In mass as well as numbers – that is to say, in regard to importance as well as coincidence – the data to be absorbed by markets is each day more extreme. For a market that has been trained to process its information in spoonfuls – earnings season, interest rate fluctuations, Fed statements, weekly jobs reports, and so on through the afternoon, until the next day again – the enormity is almost hypnotic.
What’s more, even as in the past couple of years the news has been at its most enormous, this has tended to be sequential. First there was a real estate bubble that popped, and the market processed the event and its resulting interventions. Then there was a European debt crisis, and likewise the market absorbed the news and processed the consequences. Next, there was something of a lull in global turmoil, filled with the usual and customary batches of corporate and economic data, followed recently by the sequence of middle-eastern revolutions. Fortunately for the markets and their sense of order, these happened in sequence: Tunisia, Egypt, Lybia, and a string of less massive turbulences in between.
But the orderly lineup presented is deceptive, and may only be filtered as such by a market accustomed to news taken one by one. Because reality is far less neat, and at the present time is messy even by its own standards of complexity. Working our way back through the string of events presented above: Many if not all of the middle-eastern shakeups have not yet settled into any finality or conclusion, and are in some cases only now beginning. Economic news – even prior to energy market uncertainties resulting from the foregoing – was uneven on many of the most important fronts, not only domestically but in most of the key global markets. Corporate earnings had been relatively impressive, but it was not yet clear if margin improvements were happening mainly on the basis of cost reductions (including layoffs) rather than robust top-line growth, to what extent these margins are subject to peak theories, and to what extent top-line growth is subject to global rather than domestic trade.
Making our way back through the line even further, arriving now at the European situation, Moody’s has lately reminded us that the crisis has not been resolved. We were lulled into forgetting about Greece, and then Ireland, and then Portugal, for a while, but when much bigger Spain’s debt is downgraded, this is reason to recall the severe state of affairs, and that other crises (of smaller sovereigns) have not yet been contained. And when we look at the original bubble that brought the rest of it all down in the beginning – only for purposes of simplicity assuming that 2008 was neatly “the beginning” of something without prior cause – in other words, looking in on what’s left of the real estate bubble, we see now that its deflation has not ceased.
In short, what may have seemed to us – conditioned as we have been perhaps to market movements and current events that are revealed, processed, factored, and then let go as the next event in line shows up – as a sequence, albeit a turbulent and almost unprecedented sequence in terms of frequency of events and their degree of magnitude, is not so much a sequence as a growing mass. Or rather, what started out as a sequence has become an incremental buildup, as underlying events have not in actuality been brought to closure.
When seen in this fashion, the market run-up experienced since the introduction of QE2, a rally that has only in the last couple of weeks paused for breath, is bound to appear quite treacherous. On the other hand, though, it also comes across a little bit like the turning of a blind eye because reality is simply too much to grasp. This notion came to mind the other day, after the shock of the latest global event – the devastating tsunami in Japan, the world’s third (and sometimes second) largest economy – and the strangeness of the market reaction to the catastrophe. The market was sharply down, then rebounded, then rose, then fell, then rose again and ended on an upbeat note, although not necessarily convincingly. It was almost as though the market did not know what to think anymore, (and in the meanwhile, there was little discussion of Lybia, which is still ongoing).
When the market is seen in this fashion – as overwhelmed by events and global turbulences that are almost too much to process – one may almost look sympathetically upon the liquidity manipulation of monetary policy. QE2 is so simple and so comforting in many ways. As long as traders and their high-frequency machines stay focused on it, as long as investors of all kinds rally around the benefits of enhanced capital flows, the system can continue functioning and the economy can continue to move, when otherwise all could just as easily freeze in the headlights.