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Friday, May 31, 2013

Equity Booms Rarely Follow the Fundamentals or Logic

It is surprising to me that HSBC’s leading indicator has taken so long to buckle, since commodities topped in September and the Dutch CPB index of world trade contracted over the February-March period. Rarely has there ever been such an equity boom on such quicksand.

  • Many of history's equity booms have had nothing to do with the 'fundamentals'.
  • The market rallied 254% and provided a staggering 367% total return from 1924 to 1929 (chart).  How many times were the fundamentals characterized as quicksand before the market crashed in October 1929? 
  • Capital flows, driven by human behavior, often trump the fundamentals for extended periods; the opportunity cost of not recognizing these periods can be exceptionally high.

Chart:  Large Cap Stocks Capital Appreciation Index (LCSCAI), LCSCAI to Gold Ratio (LCSCAIGOLDR) and LCSCAI Cycle Z Scores (LCSCAIC6 and LCSCAIRC8)

Headline: No saviour in sight as world credit cycle rolls over

Any country that has failed to lock in a self-sustaining recovery by now must expect to pay the price for the failings of its policy establishment, and some risk a slide into outright deflation.

“We see building evidence of a cyclical downturn,” said Fredrik Nerbrand, HSBC’s global asset guru. “We find it highly troubling that the eurozone is still marred in a recession at the same time as our cyclical indicators appear to have peaked.”



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