It is always the same. Near the end of every bull market investors become convinced that the bull-run will never end: but of course it always does. At this time when most world equity markets continue to go to new highs one cannot but reflect on human frailty when it comes to investing. This is a phenomenon of the crowd, where markets are a net result of the emotions of millions of investors, so bubbles and market collapses will always be a feature of the market place.
The following diagram is borrowed from Harry Dent, an economist with a philosophy based on demographic trends as the leading indicators of economic activity. Dent’s diagram illustrates the naivety of investors when it comes to recognition of high risk in a market.At the moment investors seem convinced that the bull market will continue despite some widely available key… Continue reading
It is difficult to understand how the American stock market could shrug off reports of the latest United States economic data released yesterday. America’s first quarter economic growth has now collapsed to an abysmal annualized rate of 0.1% but the DOW had a record close. While the weather conditions over the recent quarter were very bad and no doubt contributed to the unexpectedly poor growth data, the sharp downturn raises real questions about the United States economy.
Was the reduced growth rate really due to adverse weather conditions? Maybe so but this flies in the face of other available data. Take for example data from MSI which has been… Continue reading
The equity market bubble continues with the unrelenting intent of central banks to continue quantitative easing. But how long can this bull market continue and is there a probability of a market correction soon? Consider the following.
The American equities markets are at an all time high and when one considers the weekly chart of the S&P 500 below, there is little indication that this trend will change. The RSI indicator is in an overbought position which in my view suggests that the trend in the S&P500 will continue. (I don’t subscribe to the generally held view of an overbought/oversold RSI as… Continue reading
This time it really is different. We now have historically low interest rates and central banks are printing money at unprecedented rates. It was assumed when central banks adopted quantitative easing that very high inflation would be inevitable. But while equity markets have certainly climbed to the point of a bubble, consumer prices have not followed and there is now some trepidation that the developed economies are now entering a period of very low inflation with even the threat of deflation.
The trend is particularly noticeable in the European Union where where annual inflation dropped from a low of 1.1% in September to 0.7% in October. This compares to a year ago when the inflation rate was 2.5%. Last week the ECB halved its interest rate to 0.25%. In the United States inflation is well below the Federal Reserve’s 2% target. Taking a… Continue reading
I was fascinated by a diagram in John Mauldin’s latest newsletter. The following is largely based on the article by Grant Williams in the Mauldin newsletter.
Successive tranches of quantitative easing have had less and less of a stimulatory effect on the United States economy and yet the diagram below shows the dependency of the United States economy on quantitative easing. This is a cycle which is now going to be very difficult to break without significant disruption to the United States economy with very significant flow on to the world economy. The United States economy and the markets are now dependent totally on the Federal Reserve.
What a dilemma! With its quantitative easing policies the Fed is now in a dreadful position. The Federal Reserve is dependent upon hope to extract itself from this cycle because its policy demands a fall in the unemployment… Continue reading
Despite the problems of a dysfunctional government in Washington and a negative reaction on most world markets, the Australian market and part of Asia, has defied the odds and had another positive day. Is this part of the honey moon period with the new government or is there real reason why Australian investors should be optimistic?
The monthly United States nonfarm jobs figures are due out tomorrow and it is likely that these will suffer as an aftermath of the Washington debacle earlier this week. United States markets are unlikely to take these figures lightly particulary since the decision on the debt ceiling now needs to be made by October 17. At this time a positive outcome for the debt ceiling seems unlikely with the Republicans emphasizing their position over Obamacare and the President not in a position to compromise after having an electoral mandate to implement… Continue reading
The failure of Bernanke to announce a tapering of quantitative easing last week was effectively a warning from the Fed that the United States economy is still not robust enough to remove monetary stimulus without causing economic damage. The market responded to Bernanke’s statement with a one day buying spree but it should have been a warning to investors to treat this market with caution. Since the exuberance of the market on the announcement day there have been three down days on the American market which have now wiped out the gains which accompanied Bernanke’s announcement.
It seems that the market can only focus on one thing at a time and tapering is only one of a number of issues which can strongly influence the markets. What about the debt debate? Investors seem to forget that between 22 July and 8 August 2011, the market… Continue reading
The decision of the United States Federal Reserve not to start the taper should be viewed as a warning and not an encouragement to join an ongoing bull market. Bernanke has in fact given investors a warning that the United State’s economy is not yet robust enough to reduce quantitative easing without significant risks.
Yes the bull market will be stimulated by this announcement but this market is driven not driven by growth but by quantitative easing from central banks and is further fuelled by the desperation of investors needing to find a reasonable return in this very low interest rate environment. Equities give a better return but are not without risk of significant capital loss, particularly in a “contrived bull market”. How many investors understand the risks?
While the continuation of quantitative easing simply confirms to investors that they should remain in equities this is a … Continue reading
Equity markets particularly in the United States are replete with speculative capital with more and more funds coming out of treasuries into equities. The equity markets must now be considered to be a bubble, since they are now stimulated, not by real economic growth but by the economic stimulus from central banks. The reluctance of the Fed to taper quantitative easing last night was disappointing and simply means that the equities bubble will continue to expand. But surely this is a dangerous situation because if the bubble continues to expand then the inevitable correction will be more severe?
This now poses a problem for the value investor. The equity markets in Europe and US are either at or close to new highs with valuations having little relationship to growth and it is increasingly difficult to find value in this market.
It appears now that the equity… Continue reading
The global economy is gaining momentum but it is only in America that economic growth is likely to be sustained. In the rest of the world there are continuing issues which threaten an economic recovery.
The European Union has failed to remedy the problems with its banks or to write down debts which cannot be repaid. After six quarters of recession, the European Union economy has begun to grow again but this growth is weak and due mainly to Germany while in France and the Mediterranean nations continuing economic reform is needed. There are now significant issues with unstable governments in most southern nations and this complicates the recovery process.
In China, recent indicators show an improvement in trade and industrial output, suggesting that the world’s second-biggest economy may avoid a slump. But there is little reason to expect faster growth because China has yet to make the transition from… Continue reading