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Wednesday, May 5, 2021

Have the Stock Indices Transcended the Economy?

One important function of the stock exchanges is information dissemination. When the stock indices rise, people get the sense that the economy is doing well. When the stock indices decline, they know that the economy is ailing and then they can put pressure on the government, regulatory bodies, and the business houses to do whatever is necessary to cure the economy. But these days, the stock exchanges are not distributing the right information. They seem to have transcended the fundamentals of economy. The movement of the stock indices is not showing any correlation to economic reality. 

In the last three months, there has been a 12% spike in commodity prices, which has resulted in a spike in the ex-factory prices of several goods and services, To keep the consumer level inflation under control, the USA and the West European countries are now sourcing a higher amount of cheaper goods and services from overseas which is resulting in less domestic manufacturing (resulting in loss of jobs) and a higher trade deficit (in March 2021, the trade deficit was $74.5 billion in the USA). Dollar is under pressure—at some point, it must fall. The Euro too is under immense pressure. Why is this information, and other bits of disturbing information, not having an impact on the stock indices? 

The S&P 500 Index, DJIA, NASDAQ 100, Nikkei 225, CAC 40, DAX, Hang Seng Index, and other indices have been “eerily” stable in the last five months. They have been moving in a range of just 2% to 7%, which, in my opinion, is quite unnatural—this is certainly in defiance of the laws of economics. The question is who is paying for keeping the world’s stock indices in a steady state at such high levels? The simplistic answer would be: The taxpayers. But the taxpayers do not control the tax money. Some other forces are managing this “brilliant” operation. Howsoever brilliant they may be, I don’t think they can sustain the bubble for more than seven to ten months. 

All it takes is a little prick in the bubble economy to make the stock prices come down like a crashing meteor whose blast will decimate the civilization of the present day dinosaurs.

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