As a student of literature, I have read many poems, but one that comes to mind today is Robert Frost’s “Nothing Gold Can Stay.” In eight short lines, Frost captures the essence of cyclical change.
Nature’s first green is gold,
Her hardest hue to hold.
Putting aside the obvious comparison to money and gold for a moment, one can say just three short weeks ago, the market was reaching out for and then topping all-time highs. In four years, the market had risen from its winter of discontent to a spring of rejuvenation. It has returned to its level of 2007, the then highest point of all time.
Her early leaf’s a flower;
But only so an hour.
I have to tell you, the market making it all the way back was a joyful and beautiful thing in my eyes, but as much as the market felt the power of its own rising, it also knew it could not last. It could not keep going up. It had to have a correction.
Then leaf subsides to leaf,
So Eden sank to grief,
And so, the prophets of doom predicted the end of Eden, so to speak, but since economic fundamentals ultimately define market direction, the issue of the green shoots turning brown before the cycle could turn completely did not make sense, nor does it now.
So dawn goes down to day
Nothing gold can stay.
And there it is. The market hitting all-time highs three weeks ago was a rebirth for the market, if you will, but that beautiful fresh spurt of green growth (money) has to shade away toward a plateau more suited to growth (market consolidation).
The question, as always, is: do the economic fundamentals support the idea that the global economy is growing? The answer is quite clearly, “yes,” on just about every front. The biggest exception, of course, is Europe. It has yet to rise from its winter freeze, but it will, despite the prophets warning that the euro is a misguided attempt at economic unity and that it will fail miserably.
The fact is that like the US, China, Japan, and everywhere else on the planet, economic cycles rule. It is always just a matter of time. Humans are driven to commerce and in today’s world, there is so much money to be made that those with most of it will turn the cycle because they understand they need to invest, they need growth to make money.
My point is that what we are now seeing is the shifting of the economic cycle. It has happened the last four springs. The difference this year could well be 1) no European crisis, 2) no pending US political fiasco, 3) energy and food prices are going in the opposite direction, and 3) hopefully, no earthquakes, tsunamis, or unbelievable droughts. Of course, anyone of those could happen, but if they don’t, the economic fundamentals will drive the market forward.
- Oberhelman [Caterpillar CEO] suggested optimism, telling CNBC that it was the first time in three years he has seen relative stability around the world, noting inventories in China and the United States have come down significantly. “We don’t want to be overly optimistic but it certainly feels better than the last two springs,” he said.
Although Caterpillar’s earnings missed big on profit, the culprit, according to the CEO, is mining, a fact that he alludes to in the above quote regarding inventories. The point here is that the inventories have come down, which means usage, which implies restocking, which suggests economic growth. It is an economic cycle, as is consumer spending, manufacturing, wholesale distribution, and on and on.
So, don’t be misled by the market myopia focused on earnings. Keep in mind the economic cycle is turning up, not turning down as it was in 2007, the current pause notwithstanding.
- The drop in global commodity prices is obviously very good news for China, because it will help lessen imported inflationary pressure and leaves Beijing much more scope to expand credit and loosen monetary policy to bolster the domestic economy
- Finance leaders of the G20 economies on Friday edged away from a long-running drive toward government austerity in rich nations, rejecting the idea of setting hard targets for reducing national debt in a sign of worries over a sluggish global recovery
- Japan won approval from participating countries to join talks on a U.S.-led Asia Pacific free trade agreement, central to Prime Minister Shinzo Abe’s plans to open the economy to more competition and revive growth.
Yes, both short and long term the cycles flow. Since the great collapse, the economic cycle started again, and the market has tracked it almost perfectly, aside from some man-made bumps.
- Every April we have this. It’s scary how the market is trending exactly as it has for the last four years running. There is this confluence of factors. The fundamental case-everyone was excited about the economy improving, but that story broke down. The earnings are not improving. The commodities complex looks just like last year.
So here we are again, fretting about this or that, but to me, the real indicator of future market direction is gold. The media is full of arguments as to why the price of gold has plunged. As I have said before, I am a follower of Occam’s Razor that suggests the simplest explanation is usually the one that best explains a situation. Gold is a hedge against inflation and economic collapse. It has been in decline for some time because neither has happened. Its recent drop could suggest what I have been saying today – nothing gold can stay when all points to slow but steady global economic growth.
Trade in the day; Invest in your life …
