``One of the mysteries of human society is how we interact with each other. We’re an empathic species. When you have emotions, I see it in your face and I feel the same emotions. That means we kind of move as herds. And so when other people are getting excited and they are talking about the market, it gets me excited too. You can't stay above it. If you are human, you get drawn in. But then when the emotions start changing, you get drawn into that too. And the emotion does seem to be changing. It looks like we're at the beginning of a change in psychology”- Robert Shiller on the Housing Market, Yale Professor, Author Irrational Exuberance
Now the realization of a slowdown in the
Figure1: Merrill Lynch David Rosenberg: NAHB Housing Index vs. S&P 500
Analyst John Maudlin, citing
Since the world’s financial markets have been manifesting increasing degree of interconnectedness, the probability is that any significant downshifts in the
Now before anybody gets petrified by the prospects of a worldwide markdown of prices led by the
I say domestic because even as markets today have been strongly correlated, I think there will an eventual decoupling in the future from the trends of the US market, if one were to take into account the present cyclical phase of the domestic market cycle if not the region’s cycle led by Japan’s Nikkei.
Figure 2 Barry Ritholtz: 100-year chart cycle of the Dow Jones
Analyst Barry Ritholtz in his blog points out that since 2000, see Figure 2, the present secular phase of the US equity markets, as measured by the Dow Jones Industrial Averages, despite the recent uptick (in 2003) has been DOWN or has been in a BEAR market phase.
Besides, it takes a lengthy period of time of about 17-20 years for these secular phases to shift from peaks of overvaluation to the chasms of undervaluation. This suggest that any shift towards a new secular bullmarket in the
Figure 3 Yahoo!:
In the same context, we see in Figure 3 Japan’s Nikkei 225 in a declining secular phase for about 13 years, from peak-to-trough, as shown by the red arrow. Today, the Nikkei 225 has rallied from its 2003 low of about 7,600 and appears to be treading in a secular advance phase.
What this implies is that the Nikkei which is coming off from the pit hole in 2003 is unlikely to head lower or decline in excess of its previous depths but could possibly trade sideways (which translates into a pause in the advance phase) or decline marginally but not to exceed its 2003 bottom level (or present market cycle could suggest of an extended bottoming out) as the US markets tails off. These historical divergent paths as manifested by the valuations of
Figure 4: What you see depends on where you stand! The Phisix Cycle
In a same plane, the Philippine Composite Index manifests of similar transitional phases as shown in Figure 4. It took the Phisix about 10 years from trough-to-Peak to cap its advance cycle from where the Phisix skyrocketed from about 150 to 3,300 to gain by (take note)...21 times! Think about it; if a boom given the same magnitude as in the past would be replayed into the future, this should translate to a Phisix at 22,000! Impossible you say? Look closely at
Figure 5 Yahoo! India’s BSE 30
From a bottom of around 2,600
Booms are usually characterized by having new record high price levels. To quote Dr. Marc Faber in his book Tomorrow’s Gold (emphasis mine), ``The longer a trend has been in place, the more time will be required after the turning point before the changes are perceived, even if the new investment themes immediately enjoy a very powerful bull market.” In essence, it takes time (again!) for the investing public to realize a change in psychology which prolongs, deepens and intensifies the trend (see market action below).
This is not however to suggest or predict that the Phisix would hit 22,000, although given the cyclical aspects of the present market, such probability could not be discounted. My point is, if indeed I am correct to assess that the underpinning of today’s market cycle as thriving at a secular advance phase, sometime in the near future, the Phisix would most likely take out its recent high of 3,300. And like
Going back to the Phisix, since it peaked in 1997 alongside our neighbors and segued into its declining phase triggered by the ‘Asian Crisis’, the benchmark fell by about 70% to a bottom of about 1,000 in 2003 or in about 7 years. This makes the entire trough-to-trough cycle of the Phisix to about 17 years. Of course, our scant records could hardly be used as sufficient grounds to make a trajectory. But if history would do a reprise then we could about 6 to 7 years before the market tops out.
The Phisix today, like
In addition, I expect the market-supportive politically-motivated policies of global central banks led by the US Federal Reserves to maintain a continued lax or loose liquidity environment, since a significant segment of the world economy have been driven by the financial markets, through what we call the “wealth effect” or ``an increase in spending that accompanies an increase in wealth (in absolute terms), or merely a perceived increase in wealth (in relative terms), according to the definition of Wikipedia.org.
Another factor that could temporarily diminish the negative ramifications of the declining housing industry in the
Put differently, if the psychology of the investing public or if Wall Street remains inexorably tilted towards the purview of favorable market action, and most importantly if such optimism is backed by the wherewithal to do so, then the markets may, in defiance to these “negative” developments, continue to rise. And the likelihood of the continued provision of cheap capital gets closer by the day as signs of weakening in the
Of course, one would argue that US rate cuts would translate to an open admission of an ongoing US recession, as economist Gary Shilling notes ``With only one clear exception in the mid-1990s, central bank ease since the mid-1950s means the economy is in a recession, or will be within a few months” and that such would imply muted growth prospects for emerging market economies and in effect, would be baneful for its equity assets. However, it is my view that since markets have been propelled by liquidity in 2003 and thereafter, for as long as these liquidity injections remains voluminous enough to offset any intervening economic weaknesses, asset classes would likely find a floor and most probably start to rise anew. Where else would all these excess money go anyway? Although, inflation signals would likewise rear its ugly head anew overtime.
Finally, there have been increasing debates among the experts today tackling on the supposed decoupling of Asia from the