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Economic Review

10/12/2009

Will the evolving bubble in US Equities spillover into positive economic data?

The major Equity Indexes are well into double digit returns for the 2009 period, despite a host of dismal fundamentals.  The gains however seem to be resting on the questionable fundamentals of inflation expectations or should we say “the reflation trade”.

As speculators push funds into Stocks with the expectations of a falling US$ that will increase asset prices, and as other investors get sucked into the evolving bubble because they don’t want to miss the boat, the major Indexes have been posting exuberant gains. 

Now let’s see if this newly forming Stock bubble begins to spill over into economic activity as consumers get some relief in the form of increased values in their 401ks (that’s assuming that they didn’t liquidate their stock holdings during the massive sell-off).   Over the next week or so the corporations will be reporting earnings and retail activity will be updated as well.  The results may be positive on face value, however remember what the positive Stock scenario is built on…unemployment at 10% with real unemployment much higher, significant foreclosure activity and an international community that is beginning to allocate assets away from US$s…just to name a few interesting factors.

Can Stocks go up?  Of course they can…there’s plenty of air out there and the inflation trade could have much more upside.  But just keep in mind what those potential gains are built on and all it takes is a little pin prick to let the air out.

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