(posts, links and tweets)We all hear from all possible stock market advisers and economists that the market discounts all news in advance, essentially validating the tradition to call news “newsnoise”. And I totally agree with that. However I also hear as many times that the market discounts fundamentals well in advance. And here’s the problem. It turns out that many (if not most) people cannot properly distinguish between “news” and “fundamentals”. The last straw was Pretcher’s Elliott Wave book that I’m reading now where he uses the word “news” and “fundamentals” interchangeably, essentially treating them as synonyms.
And I think that’s a grave mistake.
Let me put my opinion forward before I explain it.
I believe that in the 4-year economic cycle, i.e. in what we call the traditional bear/bull market, as opposed to the secular bear/bull market that I usually describe in my Kondratieff wave-related posts, the stock market trails fundamentals by about 6 months, while the news stream trails the stock market by about 3 months. In other words, news trails fundamentals by 9 months, roughly. And thus news and fundamentals are two different, unrelated entities.
And here is my very short proof. Here is the chart of our recent stock market crash:
You can see here what you remember very well – the stock market peaked in October of 2007.
Now let see the fundamentals, just briefly. This is the chart of ABX.HE AAA 07-1:
Here you can see that the index started to deteriorate in January of 2007 and was in full panic mode by July. So, depending on how you count based on this chart, the stock market trailed fundamentals by 3 to 9 months. Using different fundamental metrics the average of 6 months is about right, while many professionals spotted some troubles as early as in 2005. For example all debt-to-income metrics became insane as shown in this chart.
Here you can see that mortgage debt/GDP became insane as early as in 2003. This is what I call fundamentals. And this is why I claim that the stock market is very, very dumb in discounting the future. Heck, it doesn’t do a good job in discounting the past as well. It is just dumb. Period.
And now back to news. What would I call the first real scary news making anyone aware that trouble is ahead? I think a good example would be the collapse of Countrywide back in January of 2008. It trailed the market top by 3 months. I don’t recall anything newsworthy that happened before that to highlight the magnitude of the problem. Yes, some minor events happened back in 2007 but nothing bad enough to be called a bull market killer.
Would you call news the opinion of a “famous” money manager? Then I’ll give the call of Ken Fisher dated Feb 2007:
Don’t buy it. For months now the debate has been over whether America will have a hard landing or soft landing, the answer hinging on how big 2007’s housing disaster turns out to be. Well, there won’t be any housing disaster. We won’t have a landing at all, soft or hard. Right now the U.S. and global economies are both accelerating.
You can see right through the housing crash story by looking at the prices of housing stocks. The market knows what the economic worrywarts do not, which is that the housing sector is already making a comeback. In the last six months housing stocks are up 24%, well ahead of the overall market. If housing were destined to fall apart in 2007 these stocks wouldn’t be so strong now.
Here you can see that “economists” use the stock market as the predicting tool and the stock market is using “economists” for its marching orders. Like the chicken and egg problem, they feed each other in disregarding fundamentals, while in fact fundamentals were simple and clear back at that time, saying – sell!
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5 Comments
As I recall the rumblings about the subprime problems began in earnest early in 2007. But you can find people who were predicting a collapse in housing back in 2005.
And yes Fisher is an idiot. Another one.
But he’s rich and I’m not, so there you go.
Hi Andy,
I know that you referenced Ian Gordon’s “This is it” and added a link in the past.
Are you interested in posting his latest article” All that glitters is gold”?
I enjoy your work and would gladly provide a link to your k-wave site in the new year when we update our website.
Cheers,
Jay
Jay, thanks a lot for kind words and link. I plan to write a bit about fiat money but don’t have time.
In my view the govt and Federal Reserve really believe that their Keynesian policies to try to prevent deflation will be effective because it gives time for the banks to earn their way out of the problems. However, the govt has done little to fix the basic structural problems in the economy, of too much debt relative to peoples’ incomes. And it has tried to prevent the normal business cycle from occurring, in which the recession would clear out the excesses and lead to a proper form of price discovery. Instead they’ve tried to fix a debt problem with more debt, which I believe is reckless and dangerous. Unfortunately, those in power are the same people who mismanaged things leading up to the financial crisis. So in my view, one of the few ways for those of us who understand the severity of the problems to protect themselves from the risks still out there is to invest in gold and silver related assets, because gold and silver should continue to benefit from the Fed’s Keynesian efforts to avoid deflation. One company I particularly like is Fortuna Silver, which I recently saw at http://www.goldalert.com/goldmining/fortunasilver recently announced approval of the final permit necessary to begin construction at its San Jose silver and gold mine in Mexico. The company’s stock has performed very well this year, and I think there is a lot more room on the upside because of the increased production potential of the new mine. Overall I think that it is worth the time investigating specific gold and silver mining companies that offer leverage to the gold and silver price because they tend to outperform the metals.
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