This is an interesting piece from the end of August, published at Seeking Alpha, by Wayne Corbitt:

“In the chart below, I have plotted a spread between FXM (Mexican Peso – a riskier currency) and FXF (Swiss Franc – a more stable, defensive currency). When the black line is rising, money is flowing into the peso more than the franc, which is a sign that traders are embracing risk. When the black line is falling, more money is flowing into the franc and away from the peso, which says that traders are moving away from risk. I have also plotted the MSCI World Index [MSWORLD] as the red dashed line to show world equity performance in relation to the currency spread.Notice back in November/December 2008 (on the left side of the chart) how MSWORLD rallied while traders were moving away from risk in the currency markets. That party lasted about six weeks before the move away from risk caught up to equities. MSWORLD subsequently dropped 28% to its March low.

Following the volatility surrounding the March low, the spread and MSWORLD got back in synch in early July and moved higher together. Since early August, however, the spread and MSWORLD have been diverging badly, demonstrating that risk is once again being taken off the table. This is saying that the world-wide liquidity driven rally may be near its end.

When equities rise while traders are moving away from risk, there is not enough fuel in the tank to support prices at very extended levels. This is one more warning sign that must be heeded.”

My Comment:

This is a very interesting piece, but I must confess I’m in two minds about things.

On the one hand, I do believe that all the fundamentals, and many technical factors, call for a correction in the market rally (a bear rally) – and a substantial one. I think “green shoots” is simply PR.
On the other hand, there are other technical and economic data that are promising. And I think the powers-that-be are fundamentally committed to pushing up stocks.

So which of these two sides wins?

It’s a tug-of-war, with deflationists generally on the side of a negative outlook on equities going forward. I’m on that side, but I’m also not a theorist. And I have a suspicion of theories in this environment. I’d rather look at things and figure out how I want to position myself for the next 3 months going forward. Sometimes that works out, and sometimes not.

So, I can feel negative about the economic picture and still see why some people like Jim Grant and Marc Faber seem to feel investing in stocks makes sense over the next three years. I’m wondering if there isn’t so much concerted effort being put into this that the market might indeed be propped up further, despite the problems in the commercial real estate sector.

(By the way, in one extended analysis of the credibility of prognosticators, Faber is ahead of the pack, being right a bit more than half the time; Peter Schiff and Robert Prechter were pretty low down, being wrong more often than not, and considerably wrong). So you can be a pretty smart macro analyst (like Prechter) but be a pretty bad financial adviser.