Investors: Prepare to Be Deceived on the Europe Story

Here is the question for individual investors:  Do you want confirmation of your biases, or do you want profits?

This is a simple question, but investors have taken the wrong path for decades.


The bearish case is so easy to make.  Problems are obvious, solutions are obscure.

If your objective is to sound smart to your audience, just tell them what they want to hear.

Consider the example of the recent Fed statement.  I have never seen so many top-ranked pundits who are so wrong.  Instead of carefully considering the many events taking place at the same time as the Fed statement, they have jumped to an easy conclusion that will play with the crowd.

They think that the Fed is really, really worried.  They arrive at this conclusion by comparing these two statements:

Prior, August, 2011. “Moreover, downside risks to the economic outlook have increased.”

Current. “Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets.”

Let us think about this.  The Fed, updating every six weeks, acknowledges that economic data continued the Japan earthquake induced soft patch, exacerbated by the debt limit pseudo-crisis, and now augmented by the latest story from Europe.  They observe that things are worse.

Suppose that the Fed had issued a statement that did not acknowledge downside risks.  What would have happened?

If you want to make Bernanke sound dumb, you can do so regardless of the statement.  You could claim that the Fed was completely out of touch.

To sharpen the point, pretend that you were a member of the FOMC.  What would you have said?

Back to Europe

As I read the news from Europe I am basically pleased.  The ultimate solution will be something that includes many parts — ECB, ESEF, IMF, BRIC investment, bank recapitalization, and maybe some USA action.

I do not claim to know whether today’s rumor is the “ultimate solution.” It represents progress.  If you do not see this, you are not paying attention.  It will be a complex story that involves delay while the relevant parties are brought on board.

Most celebrated experts are looking for a magic bullet.  A highly touted pundit tonight said that the plan was Byzantine and complex.  He had just written a negative op-ed in a major paper.  If the plan had been simple, he would have said that it would not work since it did not cover all possibilities.  His mind was made up in advance, as will be most of those you read.

I want to emphasize one of my most important themes — traders and TV interview types grasp for simple solutions.  Most of those commenting have no relevant expertise.  They are traders, who fantasize about a world where there is a dictator with instant decisions.

Democratic governments do not work that way.  The results come from painful negotiations and compromise, one step at a time.  If you do not understand this, you will never see progress, even when it slaps you in the face.

Investment Conclusion

I do not pretend that the European news is an instant winner.  It is positive, interesting, encouraging, and much better than you might think.

Meanwhile, many investors were frightened out of the market last week.  I am shopping like a kid in a candy store.

This post originally appeared at A Dash of Insight and is reproduced with permission.

3 Responses to "Investors: Prepare to Be Deceived on the Europe Story"

  1. rguzmanhuerta   September 28, 2011 at 12:20 pm

    Agree. But then, can the Fed say that they are genuinely and deeply concerned about the economy? If they could, which for expectations and political reasons I think they can’t, how would they articulate it then?