a) Stock prices drive economic activity, not the other way around. A 10% change in stock prices has been associated with a 3% change in real capital expenditure in the same direction, going back to the 1920's.
b) The crises will end when stock prices start moving up. This is a very important point.
Almost everybody says that stock prices precede economic recovery by 6 months. I think the converse is true. Stock prices move up - for whatever reason - and if the trend gets sustained for a few months, they pull the real economy out of its doldrums. That is why price momentum is extremely important.
This was the unfortunate logic I used last May to turn bullish for a brief period of time. I was like - it doesn't make sense, but if the markets are rallying (post Bear Sterns bailout), it will itself take care of the problems. Thankfully I didn't lose a lot.
This is an excellent blog that someone has started - ZeroHedge. Highly recommended for anyone who is interested in credit markets.
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