7/20/12 4:29 PM – Markets Missing Clear Sense of Direction

If you are one of those people that believe that the main reason the market went up one day or another is because of the reason TV newscaster cite, I think you’ll have a hard time understanding the markets. Technical factors play a much bigger role than people think. Usually the reasons for market behavior are complex.

Right now, world markets are pretty much playing Follow the Leader and that leader is Europe, with a lesser role played by the strength (or lack of it) in the US economy and emerging markets, particularly China.

Sometimes, government can’t fix the problem, folks. Sometimes government is the problem and the more they do the more distorted markets become. That is almost certainly the case now where European announcments and the rising or falling expectations for more Fed easing send the markets around the world shooting higher or lower.

When volatility is high and the trend is really choppy and unclear short-term market reading is really tough and often wrong.

Stepping back, the biggest economic problem on the planet is slowing growth and Europe is at the center of it. As they slow so do the countries that export to them and that includes the US and China but many more.

Loaning more money to Spain, Italy, Portugal or Greece or not loaning it is not the real issue, although it is the one newspeople focus on relentlessly. The real issue is the fallout from many years of massive increases in government and red tape. Cutting government means cutting wages or jobs or both and that means slow growth.

Cutting red tape and over-regulation (if there is a difference) – well, I don’t know that I can think of a government that has successfully reduced the size of that giant ball of twisted yarn. Getting government to shrink is like asking someone to kill himself. The desire to live and prosper is just too strong, probably even stronger when society believes government can always make everything better.

As I mentioned in my latest newsletter, fixing this is a generational issue and may take a generation to fix, especially under the constraints of the common currency union.