we can see no fundamental basis for a stock market recovery

Foreign Exchange - Currency Outlook

The Empire State Index from the New York Fed summarizes the situation as well as anything - it was less bad in April at -14.65 from -38.23 in March. This is not as bad as the -30 that was forecast, which would have been less bad than March but by less than the actual really-less-bad number.

Got that?

Remember that in a diffusion index, +50 is the dividing line between expansion and contraction, so an outright negative is really, really bad, even one in the teens. The sensible way to put it is to say the economy is still contracting but at a slower pace, but that fails to disclose and describe the true condition, and let's people grasp at the straw of "less-bad."

Evaluating these numbers is a bit like reconciling a falling income statement with a contracting balance sheet. At some point the numbers have to go positive just because the earlier numbers were so low, but that doesn't mean conditions are good.

We sometimes criticize "stockbroker economics" for misrepresenting economic truth, and this is one of them. What equity and some commodity markets are missing is that "less bad" doesn't mean "good." We like to assume that P/E ratios actually mean something. How can stock prices be rising while earnings are, or should be, or will be falling? We don’t care about equity prices for their own sake, but because they are the canary in the coal mine for the US dollar exchange rate. Rising stock indices in the US feed rises elsewhere in the world, with the odd exceptional Event like UBS' earnings announcement yesterday (that affected European bourses but not the US market, or by a lot less).

In sum, we can see no fundamental basis for a stock market recovery. If - a big if - the market starts seeing it that way, equity indices should fall. At this point they are being held up by an inaccurate assessment of economic conditions and unrealistic hope. The only possible rebuttal of this idea is that the Empire State also reported the six-month outlook jumping to 33.10 in April from 3.14 in March. Let's say the hopes of the survey respondents for improvement in six months is accurate. Therefore for stocks to rise as a leading indicator is okay, right?

No.

Expectations are exactly what the word says - expectations, not actual evidence, let alone proof. And 33.1 is a minority. It means the majority did not see an improving outlook in six months.
"Improvement" is a funny concept in economics. While we like the metaphor of the economy being organic and more like an animal than a machine, in this case the patient has the plague. It is getting big doses of antibiotics and being kept clean, warm and fed, but "improvement" is like saying the patient hasn't died yet and white blood cells are hard at work. Not dying is the good thing. Is this overly pessimistic? Maybe, but being overly optimistic is foolish. As Keynes is reported to have said, "The market can stay irrational longer than you can stay solvent."

Seeing an imaginary bottom is dangerous to your financial health.

Assuming more bad news is yet to come, foreign exchange traders will buy dollars as the dollar should benefit, even if the news is not as horrendous as what we already have seen (think of what we have already seen as the diagnosis of plague). To judge degrees of horrendousness is not really useful. Europe declining to be sufficiently scared is noticeable, though.

Weirdly, we expect pounds sterling to recover because the worst of all possible bad news is getting released.

Pounds to US Dollars = 1.4900
Pounds to Euros = 1.1292
Euro to Pounds = 0.8850
Pounds to Australian Dollars = 2.0685

Bye For Now

Barbara Rockefeller
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