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Media commentators have an unfortunate tendency to misunderstand cause and effect when it comes to market action. When two things happen at the same time, it only means that there is correlation, and does not necessarily prove causation. (Maybe there is a causative relationship, maybe not).

This morning is no different. Scanning the news, we can spot more than half a dozen factors that MSM is blaming for this morning’s selloff:

1) Discussions amongst European leaders on Greek debt crisis have broken down (Telegraph)

2) Germany: Bondholders must suffer a loss over Greek bonds (FT.com)

3) Numerous European banks failed their Stress Test (Bloomberg)

4) Regardless of #3, the latest round of industry stress tests were “inadequate,” “overly optimistic,” and “failed to capture the severity of the current sovereign debt crisis” (Telegraph)

5) Several Wall Street firms reduced GDP forecast on Friday;

6) EU Stress Tests revealed trillions in loan exposure to struggling southern European nations. (WSJ)

7) Clock ticking on US debt ceiling negotiations with no real deal in place. (WSJ)

Want to find an after-the-fact rationale for market action? You have an entire menu of excuses for market softness, but I prefer none of the above. There is nothing on this list that wasn’t well known weeks or even months ago. Event he Stress test failures were widely suspected. And if anyone expected a fast compromise deal between the GOP and Obama, they have not been paying much attention the past 2 years.

My view has long been that day-to-day action is mostly noise; if you are looking for “signal” amongst the background static, you should focus on two things: Trend and Oscillators. Trend smooths the noise and provides a basis for directional trading. Oscillators allow you to determine when various metrics with probative value have reached extreme levels that frequently occur nearing major turning points.

The easy rationales for market action should be discarded as worthless; those who push such silliness to a gullible investing public should be looked at askance.

Those who claim to know actually know nothing.

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Previously:
Lose the News (06/16/05)

Lots of interesting reading to start the week:

• Five truths about the deficit and the national debt (Washington Post)
• Gold Rallies to Record in Best Run Since 1980 (Bloomberg)
• Big Mortgages Are Back (WSJ) see also 2nd Loans, 2nd Wave of Losses (NYT)
• Either the Fed Goes, or I Do: (Slate) Ron Paul retires from Congress, leaving behind a GOP that finally learned to love him.
• Carl Bernstein: Murdoch’s Watergate? (Newsweek) see also NewsCorp Scandal Grows (WSJ)
• Google’s a big infrastructure spender (Washington Post)
• Driven off the Road by M.B.A.s (Time) Why a Rise in M.B.A.s Coincided with the Fall of American Industry
• Medical marijuana: A science-free zone at the White House [Blowback] (LA Times)
• New Research Suggests Everybody’s Less Satisfied (Miller McCune)
• This week in Content Farms: Huffington Post Challenge (Slate)

What are you reading?

Once a Wall Street lawyer, Elizabeth Warren was selected by President Obama to set up the Consumer Financial Protection Bureau. She talks about her work to organize the bureau amid heavy opposition.

S & P: America Could Default Even if Debt Ceiling is Raised

As I noted yesterday, America could default even if the debt ceiling is raised.

One of the big, government-sponsored American rating agencies has just confirmed my post.

Specifically, Standard & Poor’s announced today:

[We're putting U.S. debt on] CreditWatch with negative implications … owing to the dynamics of the political debate on the debt ceiling, there is at least a one-in-two likelihood that we could lower the long-term rating on the U.S. within the next 90 days ….

The political debate about the U.S.’ fiscal stance and the related issue of the U.S. government debt ceiling has, in our view, only become more entangled.

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We may lower the long-term rating on the U.S. by one or more notches into the ‘AA’ category in the next three months, if we conclude that Congress and the Administration have not achieved a credible solution to the rising U.S. government debt burden and are not likely to achieve one in the foreseeable future.

The Washington Post adds:

S&P managing director John Chambers said in an interview … even if the parties agree to raise the debt ceiling, it may not be enough to avert a downgrade. Chambers said the country must implement a plan to reduce the annual budget deficit by roughly $4 trillion over 10 years, which makes the debt manageable over the long term.

The White House and Congress have discussed a plan that big, but negotiations have more recently centered on a smaller deal, at $2 trillion or less.

“That could still lead to a downgrade,” Chambers said.

Knee-jerk conservatives may say, “yes, we have to slash all social support programs like unemployment benefits and food stamps”.

Knee-jerk liberals might say “raise taxes instead of cutting any spending”.

But the truth is that plugging the major holes in our economy is more important than either cutting spending or raising taxes.

And stopping bailouts and giveaways for the top .1% of the richest elite (which weaken rather than strengthen the economy, as shown here, here and here) and slashing spending on unnecessary imperial wars (which reduce rather than increase our national security, as demonstrated here and here) is what the budget really needs.

As I wrote last year:

Why aren’t our government “leaders” talking about slashing the military-industrial complex, which is ruining our economy with unnecessary imperial adventures?

And why aren’t any of our leaders talking about stopping the permanent bailouts for the financial giants who got us into this mess? And see this.

And why aren’t they taking away the power to create credit from the private banking giants – which is costing our economy trillions of dollars (and is leading to a decrease in loans to the little guy) – and give it back to the states?

If we did these things, we wouldn’t have to raise taxes or cut core services to the American people.

I pointed out the next month:

If there’s any shortfall, all we have to do is claw back the ill-gotten gains from the fraudsters working for the too big to fails whose unlawful actions got us into this mess in the first place. See this, this, this, this and this.

Another weekend, a few more shut downs, via The Chart Store:

Professor Richard Thaler offers up some very practical advice for future social security recipients:

There is a simple, easy way to convert a portion of your wealth into a fairly priced, inflation-adjusted annuity. Simply delay when you start receiving Social Security benefits.

Participants are first eligible to start claiming benefits at age 62. For those who wait, the monthly payments increase in an actuarially fair manner until age 70. The claiming formula is designed to make the economic value of the stream of benefits the same, regardless of when you start. The longer you wait, the greater your monthly benefits when you start getting checks, because you will not receive them for as long a period. If you wait from 62 to 66 to start, your payments go up by at least a third, and if you wait all the way until 70 to start claiming, your benefits go up by at least 75 percent. (I say “at least” because if you delay claiming and keep working it is possible that you can qualify for an even higher benefit level.)

With these rules, waiting is the cheapest way to buy more annuity coverage. However, few take advantage of this opportunity. Currently, about 46 percent of participants begin claiming at 62, the first year in which they are eligible, the government says. Less than 5 percent of participants delay past age 66. This is unfortunate. If you are in good health and you can afford to wait, my advice is that you should wait as long as possible. The greater is your guaranteed lifetime income, the easier it will be to organize your retirement budget, and the less you will worry about living “too long.”

Straightforward, intelligent observation . . .

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Source:
Getting the Most Out of Social Security
RICHARD H. THALER
NYT, July 16, 2011  
http://www.nytimes.com/2011/07/17/business/economy/when-the-wait-for-social-security-checks-is-worth-it.html

Leonardo da Vinci’s ‘The Mona Lisa’ reduced & remixed down into 140 exact circles of colour. Makes no sense close up. Makes every sense from the other side of the room.

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Hat tip Kottke

Source:
Mona Lisa Remix
Some Prints

Michael Fishbach narrates his encounter with a humpback whale entangled in a fishing net. Gershon Cohen and he have founded The Great Whale Conservancy to help and protect whales.

Dealbook’s Andrew Ross Sorkin and media editor Bruce Headlam discuss News Corporation’s announcement it is withdrawing a $12 billion bid for Britain’s main satellite television broadcaster.

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My Sunday Washington Post column is out, and its titled “Note to investors: It takes longer to bounce back from a credit crisis” The online version gets a different title, Wall Street analysts and economists have this recession recovery wrong.

In it, I discuss how the post WW2 recession recovery cycle is the wrong frame of reference for looking at post credit crisis recoveries.

And while most Wall Street economists and analysts have gotten this entire cycle dead wrong, two academic economists standout as being prescient, before, during and after the crisis.

Here is a quick excerpt explaining how post credit cycles differ from ordinary recessions:

“Not only are credit crises different from other cycles, they also differ from other bubbles.

As Dan Gross explained in “Pop! Why Bubbles Are Great for the Economy,” the typical investing bubble leaves behind something of value. Whether it was thousands of miles of railroad tracks in the 19th century or thousands of miles of fiber-optic cables in the 1990s, usable infrastructure survives the bubble. Assets get scooped up out of bankruptcy for pennies on the dollar. Eventually, all of this overinvestment in the bubble du jour becomes a productive part of the economy. All that cable laid by Global Crossing and Metromedia Fiber and other bankrupt firms? Today, it is the bandwidth infrastructure that supports Google Maps, Netflix streaming video and Twitter.

Compare that with what gets left behind after a credit bubble bursts: No physical infrastructure, innovations or research breakthroughs; just soul-crushing, economy-sapping debt. And not just regular old balance-sheet obligations, but huge piles of counterproductive consumer and government liabilities.

Credit bubbles produce the exact opposite of productive resources. Deleveragers — those folks formerly known as consumers — spend the next decade paying down these obligations, rather than buying additional goods and services. And heavily indebted state and local governments are similarly thrifty, adding further pressure to the post-crisis economy.

Confusion about this is already taking a toll across the pond. The Irish, British and, soon, Greeks have bought into a misguided belief in austerity — that they can somehow cut their way to growth. In the United States, we have seen states and municipalities slashing head counts of teachers, cops and firemen. The “paradox of thrift” has morphed into a misguided economics of austerity. Hence, even when the private sector manages to create some jobs, its offset by public-sector job cuts.”

You can see the rest in either text or if you prefer PDF, click the image below:

click for PDF

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Source:
Wall Street analysts and economists have this recession recovery wrong
Barry Ritholtz
Washington Post, July 17 2011
http://www.washingtonpost.com/business/wall-street-analysts-and-economists-have-this-recession-recovery-wrong/2011/07/14/gIQAVRTIGI_story.html