Remember when news, fundamentals, ungoalseeked "data", and even math, mattered? Since it is becoming increasingly hazy, here is Bloomberg's Richard Breslow waxing nostalgic over the good old days.
Cui Bono, by Richard Breslow
The bad news is that we are investing in a world where Graham and Dodd’s “Security Analysis” has become a quaint relic of simpler times, when the nuts and bolts of a company’s fundamental were meant to motivate how analysts viewed its prospects. Now we have QE and buybacks.
We live in a world where good Keynesians Tobin and Brainard’s work on valuation (which led to Tobin’s q test) was meant to remind investors that markets needed to be grounded in some form of reality. (Interestingly, as an aside, William Brainard was strongly in favor of Janet Yellen being appointed to the Fed Chair). Today we read that equities are at all-time highs because weak economic numbers may keep the Fed on hold longer. The good news is that investing is a lot easier if you have central banks on your side
Central bankers admit they follow the markets, as they should. What has evolved in this world of activist central banks as proxy sovereign wealth funds are policy makers who watch, care and try to manage price levels in markets, rather than managing liquidity and continuous pricing.
Front-running mutual funds used to be something of a skill and art. Front-running central banks merely requires not losing sight of the bigger picture and managing your positions. Oddly enough, skill at the latter is what old-fashioned traders, who are in the process of being killed off by boxes, were actually most prized for.
In today’s world, negative rates are argued to be realistic. Markets that go up 100% in a year are prescient. Markets that go down are described as killing wealth, not, perhaps, normalizing in the face of better numbers. Economists extol the value of the “wealth effect” on economic prospects. Translated that means central banks should be in the business of helping markets along. We are all meant to be on the same side here, right?
European bonds have sold off in response to better numbers. Cruising speed. Cue the ECB’s Coeure to announce bigger buying of bonds now. He assured us this had nothing to do with the recent back-up in yield but rather prudent liquidity management. Europe does treasure the summer holidays after all.
And it ain’t only developed markets. After a nasty sell-off last week, Egypt’s EGX30 index is up over 9% this week as the government “postponed” the widely-praised capital gains tax on equities. For those gregarious enough to trade this market, watch the key 9000 level which held as resistance today
This morning, everything German responded favorably to the QE-steroid announcement. Later in the session, the ZEW was released and was horrid on its face. Immediate reaction? Profit-taking. Gives you a good example of what is driving things.
