Please Be Careful Out There

20130516_ECo.jpgBy John Richardson

Quite often, a chart is worth many thousands of words. The above chart, from Bloomberg, shows the divergence between the soaring S&P 500 index and US macro-economic indicators.

The theory is that soaring equity values will be the tide that lifts all boats. Even America’s hard-pressed middle classes will benefit, not just the Wall Street elite, is the argument as 401 funds are boosted.

But isn’t there a danger, just as was the case towards the end of the sub-prime bubble, that towards the end of this particular bubble, those who don’t understand financial markets will be sucked-in to risky investments and will thus lose their shirts?

And, according to fellow blogger Paul Hodges, the strength of the S&P 500 is out-of-kilter not only with the real US economy, but also with many other asset prices.

“What we are witnessing is the final ‘melt-up’ phase of the $7tn [central bank] liquidity programmes. Originally, this pushed up all asset prices, but reality has since begun to set in,” he wrote in this blog post.

“Four years ago, most investors assumed stimulus would quickly lead to recovery.

“But since then, they have gradually become wiser, if poorer.

“Cotton, for example, jumped from 46c/lb to 227c/lb, but is now back at 86c/lb.

“Copper jumped from $3330/t to $9880/t, but is now $7330/t.

“Gold went from $880/oz to $1920/oz, but is now $1360/oz.

“Brent went from $44/bbl to $123/bbl, but is now $105/bbl today.”

As we keep saying, please be careful out there.

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