The Dow Jones Industrial Average surged yesterday on rumors that European officials are getting closer to a debt deal. The Dow ended yesterday up 291 points or 2.6%. The above-average 15-51 strength Indicator rose 3.3% on the same grounds. And in early trading today both were in positive triple-digit territory again. Is this new European effort really cause for such a movement?
Sure it could be. But let me say, I find it ironic that the market for free market capitalism (the U.S. stock market) is applauding the pact being sought in Europe – one in which unites the region under one fiscal governing body comprised of a collection of “officials” that aren’t elected by free people.
American investors would never applaud such a tactic.
But remember that the German bond auction fell flat and interest rates across the region are soaring (an indication of greater risk.) Add to this a global recession and what you have is one ugly picture. Yet stocks are up, on of all things, a European movement in a direction away from free market democracy. Why?
In this case, overly optimistic stock prices come from the Wall Street establishment, the traders and investment bankers who believe a consolidation of European debt is easier to sell than individual sovereignty bonds – even if those bonds are from the region’s number one economy (Germany.) Wall Street loves easy money – and in their minds a European pact makes selling their debt easier. So they applaud the move by bidding stocks prices higher – because there’s more money, and more money to be made easier.
But by so doing, Wall Street thus endorses bailouts and dysfunction over a principled stance on free market success and failure.
Think about it this way; if a CEO ran a corporation and Greece was a business unit of it that consistently lost money, produced little, and wasn’t willing to work harder to get cash flow positive, they’d be excoriated on Wall Street for not eliminating the losing unit from the organization. Why? Because losing units of the Greek ilk suck resources from units that produce greater returns on investment (ROI.) This drains future growth and mutes long term performance. As a result, the stock price for such a company would be driven into the depths of valuation hell, as investors and bondholders ran from impending doom.
And rightfully so.
But we’re not talking about a corporation or a stock. We’re talking about a region called Europe and troubled countries called Greece, Italy, Portugal, Spain, etc. etc. Even though this is a much bigger problem with much larger consequences than just a poorly managed company, broad based stocks moved higher on the bad news.
Isn’t it ironic.