Charts That Tell Us a Different Story

The endeavour of our blog is to provide an alternative view as the title suggests. To meet this goal we have been scouring the Internet for statistics that will enable us to meet our goal of trying to understand and explain the formation of bubbles that are forming in different asset classes. Optimism now pervades through the financial markets even the more rational among the policy makers leave alone the investing crowd (which is usually wrong) about the sustainability of this recovery and the impending return to a boom (if not immediately over the next two years).

Certain interesting statistics need to be cited so that it will enable our readers to place the present rise in the financial markets in the proper perspective.

* In April 2008, the US Budget Deficit was 1.6% of GDP. It is now closer to 9.9 percent. So after spending nearly 8.3% of GDP, the US has been able to eke out a growth in GDP of 2.2% or thereabouts.

* The US Federal Reserve's balance sheet has expanded from US$858 billion at the start of 2007 to the present more than US$2.24 trillion dollars (at the end of 2009)

* Globally, governments have pumped in nearly US$12.8 trillion (or probably more) as different forms of stimulus measures.

These must have been the 'positive surprise' for the markets and hence the rise by nearly 60% or more in most of the asset classes (i.e. from its March 2009 low).

Another predominant wisdom that we hear regularly has been that economies witness faster economic recoveries coming out of a recession. This is one of the reasons why the markets are discounting a 30% rise in earnings. Unfortunately it is only a matter time that this myth is deflated. The chart attached with this post provides the behaviour of economies coming out of recessions. It is clear that historically economies witness weak recoveries (if you can call it that) coming out of a financial collapse. Considering universally acknowledged fact that this is the worst financial meltdown since the Great Depression, the global economic recovery should be considered if it can grow at 2 percent over the next few years. However, one can never underestimate the power of financial speculation that has now become rampant due to all the money pumped in the economies by the governments. Moreover, one never knows when the next stimulus package will be announced, it could be just round the corner.