Friday, April 03, 2009

Sorting Through the Bull: Lagging or Leading?

Much of the economic troubles we are coping with today were brought about as a function of faulty analysis and logic greatly amplified by a truly embarrassing level of groupthink.

Concepts like “home prices never go down” or “dot-com stocks with a P/E of 50 are still a good buy” are some notable examples but what about others we don’t easily recognize as false?

For example, notions like “prime borrowers have strong credit quality” or “government can spend us into prosperity again” are still not universally seen as instances of faulty thinking.

How many times have you heard that “jobs data lags economic recovery” while “the stock market looks ahead (is a discounting mechanism)”?

Given the events of the last year or so you should have at least a bit of skepticism about the validity of that notion.

Study the following charts carefully (click for larger) to see if you can spot the faulty logic.

UPDATE: added the following chart which has "real" (inflation adjusted with CPI) S&P 500... both stocks and jobs have been declining since 2000.

As you can plainly see, the stock market is hardly an oracle… Clearly there is more at play here.

So if you bought into this simple notion you need to first ask yourself “why?” and more importantly start to question other similar junk concepts.