Wednesday, April 4, 2012

Is There Really a "Market" These Days?

By definition, a "market" is a place where prices are agreed upon ("discovered") by the interaction of buyers and sellers. It follows that when either of those parties is absent, prices are set artificially. Buyers fled equity markets in the developed world after the financial meltdown of 2008, having only gradually gotten their nerve back after the 2000 "dot-com" stock crash. After being devastated twice in one decade (and this time by unethical if not criminal behaviour, not some "new normal" of earning-less dot-coms), it appears many investors haven't come back this time. Stock market "volume" (shares traded) is dismally low, despite historically low interest rates courtesy of Ben Bernanke - which among other "benefits"should be forcing mom and pop investors back into the market to get some yield, any yield, on their nest eggs (what's left of them). It hasn't worked. In fact, volume continues to get worse, even as stock indexes recently surpassed their 2008 highs. This begs two questions: 1) if individual investors are buying bonds, real estate, guaranteed term deposits, Treasuries, or keeping their money in savings accounts (or under the mattress) paying little or no interest, ie. buying anything but stocks, who are the buyers that keep pushing markets higher? And: 2) if prices are being set "artificially" due to a dearth of buyers, is this situation sustainable?  Yesterday, when the Fed's minutes from their last meeting were released and investors saw in writing what Bernanke had told them verbally last week (there will be no Quantitative Easing 3) the markets sold off sharply.  Was yesterday's skittishness a sign of just how fragile this market recovery really is - a market recovery sans buyers?