Mutually Assured Distraction

05/20/2010 11:11 am EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

Tangling with markets must be maddening for politicians. Markets are an adversary without a name or a position paper, a mob expressing itself with cold, hard numbers that can hurt more than catcalls or the stray projectile. When official attempts to calm the markets backfire, the inescapable implication is that the people paid to listen to the politicians don’t think they know what they’re talking about.

There is an extra layer of mistrust between the financial arena and European officialdom, a goodly portion of which views markets as an Anglo-Saxon conspiracy. As the Euro-crisis careens between farce and tragedy, the continent’s political and financial elites appear to be locked in a suicide pact.

So European Central Bank chief Jean-Claude Trichet tries to “calm” nerves by saying that Europe’s economy “is in its most difficult situation since World War II or perhaps even World War I.” So almost this bad, apparently. And his prescribed solution is government spending cuts sufficient to tip the continent into renewed recession.

Then it leaks out that French President Nicolas Sarkozy staged a temper tantrum in pursuit of the recent bailout of Greece, threatening to reconsider the French commitment to the euro if the Germans didn’t ante up. Perhaps he also planned to take down the Eiffel Tower and blow up the Louvre had Berlin refused to budge.

Happily for Paris, Germany obliged, and when its bailout commitment did not produce the desired result, it re-imposed short-sale restrictions and banned bets against sovereign debt via default swaps, further spooking the markets and delighting all the short sellers. Even its allies in Europe read the move as a sign of desperation rather than cohesion.

With so much of the trading volume generated by computer programs built to profit from historical patterns, it’s only natural to anticipate the unexpected and counterintuitive. You’d expect this to produce occasional volatility spikes like the one seen during the recent “flash crash,” though it would really be more prudent to check any expectations at the door.

What we do know is that battleships don’t stop on a dime, and that the global economy had built up a decent head of steam before the recent bout of financial panic. Most European economies eked out slight growth through March. Asia and Latin America continue to boom. And North America isn’t doing so badly, either.

As Ryan Irvine writes, the feared slowdown in Chinese growth would be a positive, if it sets the economy on a more sustainable path without crushing the progress made to date. To expect otherwise would be to deem emerging Asia somehow incapable of catching up to Western living standards.

If the Shanghai market’s recent slump proves to be an overreaction to official attempts to slow things down, Asian-based consumer stocks like the one recommended by Carlton Delfeld could deliver a windfall.

Growing Asian wealth should also spur an energy search that, with traditional sources depleted, should benefit the intrepid. The two UK-listed drillers recommended by Elliott Gue certainly qualify by prospecting in Africa and Greenland. These are risky plays on higher oil prices. Over time, this could prove an excellent entry point.

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