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Prieur Perspective: Stock Uptrend Resumes as Economy Rebounds


Investor confidence in the recovery of the global economy gains traction.

The global economy is now beginning to emerge from its worst crisis in generations, but the downturn might have been much worse if central banks hadn't acted so forcefully last fall, Federal Reserve Chairman Ben Bernanke said on Friday in a speech at the Kansas City Fed's annual retreat in Jackson Hole, as reported by MarketWatch.

The chart below, courtesy of US Global Investors, shows the results of the Fed's Senior Loan Officer Opinion Survey. An inverted scale is used, i.e. when the percentage of banks tightening their lending standards increases, the line trends down and vice versa. As indicated, the trend in lending standards has historically been closely correlated with the year-on-year change in private non-residential fixed investment, or capex, lagged by 3 quarters.

The lending standards data for July were released last week and show that a net 31.5% of large banks were tightening their lending criteria versus a net 83.6% last October, resulting in the line trending up. Based on the historical relationship, one would expect capex to start rising soon. Although not shown, the research also indicates a similar correlation between lending standards and both industrial production and total non-farm employees, implying these should also soon start trending up.

Dampening some of the enthusiasm, Nouriel Roubini (RGE Monitor) said (via Forbes):
"I now anticipate that policy measures and other factors will boost real GDP growth, albeit in a temporary manner, in the second half of 2009. Yet the shape of the recovery (will it be V, U or W?) and other challenges will influence the US economic outlook going forward. Growth will remain well below potential in 2010, while the shape of the recovery will be closer to a U."

Week's Economic Reports

Click here for the week's economy in pictures, courtesy of Jake of EconomPic Data. Click here for the weekly economic calendar from Yahoo.

The US economic data reports for the week include the following:

August 24


August 25

Consumer confidence

S&P/Case-Shiller Home Price Index

August 26

Durable goods orders

New home sales

August 27

Initial jobless claims

Second quarter GDP

August 28

Personal income and spending

Core PCE

Michigan Sentiment Index


The performance chart obtained from the Wall Street Journal Online shows how different global financial markets performed during the past week.

"Some people are addicted to seeing catastrophe in the future," said the late Peter Bernstein, author of Against the Gods, The Remarkable Story of Risk. Readers should go about making investment decisions in a level-headed manner and steer away from excessive pessimism (or extreme optimism).

That's the way it looks from Cape Town (where I'm making final arrangements to take a group of local business people to Slovenia in 10 days' time -- let me know if you'd like to meet with us in Ljubljana).
No positions in stocks mentioned.
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