Friday, July 11, 2003

Stephen Roach's take on the insanity that is the US stock market:
As measured by the S&P 500, the US stock market had risen some 26% from its March 11 lows before slipping about two percentage points over the past couple of weeks; at its 17 June high, that run-up went about six percentage points further that the four previous post-bubble rallies, which averaged about 20%. I am beginning to worry that since the current rally has now distinguished itself from the previous false starts, market spin is starting to take over in driving perceptions of underlying economic activity. That�s exactly what happened in the late 1990s, when the bubble gave rise to a constant stream of �new wave� interpretations of the New Economy. And it may well be happening again today, as the sharp recent rebound in the stock market appears to have shifted the emphasis from hard to soft data. This time, it�s policy stimulus that is presumed to make a difference. But 550 bp of monetary easing and nearly five percentage points of fiscal stimulus later, the consensus call for a vigorous recovery remains nothing more than an unsubstantiated forecast. In my view, the issue of policy traction remains as contentious as ever. Yet try telling that to a stock market on the mend. To me, this is all starting to have an eerie sense of d�j� vu.
Note especially the shift of emphasis from hard to soft data. "Hard" data is that useless backward looking stuff like unemployment rates, jobless claims, GDP growth and the like. "Soft" data is the crystal ball that reliably forecasts the future like surveys (of purchasing managers, consumers, even economists!). Remember, when material facts fail to please, just ask people about their feelings.

Good Lord, and you can actually win a Nobel Prize in this discipline!!

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