You may have heard of Malcolm Gladwell’s book from 2000 called ‘The Tipping Point’ where ideas, messages and behaviours spread like a virus to reach a boiling point. Right now, traders and investors are on alert for the tipping point in the sharemarket. Will the QE2 be that tipping point?
Is the jar half full?
Think of the tipping point as if you have a jar full of allergies. Let’s say that your immune system is the jar. If you have allergies (like hayfever) you won’t actually experience any symptoms until your jar is full (say when Spring arrives). Once the jar overflows, the sneezing starts.
It’s the same with the sharemarket. There are countless facts constantly swirling around in the jar. Then suddenly the sharemarket will catch onto a piece of news and the mysterious tipping point, the point of no return, will cause the jar to overflow.
Once that jar is full and overflowing, it’s difficult to get more facts into that same jar. Then the symptoms begin.
Theory of reflexivity
Just like the tipping point, there is the theory of reflexivity, which addresses the circular relationship between cause and effect. Billionaire investor George Soros is an active promoter of the relevance of reflexivity in economics. He calls the tipping point the ‘inflection point’.
The inflection point with the markets is the point of no return. That’s when the facts and circumstances are the same, but the view of the world is not the same. So when the view of the world changes, the sharemarket changes with it.
The inflection point: what to look for
Traders and investors are on alert for the inflection or tipping point with indicators like:
• the US dollar
• the US economy
• the European economy
• gold prices
• bond prices
• commodity prices and
• investment performance.
What they’re trying to identify is that last step just before the market finds its tipping point and then naturally levels out.
The QE2 stimulus
Intervention and stimulus from governments are like a temporary dam against the tipping point. However, once real demand starts to take over there will be no stopping the sharemarket. Unfortunately there’s no sign of that as yet. The sharemarket is waiting and watching for the reset button to be pressed by real demand which will potentially drive real recovery.
In the meantime, the US is moving towards printing more money to try and smooth the way through its current problems. This potential solution will be to use another quantitative easing program, which has been dubbed ‘QE2’.
Many argue that QE2 will be the inflection point for markets. QE2 looks to be asset inflationary, currency deflationary. So the question you need to ask is, what does this mean longer-term?
The QE2 impact on the Australian market
Investment analyst and entrepreneur Marc Faber thinks that global investment markets are heading for an “important turning point”. He says, “I’m ultra-bearish on everything, but I believe you’ll be better off owning shares than government bonds.”
While Marc Faber is referring to the US markets, there is no disputing that the Australian market is still highly correlated with the US market (ie it moves together with the US markets).
In other words, when the US sneezes, Australia still catches a cold… or hayfever!
So what does QE2 mean for shares? The expectation for another quantitative easing program in the US is seeing higher movements in bonds, equities, commodities and gold, but a lower US dollar. The program is an attempt to inflate the US out of its lacklustre growth. The market is betting that QE2 will occur and that it will result in asset inflation.
So the big questions still remain: when will markets reach an inflection point? And what impact will this have on your shares?
All I can suggest is, if you’re playing in the market, watch closely for any signs of confusion. The world is engaged in a new experiment where no-one can confidently say what the result will be.
And make sure you have tissues ready.
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May all of the victims rest in peace.