Why the Stock Market Disagrees with the Economy

“28 days… 6 hours… 42 minutes… 12 seconds. That… is when the world… will end.”

Or so said ‘Frank’, the mysterious character from the weird and wonderful movie, Donnie Darko.

According to the toads running the European Union, Europe doesn’t have that long. The end of the world might be upon them in four days. That’s why they’re so desperate to come up with something – anything – to show the world they can keep a bunch of disparate economies together by wrapping them up in the tissue-paper currency called the euro.

This week has just been one long leaking sewer pipe of rumours and stabs in the dark about what might ‘save’ the eurozone. It has been accompanied by hysterical calls of apocalypse if there’s no solution by this weekend.

If we sound angry, it’s because we are. Democracy and national sovereignty have been hijacked in the name of saving a dysfunctional and interlinked system of bankers, bureaucrats and politicians lusting after power.

We’re not the only angry ones. It appears someone sent Deutsche Bank chief Josef Ackermann a bomb in the post yesterday. The sender hedged his or her ‘position’ by putting the ECB down as the return address. Thankfully, neither sender nor the intended receiver got to open the parcel. But it does go to show the contempt the power elite has for society is now being returned…forcibly and violently.

Getting back to Friday’s Wundersummit, or whatever it’s called, our guess is these morons will not be able to come up with a solution, because there isn’t one. That might be bad for markets in the short term but failure now will be good for long-term growth.

Huh? Failure is good? We know that sounds a little radical in a world of too big to fail, but it is the essence of capitalism.

Our mate over at Money Morning, Kris Sayce, summed it up well yesterday in a quote by famous basketball star, Michael Jordan:

‘I missed more than 9,000 shots in my career. I’ve lost almost 300 games. 26 times I’ve been trusted to take the game-winning shot… and missed. I’ve failed over and over and over again in my life. And that is why… I succeed.’

Failure is one of the keys to success. Failure prepares you for success. Failure promotes perseverance. And at the very least, failure removes the underperformer and makes way for the success story.

But there’s too much other stuff going on in the world of money to spend any more time on Europe.

In the past few days we’ve seen Brazil’s economy contracting…Australia’s economy expanding…the RBA slashing interest rates…and China’s currency under pressure.

Brazil’s economy contracted by 0.04 per cent in the three months to September. This should be something of a wake-up call to the proponents of the BRIC decoupling theory. This is the theory that says emerging markets will continue to grow strongly while the West remains bogged down in debt.

The reality is the world is highly connected. When the main economic powers slow down, so does everyone else. But to think that it’s simply a story of lack of consumption in the West misses the point.

The point is really about how the international monetary system facilitates global economic growth. It is a system that relies on the US running current account deficits. The countries that run surpluses (which many emerging nations do) put these surplus dollars in the vaults of their central banks.

This is where things get interesting. In order to maintain competitive currencies, these countries print reals, yuan, or whatever to offset the inflow of dollars. The newly printed currency sits as reserves in the domestic banking system and is fuel for the fire of domestic credit expansion.

So excess US consumption, made possible by the US dollar being the world’s reserve currency, filters through the global financial system and results in ever larger amounts of US dollars piling up in central bank vaults. This is the world’s ‘base money’, which further credit creation rises from.

That’s why when US economic growth slows, so does the pace of US dollar exports to the rest of the world. This in turn slows down the international ponzi scheme of credit creating credit.
So forget your decoupling theories, it cannot happen.

Greg Canavan
for Markets and Money

Greg Canavan
Greg Canavan is a contributing Editor of Markets and Money and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails. For more on Greg go here.

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3 Comments on "Why the Stock Market Disagrees with the Economy"

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How failure of the EMU would be good? How will it not breed a new brood of parasites sucking blood of the economies at the point of currency exchange?
Has anyone looked at both problems and benefits of the EMU in a balanced way?

Sally C.

Very good article. I am just wondering about US Dollar printing by the Fed. Are we basically in an experiment to see whether electronically created US Dollars (as opposed to US Dollars genuinely earned via manufacturing say) which are then used to provide US Dollar swap lines to the ECB, for example, can keep ‘the international Ponzi scheme of credit creating credit’ afloat ?

Jeremy Britton DipFA SA(Fin) AAHA HH Dip(PH)
Jeremy Britton DipFA SA(Fin) AAHA HH Dip(PH)
Will decoupling *really* be avoided due to the Chinese printing more yuan? I look at things very simply: the Chinese family own a business selling TV’s and cameras; the Aussie family own a business selling coal and steel. The US family own a business selling weapons. Currency is largely irrelevant in this example: demand for goods will mean that one family business makes more money than the others. At the moment, it is China & Australia; the US cannot compete unless they a) start a new war, or b) start to manufacture consumer goods that people actually want to buy.… Read more »
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