Tuesday, August 16, 2011

What downgrade?

So despite all of the breathless talk over the past week about market collapses, the stock market is now back to flat after the S&P downgrade of the US. Clearly, the market expects more Fed easing (the bond market currently believes QE3 will be between $300-$400 billion) and that's the heroin that this market needs to keep us afloat. It's not healthy and it's not sustainable, but the alternative is not very appealing to politicians of both parties.

This chart is a little hard to read but if you can see the two lines you'll get the point. The red line represents the Japanese stock market and the green line represents the US market. It may be a coincidence but it appears as though there is a pretty clear lag between the US and Japan. Our markets are basically marching in lockstep with an 11 year lag. Remember Japan is about 21 years into this current soft patch.

Yesterday we got news that the Japanese economy shrank and stocks soared but today we get news that Europe's growth slowed and things have turned south.

Perhaps most disturbing is news that the German economy has basically stalled. Germany has been a beacon of strength in a very bleak European landscape but if Germany begins to stall we could see a new period of uncertainty in the European markets.


No comments: