Wikinvest Wire

The circular logic of stocks and the LEI

Monday, July 27, 2009

John Hussman of Hussman Funds (Money Magazine's best bear market money manager some time ago) provides the following commentary on a subject that I've been meaning to discuss here for a while - the circular logic of some components of the Conference Board's Leading Ecnomic Indicators, said indicators recently all but declaring an end to the recession.

The extent of the recent rally is still smaller than the rally that stocks enjoyed following the 1929 crash (and was later followed by spectacular losses). That doesn't mean the same outcome will follow in this event, but I continue to believe that the path to recovery will be far harder, with much greater headwinds, than investors seem to assume at present.

Taking the rally in stocks as an indicator of economic recovery (which the LEI largely does), and then taking the presumption of an economic recovery as a reason to buy stocks, all strikes me as circular reasoning.
Of course, the other components in the LEI that are also a bit dubious are the money supply and the difference between long-term and short-term interest rates, both of these being affected, to some degree at least, by Federal Reserve policy.

1 comments:

News said...

Tim,

this actually makes some sense. It's like Soros' theory of price reflexivity. Higher prices encourage even higher prices. Lower prices encourage even lower prices.

If Dow went to 15,000 right now for whatever reason, people, even if they have not money, would spend more.

I believe s&p will be back in 700s before year end as earnings do not improve and revenues continue to decline.

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