There is ongoing debate over the “true worthiness” of “technical analysis” for investment strategies in foreign exchange markets and stock markets. Before we briefly define what technical analysis actually is, we should note that there are 3 categories of opinions on this matter. The “against it” crowd believes that technical analysis is the modern-day equivalent of snake oil: promising wonderful things and looking really “fancy” and advanced, but having no real value, with rigorous studies to back their claims.
The “for it” people bring forth real-world examples and good studies to defend their position, which at least partially refutes the “efficient market hypothesis” and suggests that there are excess returns to be had by practicing technical analysis.
These 2 extreme camps generally have convincing arguments, examples, and studies that “prove” their points. Finally, the third crowd has a position that things are not black and white and that either camp may be right or wrong, depending on specific markets and market conditions. Let’s discuss this interesting topic a bit further.
There is nothing fundamentally new to say about the Eurozone. Back in 2010 when a portfolio management group asked me to make a presentation on the Eurozone to help them see through the maze and get a clear picture, I ended my presentation by saying “the Euro won’t fall now, but we will still be talking about all this in 5 years”… and here we are!
Large economies of the Zone have major labor market issues that are structural by nature and require major reforms. Countries have separate fiscal policies and tax collection, a country-specific-focus of most banks, different languages, no automatic “built in” fiscal transfers to absorb “asymmetric shocks”, and there are no “Eurobonds” that would aggregate risk into one debt instrument, thus helping weaker states (although this “Eurozone credit backing” was implicit before 2008)… and on and on and on… In short, the Eurozone is not an “Optimal Monetary Zone”, far from it.
In last week’s post, we clarified a few potential issues related to market predictions, especially those based on demographics and extreme scenarios. This week, we have fun by exploring a few scenarios that give credibility to bulls or bears, depending on realistic small changes to a few parameters. This will help put some nuance into doom, gloom, or boom scenarios, and bring sound reasoning and analysis back to the public and to your decision making process. Let’s go!
Many articles and academic papers have been written on the link between demographics and stock market returns. For example, a widely-circulated paper of 2011 from economists at the Federal Reserve Bank of San Francisco suggests a price to earnings ratio of 8.4 in 2025 for the US, which would mean a soon-to-be 50% stock market plunge that never recovers.
There are 2 multi-trillion dollar questions:
First, if it is true, the implication is that stocks should plunge approximately 50% and essentially never really recover, on average. Second, it means that we are really going to fall off a cliff soon, and it would be wise to get out of stocks now and hold low-return cash or quasi-cash such as AAA bonds for a decade. Let’s look into this a bit, shall we?
There is plenty of talk these days about a serious slowdown in China that is a precursor of a huge crash that will take the world economy down with it. The general story is that China’s economy is dysfunctional because of extensive state intervention, bubbles, and dependence on exports. We look at this claim point by point to get a clearer picture of what lies ahead for this rising giant. Let’s go!