With crises boiling in almost every part of the world, the bottom should have fallen out of the major trading institutions long ago. However, experts say the markets have become disconnected from reality, and only a few blue chips offer secure ports in the storm.Harvey Jones reports
In any sane and rational world, stock markets would have crashed by now.
Just about anything that could have gone wrong has gone wrong, often in a spectacular fashion, yet markets obstinately refuse to fall.
Japan has suffered an earthquake so devastating it produced the biggest nuclear panic since Chernobyl and plunged the country straight back into recession.
Greece, Ireland and Portugal have choked on their debts and are now surviving on financial life support from the EU bailout fund, while Spain and Italy are nervously checking their pulses.
Crude for June delivery rose slightly to US$97.53 (Dh358.97) a barrel on the New York Mercantile Exchange on Tuesday. The Arab Spring has turned nasty in Libya and Syria. And to top it all, there's the US. As politicians fiddled over President Barack Obama's birth certificate a couple weeks ago, the once mighty US dollar is burning down to the ground. Adding to US misery, Standard & Poor's, the ratings agency, has done the unthinkable, placing a negative rating on the country's formerly invincible AAA rating.
Every way you look at it, global stock markets should have collapsed, but somehow they haven't. They toy with the idea, then reject it. One scrap of good news, a small shift in sentiment, and it's game on again. Can it last - or are we in for a bloody summer?
It's the end of the world as we know it, says Jeremy Batstone-Carr, the director of the UK-based stockbroker Charles Stanley.
"I'm feeling very apocalyptic these days," he says. "We live in extraordinary times. Wherever you are in the world, the US, China or Middle East, there is nowhere to hide. The US is surrendering its role as sole global superpower. The endgame is probably war and a rewriting of the global geopolitical map."
Forget Japan, Europe, the Middle East and the oil price. The big story is the decline of the world's reserve currency, the US dollar.
"The US is more than $14 trillion in debt," says Mr Batstone-Carr. "Its currency has been debased by the Federal Reserve's unconventional monetary policy, a combination of 0.25 per cent base rates, quantitative easing [QE] and its successor, QE2. It no longer has the strength or will to control political events, just look at the Middle East. All this is reflected in the plunging dollar."
While China, India and Brazil hike their interest rates, the US Federal Reserve is still hooked on cheap money. Unless it shakes its addiction, the US will complete its rapid journey from hyperpower to hyperinflation, Mr Batstone-Carr says. "Hyperinflation is typically caused by currency debasement. That's what happened in Zimbabwe and the same could happen in the US. Remember the Weimar Republic in Germany after the First World War? Things could easily get that bad. Many traders are already speculating on it."
Scary stuff, yet stock markets continue to rise regardless, floating on a sea of cheap money. "As the dollar falls and US interest rates stay low, the carry trade is booming as investors borrow money in dollars and invest in countries where they can get a better return," says Mr Batstone-Carr.
The result is that stock markets have become completely disconnected from the real economy. "The market is no longer a barometer of economic and financial well-being. You can't look at equity markets and say all is well with the global economy. It clearly isn't."
These are nervy times for investors. "There is a lot of worried money floating about, looking for a safe home. We prefer equities over bonds, but are looking for defensive stocks, paying a steady dividend yield of around 5 per cent a year. We are also keen on precious metals and are increasing our physical exposure to gold," Mr Batstone-Carr says.
Yet markets haven't completely lost touch with reality. Major global companies such as Apple, Morgan Stanley and Yahoo! have all reported profits exceeding analysts' expectations.
This has helped to drive the stock market resurgence, says Spencer Lodge, the Middle East regional managing director at the Dubai-based financial brokerage PIC deVere. "Large cap stocks such as Ford and Apple are crucial to the market and their recent positive results have offset wider macro fears," he says.
Share prices continue to climb the wall of worry, says Dan Dowding, the chief executive for the Middle East and Asia at Killik & Co in Dubai. "Aside from a couple of mild dips, markets have enjoyed a two-year uptrend and are clawing their way back to pre-recession highs."
Businesses have shed a lot of excess fat in the recession and are now much more lean and efficient. "Consumers are slowly beginning to regain confidence, and this has also driven equity prices," he adds.
There are some legitimate reasons for the stock market rally, says Tom Elliott, a global strategist at JP Morgan Asset Management. "Many of the problems we face are now known quantities. Take the eurozone. The end route is slowly becoming clear, although it is still some way down the line. The sovereign debt crisis will result in some form of fiscal union, probably starting with an issue of pan-European bonds."
The economic fallout from the Japanese earthquake has already been priced in. "First-half Japanese growth has been downgraded and we could now see a growth spurt due to restructuring, as Japan literally rebuilds the country," Mr Elliott says.
Even the US deficit and dollar decline is a known quantity. "A few months ago, people were expecting a double dip in the US, hence QE2. We've now had fairly decent data for the past five months, the recovery looks increasingly robust and first-quarter earnings were strong."
But Mr Elliott says the recovery has also been fuelled by some rather questionable activities. "It has been driven by loose fiscal and monetary policy, but that will soon come to an end. QE2 is set to end in June and everybody is waiting to see how stock markets respond."
What we definitely are not witnessing is the end of the world. "History isn't kind to apocalyptic scenarios. Even the credit crunch didn't end in Armageddon; stock markets have recovered brilliantly since then. But I do expect a volatile summer. The autumn could go either way: nobody can see that far ahead."
Mr Elliott agrees with Mr Batstone-Carr on one point: defensive blue-chip stocks are the things to buy.
Defensive stocks are companies that still make money when the economy is struggling. They include utilities (people still need to heat their homes), pharmaceuticals (they fall ill), food companies (they've got to eat) and sin stocks such as cigarettes (kicking the habit is hard).
Many also pay attractive yields of about 5 per cent, on top of any growth.
Bruce Stout, a veteran fund manager who oversees the Murray International investment trust, also favours defensives, including British American Tobacco, the Swiss food company Nestlé and the Swiss pharmaceutical group Novartis.
Mr Stout fears the global economy is running out of steam. Investors who thought they had glimpsed light at the end of the tunnel could be in for a shock. "It is more likely that the light is the freight train and it is coming straight for us," he says.
All eyes are now on the US, as Democrats and Republicans bicker over how to tackle the country's massive budget deficit, says Andrew Milligan, the head of global strategy at Standard Life Investments. "Tectonic plates usually shift slowly, but occasionally there is a jarring shock. Pressure is building in one of the world's most important markets, US government bonds. Dramatic changes are likely."
The US deficit is nearly 11 per cent of GDP, in line with the weakest European countries, while its debt-to-GDP ratio has reached a post-war high. If Standard & Poor's follows through on its threat to downgrade US debt, government and company borrowing costs will soar. "If overseas investors pulled money out of US assets, the dollar could weaken sharply," he says.
We should all hold on tight for a "dangerous" summer. "QE2 ends in June, and by August Congress must decide whether to increase the $14.3 trillion ceiling on US debt issuance. The discussions could be tortuous. There are very large policy differences between the Democrats and Republicans and either side could use the threat of a government shutdown to obtain concessions from the other."
If Washington reassures the bond markets by putting together a sensible fiscal austerity plan, investors will keep buying US Treasuries. "If not, they could suffer serious damage. The pressure is quietly building, potentially for a very large tremor in a few months time," Mr Milligan says.
Investors are certainly nervous, fleeing for the safe havens of precious metals such as gold and silver, driving gold above $1,500 an ounce for the first time.
So should we brace ourselves for a summer apocalypse?
Calling it the end of the world is a notoriously tricky business. Many have tried; nearly all get it wrong.
What we are about to discover is whether the growth of the past two years was grounded on a real economic recovery, or was it merely a bubble inflated by false monetary stimulus? It will be a nervous wait.
If the global economy is heading for another meltdown, stock markets don't seem to have noticed. That could soon change.