Japan's 7% market jump is fear disguised as greed
Well, there are lots of reasons why but none of them are really good.
Here's a list of the main ones analysts and reporters are citing:
- Japan's stock market got caught up in a wave of Asian optimism after China pledged more state relief for its slowing economy. The Ministry of Finance said that it would "accelerate the implementation and improvement of proactive fiscal policy and related measures."
Fine, but other stock markets, even in China, didn't see the same huge boost as Japan. The Shanghai Composite only moved up 2.3% on that one.
- Japanese companies will be able to make more money soon. Japanese prime minister Shinzo Abe said he would slash corporate taxes 3.3% next year.
Ok, but this has been a stated policy since 2014, as the Financial Times points out. Also, 3.3% doesn't immediately sound huge.
- The US Federal Reserve might listen to the opinion of the World Bank and delay a rise in interest rates that had been pegged for September. World Bank Chief Economist Kaushik Basu said the outlook for world growth was too uncertain, so the Fed should delay. This will keep financial assets like stocks at high valuations.
Yes, but it might not too. US unemployment has shrunk down to 5.1% and a central bank trusts that statistic over the stock market to indicate where economic growth is going. Also Basu isn't the first to advocate a delay and won't be last.
Maybe it is one of these driving factors. Maybe it's all three. But either way the market is signalling distress.
Although it's nearly impossible to accurately price what news does to markets, looking at these stories you would have a gut feeling that they don't deserve the Nikkei 225's biggest one-day gain since 2008.
The move up is the sixth-biggest on record in terms of points according to this Bloomberg graphic:
European markets are also soaring on Wednesday, piggy-backing on the Japanese market hike. Here's the EU Stoxx 50, an index of Europe's biggest companies, which is currently up 2.25%:
On most days, the two animal spirits of the markets - fear and greed - are more or less balanced out and subdued. When one takes over, in this case greed, it shows an imbalance.
This time the greed is driven by a fear of missing out.
When it comes to stocks, it's based on an expectation that the twin engines of government intervention - low central bank interest rates and China's government pumping hundreds of billions into its currency and stocks - will either carry on or that you can get out before they sputter out.
There's a real fear that caution will lead to missing out on all this free money, prompting people to buy and be greedy.
But no-one can really tell what the effect of this unprecedented stimulus will be, or when it will stop.
The "stock markets are up because stock markets are up" feedback loop shows a high level of speculation, which is itself a sign of an asset bubble.
Speculation is buying something on the hope you can sell it to someone dumber for a higher price the next day, even if you don't really think it's worth the money you paid for it in the first place.
This greed usually turns into fear, and panic selling, when everyone realizes there are fewer dumb buyers out there than they thought.
The emotions are two sides of the same coin. So when you see greed and 7% stock market jumps, think fear.