The Caracas Stock Exchange Index only gained 44% this year, a far less intense surge than the 452% increase in 2013. Of course, not even in Venezuela do stocks travel in a straight line forever, as the exchange saw a bit of an extended “correction” for most of this year. However, the upswing is back as almost all of the yearly gains were produced in December.
That makes for a strange correlation with what is supposed to be economic discounting. The government just announced, belatedly of course, official economic statistics for the first nine months of the year. Through the Venezuelan central bank, it was confirmed that the country has been in recession all year to go along with its continued runaway inflation.
In a statement, the bank said GDP contracted 4.8 percent in the first quarter, versus the same period of last year, then it fell a further 4.9 percent in the second quarter and shrank 2.3 percent in the third quarter.
The statement added that 12-month inflation, which is the highest in the Americas, reached 63.6 percent in November.
The central bank statement, confirming an economic contraction widely forecast by analysts, came just before President Nicolas Maduro was about to start a news conference in which he was expected to announce economic changes.
So the recession wasn’t an unknown or even “unexpected” event, yet stocks managed to “eek out” a 44% rise?
Of course, the Caracas exchange isn’t really much of a stock market to begin with, as only 20 companies are listed. Volume and capitalization are pretty much nonexistent, at least in comparison with even markets in other “emerging” nations (though Venezuela is as much de-merging as anything now). With capital controls exceedingly tight, foreign companies often have nowhere else to park “money”, so stock prices rise as a consequence of nothing more than that.
The difference in 2014 may be related to credit changes. Some companies were allowed to issue convertible bonds denominated in dollars, creating a window for “flow” out of the country, and apparently at the expense of trading on the Caracas exchange. That may explain going from +452% to 44%, and also the fact that stocks there are trading almost exclusively on financial factors unrelated to economic destruction apart from currency collapse.
But where Caracas is more than a little absurdity in terms of its stocks, the template is at least apparent elsewhere. The Shanghai Composite rose 53% this year, “besting” Venezuela, with almost all of those gains coming as the latest slowing in China was all but confirmed. That led to the Wall Street Journal putting together an opening paragraph that at one point in history, and not all that long ago, would have seemed completely inconsistent.
Stocks in China finished a bumper year on a positive note Wednesday, even as a gauge of China’s manufacturing activity reaffirmed a slowdown in the world’s second-largest economy.
If it were only one “gauge of China’s manufacturing activity” then maybe the above would be acceptable instead of contradictory. Instead, it is a widespread decline that has economists, who refuse to take note of what the PBOC is actually recognizing, practically begging for more monetary “stimulus.” But, as in Venezuela, stock prices in China are as much about “capital flow” in a destructive context as discounting economic and profit fundamentals. Since the PBOC radically altered the landscape of bubble-type speculation in repo mechanics, the Shanghai Exchange has simply received the beneficence in its place.
Even the Nikkei 225 has managed a 7.1% gain this year, with a healthy rebound after a setback that began at the end of September and ran through the second week of October (that time period sounds familiar). Since October 17, the 225 is up 20% at the same time the government “had” to call a snap election because it was confirmed the economy had completely, and “unexpectedly” of course, sunk deep into recession. Worse for the economy, but not the Nikkei apparently, all data that has been released for the fourth quarter and heading into 2015 is no better and may be even slightly poorer still.
That trend is remarkably consistent, as market indices all across the globe have exhibited resounding resiliency since mid-October (in sharp contrast to the far, far larger credit and funding markets) to find new highs. They have done so in total dismissal of oil prices which are clearing as much on a shocking drop in total demand. This vast divergence is only curious in the context of rationalizations about the global economy (and the US’ place within it).
If that weren’t enough of a counterpoint to market enthusiasts, we might only add that stock prices almost everywhere are at valuations that make sense to nothing but prior bubble periods.
The usefulness of the Shiller CAPE and Tobin’s Q (and my modification of the Q by subtracting out real estate from corporate net worth) is as a predictor of future gains. The higher valuations get, the lower the expected future appreciation (with all three prior, major peaks leading to highly negative 10-year forward returns). While we may not know ahead of time the form those expected return profiles will take, the divergence, borne out of simple and ultimately tortuous rationalizations, between stock markets and economic reality today more than suggests that this time is no different.
One factor that may be altered from the historical record is the spread and scope of severe imbalances all over the world, as suggested by my review of “markets” above. That may be the perfect encapsulation of 2014, the year of only seeming global divergence. As it stands outside of self-insulated stock perceptions, there was and is actually a shocking uniformity all over this year. That may include, as we await any reckoning, the trading patterns of Caracas, Shanghai, Tokyo and maybe even Wall Street.
Stay In Touch