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Grant Williams Part 1: Why are equity markets rising in the face of falling fundamentals?

Grant Williams, author of the newsletter Things That Make You Go Hmm, recently presented at the 66th Annual CFA Conference in Singapore. The entire presentation is available above, but in this post we’re going to deal with less than ten minutes of his presentation. Although Mr. Williams addresses stock investors, his material should be of interest to gold and silver investors.

According to Mr. Williams, central bankers and governments are currently running up against the mathematical limitations of their policies and are resorting to extraordinary means to attempt to maintain the status quo.

In 1900, German mathematician David Hilbert published a list of 23 mathematical problems that had not been solved at the time and challenged his colleagues to provide the answers. In that same vein, Mr. Williams has assembled four apparent contradictions of the current global economy for which there does not immediately appear to be a solution.

Problem #1: If the global economy is stalling, Europe is in recession, China is slowing and growth is seemingly impossible to generate, what are equity markets doing at all-time highs?”

(Begin at 7:35 in the video, end at 16:15)

Williams observes that the S&P 500 is at all time highs and is supposed to represent the future prospects of these companies in the current economic environment, yet the Continuous Commodities Index is showing a clear divergence from the equities trend since early 2012. He notes that the same can be seen for other markets around the world. If the commodities are indeed the building blocks for the output of these companies, then why does there seem to be a decreasing demand?

He then takes a look that the global manufacturing situation via the Purchasing Managers Index (PMI). In the US and China, the PMI is now barely over 50 indicating that new activity has stalled and Europe is clearly contracting at 46.7 with the normally strong Germany struggling at 48.1.

On the global GDP front, even with the unprecedented amount of global “stimulus,” growth is currently registering at a troubling 1.4%. The Baltic Dry Index, which is a typically viewed as a measure of global trade, has fallen back to the lows of the post 2008 crash.

On the flip-side, the current Shiller P/E for the S&P 500 is currently at 24x which is about 50% higher than its historical average of 16x. A correction to just the historical norm would mean a drop in the S&P 500 by 30%. Year over year earnings per share growth for these companies have continually fallen since late 2009 to the point where they are barely positive in 2013.

What Williams does discover is that the correlation between the Fed’s balance sheet and the S&P 500 stands at about 88% since 2009. Over that period the Federal Reserve has increased the size of its holdings by about 1.3 trillion dollars.

So, we are left with a situation in which the stock markets are making new highs not because of improving economic fundamentals but rather a corruption of the risk free rate via massive central bank intervention. This has made traditional value investing nearly impossible.

Williams sums up noting that the central bankers have given us a choice: either sit on the sidelines in cash and watch your money get eaten away slowly by inflation and negative interest rates, or you hold your nose and buy stocks just because they are going up.

The question for individual investors is how long can this relationship persist and what happens if it breaks down?

One Response to “Grant Williams Part 1: Why are equity markets rising in the face of falling fundamentals?”

  1. Winston N. Martin

    Most nvestors are not economists, so they should heed the advice of those who are, such as Frank Shostak, who wrote the following recently in his article titled, “Can Bernanke Brake Without Derailing?”

    “According to most commentators, although not an easy task, experienced and wise policy makers should be able to navigate the US economy away from various bad side effects that come in response to a tighter Fed stance. We suggest that whenever the Fed raises the pace of monetary pumping in order to “revive” the economy it in fact creates a supportive platform for various non-productive bubble activities that divert real wealth from wealth generators. Whenever the US central bank curbs the monetary pumping this weakens the diversion of real wealth and undermines the existence of bubble activities—it generates an economic bust. We suggest that there is no way that the Fed can tighten its stance without setting in motion an economic bust. This would defy the law of cause and effect.”

    This is available at


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