The Big Economic Picture

Posted: Jun 01, 2013 12:01 AM

What is the true meaning of a word?  It’s all in the eye of the beholder, the proficiency of the ear in regards to the listener, or the opinion of the user.  In addition, it also depends how close you are to the situation — it’s called seeing the forest for the trees. 

What I’m referring to is the constant call from bears and bulls that a stock market “correction” is long overdue.  In fact, the recurring Tuesday charade seems just too good to be true (the Dow Jones Industrial Average has been up for twenty Tuesdays in a row.)  The Farlex Financial Dictionary defines a market correction as “a drop in the price of a market when that market has been overbought and therefore overpriced.  Market corrections are usually short-term and are necessary for the stability of the market.”

For those people that view the U.S. stock market as an entity totally devoid of a relationship with economic reality, then I suppose “correction” is indeed the appropriate word.  Whether it’s a 5% or 10% correction, it always affords the unsuspecting investor an opportunity to join the party, which is more than likely what they’ve been missing.  Wall Street’s thinking goes like this: after a 10% pullback, you’re expected to make that 10% and a whole lot more as the upward direction continues.  Yet, stepping back from the day-to-day “push-me—pull-you” of the market (the trees) which has been centrally bank driven to reach new highs, you will soon realize that the last thirteen years (the forest) has demonstrated an ending or a topping process of a bull market which began in 1982.     

The stock market notwithstanding, the world’s economies are moving closer and closer to realizing financial decline, better known as being in a “recession.”  In fact, the economies of many countries such as Greece and Spain are very close to being dubbed “depression.” 

As the world moves further and further into the depths of despair through accelerating unemployment, widespread poverty, rising nationalism, and military adventurism, the stock market’s isolationism will eventually give way to the prevailing force of economic reality.  At that point, the beginning of the stock market correction will have ensnared many unsuspecting folks who dreamt they entered the market at exactly the right time, with the 10% correction providing the so-called ideal buying opportunity. 

However, the truth will ultimately hit home when the word on everyone’s lips is not “correction.”  More accurately, the word on the tip of everybody’s tongue will be “crash” and a 10% loss will feel really good in relation to what has actually transpired.