In a recent article, I noted the various signs that things are unraveling at the periphery. In the comments that followed, plenty of people (myself included) expressed the belief that the various Powers That Be are doing everything they can to limit the damage as much as possible.
The Importance of Beliefs
After a full weekend of burning up the phone lines and the midnight oil, the central banks of the world seemed to have calmed things down a bit by Tuesday (1/28/14), as evidenced by directional reversals in the prices of various currencies, gold, and stocks. Everything that needed to head back the way it came, from a central banker perspective, was headed back in the "right" direction.
While perhaps frustrating to observe, this expected price behavior is good to see. It's much healthier for markets to work their way down progressively from dizzying heights rather than crashing all at once. Sudden crashes tend to do little to change long-term momentum because they often get rapidly fixed by interventionists and rationalized by investors. Before you know it, they are completely forgotten.
Real changes happen over time. With plenty of wiggles and jiggles along the way; because what’s really being shifted are beliefs, not merely prices.
If information ruled the day, no sane investor would be buying 30-year U.S. Treasury bonds for 3.76% or, even more crazy, Spanish 10-year debt for 3.70%(!!).
The long-term prospects of both these countries certainly and convincingly argue for much higher yields. But today lower rates persist due to principal beliefs that investors hold. The first is that the Fed and ECB, respectively, will be able to engineer a smooth return to economic growth. The second is that, if things begin to get out of hand, they'll be able to sell out of the market before the next guy.
Investor beliefs like these are what drives markets. Not information.
My Beliefs About the Future
While I do hold the belief that things will unravel faster than most people expect, I don't see the most likely path as being straight down.
Instead, I see it as being like a bowling ball rolling down a set of stairs. There will be periods of time when everything seems perfectly level and reasonable, or 'in recovery,' even, as has been the case since 2009/2010.
by lesphelps 
