Why All the Cheer?

I am an optimist by nature, and I hope a rational one in the Matt Ridley vein. But, I do not understand the optimism in the market in the last seven trading days (plus forty-five minutes). Markets are up over 12.5% in that period and the reasons are not clear. Three  pieces of news to that end:

First, from my perspective, Scott Shellady, a pit trader in Chicago, was spot on this morning on CNBC when he called the optimism over Europe, “Hopium.” The hope that people have of a very positive outcome in Europe may not be based on opium consumption, but something similar—just hope. Any news is greeted positively and all bad news is ignored. When most market observers think that Greek debt needs to be haircut by 60- to 70-percent but European banks are objecting to any haircut over 21- to 30-percent, how can any news be good news? And, Greece is just the tip of the iceberg. (Sorry, no video.)

Shellady also thinks the 30% drop in the VIX in the last eight trading days is a sign of weakness, not strength. Strong markets move in a steady, upward fashion.

Second, is a Wall Street Journal Market Beat column that was published online this morning. In it, the Economic Cycle Research Institute (ECRI) finds that their leading index is “rolling over even harder, suggesting a deeper slowdown ahead even as trailing economic data are coming in better than expected and the stock market rallies.” I am not a fan of economic and market forecasters, but according to The Economist the ECRI has “never issued a “false alarm” on a recession call” and it has been around since the 1960s.


Finally, with the focus on Europe, we seem to be forgetting other parts of the globe. A piece in today’s Wall Street Journal by John Bussey discusses the very serious threat that the Chinese government is to foreign businesses. It reminds us that china is a tough place to do business because there is no rule of law. It reminded me that my friend and former colleague James Penrose, circa 1994, criticized the Chinese government for abrogating a valuable real estate lease that McDonalds Corporation possessed in China. His criticism made the front page of the Wall Street Journal Asia the next day. Nothing has really changed in seventeen years with respect to the rule of law.


I worry about my own confirmation bias. I think I will start a new feature soon called Counterfactual Friday in which I write about the rationale behind the opinion of everyone who disagrees with my thinking and write about the facts that undermine my thinking.

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