Here's brief explanation of what has the markets so spooked: Greece is the "potential epicenter of an earthquake that could really upset the global economy." That's the summary of the current state of affairs from Brian Dolan, the Chief Currency Strategist at Forex.com.
Please note that Dolan is not panicked, screaming or particularly negative on how the debt crisis in Europe plays out from here. He thinks the situation ends well, it just doesn't end immediately. The markets aren't weak right now because traders are irrational. Quite the opposite is the case. Market professionals are thinking a few steps ahead in terms of a rational outcome from the Greek debt debacle. "Greece is running out of rope," says Dolan. And the end of said rope is "being priced in."
The selling is based on the idea that a "potential for Greek default leading to European financial instability" is very real. Economic instability, in turn, would exacerbate slowing in the global economy. "As growth slows, it makes servicing debt burdens much more difficult to service and increases potential of a default," Dolan explains.
Yes, that is a logical loop. Instability leads to uncertainty leading to more instability... etc ad nauseum. Paul Krugman observes in today's NYTimes; that's how a run on the bank works.
There are two ways for this to end. Either the European Central Bank ultimately backs the debt of weak nations, extending if not solving the default problem, or the solvent economies of the European Union opt out of the ECB's plan raising the possibility that the Euro doesn't exist in one year.
For what it's worth, I believe Germany will eventually stop bailing out the profligate notions of the EU. It's not in the best interest of the Germans to do so, but as happens in the U.S., what's in our best interest and what we vote for are not always in alignment. Dolan opines that the EU is going to hang together or be hung as individual nations; meaning that Germany will back the ECB regardless of all the "kicking and screaming".
If the Euro is going to exist in a year, stocks are almost certainly a buy here, at least for a trade. If Greece then Portugal, Spain, et al default, the U.S. stock market is most likely going much lower. To be clear, all of the above are opinions. The reality is that all bets are off in terms of how Europe plays out in the very near-term. The uncertainty is why markets are jumping and falling multiple percentage points with every update from across the pond, as well as why I'm not trading this one way or the other.
Rule #1 of trading is to protect your downside. I'm protecting mine by hanging out on the sidelines for the most part and trying to keep Breakout's audience up to speed. As always, your portfolio is your own to manage; I'm just here to offer some possibilities, opinions, and advice to keep in mind.
We want to know what you think. Please drop us a comment in the space below.