Market Rally and the Return of Irrational Exuberance 28 comments
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How much longer will the irrational exuberance of the current stock market rally continue? It is hard to tell but that it will end is certain.
Let us look at some hard facts: Q1 German industrial output fell 12 per cent, the worst fall since World War II; Q1 profits for S&P 500 companies fell 36.3 per cent; 539,000 Americans lost their job last month; Q1 Japanese trade crashed 50 per cent and even Q1 Chinese trade slumped 25 per cent. This is a global economic slump. These are not reasons to be optimistic about a quick recovery in the global economy or stock markets. This is the start of a downturn that will stretch on for years: 2012 for green shoots perhaps, not 2009, just a matter of months after the financial crisis. Why then the talk of green shoots? Get real: what is being seen is a typical inventory cycle. Recession hits and orders are held back. Eventually orders have to be placed for restocking, but that is not a recovery. Demand is still lower and probably will stay lower for a protracted period. You also find that after some months of recession a few individuals, and even companies, that still have cash decide to spend a little as they have over done the hair-shirt mentality. Again, that is not a recovery. It is also true that the massive injection of money into the global economy is no doubt having some impact, but is it doing any more than slowing the rate of decline and preventing systemic failure? Governments have never managed to expand economies on demand, why should they succeed in these circumstances? It expects more than can be delivered. Or consider the more immediate irrational exuberance over the US banking stress tests. Not only was the outcome a $75 billion hole in the balance sheet of the top 19 US banks – more than twice estimates only a week earlier. But everybody seems to have forgotten about what this means for the thousands of other US banks and financial institutions, and what about banks in Europe, Japan and all over the world. The true size of the total hole in global bank balance sheets is clearly in the trillions of dollars. Where then is the credit going to come from to fuel a recovery? Or more significantly, is this going to be sufficient in size not just to return economies to previous output levels, but set them on a growth course again? As Ronald Reagan once commented in another context ‘You ain’t seen nothing yet!’ as far as this recession is concerned. All the figures point to a continued downwards plunge, and if the speed of decent has slowed a little that is no reason for breaking out the champagne. There is no sign of a bottom yet or any reason to expect a swift recovery when it is reached. This truly is a time of irrational exuberance. Do you not see it?
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On May 10 10:05 AM Alphameister wrote:
> Most of this rally has been a highly rational relief rally amidst
> growing evidence that "the center has held" and we are no longer
> faced with the economic cataclysm an irrationally fearful market
> had discounted at the March lows. We are instead faced with a slew
> of huge economic problems that we'll need to muddle through over
> a period of many frustrating years. Quantitative easing cannot produce
> Nirvana, but it does seem to have prevented Armageddon. On top of
> this very rational relief rally there has been added a bit of "irrational
> exuberance" about the imminence of economic recovery and the health
> of that recovery once it arrives. Keep in mind, however, that when
> a stock doubles in price after a 90% decline, it still is down 80%
> from an irrationally exuberant peak and may still be greatly undervalued
> by rational standards. I have become more defensive lately, but I
> still find great fundamental bargains in today's market (especially
> within the Chinese market, which is backed by a much healthier economy)
> and I'm not expecting new lows this year.
Did he look up north ? In Canada for instance ? our banks are quite solid !!
> You can write this article AFTER the market rallies further and does
> an at least 75% retracement from the time it started crashing in
> 2008.Then it might have some relevance depending on the economic
> scenario at that point in time. Until then your cup half full mentality
> is missing the big picture. Look at where the market is compared
> to where it began the decline from and not the rise from the unnatural
> freak event of the March lows. No irrational exuberance here -- the
> market overcorrected to the downside and is now reaching a more appropriate
> level to reflect the reality of the economic situation.
Nonsense. All the technical indicators show that the market is currently overbought.
globaleconomicanalysis...
Current earnings do not justify current valuations, and there's no realistic chance earnings will increase enough in the near future to justify a rally to 75% since the slump began (in October 2007, mind you, not 2008).
A speculative bubble is not a sustainable rally.
The market can jump, but it can't fly.
Since you seem to be fond of quotes, here's one for you: "All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident." ~ Arthur Schopenhauer
I suggest you start buying guns, food and ammo. And don't forget toilet paper.
On May 10 10:00 AM Bingstone wrote:
> The market is looking for the economy 6-9 month ahead. The amrket
> was irrationally depressed. John Keynes: "The market can stay irrational
> longer than you can stay solvent", the feature of the market. Just
> deal with it.
On May 10 10:00 AM Bingstone wrote:
> The market is looking for the economy 6-9 month ahead. The amrket
> was irrationally depressed. John Keynes: "The market can stay irrational
> longer than you can stay solvent", the feature of the market. Just
> deal with it.
The bulls still can't argue against facts such as
Manipulated stress test results
Poor bond auctions
Rising oil
Rising inflation if government prints money
Rising taxes if government doesn't print money
Continued declines in home prices
Outsourcing of the jobs lost if they return in any form
Government can't create large deficits for infinity to prop economy
70K of the jobs added was government census
etc etc
The consumer will be hard pressed to have a V recovery. Its "Speculation" that the economy will be roses in 9 months. Look for the data you want to prove your bullish stance but its still very weak compared to what we know.
That being said, I don't think we retest the lows at all. I do think we will be back to these levels over the next year or so.
We all know that job losses will go from 550K to 200K over the next few months... its not bullish when theres no prospect of adding those jobs back. I wont fall for media spin.
An economy that has to grow by growing its deficit is not a long term plan.
US market is still the largest and money is to be made .
On May 10 11:37 AM InvestBaboo wrote:
> You can write this article AFTER the market rallies further and does
> an at least 75% retracement from the time it started crashing in
> 2008.Then it might have some relevance depending on the economic
> scenario at that point in time. Until then your cup half full mentality
> is missing the big picture. Look at where the market is compared
> to where it began the decline from and not the rise from the unnatural
> freak event of the March lows. No irrational exuberance here -- the
> market overcorrected to the downside and is now reaching a more appropriate
> level to reflect the reality of the economic situation.
I think that going forward, commodity-based export economies (which includes Canada) will outperform the US and the Eurozone.
On May 10 11:34 AM gaillje wrote:
> This guy will allways find his glass half empty !!
>
> Did he look up north ? In Canada for instance ? our banks are quite
> solid !!
> United states doing better than Europe? In the United States our
> recoveries are 'V shaped' unlike that of Japan, France, or Germany
> whose economies are bogged down by fiscal conservativeness, consumer
> frugality, social welfare programs, employer regulation, and higher
> taxes.
How exactly does calling the fact that there are no buyers for goods and services make someone a 'half full glass' guy?
No-one is trying to rain on your parade / sharade but you cannot "will" the market into existence and then point to the fact that more people are being convinced of its viability and have that make it so. That would be a bootstraps event of the first order and no amount of rah rah is going to change the fact that you cant pay off an overdue credit card with another one and come out ahead.
We dont let this thing DEFLATE a bit and we're in for miles of extra pain. If on the other hand you dont give a damn and are only in it (America) for the bucks, well then go ahead on and suck in all the fish you can find, party on down til your own 'ooopps epiphany', but dont try to squelch the voice of common sense, cuz waaay too many of us aint buyin it.