Bad luck for investors- confluence of two headwinds

May 6th, 2010

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For those of you who are active traders/investors, you can surely sense that the feel of fear is coming back to the financial markets. The more prominent narrative for this fear is Greece (plus Portugal, plus Spain). It was just less a month ago that the financial markets were shrugging off the possibility of a Greek default (see Is the Greek debt crisis over?). Back then, investors were ?satisfied? with just a ?40-45 billion ?bailout? package. Now, according to the narrative of the media, even a ?100+ package is not enough to ?satisfy? investors. Not only that, the contagion is now spreading to Portugal and even Spain. So, does it mean that in less than a month, the financial markets suddenly see the light that Greece cannot pay its debts?

That goes to show that the financial market is very often illogical and irrational. When you look at the big picture, it should be clear that this is a deep-rooted problem that cannot be solved with a meeting. As we wrote in All quiet on the Greek front?,

But make no mistake, this story is like a trench warfare that will play out over a period of years (see Currency crisis: first countries in the line of fire- PIIGS). It will engulf more than Greece- vulnerable  countries include Portugal, Italy, Ireland and Spain.

The financial markets, being irrational as it is, will alternate between fear and optimism. We wouldn?t be surprised if this current bout of fear turn back to optimism after another high-level meeting/announcement will appear to ?solve? the problem. Then perhaps some time later, another bout of panic will return. In a way, this is like ?trench warfare? in which neither side is able to gain ground permanently, as they grind each other down. In the same way, the forces of deflation and inflation will battle each other, as money printing (which is the only way out of this crisis) will grind down the value of paper money (euro).

For Australia, there is another headwind- the coming slowdown of China. Marc Faber even go as far as saying that China is likely to crash in 9 to 12 months. Since the global economy is already battling the crisis in Europe, a crash in China will be another serious blow.

This is just bad luck for those who are holding long positions! So, what if China crash? Keep in tune!

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