Sunday, June 07, 2009

Is This a Bull Market or Bear Bounce?

Quick question: Which of the following is correct?

A) We are seeing a stock market bounce in a longer-term bear market

B) We have entered a raging, liquidity-driven bull market

As we can see from the international ETFs above, both are correct, depending on what we're looking at.

We see very bullish 2009 returns in Australia (EWA), Canada (EWC), Hong Kong (EWH), Brazil (EWZ), China (FXI), Russia (RSX), and India (PIN).

Returns have been much more subdued in 2009 for Germany (EWG), Japan (EWJ), U.K. (EWU), and the U.S. (SPY).

One interpretation: The markets have been rewarding economies that are grounded either in natural resources, budget surpluses, or both. The markets have been penalizing economies that are grounded in debt. This dynamic has important implications for commodities (which have been rewarded), interest rates (artificially low in the debtor countries), and currencies (weakening due to debt).

Another interpretation: We have created a new liquidity bubble, which is finding a home, particularly among emerging markets. These bubbles can go much higher than anyone normally anticipates, but they inevitably end badly.