The picture below really captures the volatility of the current market and how traders must remain detached like the Coast Guard cutter closely monitoring how the ship (market) is listing. When too many are standing on one side 9f the ship (market) due to fear certain events will take place, the safest short-term bet is usually the other side. The current market volatility illustrates this point.
The real world is much more complicated, however, as we cannot see the ship and must guess how the bulk of the fast money is positioned. Are most traders bullish or bearish, long or short? And what is the probability the event they’re betting on going to be realized in the near-term?
Will Greece go to the drachma over the weekend? Will a French bank fail in the next week? Will Italy experience a failed bond auction? Will Angela Merkel announce Germany is leaving the Euro? In a loud emotional market it’s not easy to maintain the discipline to ask: What is the event probability and how is the jet set positioned?
This raises the real issue about trading and investing. Nobody but the crooks, who trade on inside information, knows the future for certain. George Soros says markets move from perception to reality back to perception and sometimes market perception can determine reality though destabilizing feedback loops.
We believe this is the state of the current market. The markets fear a Eurozone sovereign default and that some banks are not adequately capitalized to weather such an event and there is potential for mass global contagion. Eurozone leaders tell us this is flawed perception and does not reflect reality.
The markets are not listening, however, and reducing funding to those institutions, some, of which, were the largest financiers of the sovereigns who are also experiencing funding problems. The doom loop continues until it doesn’t or until a comprehensive credible plan is announced. But this takes bold leadership.
We hope the Germans understand this and do what it takes to restore confidence as the current state is unsustainable. If they don’t, the ship will capsize and the fast money, which has the staying power to ride out the volatility, and the short selling traders the Eurocrats despise so much, will become rich betting on their incompetence. Stay tuned.