Why the Markets Are Up.(International Edition; POINT OF VIEW)

Byline: Barton Biggs; Biggs is managing partner at Traxis Partners hedge fund in New York.

To understand the rally, recognize that the GDP statistics you are reading are already out of date.

Equity markets around the world are surging in the face of the sickest global economy in more than half a century, a crippled banking system that needs billions of dollars of equity capital, a flu scare and house prices that are still falling at a dizzying rate. On April 30, the front page of The New York Times read ECONOMY SLIDES AT FASTEST RATE SINCE LATE 1950S. That same day, the German finance minister said his country would suffer "the worst recession since the Second World War" and that other European economies were in dire straits.

The declines have been even more severe in Asian economies such as Japan, Korea and Singapore, and most experts are skeptical about the better numbers from China. The "great minds" of the investment world and the most highly regarded economists are preaching gloom and doom and a generation of wealth destruction. The question now: why are stock markets going up when so many economic numbers are going down?

First, recognize that the statistics you are now reading are already out of date. The U.S. government reported on April 29 that real GDP fell 6.1 percent in the first quarter after a 6.3 percent drop in the fourth quarter, the steepest six-month decline in 50 years. Yet U.S. stocks rallied to a new recovery high the same day. Why? Because beginning in mid-March, there were signs of what Ben Bernanke called "green shoots" in the real economy, namely that the rate of decline, or the so-called second derivative, was decelerating. Some investors began to believe the world economy was bottoming out.

Now those green shoots are budding into foliage. In the last couple of weeks, there have been signs that the U.S., Germany and Asian economies are on the verge of not just bottoming, but rebounding. It's beginning to appear that real GDP growth could be positive in the second half of the year--maybe even sooner. Leading indicators, including new orders and the purchasing managers survey, are rising. New home sales, the best leading indicator of the price of existing homes, seem to be stabilizing. Historically, the steeper the GDP decline, the stronger the rebound. Ed Hyman, the most highly regarded Wall Street economist, is talking about 4 percent real growth in the third quarter.

The second key reason markets are up is that most of the gloomy news that is on television and the front pages is already discounted in stock prices. Equity markets are looking ahead, not behind. Remember, this brutal bear market began in the summer of 2007, when the world still appeared to be booming.