A Bull Market in Uncertainty

If you meet the Buddha, kill him.

— Linji

Markets in the US and Europe closed higher yesterday. The Dow ended up about 100 points. Newswires — forever quick to publish and always slow to think — claimed investors were cheering the resignation announcement from Silvio Berlusconi. The late afternoon rally was a “roaring approval” of the Italian prime minister’s move, they reported.

Since then, the “roaring approval” softened to an uneasy regret…followed by a quick rethink…then a mild panic…and, as of a few minutes ago, a mad dash for the door.

Renewed uncertainty about Italy’s ability to roll over its debt sent yields on the failing country’s 10-year bonds bolting past 7% this morning — a new euro-era high. Most European indexes slid at least 2% overnight.

Not to be outdone, measures in the US also gave up yesterday’s cheerful gains…and then plenty more. Last we checked the Dow had slumped about 3%, or roughly 400 points. The S&P 500 and Nasdaq were lower by 3.3% and 3.5% respectively.

Gold, too, is back down to $1,770, having lost about $12 overnight after briefly kissing $1,800 per ounce.

One thing that IS up is the CBOE Market Volatility Index, or VIX. “Wall Street’s Fear Gauge,” as it’s sometimes referred to, spiked above 32 earlier today. It’s a bull market in uncertainty…and with good reason.

European crises…debt ceiling brinksmanship…sovereign defaults and government overthrows…open source warfare and old style battlegrounds…occupiers…tea partiers…failed recoveries and flaccid economic growth…

It’s been a big year, Fellow Reckoner. And it ain’t over yet!

To say investors have had their work cut out for them over the past twelve months would be somewhat of an enthusiastic understatement. From zenith to nadir, peak to trough, the Dow Jones Industrial Average has swung roughly 17% during the last year, from an April 29 high of 12,810 to an October 3 low of 10,655. That’s a difference of 2,155 points…roughly the same reading the entire index registered back on New Year’s Eve Eve, 1988.

“Discovering, discovering, discovering,” we remarked last week. “That’s what the market is always doing.”

And thankfully, it will never stop. Not if it is left to its own searching, wandering, peripatetic nature. In this way, the market is a bit like the contemplative Buddhist, scouting around deep in the cave of his own mind. We can almost hear his innermost meditations…

“If you meet the perfect price, kill it.”

Why kill the perfect price, you ask? Because it’s an illusion, of course, a decoy on the path to pure market nirvana.

Prices change from moment to moment…transaction to transaction. And, because value is subjective, because it does not exist, intrinsically, within the goods and services we trade, it also changes from person to person, depending on their individual desires and needs at any given time. There is no perfect, eternal and everlasting price for all things…or even for any one thing.

“Value is not intrinsic, it is not in things,” observed Ludwig von Mises in Human Action. “It is within us; it is the way in which man reacts to the conditions of his environment.”

In this way, Mr. Market’s job is not an easy one. He must search endlessly for something he knows he will never find. He must seek that which does not exist beyond the moment. His work, therefore, is never done. The second he arrives at an answer, it changes before his very eyes, vanishes behind a cloud of smoke, morphs into something new and entirely unpredictable.

That’s what makes trading markets so difficult…and so exciting. It’s also what makes trying to control, cajole and contort them to one’s own whims and desires such a laughably futile endeavor. And it’s what makes watching the feds’ attempts to do exactly that so much fun.

The feds are always trying to force and control the markets, which really means forcing and controlling the human participants whom those markets represent. They think they know what prices ought to be, forever and ever, amen. Such is their immeasurable arrogance. The price of healthcare is too high, they say, the price of whisky too low. So they give the former away for “free” and levy taxes on the latter, trying to manipulate the real world prices to fit with their bloated opinion of what constitutes a better reality for people they’ve never met, living under circumstances they could never hope to understand.

But here’s what they forget: though prices are subject to (and indeed defined by) opinion, reality is not. Consequently, they can’t really “give away” free healthcare…or free education…or free anything. And so they don’t. Instead, they steal the funds to pay for it from other people — present and future — to make it appear free. That, or they borrow it from foreigners. (Or, as is more commonly the case, a combination of both.) Either way, the real world cost hasn’t gone anywhere…except now it exists as an interest-accruing debt, growing larger by the day. In this way, free tends to become very expensive very quickly.

You can see the skyrocketing price of free goodies all over the world. Take Europe, for example…

Over in the eurozone — as elsewhere — big thinkers at the central banks assume they can fix the price of everything. How do they do that? They fix the price of money itself by controlling the supply, outlawing competition and by finicking interest rates (the cost of borrowing). They think they know what a dollar — or a euro…yen…peso, etc. — ought to be worth and precisely how many of them ought to be in circulation to satisfy the myriad needs of its millions of individual users at any one time.

In 1999, the euro politicos thought they’d go one step further and throw a blanket over the whole of the European continent. No need for drachmas or liras or francs, they said. We’ll issue a new, Esperanto currency, one that can speak all of your languages, one that knows your every need and desire and that can fulfill them all. What had previously been an impossible task for the central banks of individual nations soon became, for the European Central Bank, a monumentally impossible task. Some 322 million Europeans use the moribund currency daily. Add to that 175 million people worldwide — including 150 million people in Africa — who’s own various currencies are pegged to the euro.

How were the eurofeds supposed to know what was best for half a billion different people, spread over dozens of countries around the globe? Perhaps they never stopped to ponder the question. Or maybe they did…but ignored the obvious answer. Most folk have a hard enough time working out what’s best for themselves…never mind anyone else.

So here we are, little more than a decade into the experiment and we see how things are going. Markets are daily discovering…discovering more of what they don’t like. And politicians are daily impeding…impeding the communication lines, fogging up the signals, breaking the market’s concentration and generally damning the whole discovery process to hell.

Hey, that’s no way to achieve market nirvana…dude.

Joel Bowman
for The Daily Reckoning

The Daily Reckoning