Breaking Bad Habits
Stephen S. Roach
27 June 2013
Case in point is the absurdity noted by the acerbic blog, Zerohedge.com, which took to task various MSM outlets Wednesday for attributing market moves to both putatively strong and weak economic data ("It's Bizarro Headline 'Explanation' Day").
Editors, with little market experience, demand reporters, with even less, to construct neat, ex post explanations for whatever happens in the markets on any particular day.
By contrast, the outcome of a sporting contest is apparent from action visible to all. The account of a school board meeting should report the issues and the votes on them.
It is especially touching that, for instance, NPR continues to ring up some nice chaps who provide such service to the press but who, from my personal experience, provide no insight whatsoever to anybody with any knowledge of what's actually going on. I know this because one such source would eagerly pump me for market insights when we'd get together.
It's been at least two decades since I've chatted with him, and I'm surprised he's actually gainfully employed in his chosen field. But his continued ability to generate an income would seem to be mainly because of this nice guy's ready availability to reporters who need the obligatory quote on deadline, which attracts business for him. This is how the sausage is made, I'm sorry to say.
To presume to know the motivation for the results of events such as sporting events or school-board votes would be considered wacky. Yet it is what is presented as how markets work.
To assert that the action of the markets can be reduced to a Newtonian linearity akin to billiard balls striking one another is astounding to anyone who has ever dealt with the actors who comprise markets.
The reality more resembles the complex state of quantum mechanics, in which causality is not obvious. Moreover, Heisenberg's uncertainty principle shows the observation of a phenomenon affects the results. At the minimum, such concepts should introduce a bit of humility in reporters who describe definitive causality for any market move.
All of which is occasioned by the simultaneous surge in bond yields and the plunge in metals prices in the week since Federal Reserve Chairman Ben Bernanke indicated the U.S. central bank would begin to throttle back its $85 billion-a-month bond-buying program beginning late this year.
Those two market reactions are contradictory, except to the extent that the Fed's money-printing activities inflated all asset prices, be it financial or real ones.
The stunning further plunge in gold prices, with another $45 shed Wednesday to a three-year low of $1229.60 an ounce for the spot month Comex contract, is the strongest sign of the deflationary undertow in the global economy. Dr. Copper, the metal with a PhD in economics, is down 16% this year and more than twice as much from its early 2011 peak. Neither move would appear to be harbingers of either rising inflation or strengthening growth.
Just the opposite, in fact. Thursday's Wall Street Journal reports the uptick in interest rates suggests anything but an inflationary expansion ("Business Feels Pinch of Swift Rate Rise").
On the face of it, to argue the rise in long-term interest rates reflects something salutary in the global economy goes against the contradictory evidence of the metals markets.
How all these contradictory forces play out remains to be seen. The only certainty is that to attribute definitively any market moves to a single, simplistic reason beggars credulity.