When it comes to what the global sharemarket recovery means, it all depends on whom you listen to.

Some commentators argue that things are looking pretty good for shares, while others contend that those who have been bidding them up have got it horribly wrong.

Several matters may assist decision as to which of the opposing parties have called the market the right way.

These include (non-exhaustively):

• Interest rate outlook
• Fiscal policy effects
• Productive capacity utilisation
• Credit supply and demand

Let’s start with what a couple of hedge fund managers think, because they have the latitude to buy or short sell shares depending on whether they expect markets to rise or fall respectively, or to revert to holding cash when they don’t have a clue either way.

A hedge fund manager with a positive view of shares is David Morrison, investment director of GAM Global Macro Hedge.

According to Mr Morrison, he is long in shares (meaning he has bought them) because the outlook for continued low interest rates and loose fiscal policy in major economies is encouraging for share valuations.

“We believe that the multipliers embedded in fiscal and monetary easing strategies tend to work if they are not disturbed – ie if there is no premature raising of
interest rates, no premature removal of tax cuts or public expenditure increases, and no significant rise in the price of crude oil.”

Mr Morrison did qualify his views by stating that the debt overhang in many economies – especially the US and the UK - would dampen the effects of easy money policies and simply stabilise debt levels rather than boost consumption and spending.

Nonetheless he concluded, “However, by and large I think that the multipliers will be effective.”

In other words, Mr Morrison believes share prices have a tailwind, thanks to government interventions.

By contrast, another hedge fund manager, Gordon Grender, investment adviser of the GAM North American Growth fund, was rather at a loss as to where sharemarket growth was meant to come from.

“It is surprising,” he said, “that investors have been content to look at earnings, which are relatively good but mainly because of cost-cutting.”

“There is no real strength in the [US] economy: bearings manufacturer Timken is operating at 35% capacity; electric motor transmission company Regal-Beloit has just revised its third-quarter year-on-year revenue forecast from -30% to -25% (yet is trading at an all-time high of 19x earnings); another company I spoke to recently – a manufacturer of lubricants for injection moulding – has seen its business fall off a cliff.”

“So I have been surprised by the buoyancy of the market – I possibly underestimated the fact that because interest rates are so low, people have been happy to stuff money into stocks regardless.”

“As far as I can see, there is not much value out there.”

In a way, Mr Grender’s observations agree with Mr Morrison’s: sharemarket valuations presently reflect low interest rates.

But from there divergence of thinking arises.

Mr Morrison is has a “macro” view of where sharemarkets are going in that the macroeconomic outlook for economies stimulated by fiscal and monetary policies should bolster companies and therefore their share prices.

Mr Grender by contrast has a “micro” view in that despite macroeconomic effects he believes that the fundamentals of individual companies simply cannot justify the expectation that stimulus policies are the rising tide that can keep on lifting all sharemarket boats.

In particular, the low capacity utilisation of US companies that make products normally expected to enjoy supportive demand from other manufacturers – bearings, electric motor transmissions, and injection moulding lubricants – instead suggests they might as well take a long holiday.

Share price multiples currently prevailing do not represent “value”, maintains Mr Grender, meaning that shares cannot be bought at worthwhile price discounts to the embedded value of their underlying company’s assets and prospects.

So what then of credit, which is the ultimate lubricant upon which companies run?

Here we must turn to the wisdom of the US Federal Reserve, which this month delegated to one of its board members the unenviable task of explaining how swimmingly the central bank’s attempts to stimulate the flow of credit were not going to the US Senate’s Subcommittee on Financial Institutions, a division of the Committee on Banking, Housing, and Urban Affairs.

Daniel Tarullo, the board member concerned, jumped through all the necessary hoops in his testimony to the subcommittee concerning the wondrous things the Fed has done to oil the wheels of commerce with credit expansion.

Nonetheless, he was forced to concede, “The results from the Federal Reserve's Senior Loan Officer Opinion Survey on Bank Lending Practices indicate that both the availability and demand for bank loans are well below pre-crisis levels.”

“In July, more banks reported tightening their lending standards on consumer and business loans than reported easing, although the degree of net tightening was well below levels reported last year.”

“Almost all of the banks that tightened standards indicated concerns about a weaker or more uncertain economic outlook, and about one third of banks surveyed cited concerns about deterioration in their own current or future capital positions.”

“The survey also indicates that demand for consumer and business loans has remained weak.”

“Indeed, decreased loan demand from creditworthy borrowers was the most common explanation given by respondents for the contraction of business loans this year.”

So creditworthy businesses in the US don’t want to borrow from banks right now and the banks themselves have a gloomier outlook on undertaking lending activities anyway.

True, a lot of larger companies have raised debt funding in the capital markets rather than go to banks to borrow, but the smaller ones who employ the majority of the labour force and provide goods and services to other businesses and consumers besides don’t want bank loans even if they could get them.

We come back to Mr Grendner’s argument about surplus capacity as a likely reason to explain the lack of appetite for raising business loans.

Mr Tarullo tried to put a positive spin on much diminished demand and supply for corporate credit when he said in his testimony, “Taking a longer view of cycles since World War II, changes in debt flows have tended to lag behind changes in economic activity.”

“Thus, it would be unusual to see a return to a robust and sustainable expansion of credit until after the overall economy begins to recover.”

The lag suggested by Mr Tarullo as currently applying to US corporate credit growth invites the question, “How long is a piece of string?”

Assuming that US economic conditions can be extrapolated to many other economies – including our own - the present bullish state of sharemarkets confronts us with contradictory signals:

• For high and rising share price multiples are loose fiscal and monetary policies (“macro” reasons)
• Against are extraordinary levels of idle production capacity and enduring weakness in business credit demand and supply (“micro” reasons)

The only certainty is that sharemarket trends do not yet vindicate either camp.