Why world markets aren't about to crash

Thanong Khanthong’s analysis concerning America’s four battlefronts – the Ukraine crisis, ISIS militancy, Ebola and stock market bubbles – is educational but possibly mistaken on the stock market.
First, the stock market is purely a mirror of investors’ guesses on the economy. It is not a reflection of the economy. Warren Buffett has said that, if the stock market reflected the real economy and was rational, he would have been a pauper.
Second, financial analyst Jim Ricards’ forecast of a fall for US stocks in the 70-per-cent range was predicated on his belief that the currency system will collapse and that quantitative easing (QE) is ineffective. Both of these beliefs can be challenged. China might be the potential culprit to break the system, but, for reasons of self-interest, she will not do anything that would threaten to drastically reduce the value of her huge dollar reserves. So, in the short term, the crash won’t happen.
Third, QE has been a qualified success. Statistics on the US economy’s fundamentals all show reasonable improvement. The old idea that the Fed is out of ammunition is false, because a new round of QE could still be introduced.
The focus now is on whether the improvements are sustainable. Some members of the Fed believe QE might have to be extended. Sweden’s experience recently could persuade them not to drop QE too soon. The Swedish central bank thought the crisis was over and increased the interest rate to 2 per cent to arrest anticipated inflation. The recovery never came. Instead, a new dose of QE had to be injected.
Finally, the drop in the stock index after the economy has improved is a display of irrationality fuelled by punters’ fear of the QE tap being turned off and the Fed raising the interest rate to arrest inflation. This is a good example of why we shouldn’t use the stock market as our economic benchmark.
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