This is uncharted territory for capital markets. The stock market looks like a deer caught in headlights at night. The deer is us, and the headlights come from a European-made sports sedan travelling down the autobahn with no speed limit. Right now, the structural components of the euro currency are being tested. Investor confidence is in question. I don’t know where the stock market is going to go, but I do know this: anything could happen going forward.
I’m fairly confident that we’ll get through the current turmoil and financial markets will return to doing what they do best; that’s speculating on the future. It’s fairly clear that the long-term trading action in the broad stock market indices is showing a right shoulder formation to the head achieved in 2007. It’s an ominous-looking pattern, because the left shoulder was so spectacular in its formation. Looking at a long-term chart of the S&P 500, you can’t escape the feeling that we’re due for a protracted down cycle. I don’t know if this will happen over the coming years, but it pops into my mind every time I look at that chart.
As we know from our own mortgage-induced financial crisis, the marketplace wasn’t really allowed to correct itself. The problem was simply transferred to taxpayers. This is what’s happening in Europe, and I’m afraid that there isn’t a lot more money floating around the system for any more bailouts.
Wall Street and investors love bailouts, because it isn’t their money being used to sugarcoat a problem. I think it’s going to take several more years for all these shocks to balance themselves out and we’re going to continue to see big ups and downs in currencies, stocks, and money supplies. It could be the middle of this decade before free markets find themselves a new equilibrium.
All the current turmoil provides us with a great lesson, both as individuals and as nations. We all have to live within in our means and manage our cash flow in a responsible manner. Governments need to do the same and they need to be proactive in regulating capital markets in ways that are acceptable to all market participants. This is especially the case in derivatives markets.
Finally, policy-makers have to be more aggressive in advocating fiscal responsibility to other nations. Foreign policy shouldn’t just be about trade and national security. Global financial security is the biggest threat we face and politicians need to put pressure on countries to keep their fiscal houses in order. High-level politicians need to address global financial security before another shock ruins the entire system. Global capital markets are being tested once again and the only way that politicians will do anything about it is for citizens to speak up. You might not think about it, but what’s happening in Greece is a real threat to your financial well-being. It’s already happened.