``As a general rule, the public believes economic conditions are not as good as they really are. It sees a world going from bad to worse; the economy faces a long list of grim challenges, leaving little room for hope. We can call this the pessimistic bias, a tendency to overestimate the severity of economic problems and underestimate the economy’s performance in the recent past, the present, and the future.” Bryan Caplan The 4 Boneheaded Biases of Stupid Voters
A short discourse on the present market activities and momentum.
One odd development is that while Europe has belabored on Greece’s credit standings, where her CDS premium has run amuck, Europe’s stock markets appears to have diverged from Asia. Europe appears to have suffered lesser degree of losses, this week, in spite of the fears of a protracted crisis which risks a contagion.
In other words, in Europe the credit markets and equity markets appear to have decoupled. Yes I know, experts will assert that credit markets are smarter than the equity market counterpart. But past performance may not guarantee future outcome. Aside, market risks appear to have shifted to Asia. That’s based on this week’s activities.
Importantly even as most of the major European economies absorbed losses, the losses haven’t been broad based, as some nations like Norway, Denmark, Finland, Belgium and even the crisis stricken Greece (!!) managed to register modest gains. Moreover, the frenzied bullmarket momentum in some of the Baltic States and that of other parts of Eastern Europe remains streaking hot!
Greek Tragedy Or Comedy?
So the market and opinion pages have not been saying the same.
An analyst recently commented that austerity won’t be popularly embraced in Greece which risks political chaos. Perhaps. But it doesn’t mean that it shouldn’t be done. If a person ails, no matter how bitter the medicine or how inconvenient the treatment, these will have to be taken if the preference is to expect a recovery. To add, regardless of the choice inconvenience will prevail during state of ailment. But we aren’t talking of a person but of a nation state called Greece.
Hence, the issue isn’t about austerity. The issue is about austerity or reforms aimed at recovery under an independent Greece or under the wards of the European Union.
Yes, the Union may have to bend legal rules from the Stability and Growth Pact and may have to face the risks of moral hazard or a chain effect of bailouts among member nations, but as we have written, politics will govern. Politics that would encompass the preservation or the disintegration of the Union, where the direction of policies will likely buttress the former in spite of the costs of bailouts even at the risks of future dismemberment.
It’s rare to see officials to take on policies that have long term impact, as this would defy public choice economics, where actions of policymakers are most often associated with reelection goals.
Besides, austerity programs will likely undermine the socialist government of Greece, which should translate to a long term positive.
Yet a naughty part of me is toying with the idea that perhaps the Greek episode is being deliberately prolonged so as to extend the decline of the Euro against the US dollar.
In a world where everyone seems to hanker for a devalued currency, out of the prevailing mercantilist tendencies by global officialdom, a market based decline predicated on such adverse development, without intervention, could be part of the tactical operations. Could ECB’s Jean Claude Trichet be snickering behind the scenes?
Market Momentum And Will China Repeat Historical Patterns?
Many markets have broken trend channels (e.g. Euro and gold) or is situated at support levels (e.g. China’s Shanghai), this means that assuming market momentum persists without the interference from officials, then momentum suggests that for the interim, these markets could suffer from an extended malaise. Let’s be clear, no bubble bursting here.
Although, since some markets have technically been in oversold conditions, a bounce could be in the offing, perhaps by the coming week. However, the mid term momentum will likely translate to 1-2 months of consolidation (or downside) before a renewed upside.
In addition, in the US markets, as measured from the futures market, weak hands appear to dominate which further implies disappointments, according to the Danske Team ``The equity market is filled with investors who do not believe in holding equities long term, but who instead trade equities hoping mainly for a quick profit. This is reflected in e.g. the number of long speculative positions as a share of total open interest in the S&P500 futures market. Contrary to the norm, long speculative positions now account for 15% of total positions (down from 20% two weeks ago), something not seen since summer 2002. At that time the market corrected sharply, reflecting that the tech bubble had not fully deflated. Last week’s negative focus on the necessary Chinese and US tightening measures is thus probably a warning that equity investors collectively have little tolerance of disappointments, and that expectations for the global economy in 2010/11 have risen too high.”
Again this speaking from the context of market momentum in the assumption that markets will be left alone to operate by authorities.
Figure 8: BCA US Global Investors: History Rhymes?
Finally, this is an interesting set of charts on China’s markets, all of which illustrates how China’s market has endured from tightening concerns and how they responded after.
In the past two occasions 2003-4 and 2006-7, interim weakness eventually paved way for stronger markets. Today we are seeing the same phase of weakness.
According to US Global Investors, `` While the recent correction in China has been steep and swift, history suggests buying opportunities in the medium term. In early 2004 and early 2007, when tightening fears haunted investors in a policy environment similar to the current one, Chinese stocks underwent a sharp selloff for a couple of months and yet finished the year higher as investors realized the economy was not headed for a hard landing.”
In my view, in going against James Chanos, I’d say that China’s has ample room to inflate! And today’s weakness is a buying opportunity as the BCA chart suggests.
To be clear, it’s wrong to interpret a bubble to mean a peak of the cycle! Instead, Bubble is a process characterized by a boom followed by a bust.
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