How would you feel about your property value if there were a growing fire destroying an entire block of houses two miles away? Sure, it’s a little smoky when the wind blows the wrong way but you just slapped on a fresh coat of paint. Someone’s going to put the fire out, right?
The European sovereign debt/banking crisis is the fire for US investors at the moment and investors’ attempts to change focus to more positive thoughts – the ADP report this morning is the latest example – have been continually thwarted by events. Traders are increasingly banging their heads on the desk after another series of “false break-outs” as Italian bond yields play hopscotch with the 7% level. As the 2011 S&P 500 non-performance clearly showed, we’re stuck.
The thing is, we’re not good at this anymore. Trained by immediate, excessive news flow our collective attention spans have shrunk to the time it takes to read 140 characters. Large research reports? Forget it – if its important FT Alphaville, Felix Salmon or Megan McArdle will summarize it for us into a neat 500 word post. Next. KardashianNFLPlayoffsADPKimJongIlIranNuclearWeaponsObamaSucksRatigan’sNewBookGorillaLooseatMall. Beer. Eat. Nap. Jon Stewart. Sleep. New day – new story, please. Oh, and if someone could just fix Europe for me overnight, so I can go back to safely piling money into the market on new economic data and attractive technical set-ups, that would be terrific.
The starting date is arguable but the origins of current developed market debt problems are at least 20 years old – 1982 and 1994 are the two most-cited start dates – which implies that expecting a quick solution is unreasonable, whether our modern attention spans can handle it or not. Even if the ECB kicks the can down the road by printing (the most likely eventual outcome from all I’ve read), there is still the issue of Basel III-related forced bank recapitalization, as Unicredit was nice enough to remind us of yesterday.
The “Wall of Worry” remains a helpful metaphor and it is entirely possible that the global economy “muddles through” the host of hurdles before it. It is also likely, however, that the investor contrarian reflex to buy dips, or whenever sentiment is poor, will be a perilously unproductive one if its primary basis is boredom with yesterday’s negative news. In order to understand complicated credit issues that are a) almost unfathomably enormous if we include the shadow assets and b) decades in the making, we will probably need to learn more, maybe finish a few of those large research reports, and act less. Waiting for a bottom, when the fire is either truly out or at least shrinking towards embers, may take considerably more discipline than the era of the Great Moderation has trained us for.