Output falls by 6.1% in the US in the first quarter, more than forecasters expected. The US market rose.
Rumours swirl that maybe half of the 19 US banks being stress tested by the authorities will fail their test. The US market rose.
News filters out that the Chinese decline in output was bigger than feared, and the numbers losing their jobs higher. The Chinese market rose.
The world’s motor industry remains in deep distress. The markets rise.
The reason is simple. Interest rates have a very powerful effect. The authorities smashed the banks and the markets by their high rates and tight money, then they switched in blind panic to the lowest rates we have ever seen and started to print and pump money in to the system.
Savers and companies robbed of interest on deposits and short term government bonds have decided to take some more risk. Sometime the extreme monetary actions of the authorities will start to turn round the battered world economies. Markets look ahead.
Whether they continue on up or not depands on what the authorities do next. If the authorities want asset prices higher they have to carry on with easy money.
May 7, 2009
Its called market momentum where traders dont want to be the one who missed out on buying at the bottom. Therefore they all jump on board and the stock market rises.
Soon it will need positive data to move onwards rather than no negative data which seems to be the current driver. If more negative data comes out then the momentum will move back to selling.
Who knows which one is coming next!!!!
May 7, 2009
When we went to see our Financial Advisor (sic) at Nationwide he said that now was a very good time to buy shares because everything was so cheap.
Thank you for pointing out the reason for this rise.
I thought it was due to Gordon Brown’s genius.
May 7, 2009
Selling. There’s still too much debt sloshing about globally to be resheduled, and Govts are adding to the debt by trying to borrow out of political trouble with decreasing revenues for debt servicing. Gordon’s probably hoping for a Tom Bowling’s patch in the middle of the debt typhoon to recover some credibility – which is an indication of how detached from reality he is.
May 7, 2009
John, you are spot on. After the dotcom bubble burst in 2001 the Fed and the BoE slashed rates and kept them far too low. This meant the dotcom crash morphed into the real estate bubble of the mid 2000s. Now the real estate bubble has burst, big time, the authorities are desperately trying to reinflate the bubble for the third time. Trouble is, you can’t put new wine into old skins (if that doesn’t mix metaphors too much). Low interest rates stimulates risk taking and fiscal stimuli amplify mal-investment. At some point soon, inflation will spike up, interest rates will rise, risk premiums increase, bond yields collapse and then who knows what will happen to stock markets, pension plans and government borrowing.
May 7, 2009
There is something altogether inexplicable about the way the indexes and the “markets” seem to be moving. Is it at all possible that the indexes, and therefore the movement of markets relating to them are increasingly disconnected with and divergent from the realities of the overall economic situation? that is they only measure themselves, and not much else.
May 8, 2009
Demetrius
Your observation accords with the opinion of George Soros. I recently saw an interview with him (10/4/09 Techticker, he has a book out) in which he said that:
Markets do not tend to equilibrium;
Instead of accurately reflecting the underlying reality, markets always distort it – they are bias;
The bias / mis-pricing then feeds back affecting the underlying realities.
I think he has a point. Markets do crazy things but if you take a position against the momentum of the market it will overwhelm you (can’t buck the markets). At the moment the rise in markets feeds back creating bullish emotions which downplay bad news and underlying realities. Traders jump in not willing to be left out and thus further rises occur, which improves profitability of institutions holding stocks and so on. At some point it will correct (if the worst is not yet over) as reality bites but the problem is you do not know when the little boy is going to shout that the King has no clothes.
May 8, 2009
Well , they figure the bad news is out and there will be not much on that share for a while. A company’s shares go down after good news because we reckon that’s it for them for a while.
They are all speculating to make a bit of profit, to grow a savings portfolio. It is a market, that is why they call it a market, but Socialism does not understand it any more than Karl Marx did.
the trick is to watch it, like getting into a boat shifting on a choppy river – you wait until it is where you want to land and then go for it or get wet.
One should never buy shares in a company that depends on government to pay its bills on time, or is likely to go into liquidation for loss of sales, or is at risk of nationalisation. Otherwise, buy what’s cheap, grit your teeth and ride the wave but don’t forget to jump off at the top.
Does anyone have a formula to predict a top?