High Volatility and Low Expectations - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 4 August 2012
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- By Asad Dossani, Author, The Lucrative Derivative Report


Asad Dossani
On Friday, stock markets globally got a huge boost from a positive US jobs report. The US economy created 160,000 jobs against a market expectation of 100,000 jobs. In addition, the unemployment rate rose by 0.1% to 8.3%. The Indian equity markets will likely open higher on Monday morning due to the news.

Why did the markets cheer this report so much? A closer look at the data suggests that the jobs report was positive, but nothing spectacular. The US economy needs to create 100,000 jobs a month just to keep up with population growth, so 160,000 jobs isn't as significant as it seems. In addition, the number of unemployed persons did not show any material change.

At the current pace of job creation, it would take around 8 years for the unemployment rate to fall to its pre-recession levels. The jobs report suggests that the US economy is improving, but very slowly. Clearly, this is not a fantastic report.

This brings us back to our original question. Why did the markets do so well following this report? It comes down to expectations. The markets cheered the report because they were expecting much worse. In fact, it has become common for the markets to have low expectations.

The low expectations aren't just surrounding the US economy. The market expects that Indian GDP growth continue to fall for the rest of this year. In addition, the market expects that the worst of the Eurozone debt crisis is still to come. With such low expectations, even mildly positive news sends the market soaring higher.

A consequence of this is that markets have been and continue to be very volatile, relative to what they should be. If we look at the US employment reports over the past few months, they have been fairly stable, ranging between 50,000 jobs to 150,000 jobs created. Yet, every time one of these reports has come out, the markets have made dramatic moves, both up and down.

The Eurozone debt crisis is another example of the market's high volatility and low expectations. Nearly every week, we get news about the Eurozone debt crisis that affects markets around the world. Yet, over the last year, no Eurozone country has gone into default. Markets are fearful, but nothing terrible has happened.

All this uncertainty and volatility has an upside. There are likely to be good buying opportunities out there for long-term investors. The markets can't have low expectations forever, and now is a good opportunity to take advantage of it.

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Kind Regards,
Asad

is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

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2 Responses to "High Volatility and Low Expectations"

D Ghosh

Aug 8, 2012

Does job creation really mean growth in economy? Maybe 160,000 people retired / quit their job this month. Is the reverse true - Less job creation means economy is not growing?
The management approach in developed nations has always been to improve productivity. Produce more with less. This approach takes care of rising salary and in turn the inflation, though we Indians are far from all that. With more & more companies in the US adopting Lean methods of manufacturing & servicing (due to technological development) it may be natural for them not to employ more people even if the old one retires. But that does not mean the company is not growing.

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C K Vaidya

Aug 5, 2012

Something wrong with your numbers! If US requires to create 1 lac new jobs per month to keep up with population growth, then when 1.6 lac jobs are added in a month, the % jobless should go down, right? How then did it go up?

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