European Debt Crisis on the Brink

Andrew Nyquist

By Andrew Nyquist
This is not a healthy market.  Not by any stretch of the imagination.  The wild swings in the stock market over the past four or five months are indicative not only of the high degree of global financial uncertainty in the world, but also the degree to which individuals have lost faith in government, politics, and financial institutions.  And the lack of urgency by governments around the world to put together a collaborative solution to thwart the ongoing sovereign debt crisis in Europe is alarming, to say the least.  The crisis is real and it requires a strong collaborative solution now.  Not tomorrow, not next week, and not next month.

As many of you have probably read by now, the debt crisis that started in Greece has now spread to Italy.  And Italy is no small potato, coming in as the 8th largest economy in the world and 4th largest in Europe. Italy is also a big market for government bonds.  Beyond Italy and Greece, lie Portugal, Ireland and Spain — waiting and wondering.

It is truly unbelievable to think that the first trace of a PIIGS crisis (Portugal, Ireland, Italy, Greece, and Spain) actually came to the forefront over two years ago.  And as history has shown, debt crises tend to spread when the issues are not addressed immediately, and with shared sacrifice.  Complications due to the Euro and the one currency model have made it difficult for stronger nations like Germany to come to the table.  And per usual, politics are in play, as leaders jockey for positioning and put elections and electability first.  Furthermore, many are trying to quell social unrest by pushing popular protectionist ideas; so any plan that appears to be a bailout is almost assuredly dead on arrival.

So as we sit here and wonder about stock valuations and fundamental and technical analysis, know that none of this matters without confidence in the global financial system.  Sure the market may go up 10 or 20 percent one month, but how much confidence does that emit if the gains were both preceded and followed up by large moves in the opposite direction.  See the chart of the past 4 or 5 months below.  A similar chart was posted in The Anatomy of a Trader, part 2 of 5: Gut Check.  And you best check your gut… and your wallet during this crisis.  Easy does it.

The current social movement in the West has been a long time in the making.  And it is a natural part of the public-private cycle (we are currently transitioning from public to private).  But the extent to which leaders make, or don’t make, hard decisions will determine how difficult the economic transition phase will be. Clearly, we are taking the “sit back and hope that austerity rules the day” approach.  But I’m afraid that this isn’t going to be enough.  The social movement is here and the cycle is underway.  When markets swing as wildly as they have been, they send a message that uncertainty is ruling the day.  This erodes confidence.  And as confidence erodes, the general populous stirs… and can result in a loss of faith in its leaders.

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