No news is good news

Finally, a new blog post of mine. The last weeks have been filled with work, study, some volleyball (the preparations for the season were more than great, now let's hope our team can keep this up), and a lot of time spent on the preparations of the General Members Meeting of my volleyball club taking place in two weeks. After that: no longer Ms President of the Board for me. A short, early reflection: it has been a very good experience, but it has been a rough ride as well!

Luckily, during the past few weeks, I had some time to reflect on the economy as well.

Conclusion: nobody knows what is going on anymore! However, very few people are willing to admit this. (What makes even me so sure that nobody knows, and if that is true, I do not even know whether it really is true. Annoying.) And that makes sense. Image what would happen in Ben (Bernanke that is) would say: "Guys, I don't know whether it will help, but let's stuff another huge pile of money into the economy (or in the banks, who do not want the money anyway) and see if tomorrow or next week it can stimuate job growth, housing prices, and thereby economic confidence". Nonsense of course; this will not happen in a million years. At least, I hope it will not.

But let's assume that Ben would say this. The market's logical reaction would be to abandon the USD, and move into safe assets such as gold. The gold price will rocket, perhaps with prices of other safe assets (a more difficult question is which assets will be safe in such an event, perhaps there will not even be one considered safe). The US will face a currency crisis. Banks with substantial assets priced in USD will fail, and this will lead to contagion of other banks, with soon enough really negative consequences for the real economy. In other words: economic disaster.

However, the big question is: why is this scenario so different from what is happening today? As the Fed announced nothing new yesterday; its outlook has not changed and they are still waiting to see in what direction the US economy is heading before they decide whether or not to renew their quantitative easing efforts. Hence, no news.

The same goes for the US housing market. Figures were released on homebuilders' confidence, which remained at the same level as previous month - albeit weakest level in more than a year-. Hence, no news.

Still, market sentiment was positive today. No news is good news? At least the Fed did not announce that the overall economy was getting worse and QEII was required, and also the housing market did not become worse. And this is supposedly good news.

Right.

In some other column, I wrote that this is can be called a bias in human nature. We have seen so much bad news, and perhaps even become immune to bad news. Although bad (or mixed) signals are abound, they are not breaking news anymore. And therefore, it is easy to get optimistic when some good signals show up, which is also what everyone is hoping for.
We even perceive the not-all-too-bad news as good news nowadays. Perhaps not surprisingly, but does it really make sense? The economy is still very unstable.

Market psychology is interesting. Maybe more on this next time.