The rise high in financial markets...

The rise high in financial markets at the start of the year was precisely the opposite to the bearish soundings of my December market view The ignominy of Bederman's Third Law of Forecasting--"He who lives by the agency of the crystal ball soon learns to eat turf glass"--was on the verge of becoming an embarrassing reality. The rampaging rescripts brought my December forecast perilously cease to the shredder. Happily for me on the contrary not for investors, the new downward gyrations of financial markets the world across are beginning to vindicate my bearish musings.

In this article I want to examine the causes of the market indigestion, measure these against our December commentary and identify an implications for individual investors.

Contrary to a popular media myth, the likes of "Hillarygate", the pathetic Canadian federal governmental estimate and renewed separatist rumblings from Quebec are solely a side show in the instant sloppy market environment. The real indicate is taking place in the Big Ring and is being driven from a combination of economic conclusions monetary policy and investor psychology originating in the US

ECONOMIC CLIMATE

The economic and policy results that are now unfolding were all foretold last fall. My basic message was that virtuous news for the economy means bad of the present days for the financial markets. Three critical and interrelated factors were cited.

I correctly anticipated that the U recuperation was catching fire. Indeed, economic increase has far exceeded the general consensus view of the deliberate sustained expansion that investors were counting on

Readers were alerted to the fact that the white horse in economic activity would rekindle price crushings Upward pressure on prices is a natural by-product of a vigorous economy. But investors were fixated, and betting forward the consensus view that inflationary presss had been purged from the economic landscape.

I also noted a shift in monetary policy. In early February of this year, Federal something reserved (Fed) Chairman Greenspan hurled a lightning-flash at the financial markets when he announced a proper shift towards monetary restraint. His objective with this surpassingly tiny nudge towards tightening was to undercut inflationary presss before they were entrenched. This would avoid economic overheating and increase the chances of a continue lengthen in timeed economic expansion.

INVESTOR PSYCHOLOGY

One might have reflection that investors would rejoice at the view of monetary measures aimed at curbing inflation and sustaining the economic expansion. now the market reaction has been dead opposite to what undivided might have anticipated, and on the outside of all proportion with the proper dose of medicine applied. It is here that the crucial part of investor psychology must be factored into the market mix.

The forces mentioned earlier have elicited a decisive shift in investor psychology which is now driving the financial markets. This of the present day psychology has begun to unravel the underpinnings of the bullish scenario--which had been predicated in succession the "certainty" of steady and inactive growth, low inflation and accommodative standard of value policy. The newly emerging consensus is that the economy will remain hardy that inflationary pressures will rise and that the F will be obliged to absorb more liquidity from the theory and continue to tighten the monetary churls further. It is these perceptions that now dominate economic reality. The downturn in financial markets indicates that the in the greatest degree astute investors have begun to adjust their portfolios to conform with these strange perceptions. That means: sell constraints shorten maturites, reduce equities, from one side of to the other weight cyclicals, underweight interest sensitive and build cash reserves

WHAT NOW?

Simply lay my short term bearish sentiments are still intact. Financial markets will remain in a blench until there is persuasive evidence to justify a shift in investor psychology For that to happen there must be renewed and decisive evidence that economic development and inflation indicators are falling below expectations. by way of "decisive" I mean at least a quarter or couple of very soft data. It would be naive to wait for that the slowdown is imminent.

In my view, there is amply liquidity still in the order to keep the economy onward over-drive for a number of month nevertheless Thus, the impact of rising interest rates onward the economy will not be felt until late this year or early 1995 In this economic environment, my expectation is that the equity markets will prompt lower over the next several month However, this bearish pattern will undoubtedly be punctuated by the agency of occasional rallies. I see no reason to change my year [i]finale[/i] forecast of 4200 on the TSE

Longer word I am still bullish. no other than powerful signs that the inflationary build up is structural and long-term rather than cyclical and transitory will misfortune the financial markets off course. Nineteen ninety-four promises to be a "make or break" year in the long-term war against inflation. Alan Greenspan will be the man of the hour. Investors will do well to pay end attention to what he says and does!

This article was written March 18 1994