How Up and Down Markets Toy With Investor Emotions

“I want it all, I want it all, I want it all, and I want it now.”

— Lyrics from a popular Queen song…and the prevailing political “wisdom” of our time.

Stocks up. Gold up. And oil back within a few cents of the $100 mark.

The world economy is, apparently, in full swing again. Until tomorrow, that is. Or next week. Who knows?

Investors have been suffering through a dazzling display of mixed signals lately. One minute they think the market’s got the hots for them…the next minute it’s throwing cold water in their face. It comes on strong…then plays coy. Shows some leg…then slaps a cheek. Last week investors got whacked. This week they’re all doe-eyed again. They think they’re in love.

Most folk don’t like all the games. “A simple ‘Yes’ or ‘No’ would do us just fine,” they say. “Think of all the time and money a straight-forward answer would save if the market would just pick a path and stick to it!”

Ah…but where’s the fun in that, Fellow Reckoner? Where are the lessons along the way…the travails of the journey…the hardships to look back on through the rose-colored glasses of retrospect…the glory days to romanticize at some distant date in a far off future?

More importantly, what would we have to write about all day if everyone already knew the headlines of tomorrow’s papers? Who’d bother asking any questions? Not us.

Fortunately, that’s not the way markets work. The relationship is far more complex than that. Last week, for instance, it looked as if the whole thing had gone sour. Stocks plunged during the shortened trading week. News came out that Germany couldn’t sell its debt. Not Greece or Italy or any of the other fiscal misfits. Germany! An auction of 10-year Bunds fell apart at the seams.

“If Germany can’t sell its debt,” cried investors in a panic, “what hope does the rest of Europe have? Portugal…Spain…the rest of the PIIGS…they’ll have to go bust! Then what!?”

[Editor’s Note: As a quick aside, Eric Fry recently discussed these ongoing problems in the Eurozone, specifically Germany’s failed bond auction, on Capital Account with Lauren Lyster. As always, his comments were incredibly insightful. Check it out here:

Well, what a difference a good tryptophan-induced food coma can make. Investors awoke from their long weekend slumber having seemingly forgotten last week’s little lover’s tiff. Romance is in the air again. German Chancellor Angela Merkel and French President Nicolas Sarkozy are playing footsies under the Euro table, promising to come to a solution that satisfies everyone’s deepest desires.

In the US, too, investors have been quick to forget past transgressions. And quick to forget their own situation. Shoppers, for instance, forgot they had no money and hit the retail stores last week with all the gusto of a drunk falling off a wagon. Black Friday sales were up. Wages, savings and disposable incomes were not. Neither were employment levels. How long can out-of-work consumers continue buying Chinese knickknacks with money they don’t have? Not long would be our first guess. And our second, too.

Of course, it’s hard for the average man to know where he stands today. He follows his heart and his emotions. And both tell him to look to his leaders. He has heard that his country is broke…but he sees his leaders spending…and spending more than ever. He has a suspicion that debt might be a problem…but he is told that deficits don’t matter. He knows the money has run out…but he remembers hearing something about a helicopter. So he sticks his head out the window and looks to the sky. Then, when no money falls from the heavens, he heads to the mall just the same.

“Capitalism is supposed to be a system of profit and loss,” writes Jeffrey Tucker, publisher at Laissez-Faire Books, in today’s Whiskey & Gunpowder, “but in recent years, central bankers and central planners seem to have forgotten the part about losses. They push and pull every lever on the control board to try to make losses for the big players go away, which can be a bit like trying to stop a receding tide.”

Governmental “Too Big To Fail” mollycoddling has rendered a generation virtually incapable of dealing with losses. In short, the average man on the street today lives in a world largely sheltered from the consequences of actions, both his and his government’s. (For now.) His leaders promise him creation without destruction, knowledge without lessons, wisdom without experience…all funded with EZ credit, made available until the day he dies. Amen.

How is this man prepared for a catastrophe, you ask? He isn’t.

How can he conceive of a day when effect again meets with cause? He can’t.

What will happen when the unthinkable becomes the inevitable? Don’t ask.

Occasionally, however, the nourishing process of creative destruction, of unfettered capitalism, is “allowed” to do its work. It can be painful in the short run, yes, but the eventual result is a stronger, more vibrant future…one deserved of those brave enough to resist the urge to meddle.

Joel Bowman
for The Daily Reckoning