February 28, 2013

Stock markets can decline

“For those who are of the view that the U.S. stock market feels like it will never decline (and that global easing is the panacea for growth and ever rising share prices), we suggest you look at the price of gold in mid-September 2011 and/or the price of Apple's shares in late-September 2012,” Kass says. “At those points in time, investor sentiment was at an extreme. Now look at the subsequent price drops following those heights and where those prices stand today.

“It is important to remember that over market history, progress often cuts with a manic edge,” Kass adds. “There is little or no permanent truth in financial markets as financial ideas have their seasons. So it is, as in the later stages of bull markets there is often a blurring between progress and fantasy.”

Investors not realistic in their expectations

At the core of my concern is that a global economy built on a foundation of excessive monetary easing is one of low quality, decaying fundamentals and not likely to be effective or self-sustaining.

To me investors are not being realistic in their expectations (and almost magical thinking) that an aggressive printing press can relieve and trump the profound challenges and headwinds to global growth without any negative consequences.

I remain concerned that much of the current investor optimism expressed in a rising stock market is not consistent with the underlying economic and profit data.