Either we're skewed or the markets are

This is a bad time for market purists who believe that financial markets provide the best reflection of what's really happening in the economy.

On the many occasions when markets offer a cracked prism through which to understand the economies they represent, the purists insist that markets do not have to reflect what's going on at the moment but are inherently forward looking and thus foresee the future.

Nevertheless, most markets do not offer a realistic picture of what's happening in the world economy right now, nor does their performance make for a convincing forecast. Let's look at some examples of just how flawed the vision supplied by markets is.

Exhibit One is the US dollar, which is frequently written off as having had its day as the world's most significant currency. At the moment the dollar is issued by a treasury mired in record levels of debt, which is freely printing money (this is politely called 'quantitative easing'), and the currency is backed by an economy registering growth at anaemic levels. Yet the dollar is not collapsing. Indeed, its value continues to rise against other currencies, mainly because there is no alternative to what is effectively the global currency of last resort.

Exhibit Two is the mainland stock markets, which recently slumped to a 33-month low. Yet this is one of the few major economies still registering significant growth, and inflation looks as though it is being tamed; last month inflation dropped to 4.2 per cent from 5.5 per cent in October.

However, any sliver of good news seems incapable of moving the mainland equity markets, which are trading on a staggeringly undemanding price-earnings ratio (PER) of about eight times. What's happening is that investors expect worse to come, and they might be right. However, the investment houses that churn out enthusiastic reports about the mainland economy are clearly not putting their money where their mouths are.