The problem with the comparisons John makes is that all of his "price/peak earnings" periods are not equal. A valuation approach that completely omits interest rates leaves out the biggest asset allocation comparison faced by both managers and individuals. Here’s the story, then I’ll elaborate.
Link: Hussman: Fed Action Won’t Boost Stocks.
Excerpt from John Hussman’s latest weekly essay: …attention has turned to the prospect that the Fed has finished, or is just about to finish, its tightening cycle. Isn’t that alone a great reason for bullishness here? …If you …
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After scaring the daylilghts out of the average investor yesterday, CNBC today found some economists who did a good job of explaining why indicators do not always indicate. My readers will recognize the same points I was trying to make yesterday.
- You cannot interpret an indicator without some idea of how and why it works. That means a causal model. Multiple commentators said that what really drives recessions is not the shape of the yield curve, but the LEVEL of rates. The current situation contrasts sharply with, for example, 2000. David Malpass, Chief Global Economist at Bear Stearns, points out that when the curve was flat in 2000 it was at a 6.4% level not the 4.3% of today. Malpass has had the best handle on the economy for several years now.
- The indicator is "broken" because of artificial impacts on the long end. The WSJ cited a Fed study suggesting that the impact of Asian bank buying was about 75 bp and CNBC said as much as one percent. Several sources made the point I repeatedly raised yesterday, that this foreign buying is good for the U.S. citizen and our markets.
- Most importantly, other economic indicators are very solid. Yield curve inversion is only one indicator. It is a necessary but not sufficient condition, as Barry Ritholtz pointed out yesterday. Past instances of false positive signals were discussed on theStreet.com and in several CNBC interviews.
Bottom line: Traders and market strategists would do well to give the economists their due respect. As Steve Liesman of CNBC pointed out today, the large group consensus economic predictions, like the Blue Chip group, show no recession forecasts. None! The group calls for a little slowing but growth of 3.4%.
We are in a prolonged sweet spot for investors. GDP growth has been excellent. Inflation has been low. Corporate earnings continue to set records—and the market has not kept up.
Understanding the causal relationship is crucial in using any indicator. Lacy Hunt says that reducing M2 growth will slow the economy, but what does this have to do with the slope of the curve? Meanwhile, there was a lot of economic and media commentary today citing the same arguments I made yesterday. I’ll summarize below, but first review the Hunt argument:
Link: Explaining Yield Curve Inversions.
The Yield Curve briefly inverted — twice — Monday. As we noted yesterday, the deeper and longer a curve remains inverted, the more potentially significant it is. That factoid has been overlooked by many commentators. Following yesterday’s post about …
Continue reading “Yield Curve — an Indicator, not a Cause”