You've got to laugh when small fluctuations are given big explanations.
When I began investing nearly a decade ago, I paid very little attention to the wider economic news. I'd vaguely know whether markets overall were up or down that month, mainly from movements in my own portfolio. I came to The Fool to learn about investing, and to read the discussion boards, of course.
But I only occasionally took an interest in the wider economic narrative. In fact, in those days I read The Guardian, not the Financial Times!
How things change. Now I partly make my living writing about investing and the markets. I take a keen interest in all the financial media, from Reuters and The Wall Street Journal to Bloomberg TV and a host of blogs.
The benefit is that I've got a much greater understanding of the backdrop against which my investments play out.
The downside is that much of this coverage is, frankly, from Alice in Wonderland.
Greek myths
Consider for example the current eurozone 'sovereign debt crisis' [sic]. Around the beginning of spring -- after one of the fastest, strongest rallies global stock markets have ever seen -- shares fell back modestly. At the same time, the yield on Greek government bonds rose as investors became concerned about the Greek government's ability to refinance its debts.
It's impossible to know for sure, but I don't believe the fall in the stock markets had anything to do with the situation in Greece, for all the acres of newsprint dedicated to the story.
Markets move in the long term in response to earnings, but in the short term they seem to fluctuate without rhyme or reason. Yet unfortunately, if your job is to tell people why the markets are down that day, everything starts to look like a solution.
One reason I don't believe there's much logic to the eurozone crisis theory is because of what's happened since. Shares quickly recovered and then fell again, despite an unprecedented near-$1 trillion rescue package that comprehensively deals with the liquidity issue that was apparently at the root of the crisis.
Old news
As for the solvency issues around the likes of Greece, they have been known since at least October -- and for the wider eurozone have been implied ever since we went into recession and it became obvious that a structural deficit would occur in all advanced economies when tax receipts fell away.
It's hard to believe that markets can shift in an instant to utterances from a Greek politician, but not spot a deep global recession and its consequent implications for public debt and spending.
Moreover, government bond yields have actually been falling in many European countries, despite the so-called crisis, and on a long-term basis remain surprisingly low, even in countries like Spain. These are hardly assets that are being thrown overboard by investors terrified they won't get their money back.
Even more tellingly, Credit Suisse last week produced research showing that cyclical shares have been outperforming even as European government bonds have rallied!
So let me get this straight -- the riskiest companies most attuned to the economic cycle have done better than the defensives, even though Government bonds are signaling lower growth or even a double-dip recession in Europe?
Yeah, right.
Comment is free
I don't doubt I may read some wise-sounding explanations appended on to the end of this article by readers pointing out why this or that fact has been overlooked.
Let them comment. Everyone has an opinion on the macro picture, and the corollary of this ubiquity is that on average it's useless, not to mention the capriciousness with which events confound over the received wisdom.
For instance, how many times have you read in the past couple of months that Europe will slump again this year, because of the austerity measures in deficit-stricken countries and their knock-on effects across the continent?
Every day, I'd imagine -- even if you read The Guardian.
Nice theory. The only trouble is the European Central Bank came out on Thursday with an upwards revision to growth expectations for the eurozone for 2010 (it's now looking for between 0.7% to 1.3%).
Oops!
Noise abatement
I heard an analyst on CNBC early last week whose comments typified the sheer silliness of macro navel-gazing for short-term market insight. I won't share his name and company -- partly to spare his blushes, but also because I was so howling with laughter that I didn't quite catch it between the floods of tears.
The chap -- who is doubtless paid annually more than I earn in a decade -- was asked why a one-day rally in the US market had seemingly petered out.
Instead of saying something honest like "I don't know" or even "Nobody knows", he opined: "Investors have remembered that the deficits in the eurozone countries have not gone away, and that these debts are going to drag down growth for years to come."
So apparently, a daily micro-movement in the US market was being driven by dumb and forgetful investors suddenly finding the mental nous to do a discounted cashflow model (overnight!) to take into account reduced GDP expectations for Europe and then paying less for their shares on the results.
And since the debt situation will hang around for years, presumably stocks would continue to fall for years by this logic -- or at least until they were rationally priced for the situation on the ground.
Not only was this argument fanciful -- it was immediately contradicted by a 4% rally in the week after he uttered his views.
Perhaps investors had now forgotten what they'd only just remembered? Or maybe he was adding mere verbal noise to market noise, when he'd have done better to say nothing at all.
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