Predictive Markets Part I

How far can the stock market go in this current rally? Is gold really going to 3000 and above because of an impending dollar crash? I find these two question asked because of a clear misunderstanding of both.

Does a 40% rally in stocks signal recovery or is it a massive bear market bounce? In my opinion it tells you what is a fact of the matter and nothing more at a current moment in time.

In March I posted about "Quantitative Easing", basically an attempt by the FED to reflate the deflated economy by stealing from the future. And that's just what happened. They FED began pumping air back into the balloon and change the current valuations in dollars of US stocks by adding more money to the pool of existing money. Stocks had to be revalued in terms of the increasing money supply while maintaining accurate relative values. Just as stock values decrease as money was being let out of the balloon so did they rise as money was pumped back in.

I have never ever believed the markets to be forward looking. In my opinion when they topped and crashed in March of 2000, tech stocks had validated in that quarter that their earnings growth rates were unsustainable. The Federal Reserve had just finish an aggressive round of rate hikes much like they did at the onset of the Real Estate crash and restricted the future growth of the United States. A contraction in credit due to higher rates and the declining growth rates where evident at the moment of the market top. The market didn't predict that year 2000 reality in 1999 it showed its reality in 2000 when it was indeed a reality.

The fact of the matter the is the recent move up was real and if you did not participate then you just missed that real market return. However to take current market behavior as a future economic indicator is a thought process that has been sold to us based on efficient market theories.

The fact of the matter is markets are not as efficient as the experts assume. If they were then what was OIL telling us about its future at $147 a barrel in June of 2008. Not that it would be $35 a barrel by March of 2009 and the growth of all nations would be ground to a halt in 6 months. The experts told us it was because of consumption from the hyper growth rates China and India were experiencing.

Just as a Dow Jones at 14k in 2008 didn't forecast DOW 6600 for next march and the impending credit collapse which took place at precisely the same time as the market's collapse.

Markets are a snapshot of today's estimated fair value based on all available information today; which include estimates of future growth, nothing more. If the inputs change tomorrow so too will that estimate of fair value. The predictive power of the future that experts believe capital markets deliver is left seriously wanting and the ability of analyst to give us good foresight based on the conventional wisdom is left equally wanting. The conventional wisdom is grossly unsupported.