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The Real Economy Vs. The Financial Economy

Oct. 06, 2011 2:54 AM ETDIA, QQQ, SPY3 Comments
Keith Summers, CFA profile picture
Keith Summers, CFA

This quarter, the financial economy (interest rates, foreign exchange rates and stock prices) stopped being reflective of the real economy (profits, growth, and job creation). This isn’t the first time this has happened. Navigating these waters requires a different set of charts than what we normally use, but we’ve been down this road before.

There are two fears that haunt the financial economy right now: Fear of recession and fear of sovereign default.

Both of these fears are triggering a flight to US dollars that is creating both a tremendous buying opportunity in some asset classes and tremendous levels of volatility as bargain-hunters give way to panic sellers, and then more bargain hunting. A few quarters from now, the prices paid for assets in September 2011 will look like great deals. But, in the short-run, those buying decisions may seem hard to justify.

We are actually getting good news on the real economy side of the equation:

  • In the USA, the pace of layoffs is slowing and is below its long-term average; year-over-year retail sales are up over 7%; and corporate profits continue to grow.
  • The Baltic Dry Index, an indicator of global shipping demand (and thus of the overall level of global growth) has jumped in recent months and is at its highest levels of the year.
  • Chinese electricity production is up 12% over last year, consistent with its 10-year average growth rate indicating that the Chinese economy (a major driver of global growth) is still running on all cylinders.

So a recession seems unlikely, but the financial economy is sending different messages. Although sovereign debt is seen by many as toxic sludge, debt/GDP levels and economic growth rates will be ignored in setting exchange rates.

Change in Value of Currency in Sept ‘11

Debt/GDP Level[1]

IMF Growth

This article was written by

Keith Summers, CFA profile picture
Keith Summers, CFA has been managing the Tricoastal Capital funds since their inception in 2004. He has been managing institutional portfolios for 17 years in both the US and Canada following a career in banking and public finance. Keith's mantra, "there is always a bull market somewhere" guides his research into global equity and commodity markets where he uses a synthesis of quantitative and qualitative measures in selecting sectors for the Tricoastal Capital portfolio. Keith has presented at a number of industry conferences and appears regularly on television as a market commentator.

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Comments (3)

Asbytec profile picture
"At some point, the real economy will resume its rightful place as the driver of asset prices, but not for a while yet." Cool.
User 353732 profile picture
In an era of financial non being and economic reality it is no surprise that the fraudulent financial economy(a subset of the parasitic economy) is ascendant while the real, productive, wealth creating economy is descending.

Fortunately all lies are eventually exposed and die while economic, financial and moral verities triumph.
elvinkwokca profile picture
Turmoil yet to end, we just at phase 1.. maybe 12 more mths to go..
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