By MoneyMorning.com.au
The stock market is a sideshow.
Let’s get this straight. Europe is in recession and at risk of a destabilising break-up of the currency union. The US is very close to recession. And the air is coming out of China’s property bubble.
In response, the stock market has rallied.
Despite all evidence to the contrary, the market still has faith in the authorities to do something.
It thinks Ben Bernanke is ready to push the button on QEIII (even though QEII produced only very short-term gains).
It thinks the European Central Bank (ECB) will soon print money in unlimited quantities to bail out Italy (even though it is blocked by treaty – and Germany – from doing so).
It reminds me of a passage from Gary Shilling’s book, The Age of Deleveraging from the chapter ‘Results of Denial’. The current environment reminds me very much of the situation of just a few years ago.
It’s incredible that after the subprime residential mortgage market started to collapse in earnest in February 2007, even as the woes spread rapidly to the rest of housing, and even as the crisis spread to Wall Street with the Bear Stearns bust in June of that year and threatened to sink the domestic and global economies, most forecasters remained in denial. In August 2008, eight months after the recession had actually started, the Wall Street Journal’s poll of 53 economists, including me (Gary Shilling – Ed) found that only about half believed the US economy was in recession and that most expected real GDP to rise from the fourth quarter of 2008 (it actually dropped 1.9 per cent).
Meanwhile, investors, policy makers, regulators and Wall Street leaders did not appear to understand the depth and breadth of the financial crisis. Every step of the way, they felt sure that the latest problem would be the last problem, that the latest bailout would solve all difficulties and no more would be required. They weren’t really aware that it was a financial crisis driven by deleveraging. And the stock market, although a good measure of sentiment, was only a sideshow.
Sound familiar?
An enduring characteristic of human behaviour is to repeat past errors. Most people still don’t realise that what they’re seeing is a breakdown of the monetary system that has sustained them (or their industries) for decades.
They think a few bailouts will rectify the problems. But it’s the bailouts that are making things worse!
As Gary Shilling wrote, the stock market is simply a measure of sentiment. In the scheme of things, it is only a sideshow.
Keep this in mind if you’re tempted to move back into the market in a meaningful way.
Greg Canavan
Money Morning Australia
Editor’s note: Greg Canavan is the foremost authority for retail investors on value investing in Australia. He’s the former head of Australasian Research for a major asset-management group and a regular guest on CNBC, Sky Business’s ‘The Perrett Report’ and Lateline Business. Greg shares his insight, ideas and investment recommendations with readers of his Sound Money. Sound Investments newsletter…