“Two Staggering Drunks Connected By a Long Rope”

Does the economy eventually have to catch up with the stock market – or confirm it if you will?

Or, in failing to do so, will the economy eventually drag stocks back to “reality”?

The answer to both is maybe, eventually, probably.

The financial blogosphere has come alive this week with a discussion about the equivalence or lack thereof between the economy and stock market. I liked this take I hadn’t seen before from economist Roger Farmer as quoted by Peter Coy at BusinessWeek (emphasis mine):

When he’s talking to his fellow economists, Roger Farmer describes the stock market and the economy as “co-integrated random walks.” For lay audiences he prefers a clarifying metaphor: two staggering drunks connected by a long rope. Sometimes the stock market and the economy go in the same direction, sometimes not. But tied together as they are, they can never get too far apart. “The relationship has been quite strong,” says Farmer, a Briton who teaches at the University of California at Los Angeles. “It’s one of the most stable things I’ve seen in the postwar period.”

Source:

The Stock Market and the Economy’s Apparent Disconnect (BusinessWeek)

Read Also:

The stock market and economy are two very different animals (Abnormal Returns)