Why Do Equity Markets Disagree with the Data?

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 |  Includes: DIA, GLD, QQQ, SPY, USO, UUP
by: Adam Hayes

Some of the smartest economists, traders, bankers, brokers, and academics are all screaming and yelling the same things: "This recession/depression is NOT over yet! This is just bear market rally! There are NO green shoots!"

And the data does support these beliefs. Retail sales and consumer spending remain muted as families increase savings and pay down debts.

Unemployment is not yet recovering, foreclosures are still rising while home prices are still falling. Commercial real estate is starting to falter in a major way. Oil and metals remain elevated while the dollar remains relatively weak. Banks are failing at a record pace and the FDIC is on the verge of insolvency. The government is auctioning debt at a record pace (and record % of GDP) while the deficit explodes. Banks are still NOT lending to small businesses or homebuyers nor to each other. Much of this data is also showing no sign of decelerating. Every week a new number comes out the revision for the previous always seems to go worse!

And the GDP numbers, when analyzed, show that government spending and issuance of government debt is keeping the economy from being much much worse. And what happens when BRIC countries stop buying our debt and dollars? The Ponzi scheme falls apart then? And what about diminished tax rolls both local and federal due to low employment and low corporate earnings!?

On these points nearly everybody agrees - the numbers don't lie and this is what has been and is going on right now. And yet the major stock market indices continue their march upward... not even sideways but upward indeed!

So, why do the equity markets seem to disagree with the data? What conclusions are the markets drawing, where many people including myself cannot seem to connect the same dots? Perhaps it was the the weakening dollar is causing inflation which would produce higher stock market prices (but not necessarily higher market VALUES). However CPI, PPI and other data suggest that inflation is nowhere to be seen (except maybe at the pump or the supermarket). So that can't be it. Right now the S&P 500 index is trading at a higher implied P/E than it has seen in ages! Maybe a record.. and this is when the consumer isn't spending!?

Even the credit markets don't entirely agree with what is going on in the equity markets - there is still a big disconnect, and generally speaking the credit market are the "smart guys," right?

Is this all just a gigantic short squeeze? The rally seems too widespread, intense, and prolonged for a squeeze which is generally a short-lived spike of panic and covering.

So please, share your insight. Because I am at a loss.