Explaining the Sudden Economic Illness

In an effort to make sure we all do not forget the forest because of the trees, we wanted to quickly review what thorn has gotten under the world capital market’s saddle, and how we arrived on this trail.

As of late the capital markets are on a rollercoaster ride, peaking from one headline, only to stall, and trend down quickly on the next. Currently, capital market participants are mostly concerned with the following three items:

  1. The possibility of a macro global slowdown.
  2. Italy and Spain possible defaults.
  3. The terribly timed S&P Downgrade of US debt from AAA to AA+.

With August being a relatively datapointless month and many overseas companies and individuals on holiday, we are subject to the whims of the most dramatic headlines until we receive more data. This could be as long as 3-4 weeks, so Dramamine may be a good solution.

How Did We Get Here?

Markets are like an immunity system. When events are going good and stress is low, the system/investors act to repel negative influences. As individual items stack up against the immunity system, i.e. a few slightly soft economic numbers, delayed and much publicized US debt ceiling debate, fears of Spain and Italy default, a terribly timed Downgrade of US debt, mount, the weight, sometimes becomes too much to handle and sends the financial immunity system into a tail spin.

Interestingly, each distraction in their own right would have very little effect on the system, and most likely would have been repelled for another more weakened day. Eventually, the stress, and minimal small concerns became heavy enough to get at least a cold.

Recall how fast your last cold or other illness came on? Usually in one day at the most. How could I feel ok yesterday, only to barely be able to get out of bed today? Just like our own immunity systems, economic colds come on very fast.

The key from here is how well we take care of ourselves, to ward off further infections. This story is playing out as you read this, and we will keep you posted on the prognosis.

Thanks for your time on a slightly lengthened post !

JK

Comments are closed.