NOBEL laureate Paul Samuelson once described investors’ fixation with the stock market as a leading indicator of an economy’s health as a fallacy.
Many years ago, he remarked that commentators kept harping on economic studies which alleged that market downturns predicted four of the previous five recessions.
“That is an understatement. Wall Street indexes predicted nine out of the last five recessions! And its mistakes were beauties,” he observed.
The converse may hold true as well. A rally on Wall Street may not necessarily presage a recovery in the real economy. This means that the rest of the world will have to wait a while yet, while the US sorts out the problems besetting its economy, despite the sharp recovery experienced in global bourses.
Going by the tight trading range encountered in regional markets in the past week, it would appear that traders are undecided over which way share prices are headed.
Since March, emerging markets have caught fire and major indicators such as the benchmark Straits Times Index and the Hang Seng had gained by more than 50 per cent.
But there are significant road-blocks to further upside. One US-based fund manager, Mr Whitney Tilson, warned that growing unemployment in the US may be the next big problem to hit that country.
With more people losing their jobs, losses in the residential and commercial real estate market could hit a further US$1 trillion, he warned.
What I am more worried, however, about is the financial storm clouds gathering in Europe.
At least, the US banks have faced up to reality, following the health tests conducted by the US banks. This has prompted them to use the recent rally to raise as much capital as possible to buttress their balance sheets.
But major European lenders have not followed the lead taken by their US counterparts. As many of them also have major operations in the US, this is worrying. Can their already weak balance sheets cope with a further deterioration in the US mortgage markets ? Any problems they may encounter will also give us collateral damage, since some of them are big lenders here too.
Last week, as I was going through the columns I had written on the global credit crisis last year, I came across a remark made in March by former US president George W. Bush that the worst of the financial crisis was over when stricken investment bank Bear Stearns was rescued by JPMorgan Chase.
I experienced a sense of déjà vu when US treasury secretary Tim Geithner told Congress last week that “the banking system is beginning to heal”.
Some things are best left unsaid. They have an unfortunate way of ricochetting back at those who made the remarks.