The S&P500 dipped fractionally last week. Volume was extremely light, and volatility—while inching higher—was still close to 10 year lows.
Technically, the picture has not changed. Stock prices are extremely overbought—both on the daily and weekly charts. Yet breadth is not as strong as it was at prior peaks; stock market prices are being led by fewer and fewer “general” while the vast majority of “soldiers” are lagging.
At the same time, there is no material change in the US economy—on Main Street, the struggle for growth and true recovery continues. Last week, The Richmond Fed Manufacturing survey disappointed, as did the Kansas City index. Durable goods orders, both headline and ex-autos, missed badly. Initial jobless claims were a bit worse than expected. The house price index missed expectations. And personal spending also missed. On the positive side, New home sales were better than estimated, as were existing home sales. Consumer confidence also beat estimates. Overall, no real change in the picture—it’s still not very good, almost five years after the financial and economic crisis supposedly ended.
As financial markets, and especially the equity markets, continue to climb to new record highs, alarms are being sounded from a most surprising source—central bankers around the world.
The reason that warnings from central bankers are surprising is that most experts and even casual observers have now come to understand that these very same central bankers are the ones responsible for the massive levitation in risk asset prices in the first place!
And given that one of the most common concerns raised by market observers, including this one, is that market prices seem to be divorced from the reality on Main Street , it’s very surprising that the Bank of International Settlements (better known as the central banks’ central bank) just issued a report that makes the very same argument.
Here are some key excerpts:
“… it is hard to avoid the sense of a puzzling disconnect between the markets’ buoyancy and underlying economic developments globally…. Despite the euphoria in financial markets, investment remains weak. Instead of adding to productive capacity, large firms prefer to buy back shares or engage in mergers and acquisitions.”
“As history reminds us, there is little appetite for taking the long-term view. Few are ready to curb financial booms that make everyone feel illusively richer. Or to hold back on quick fixes for output slowdowns, even if such measures threaten to add fuel to unsustainable financial booms. Or to address balance sheet problems head-on during a bust when seemingly easier policies are on offer. The temptation to go for shortcuts is simply too strong, even if these shortcuts lead nowhere in the end.”
So when even the very same central bankers who helped blow the ever-growing bubble in financial assets are warning everyone that current prices are no longer making sense, that real underlying problems in the economy were never fixed, and that bubbles inevitably burst and wipe out paper gains, it’s time to listen and to listen carefully.
Sadly, most people will not. As the central bankers so aptly note—“the temptation to go for shortcuts is simply too strong’—human nature will dominate common sense and historical evidence. And so, the final outcome will not change—people will get hurt, again, after this current bubble also bursts.