Thursday, August 4, 2011

Risk Sell-Offs and Feedback Loops

I’m watching the market dive, and contemplating the thousand or so points it dropped in just over a month. Oil is down to $88, gold dropped today, energy stocks dropped, Europe is lunging lower and the only thing gaining right now is the Treasury. You know, the treasury. Which until August 2nd was going to default and loose its ratings? What we have here folks is a risk sell off. A risk sell off is the panic button call by some investors to ‘sell everything’. Sell stocks, sell Europe. Sell banks, sell oil, sell everything. Stick somewhere safe (which happens to be Treasuries, despite the fact that the same people panicking know were avoiding treasuries last week.

Europe has reversed its course and (surprise) is not finished with its debt crisis. Today the employment numbers were anemic, and the economic numbers for July look like the economy is worsening. Egad! A double dip? Walk three steps back from the TV (even though I have CNBC on now). What happened last month? Only the most unorganized, inconsistent, petty and incompetent political debate I’ve ever seen on the important issue of extending the debt and reducing the deficit. Politics and sausage are two thing you don’t want to see being made, and I’ll vote sausage making is better to watch. No rational business owner would hire in the midst of wondering where taxes, interest rates, or anything financial for that matter was going. Consumers didn’t run out and buy things either. Why? Uncertainty.

Uncertainty caused by, in my mind, deliberate actions on behalf of Washington and uncertainty caused by the lack of reliability in leadership. Our debt may still be AAA, but I’ll rate washing junk status.

So what does it mean? It’s a feedback loop. A feedback loop is when one event happens, and trigger a response that reverses the event. Take oil. When oil prices surge (and the market usually goes down), demand usually curtails rapidly and supply increase, which…drops prices.

So then this feedback loop: investors are panicking because of bad economic news from July, which is driving prices down, oil down and yields on Treasuries down, which make stocks more attractive and Treasuries less attractive, which makes…stocks go up.

Look at it this way: a month and a half ago, we were facing a government shutdown, which was averted. Oil was higher, interest rates were higher, the deficit was higher, and the exact same other problems were in front of us. Today, deficit is lower, debt ceiling is extended, dollars is stronger, oil is cheaper and stocks are cheaper. Panic or Possibility?
I’ll vote the feedback loop is at work.

Leon C. LaBrecque, JD, CPA, CFP®, CFA