What Are The Markets Telling Us?
The reality disconnect between the markets and the economic news has become extreme. Consider the following headline:
Steep declines in the economies of three of the U.S.’s biggest trading partners — Mexico, Japan and Germany — underscored the severity of the global recession
On Wednesday, Mexico became the latest country to report a plunge in output. The country’s gross domestic product fell at an annualized rate of 21.5% in the first quarter
Mexico’s decline followed by a day Japan’s report that its economy contracted in the first quarter at a 15.2% clip, its worst performance since 1955. Last week, Germany said its first quarter decline in GDP, an annualized 14.4%, was the worst since 1970.
Contrast the reported huge plunge in GDP for these three countries to price movements in their respective stock markets:
Germany DAX Index
Mexico Bolsa Index
Japan Nikkei
Each country reporting huge declines in GDP has seen a 25% or greater increases in stock prices since the markets bottomed in March 2009. Besides the reported large contractions in GDP, there is a plethora of other negative economic headlines that suggest markets should be plunging rather than rallying. Consider a small list of some of the well known and seemingly insurmountable problems that the US and other major world economies face.
- massive unemployment
- potential downgrade of US credit rating
- declining asset values
- California insolvency
- plunging tax receipts
- massive deficit spending
- huge consumer and governmental debt obligations
- potential insolvency of major European and Asian nations
- declining incomes
- collapsing commercial real estate
- insolvent public and private pension plans
Judge a man by his questions, not his answers – Voltaire
Many of these problems seems beyond the point of solution yet the equity markets rally in the face of horrific news. Is this a classic bottom where all the bad news has been discounted? Have the markets correctly priced the fundamentals or is this just the mother of all bear market rallies born of false hopes and a deeply oversold condition? The only certainty is that no one has the answers.
My goal as an investor is to make profits and not argue with the markets. Governments seem determined to inflate equity and asset prices and money is being driven from the “safe” alternative of treasury bills yielding a fraction of a percent. Besides the standard long term allocation to gold and commodities, maintaining or increasing equity positions seems warranted. If major markets violate their March lows, the Armageddon scenario comes back in full force.