Cracks in the Foundation

dailyreckoning.com.au / By Dan Denning / August 6, 2012

Step away from watching the markets hour by hour and eventually you’ll notice something. What you’ll notice is that most of the news is garbage. Websites and cable news channels need a constant news flow to justify movements in stock prices. But most of the time there is no connection between the news and the price action.

Your editor makes this observation after being away from his desk for two weeks. During that time, we were only intermittently in touch with hourly news flow. We didn’t miss it a bit. And it turns out we didn’t miss anything important either. The status quo prevails.

And what is the status quo? Well, for one, let’s not make the mistake of calling the market a market. It isn’t. A market is where you have a buyer and seller willing to exchange goods and money at a mutually agreed price. That price is ‘discovered’ by aggregating all the bids which buyers are willing to pay and the asks which sellers require.

Price discovery is ruined — and markets don’t function — when you have a serial intervener in the form of a central bank. That’s what we have today. For example, markets reacted in Pavlovian fashion last week when European Central Bank (ECB) President Mario Draghi said he’d do ‘whatever it takes’ to save the euro.

What does that even mean? Does it mean Draghi will print money to buy Spanish and Italian government bonds? Does it mean he will don Lycra and learn to leap tall buildings in a single bound? Does it mean anything at all when it comes to resolving Europe’s structural economic problems?

It’s a giant pile of nothing, to be frank. You should ignore it. And while you’re at it, ignore the Dow Jones Industrials index too. As we said in our remarks in Vancouver a few weeks ago, the Dow communicates no useful information about the underlying health and direction of the US economy. It’s a narrative device designed to promote stock buying to the investment public.

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2012-08-06 10:30:19

Source: http://silveristhenew.com/2012/08/06/cracks-in-the-foundation/