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Are There Really Global Uncertainties?

  • Written by Syndicated Publisher 1 Comment1 Comment Comments
    June 1, 2012

    It’s well known that markets don’t like uncertainty.

    And it’s estimated that almost $3 trillion was wiped out of equity valuations globally in the market corrections in May. Understand, the value doesn’t shift to different owners. It disappears. If your house is worth $200,000 less now than it was five years ago that $200,000 didn’t move into someone else’s bank account. It disappeared – doesn’t exist anymore. It’s the same with stocks or bonds or mutual funds when they lose their previous value.

    But is there really enough uncertainty to cause the kind of damage we’ve seen?

    Most of May’s losses are being attributed to uncertainty over Greece.

    However, with all the months of debates by experts, and focused meetings by global leaders and EU officials, it’s pretty much known what will happen – isn’t it?

    If only markets would listen to the experts.

    For instance, economists at CitiGroup forecast a 75% likelihood that Greece will leave the euro-zone, and even pinpoint the likely day, January 1, 2003. So there you go. Seventy-five percent certainties are more than it takes to be successful in investing.

    Whoops – Jacob Kirkegaard, an economist at the Peterson Institute for International Economics says he thinks the probability of Greece exiting the euro-zone is less than 5%.

    Oh. – Okay, so there is some uncertainty over whether Greece will stay in the euro-zone.

    But everything will be all right if it stays, right? We can see that in the way that global markets rallied yesterday in reaction to the news over the weekend that the pro-austerity, ‘stay in the euro-zone’ New Democracy party has moved ahead in pre-election polls in Greece.

    Well, maybe not.

    Michelle Meyer, an economist with Bank of America has warned clients that “The situation in Europe is becoming more uncertain.” The worse than expected euro-zone recessions raise concern about spillover effects to the U.S. economy even if Greece stays in the euro-zone.

    But the eurozone only accounts for 15% of U.S. exports. So recessions there wouldn’t hurt the U.S. economy much – would they?

    Sure there are nervous experts who seem to think that that even if Greece stays, the debt crisis is moving on to Spain and toward Italy.

    Craig Alexander of TD Economics worries that the primary impact on the U.S. from a worsening EU crisis would be financial markets turmoil. “If the banking system in Europe seized up it would be a mess.” he says. “It would hark back to Lehman Brothers in 2008.”

    Reuters reported this morning that “Worries about the cost of shoring up Spain’s banking system have Spanish debt costs elevated, while the gap between them and German 10-year yields is near euro era highs, as the risk grows that Spain may be forced to seek an international bailout.”

    Steve Barrow, head of G10 currency research at Standard Bank  says. “The bad news on Spain just keeps coming.”

    But, Spain is the 3rd largest economy in Europe and the 12th largest in the world. Surely, it’s not really in that much trouble.

    And its Prime Minister, like the prime ministers before him in Ireland, Portugal, and Greece, assures markets that Spain will not need outside support.

    But then, markets themselves are known for ignoring what politicians say, seeing problems before they arrive.

    And Spain’s stock market, has been steadily plunging, now at more than a 15-year low. Every few days it bounces as traders apparently jump in trying to catch the bottom. But as oversold as it is, so far it’s just been a relentless further plunge for more than a year now, its rally attempt off the October low feeble at best.

    It’s given back all of its spike-up gains from the 2002-2007 bull market, now down 77% from its 2007 peak, with no sign of a reversal. (And it’s down another 2% so far today).

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    Okay then, there may be uncertainties in Europe beyond just whether Greece will remain in the eurozone or not.   

    But do markets elsewhere really have uncertainties about their own economies that also justify their declines?

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    Well, okay. Maybe something is going on globally that the U.S. market continues to ignore.

    Images: Flickr (licence attribution)

    About The Author

    Sy Harding publishes the financial website www.StreetSmartReport.com and a free daily Internet blog at www.SyHardingblog.com. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!
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