Chicken and Egg

My view is that stock markets are normally driven in equal parts by psychology and financial analysis, but the less there is of the latter, the more the market reacts to the former. Hence panics and overconfidence – excessively reactive sharp movement (volatility). While “leading economic indicators” (stuff like gross domestic product – GDP – stock prices, liquidity and unemployment statistics) are interdependent, and changes in any cause changes in all, generally the one with the fastest instant reaction time – the stock market – is the one that usually sets the overall trend, and once the bottom is perceived, the others will follow.

When you see spurt up in the market, obviously, people buy stock because they believe it will rise… and professional traders don't want to miss the instant rise that will occur when the real floor is reached. When they realize that “wasn't the bottom,” guess what? Yeah, the stock falls. That’s why you see so much governmental intervention directed “at the top,” which is a great theory if you think the bottom is just around the corner. They think the stock market will lead us out of this malaise.

Well, not exactly. When the damage is so deep, pervasive and grassroots, the markets won't perceive the bottom and lead up unless they believe the underlying causes of the problem are fixed or are confident that there is a viable plan to repair the damage. Europe and Asia don't have homeowners with bad subprime mortgages; they have institutions that bought toxic derivatives – American subprime mortgage-backed securities, global institutional credit default swaps, stock in failing companies, etc. So Europeans must focus on fixing their institutions, while America has the people at the bottom whose problems must be solved to give our stock market the confidence to “lead” us back to economic growth.

When the folks at the Department of the Treasury had a choice of doing top-down fixing versus grassroots repair, they met with the heads of state and finance ministers from nations around the world. Since only the U.S. had the people with bad mortgages problem, they were the only one that needed to focus on the grassroots solutions. But instead of recognizing that fundamental difference between the major issues in the U.S. versus the major issues in other countries, Treasury adopted the global pursuit of shoring up banks and markets as the first priority and left fixing the uniquely “people-directed” solutions on the table.

Needless to say, absent a viable solution to the mortgage crisis, even as piggy institutions realized that they were just taking care of themselves at the expense of the “greater good” – of course they want to be first to the trough – no one perceived that we were anywhere near the bottom; the markets voted and dropped even more.

So Treasury, sheep-like (lots of barnyard animals today!), picked the chicken that every other nation was looking at, and the egg was left out in the sun to spoil – homeowners were left out to dry. America is not Europe or Asia ; we do not have the same core issues even if the recession makes it appear we do. The definition of leadership is to ignore the flock and well… lead. Wake up “leaders”!

I’m Peter Dekom, and I approve this message.