Tuesday, September 28, 2010

A "Disconnect"

The word "disconnect" used as a noun cannot be found in the dictionary. Disconnect is, grammatically speaking, a verb, as in "disconnect the damn television before I smash it", or something like that. Evolving out of business jargon as a noun it is a usage that is annoying and therefore is avoided here - until today.

Here is an example of what is meant when word is incorrectly used as a noun.

Disconnect,(n) High unemployment without any near term relief in sight, stagnant home prices at low levels are once again confirmed, consumer confidence drops to a level last touched eight months ago and what happens to equity markets? They go up.

On the surface this does not seem to make sense if one considers that 70% of the U.S. economy is driven by consumer spending(or so they always say) and all of the negatives listed above should directly impact that capacity. That these negatives do impact the strength of the economy is not at question. They of course do. The fact is, however, that the equity markets work on more than the here and now. IF functioning as intended by the God of markets, they look to the future, as in discounted future cash flows. This foresight is completely imperfect, but it is the goal. Global growth potential, ongoing rationalization and consolidation of corporates, the continuing ascendancy of technology advances, and the lack of alternative investments can drive the market higher on a week's whim and overwhelm current economic statistics. It makes sense in the short term, but it's a "disconnect" that may or may not last.


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