The Land of Self-Fulfilling Prophecy

 | Oct 18, 2011 | 8:02 AM EDT  | Comments
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I've never been a big fan of sentiment indicators because of their self-fulfilling prophecy component.

Take Germany's October ZEW investor confidence index, which hit a three-year low. The index slumps for the eighth time in a row, the DAX falls and the euro weakens and everyone loses confidence because prices are falling because confidence was low in the first place.

And this is what it's like every day with Europe's debt problems. Anyone who thinks that a solution to Europe is the key to salvation for the U.S. markets should be clear that events are feeding off each other and plugging one hole just means water coming out of another.

The sharp selloff in Dexia's share price today is a great example. It's off nearly 14%, despite saying its ready to finalize the nationalization process. The drop comes as a Holding Communal, a major shareholder, may have to dump all its Dexia shares. The reason for that is because its Dexia stake is worth so much less that its assets can't cover its debts.

This allows me to dig up a quote from the very underrated early 90s movie "Sneakers."

"Posit: People think a bank might be financially shaky."

"Consequence: People start to withdraw their money."

"Result: Pretty soon it is financially shaky."

"Conclusion: You can make banks fail."

Now, just because I'm wary of sentiment indicators doesn't mean I won't jump on the bandwagon and create one that is just as useless. Using Google News, take a bullish and a bearish phrase and see how they add up.

Today, "wall of worry" yields 56 results, while "Europe worries" gets ... 56. So we're totally neutral.

Worth a read this morning: Ian Bremmer on why Germany won't leave the euro, the latest EFSF leverage plan and UK inflation hitting 5.2%.

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