Best of the Week
Most Popular
1. Gold Final Warning: Here Are the Stunning Implications of Plunging Gold Price - P_Radomski_CFA
2.Fed Balance Sheet QE4EVER - Stock Market Trend Forecast Analysis - Nadeem_Walayat
3.UK House Prices, Immigration, and Population Growth Mega Trend Forecast - Part1 - Nadeem_Walayat
4.Gold and Silver Precious Metals Pot Pourri - Rambus_Chartology
5.The Exponential Stocks Bull Market - Nadeem_Walayat
6.Yield Curve Inversion and the Stock Market 2019 - Nadeem_Walayat
7.America's 30 Blocks of Holes - James_Quinn
8.US Presidential Cycle and Stock Market Trend 2019 - Nadeem_Walayat
9.Dear Stocks Bull Market: Happy 10 Year Anniversary! - Troy_Bombardia
10.Britain's Demographic Time Bomb Has Gone Off! - Nadeem_Walayat
Last 7 days
Stock Market Crash Edition - 26th Mar 19
Handy Ways to Boost Your Home Income - 26th Mar 19
US Treasury Bond Yield Inversion and Political Fed Cycles - 26th Mar 19
Golan Heights Oil all about the Shekels - 26th Mar 19
Falling Yields a Catalyst for The Gold Catalyst - 26th Mar 19
Can We Lock Up Rachel Maddow Now? - 25th Mar 19
Real US National Debt Might Be $230 Trillion - 25th Mar 19
Friday's Stock Market Sell-Off - New Downtrend or Just Correction? - 25th Mar 19
20 Days Left to Find Buying Opportunities In Gold - 25th Mar 19
Will the Historic Imbalance in Gold Stocks to Gold Price Resolve ? - 25th Mar 19
EasySMX Wireless Games Controllers Review - 25th Mar 19
Stock Market Short-term Top - 25th Mar 19
UK Population Growth - Latest ONS Immigration Statistics and Consequences - 24th Mar 19
The Fed Follows Trump's Tweets, And Does The Right Thing - 24th Mar 19
Yield Curves, 2yr Yield, SPX Stocks and a Crack Up Boom? - 24th Mar 19
Risk/Reward in Silver Favors Buying Now, Not Waiting for Big Moves - 23rd Mar 19
Similarities Between Stock Market Today and Previous Bull Market Tops - 23rd Mar 19
Stock Market DOW Seasonal Trend Analysis - 23rd Mar 19
US Dollar Breakdown on Fed Was Much Worse Than It Looks - 23rd Mar 19
Gold Mid-Tier GDXJ Stocks Fundamentals - 23rd Mar 19
Which Currency Pairs Stand to Benefit from Prevailing Risk Aversion? - 23rd Mar 19
If You Get These 3 Things Right, You’ll Never Have to Worry About Money - 22nd Mar 19
March 2019 Cryptocurrency Technical Analysis - 22nd Mar 19
Turkey Tourist Fakes Market Bargains Haggling Top Tips - 22nd Mar 19
Next Recession: Finding A 48% Yield Amid The Ruins - 22nd Mar 19
Your Future Stock Returns Might Unpleasantly Surprise You - 22nd Mar 19
Fed Acknowledges “Recession Risks”. Run for the Hills! - 22nd Mar 19
Will Bridging Loans Grow in Demand and Usage in 2019? - 22nd Mar 19
Does Fed Know Something Gold Investors Do Not Know? - 21st Mar 19
Gold …Some Confirmations to Watch For - 21st Mar 19
UKIP No Longer About BrExit, Becomes BNP 2.0, Muslim Hate Party - 21st Mar 19
A Message to the Gold Bulls: Relying on the CoT Gives You A False Sense of Security - 20th Mar 19
The Secret to Funding a Green New Deal - 20th Mar 19
Vietnam, Part I: Colonialism and National Liberation - 20th Mar 19
Will the Fed Cut its Interest Rate Forecast, Pushing Gold Higher? - 20th Mar 19
Dow Jones Stock Market Topping Pattern - 20th Mar 19
Gold Stocks Outperform Gold but Not Stocks - 20th Mar 19
Here’s What You’re Not Hearing About the US - China Trade War - 20th Mar 19
US Overdosing on Debt - 19th Mar 19
Looking at the Economic Winter Season Ahead - 19th Mar 19
Will the Stock Market Crash Like 1937? - 19th Mar 19
Stock Market VIX Volaility Analysis - 19th Mar 19
FREE Access to Stock and Finanacial Markets Trading Analysis Worth $1229! - 19th Mar 19
US Stock Markets Price Anomaly Setup Continues - 19th Mar 19

Market Oracle FREE Newsletter

Stock Market Trend Forecast March to September 2019

Hunt for Stock Market Juncture Inflection Points

Stock-Markets / US Stock Markets Oct 30, 2007 - 08:32 PM GMT

By: Brady_Willett

Stock-Markets Best Financial Markets Analysis ArticleThe GM and Ford debt downgrades in 2006, the Amaranth blowup, the mini-market crash in China in March 2007, and the subprime debacle/credit crunch that started in July. The common theme following these and other events was that the U.S. equity markets quickly rebounded following a brief period of heightened investor fear.


Along with the buy-the-dips theme in U.S. equities, other asset classes have proven equally resilient to short-term shocks.  For example, since crude oil first topped $60/barrel in 2005 and the price of copper quickly doubled in late 2005-early 2006, calls for a commodities-‘bubble'-blowup have repeatedly arrived during every price correction.  But commodities prices, and in particular crude oil at $90+ barrel today, continue to increase, with the CRB index currently sitting near record highs.

The obvious danger following many years of financial market ‘resiliency' is that investors have become complacent; that investment decisions supposedly based on realistic assumptions of future returns are instead being composed by a myopic glance at the historical ledger.  To wit, is it realistic to surmise that developed nations that previously benefited from housing prices essentially doubling from 2000-2005 will be able to grow as smoothly with those same housing prices poised to decline? Moreover, is it rational to watch emerging markets go from being ignored by the global investing community to cherished and in many cases comparatively overvalued (to developed nations) and still expect spectacular EM gains in the future? Finally, is it wise to gaze at the slow-motion breakdown of the world's largest economy and still remain super bullish on commodities?

Suffice to say, as an increasing amount of seemingly intractable macro gambles get played out across the financial spectrum drawing conclusions about potential inflection points for asset prices and economic activity becomes exceptionally difficult. Even so, it is highly doubtful that sublime madness has transcended historical precedent and rendered recessions and bear markets obsolete.  In other words, while Mr. Inflection is unlikely to shimmy down your chimney and hand you a check for being a good market seer, that shouldn't deter the investor from asking when, not if, the good times will end, and what contrarian opportunities will inevitably arise.

“The central question now is whether the global economy is at an inflection point.” IMF's Rato

A central question that while untimely, has been a prudent one to ask for more than two years…

Questioning Blissful Ignorance

Few analysts and money managers focus on the fact that the U.S. economy and financial markets continue to underperform most of the world.  Rather, apparently all that matters today is that stock prices are rising.

“It is astonishing to me that the subprime-/housing-induced inflection point in credit, from credit expansion to credit contraction, continues to be ignored by market and economic bulls.”  Kaas

Astonishing or not, the U.S. has proven capable of functioning somewhat happily with its debt quagmire and credit addiction by weakening its currency from a position of strength. Is the world being conned (forced?) into playing the ever weakening U.S. dollar hegemony game?  Can U.S. policy makers and investors alike continue down their current paths without stoking inflationary pressures? Is it really rational to conclude that the Fed can adroitly contain a deep recession in the housing market, that corporations can continue their hot earnings streak, and that the U.S. consumer can continue to borrow their way to prosperity?

Answers That Haunt

The bullish story maintains that equity gains will nullify the wealth destruction in real estate, corporations will benefit from the weaker U.S. dollar, and the U.S. consumer will continue to spend thus defying the slow down odds. Combine these outlooks with years of ‘resiliency' in the financial markets and global economy and the rosy conclusion is that ‘rationality' is overrated.

Unfortunately it is this optimism-resiliency-optimism loop that could prove both dangerous and irrational.  Thanks to recent financial market gyrations - movements that are actually being applauded by many economic/market bulls - it is not inconceivable today to imagine a world breaking free of U.S. dollar hegemony; a world that moves into newly emerged markets during times of crisis rather than into U.S. based assets.  Given the U.S.'s recent dependence on foreign capital, asset bubbles, and financial market premiums to sustain economic growth, it is wholly irrational to cheer underperformance of the U.S. economy and financial markets as this trend threatens to rob the U.S. of its ultra-important safe haven status.  Quite frankly, as the U.S. Fed acts alone in desperately cutting interest rates equity investors should be concerned that something is serious amiss.

Instead investors and analysts bask in the U.S.'s resilience; they yell for bailouts and cheer larger than expected write-downs, while at the same time incessantly speculating on housing/financial stock bottoms. This eerie confidence doesn't appear to be in reaction to the deteriorating fundamentals, but born from years of conditioning.

Conclusions

With an estimated $2+Trillion of capital being deployed with unknown amounts of leverage by hedge funds, sovereign wealth funds entering the financial market fray, and individuals increasingly apt to make adventurous capital decisions from both an asset class and geographical perspective, identifying the exact spark that ignites lasting damage to bullish investor sentiment is difficult to do.  Quite frankly, in today's new age of resilience the expected oscillations between investor complacency and fear have been permanently modified, or so we have been led to believe.

Before accepting any new investment order, it is worth recalling that although the U.S. stock market mania started to crater in 2000 and the U.S. recession arrived in 2001, it was not until 2002 when the majority of ticker chasers finally gave up and pulled money out of U.S. mutual funds en masse. A similar outcome may well be in the cards today, with the so called ‘inflection point' for the U.S. economy arriving well before average investor dramatically alters their investment approach.

As for when Mr. Inflection will enter the building, not withstanding the seemingly intractable gambles being played across the financial markets today, there is ample evidence to suggest that this moment already arrived for the global economy in July 2007. The delayed response by investors to Mr. Inflection's arrival isn't necessarily anti-archetype, but a product of resiliency conditioning.

By Brady Willett
FallStreet.com

FallStreet.com was launched in January of 2000 with the mandate of providing an alternative opinion on the U.S. equity markets.  In the context of an uncritical herd euphoria that characterizes the mainstream media, Fallstreet strives to provide investors with the information they need to make informed investment decisions. To that end, we provide a clearinghouse for bearish and value-oriented investment information, independent research, and an investment newsletter containing specific company selections.

Brady Willett Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules