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Wednesday, August 10, 2011

Market rollover has little to do with U.S. fiscal problems

One of the most important rules of statistics is that correlation is not causation.  What this means is that just because two things happen one after the other (or around the same time) does not necessarily mean one caused the other.  If I cough and then thunder roars, that doesn't mean my cough caused the thunder.  A causal connection must be established before one can be connected to the other.  Statisticians, not surprisingly, have a name for mistakenly labeling correlation as causation: spurious correlation.

The stock market's recent drop has lead many commentators to assume that recent action (or, more properly, inaction) by the U.S. government in dealing with its precarious fiscal situation caused the stock market to fall.  That's not necessarily so.  Just because the two things happened around the same time doesn't mean one caused the other.

In fact, the stock market most recently peaked late last April, and has been in the process of rolling over ever since.  More tellingly, U.S. Treasury bonds have rallied strongly since our government failed to deal with its debt problems.  If market participants were scared about U.S. government debt, they'd be selling U.S. Treasuries and buying commodities and foreign assets.  On the contrary, commodities (except gold) have been falling and foreign assets have been tanking, and U.S. debt has been rising strongly.

No, the real reason for recent market drops is slowing global growth.  ECRI (the Economic Cycle Research Institute, www.businesscycle.com) started discussing a global slowdown early last May.  Do you think, perhaps, market leaders and ECRI saw the same data in late April when markets peaked and started rolling over?

Indeed, recent economic data has been confirming that global growth is slowing.  Most interestingly, growth has been slowing markedly in China--which has been by far the biggest engine for global growth over the last 3 years.  At the same time, inflation numbers coming out of emerging markets, especially China, have been frustratingly high.

I don't think markets are reacting particularly strongly to government inaction with respect to U.S. debt.  I think they are reacting to slowing global growth, and that more closely explains why bonds would be up and stocks and commodities would be down. 

The unique exception here is gold.  Gold is rallying strongly, probably because gold market participants expect the governments of the world to react to slowing global growth with more stimulus (spending borrowed money and printing currency).  Either bond markets or gold markets are wrong, although I can't say I know which. 

What I do know is that tanking markets are a big opportunity.  Contrary to popular belief, it's better to buy investments when they get cheaper, not when they get more expensive.  With that in mind, I'm hoping that markets tank and serve us up some super-bargain pricing!

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

1 comment:

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