Parallel Universe: Booming German and French Stocks as Economies Stagnate

In a the world where central bankers have become demigods, the disconnection between the financial markets and the real economy have increasingly become evident.

From the Bloomberg:

The German economy expanded less than forecast in the first quarter and France’s slipped into recession, increasing pressure on the European Central Bank to do more to stimulate growth.

German gross domestic product rose 0.1 percent from the fourth quarter, when it fell a downwardly revised 0.7 percent, the Federal Statistics Office in Wiesbaden said today. Economists forecast a 0.3 percent gain, according to the median of 41 estimates in a Bloomberg News survey. The French economy contracted 0.2 percent in the three months through March after shrinking the same amount in the final quarter of last year.

The above data revealed in the charts below. [Charts courtesy of tradingeconomics.com and stockcharts.com]

 

The German equity market bellwether, the DAX, has been on an uptrend (upper pane) since October 2011 even when statistical economic growth peaked during the first semester of 2010 and continues to worsen (lower pane). Thus, the two year divergence can hardly be interpreted as anomaly.

Year to date, the DAX, as of yesterday’s close, has been up 9.55% even as statistical economic growth is at the borderline with the negative.

The French phenomenon seems even more elaborate.

The French equity market as measured by its bellwether, the CAC, has been on an uptrend along with the German DAX where both began to reverse near simultaneously higher during the last quarter of 2011.

Ironically, the French economy has been zigzagging mostly in the recessionary territory (lower window) even as the stock market continues to boom through 2012 (upper window).

Once again, the French economy has been reported above as enduring a statistical recession, but the CAC has been up 10.38% year to date as of yesterday's close.

The above has been exhibiting the unintended consequences of central bank policies.

The micro or the real economy continues to suffer from real economic obstacles (high taxes, more mandates, relative price distortions, regulations and etc….) which deters investments, but adds to the incentives generated by easy money policies in diverting capital towards yield chasing activities in the financial markets, where the latter have also been buttressed by central bank guarantees.

Such parallel universe is a sign of an unsustainable bubble in progress. 

For now we see a boom. Eventually we would either see a grand bursting of these bubbles that would likely lead to cascading wave of debt defaults or a currency crisis.