Criteria to be Met Before Investing in Financial Markets

Over the last many days stock markets around the world have rallied considerably.  The question is: what to make of this buying activity?  In other words, have the storm clouds passed and now a good time to invest?

What is needed to answer these questions are some objective criteria.  Namely:

• The U.S. sovereign debt crisis triggered a huge market sell off mid-summer.  Has there been actual movement on this issue?  Are Republicans and Democrats finally able to compromise on budgetary plans and/or deficit reduction plans?  As you survey the landscape currently there doesn’t seem to be much evidence of this accord.
• After the U.S. sovereign debt crisis, the European sovereign debt crisis reared its very ugly head, once again.  Have the Europeans actually done anything other than talk about solutions?  That is, are they walking the talk?  Up until this moment the Europeans have talked and talked and talked and talked.  Investors around the world have vacillated between trusting the veracity and force of these statements and absolute panic that nothing could be, or would be done.  Thus far all there is is a lot of talk and a little bit of walk (e.g. the EFSF).
• A slightly less talked about crisis, but one that is just as scary as the European sovereign debt crisis is the debt crisis confronting European banks.  To put it mildly, Europe’s banks are undercapitalized and overexposed to the sovereign debts of European nations.  It is unclear how the nations of Europe can be expected to bail out European banks when those same banks are being asked to bail out the same European nations.  Until there is some sort of concrete plan announced for dealing with this then the possibility of large, and outsized volatile sell offs exist.
• As I have written about continuously on this blog, the Chinese economy is massively overheated and it looks as if there is going to be a bursting of its bubble.  What evidence do you see out there that the Chinese are reigning in the real estate bubble in China?  As long as they are still implementing new measures to stave off inflation then you can be sure that there are still large inflationary forces at work.
• State of the U.S., European and Chinese economies have to be positive, and non-recessionary.

I think that you will agree with me that the above five criteria have not been positively met.  The closest criteria to being met is that the U.S. has not entered a recession.  The jobs report on Friday (103,000 jobs added in September) was nice, but was still short by 160,000 or so jobs from being high enough to lower the unemployment rate.  What’s more, European nations are all reporting declining economic statistics, as are the Chinese.

So is there a continued financial market selloff?  No.  Instead we have lift off in share prices, that may look appealing, but they are discounting hope right now and not reality.

Jason