fiction during the July-Sep quarter. Three main asset classes namely stocks, gold and treasury bonds witnessed double digit growth. This phenomenon is supposed to have occured only twice earlier in the last 50 years.
Unidirectional movement in prices of these asset classes is exceptional because of their different charateristics. Gold price goes up when there is a 'flight to safety', i.e. when the market is risk-averse. Stocks turn bullish when the market becomes comfortable with perceived risk. Movement in government bonds is a function of many variables including money supply (which of course impacts the other asset classes also), market's confidence in the government etc. In the case of US government bonds, China plays a crucial role in view of its vast accumulation . Of late, China has been airing its increasing discomfort with its possession of such bonds.
One factor that has contributed to this rare phenomenon is quantitative easing which has released excess liquidity. It is only a matter of time before the liquidity tap gets less open .
Reserve Bank of Australia has already taken the lead in reversing the quantitative easing. While increasing the key policy rate by 25 basis points on 6th Oct., RBA's governor said,
"In late 2008 and early 2009, the cash rate was lowered quickly, to a very low level, in expectation of very weak economic conditions and a recognition that considerable downside risks existed. That basis for such a low interest rate setting has now passed, however. With growth likely to be close to trend over the year ahead, inflation close to target and the risk of serious economic contraction in Australia now having passed, the Board’s view is that it is now prudent to begin gradually lessening the stimulus provided by monetary policy. This will work to increase the sustainability of growth in economic activity and keep inflation consistent with the target over the years ahead." Is he clairvoyant or overly optimistic? It is too early to say.
American economy grew by 3.5% in the July-Sep quarter after receding in the previous four quarters. This trend reversal also might have contributed to simultaneous growth in different asset classes.
It is now evident that we escaped a global depression despite the massive failure of the US economic system only because of synchronisation of liberal monetary policies in many economies. Since we are not known for co-operative behaviour, it is a moot question whether such synchronisation was a concerted action or mere coincidence.