The Problem With Markets

Although I'm a long-time market-watcher, that doesn't mean I always believe what I see. In fact, one problem with relying on price trends and trading activity to try and gauge what's going on in the world and what might happen next is that "the crowd" is occasionally dead wrong, especially at major turning points.

That was the case back in the spring of 2007, when credit markets were priced to perfection — just as the financial world was poised to fall apart. Something similar happened in October 2007, when clueless equity traders ramped share prices to record highs even though it was clear that the economy and the banking system were spiraling into a dark abyss.

Another reason why market trends need to be assessed in light of other factors is because they can be affected by a variety of occasionally contradictory forces. For instance, sometimes foreigners will acquire goods or investments that locals believe are overpriced because the net cost in their own currency is less than they might pay at home.

People may also believe, as a great many apparently do nowadays, that those currencies and foreign assets that are risky in their own right are nevertheless a better bet than any of the alternatives — that is, they are the best of the worst.

That's one reason why the U.S. Treasury market has remained buoyant even though Washington is spending and borrowing money like a drunken sailor and wrecking the nation's long-term creditworthiness in the process. From the perspective, say, of a European who is worried about the burgeoning debt crisis in his own backyard, our market might appear to be a safe haven.

But as The Economist's U.S. business editor suggests in a Yahoo! Finance Tech Ticker story (and video report), "'Longer-term Issues for America Are Really, Really Serious,' Bishop Says," such a perspective is dangerously short-sighted.

While the U.S. dollar and Treasuries are benefiting near-term from Europe's fiscal problems, Bishop anticipates tough times ahead for both America and Europe. "It's going to be a horrible roller coaster in Europe. There's going to be a lot of political stresses and strains," he says.

Meanwhile, Bishop remains skeptical a new Congress after the November mid-term elections will yield a return to fiscal discipline in the U.S. "The longer-term issues for America are really, really serious," adds Bishop, co-author of The Road from Ruin: How to Revive Capitalism and Put America Back on Top.