01 September 2010

The Recovery

If the market is in the kind of shape yesterday's and earlier blog post thought, then today's rally is to be expected. But is today's rally because of greater clarity of the economic landscape or because of a belief the Fed will pump up money flow, by finding ways to lower interest rates (Kohn's comments this evening making this assumption from Friday's comments real).

If the market is in better shape than it might seem, then lowering interest rates would be counterproductive. The market needs to catch onto that core expression in the Fed's statement on Friday, that the economy will recover. The market computes on future beliefs in income streams but in a slump it tends to compute on the state of income streams now.

The financial crisis was possibly unique and its effects need to be seen in this light, not in the light of other market structural alterations. If the market believes in a recovery everything changes in terms if valuations. It might be asked if money flow economics have distorted views of what a recovery or a recession is.

They have certainly distorted attempts to define what this economic state now actually is. The question can be asked as well, is the US reliance on asset inflation a consequence of economic problems. I believe it is not, but is a consequence of the United State's role as the engine of economic growth, which it still very much is.

It could be conjectured previous deep recessions or depressions damaged companies in terms of their financial structure. I did some comparative studies on this myself. But the crisis did not seem to damage companies in the same way.

This may be because of government policy to alleviate the crisis or it could be because the growth of US companies has been occurring despite economic policy for years. In fact this blog has conjectured US companies thrive in hard economic times, thought whether this is because of forced adaptation is another matter.

The question which interest this blog is what would investing economic policies do for US companies, would it be neutral, harm them or be a rocket under them. It depends perhaps how intelligent the approach is, the market rewards intelligence as Ben Graham pointed out.

The question can be asked is USD/JPY rising with the market because of concerns about Yen valuation and responses to this or because of a belief in the recovery.

Answering the question in the first paragraph: the fall of EUR/USD against the market suggests the recovery is part of this. This suggests the perception of the economic landscape is changing.

But the rise in EUR/USD in the run up to the US equity markets open suggests money flow is still very much a part of the equation.  It is what this blog suggested in earlier posts the recovery is a subtle part of the market, it just seems to be not so subtle now.

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