Friday, November 15, 2013

Disconnected Stocks

Come up off your color chart
I know where you're coming from

Stock prices continue to distance themselves from economic reality. Bulls argue that because stock prices are forward looking, higher prices are merely a harbinger of future economic strength.

But bulls have been saying that for years. Their economic recovery perpetually remains just around the corner.

Meanwhile, policies aimed at stimulating business activity by 'wealth effect' techniques (i.e., drive stock prices higher-->make people feel richer/more confident-->cause them to spend more) appear to be losing whatever marginal effectiveness they may have had previously. Gauges of economic sentiment are disconnecting from stock prices. Small business optimism here:

Consumer confidence here:

What is driving stock prices? The relationship between central bank balance sheet levels and stock prices is obvious:

But now this relationship is disconnecting from GDP:

What happens when pent up market forces act to close the gap?

position in SPX

1 comment:

dgeorge12358 said...

If financial assets no longer work for you at a rate far and above the rate of true wealth creation, then you must work longer for your money.
~Bill Gross