Last week's headlines were dominated by European leaders meetingto try to finally develop a coordinated strategy to address the fiscal woes of the European Union’s sovereign nations. As usual, Germany and Francetook the lead in attempting to forge a closer financial bond to alter the negative sentiment about European financial conditions.
While many have talked about the possibility of the European Union breaking up, leaders are proposing an even stronger union with strict financial controls in place to assure members that all countries play by the same rules. We support this proposal but wonder why this wasn't part of the European Union in the first place.
Behind the scenes, the goal is to break the back of speculators attempting to short the euro and drive the European Union to financial ruin. This is no different than the speculation that occurred in 2008 when short-sellers attempted to crash the U.S. economy during the Lehman crisis. Traders have attempted to crash JP Morgan and Goldman Sachs and they are not done yet.
What many investors do not recognize is that the incredible volatility that we see on a regular basis is not based on fundamentals, but is instead based on high momentum trading designed to create a liquidity crisis. And when a liquidity crisis emerges, short sellers are often rewarded by betting on negative sentiment.
In essence, the current market swing development is due to a massive element of contrived panic. The media does not help because of the short news reporting cycle. As a result, most investors are bewildered and negatively impacted by market swings and hysteria.
While one might be tempted to be outraged at the games being played in the market by institutional speculators, such consternation really won’t help; it's not going to change. The reality is that the market is driven by investing and trading, and traders drive a significant percentage of revenue for exchanges and brokerage companies. Like it or not, a free enterprise market allows for yelling fire in a crowded movie theater.
As investors, recognize that euphoria and panic may happen on a regular basis. Take into account sentiment; one cannot ignore emotion when investing. But one cannot be SUBJECT to emotion when making decisions. Rational thinking is required. It's not always easy, but maintaining a clear perspective is the best way to move towards long-term investment success.
The market will never stabilize; it is what it is. And with the shorts attempting to pile on every minute (and second), volatility is here to stay. Like it or not, that's the world we live in.
Michael Yoshikami, Ph.D., CFP®, is CEO, Founder and Chairman of YCMNET's Investment Committee at YCMNET Advisors. Michael is a CNBC Contributor and appears regularly on the network. YCMNET is a San Francisco Bay Area-based independent money management firm that provides fee-based wealth management services to institutions and individuals around the world. Michael was named by Barron's as one of the Top 100 Independent Financial Advisors for 2009, 2010 and 2011.