Wednesday, August 02, 2006

Stock Market Action Foreshadows a Coming Crash?
Wednesday, August 2, 2006
U.S. stock markets have been acting very strange of late, and economists worry that it may portend coming trouble.Consider this idiosyncrasy: Last Friday, after the release of governmental statistics stating sharply lower economic growth during the second quarter, U.S. stocks rallied strongly (, July 31).
It certainly seems strange that stocks would go up in value upon hearing poor economic news. If this was an isolated incident, it could be written off as a market aberration—but it isn’t. The stock market has lately been rallying upon the release of all kinds of negative economic indicators: weaker-than-expected manufacturing activity and other figures that show a slowdown in the U.S. economy.Economic analyst Paul van Eeden summed up the ominous market action on July 6:

The reasoning goes that a sufficient slowdown in the economy will cause the Federal Reserve to stop raising interest rates, and since higher interest rates are generally bad news for stocks, then a hiatus in rising interest rates should be good for stocks.You don’t have to be a genius to figure out that when the market hopes for bad economic news and interprets them as good news, something is wrong. Since when are falling retail sales good for stocks? Since when is reduced manufacturing activity good for stocks? Are stock traders so obsessed with the Fed’s next move that they forget to look at what is really going on?If the U.S. economy is slowing down, as confirmed by tepid retail sales and slowing manufacturing activity, then it is merely a matter of time before corporate earnings come under pressure and stock prices start falling.When the market becomes this shortsighted, you should know that we are in a dangerous environment. Anything can happen.
On July 19, it was even more amazing that the stock market rallied. That day, Federal Reserve Chairman Ben Bernanke actually warned Congress that the economy was slowing down, yet again investors took that for a positive.
As Van Eeden says, “When bad news is good news, all news is bad news.”It has been years since the U.S. has faced a major market meltdown. Whether or not recent market action indicates a pending collapse remains to be seen.
But considering the plethora of negative economic indicators of late—including the unwinding of the yen carry trade; recent inverted yield curves; rising inflation and interest rates; record negative personal savings rates; massive private debt; record trade deficits and governmental debt; along with a now-deflating housing bubble—the case for a stock market bust looms ever larger.


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