Are you tired of seeing European politicians meddle with the value of your share portfolio on a daily basis? Their bickering is unleashing waves of optimism and pessimism around the world.
Hedge fund manager Kyle Bass pointed out to the BBC ‘you know how screwed up Europe is when you have a German Pope and an Italian central banker.’ The poor pope!
You’ve heard all about Europe’s economic problems for a while now. What of solutions? Here is our attempt to sum them up for you: This round hole won’t fit into its square peg. In other words, they’ve got it wrong and backwards.
Now on to the details.
How does changing your political leader change your economic situation? It doesn’t. But that’s what the Greeks and Italians propose will solve the debt crisis. They’ve reshuffled their heads of state. The Italians have appointed a cabinet with – get this – not one politician. They didn’t vote for a single member of the new government. And you thought Berlusconi ruled inappropriately!
But maybe an autocracy is just what the Italians need… after Berlusconi…
That’s how an optimist could interpret it anyway.
Economic Problems Will Catch Up With Politics
What’s remarkable about the political shenanigans in Europe is that the stock markets buy it. Literally and figuratively. That’s why the stock markets have resembled a seesaw lately. Up on good political news. Down on the bad. Ending nowhere.
When the political news cycle determines the price of your stocks, it is going to end badly. The seesaw is going to turn out to be a Korean Plank; someone will be launched into the air and land hard. And that means the fun will be over for whoever is left on the other end of the seesaw too.
But who is in for the most spectacular crash?
One thing history teaches us is that a real crash comes from somewhere unexpected. Does that count Europe out? Maybe. Europe is in for an economic crisis. But stocks around the world have discounted that to some extent. That’s a snazzy way of saying they have factored it into the prices of investments. To what extent they have discounted the severity of the crisis is another question.
Less obvious crises you should proof your portfolio against include a Chinese economic collapse and an Australian housing bubble pop. To find out how to proof your portfolio against them, click here.
By the by, we’ve left the Americans and their mess out of our list of things to worry about because it’s difficult to make heads or tails of them. Here is an example of the nincompoopery coming out of the US central bank… affectionately known as ‘The Fed’.
Bloomberg, November 14th: ‘Federal Reserve Bank of Dallas President Richard Fisher said the U.S. economy is “poised for growth” going into next year and that he sees a declining likelihood the central bank will need to ease further.’
Bloomberg, November 14th: ‘The odds of a U.S. recession in early 2012 exceed 50 percent as a result of Europe’s debt crisis, according to researchers at the Federal Reserve Bank…’
Yes, on the same day, two research groups from the same institution managed to completely contradict each other. It’s not clear what they are smoking at the Fed these days, but it’s definitely working. We prefer a stiff drink when thinking about the $14 trillion – no, wait – $15 trillion dollars of debt everyone seems to expect the Fed to inflate away.
Ultimately, economic problems catch up with politics. Sometimes in a good way, like the fall of the Soviet Union. But it isn’t always pleasant to have economic law pull you back to reality by the ear. It can lead to a world war, for example.
Whether the world reacts badly to the realisation that welfare states don’t work is still up for grabs. On the one hand, times will be tough. But when times are tough, the tough get going. We could see a resurgence in economic growth once debt troubles force deadbeat governments to downsize. And that forces people to work hard.
What has become very clear this week is that economic problems are accelerating. Finance guru’s blogs are running hot. Derivates are fluctuating all over the place. Swiss credit default swaps rallied (worsened) 50% in a single day! Downgrades are sucking Germany’s banks into the crisis. And American banks are just discovering their exposure to Europe’s economic problems, while their own nation teeters with its own debt problems.
So economics is stepping up the pace. It’s catching politics. And it’s going to win.
for Markets and Money