The Experts Continue to Be Wrong

For a long time, there was a popular delusion among highly paid Wall Street “strategists” that the rest of the world would be relatively unaffected by an economic downturn in the U.S. Even though America accounted for a quarter of global gross domestic product, they rejected the longstanding reality that when the U.S. sneezes, the rest of the world catches a cold -- favoring instead a dubious theory known as “decoupling.” Based on the data included in the chart below, it looks like the so-called experts -- who have been wrong about virtually every aspect of what has taken place over the past year or so -- are turning out to be some of the world’s best contrarian indicators.

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Indeed, many of the same “experts” who claimed that the rest of the world was an unstoppable locomotive also argued that emerging market equities would continue to power ahead, virtually regardless of what happened to share prices in more developed economies. Unfortunately, that assertion has proved to be wide of the mark. In fact, the MSCI Emerging Markets Index is currently down around 25% from its late-autumn peak, which is more than the loss in the S&P 500 index over the same period. True, emerging market equities have performed far better than other markets during the past several years, but if the recent price action in other speculative trading arenas is anything to go by, there may well be a lot more downside to come in this very trendy asset class.

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According to the Congressional Budget Office, the federal government recorded an estimated deficit of 2 billion in July, about billion more than the year-ago gap. Including this shortfall, the running total deficit over the past twelve months is 4 billion, a three-year high. Based on how things have been going, it won’t be long before cumulative 12-month deficits breach the record of 5 billion seen in April 2004.

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Today, the National Association of Realtors (NAR) released its updated quarterly forecasts through the middle of next year. In less than 12 months, according to the NAR, home prices will be 1.8% higher than they are now. Over the same span, the pathologically bullish trade organization also expects sales of existing homes to explode by 33% (in fact, the NAR apparently believes that June was the low point for this data series). In both cases, their numbers for the second quarter of next year are in line with those last seen in mid-2007.

Based on other data, including anecdotal reports and news of a dismal spring selling season, I can only ask one thing: What the heck are they smoking?

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Stocks finished sharply lower, hurt by weakness in financials following disastrous results from American International Group (-18.0%) and a sell-off in retailers after Wal-Mart (-6.3%) forecast slower sales growth. A rebound in crude oil prices also weighed on share prices.

At the close, the Dow Jones Industrial Average slid 224.64, or 1.9%, to 11,431.43. The S&P 500 Index fell 23.12, or 1.8%, to 1,266.07. The Nasdaq Composite Index dropped 22.64, or 1.0%, to 2,355.73.

December gold finished $3.20 lower at $879.80, while the U.S. Dollar index rose 0.5%. Ten-year Treasury bond yields lost 13 basis points to 3.92%.

Michael Panzner

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Author, Finance Faculty Member
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