So, the worlds central banks are going out in front to save it from its politicians? Wow… you do sure experience some crazy things coming out the woodwork when the house is on fire!
Then, everything is fine, right?
Well, at least expect the falls to be less churning and painful in the future, where we have both new worries from our greek tragedy and the upcoming super committee discussions in the US. Central banks just put a cushion with some good padding underneath the market, but did not provide it with wings. Here’s why volatilty should fall but markets not necessarily rise, in a general performance perspective:
We only addressed liquidity, and Greece (and who knows just who else) are insolvent. Loans are unlikely to fix this as long as they really don’t have their house in order. This is like putting a bandaid to a burst artery: could help, but we really need a tourniquet to be able to fix the issue. That tourniquet can only be provided by policymakers doing the right thing. In Europe, the markets are falling because everyone is expecting just the opposite. At least banks should be able to avoid freezes on their capital so they can be participating in the market, but again the bandaid symptom is showing: these banks are stuffed with “100% percent safe” assets known as periferal sovereign bonds issued in euros. No amount of free lending is really gonna take that out of their balance sheets, so either they need to deleverage, which shareholders hate, or they need to do writedowns, which shareholders hate, but at least seem to have priced in.
Bullish or bearish? The bull is breathing, for sure, but that’s because of the CPR!
Expect stranger things out of the woodwork, I think I see some embers…