Why We Should Stop Worrying About Greece

By Jani Ziedins | End of Day Analysis

Feb 11

End of Day Update:

Stocks ended flat as all eyes were turned toward a meeting between Greece and European finance ministers. While progress was made, they failed to reach an agreement and pushed the final deal making to Monday’s meeting.

Clearly the market should be paying attention, but is it something we need to worry about? It seems every bearish amateur investor with a Twitter account is proclaiming the #Grexit will annihilate our market. They confidently believe they have some cunning insight that everyone else is too stupid to recognize. But do they really?

In the summer of 2008, very few professionals knew what MBS and CDS stood for, let alone the risks they posed to our financial system. Only in the aftermath of the collapse did people finally realize what happened. Now compare that blindside to the Grexit that retail investors have been discussing in coffee shops for nearly five years. Everyone in the market is fixated on each twist and turn in the Greek story, meaning if this thing blows up, it won’t catch anyone by surprise. Some predict this is just another false alarm, but even the optimist is well aware of the risks because this story is moving so slowly it is nearly old enough to enter kindergarten. With so much time to prepare, major institutions long ago hedged their exposure and a Greek default will be as traumatic to our financial system as Y2K was.

And there is another thing, markets tend to blow negative news out of proportion. The herd gets spooked and traders stampede for the exits. But we haven’t seen the fear of the unknown and the herd selling yet. What gives?

While every bearish amateur is waiting for the other shoe to drop, what if it already dropped, only no one heard it? If everyone knows about something and has plenty of time to prepare, doesn’t that mean it is already priced in? Hasn’t everyone who fears the #Grexit had plenty of time to sell? If all these people sold ahead of time, then who is left to sell when it happens? Contrary to popular perception, the market doesn’t need to crash for bearish news to be priced in.

There are a lot of things for us to worry about, but the Grexit is not one of them. The market is not reacting to these headlines, not because it is stupid, but because it is more savvy than the amateur investors predicting its demise.

Jani

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About the Author

Jani Ziedins (pronounced Ya-nee) is a full-time investor and writer who has successfully traded stocks and options for more than a decade. He earned a B.S. in Mechanical Engineering from the Colorado School of Mines and an MBA and M.S. Marketing from the University of Colorado Denver. His prior professional experience includes manufacturing engineering at Fortune 500 companies, structural engineering, small business consultant, collegiate instructor, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two young children.

Duane Smith February 12, 2015

I liked your article and a good number of intelligent investors also share the same idea about this situation. What you’re describing is almost the idea behind the Nash Equilibrium. Which is the idea that people in a competitive space, tend to base their actions on what best profits them but while also taking into account what the other parties will do and how there actions will effect them.

Only caveat to this idea is that people tend to be irrational, and despite warnings and foreknowledge, many people will still keep themselves well exposed to a down market. Though it can be said that if an amateur can uncover the obvious then there was probably nothing to be uncovered to begin with, it can also be equally stated that emotions and superstitions are as strong a driving force for human action as self-preservation. Which goes to say, that if a market crash can only occur due to a hindsight miscalculation of information, then the gross level of information beforehand would have been described as correct or incorrect with exact certainty, whilst all the while being completely incorrect in its entirety.

    Jani Ziedins February 12, 2015

    Thanks for the thoughtful comment!

    The interesting thing is independent, irrational investors still produce a rational market since opposing extreme views neutralize each other. Problems like the dot-com bubble only arise when non-independent thought dominates, ie group-think. Given the amount of ominous headline coverage Greece is getting, it seems highly unlikely we have overly optimistic group-think.

    The other problem comes from unaccounted risk the crowd doesn’t know about. In 2008 very few knew about MBS/CDS and is why the price didn’t adequately reflect that risk. With Greece, it would be hard to claim the majority of market participants are unaware of the situation.

frednash February 12, 2015

Agree

    Jani Ziedins February 12, 2015

    Thanks for reading the article.

He De February 19, 2015

My thoughts:

The market rally will continue for the next several years to come because that is the way it is being set-up. It takes market participants to drive the market, but the Central Bankers know how to get the market participants to do as they wish (pavlov’s dog). The restructuring of debt (technical defaults) across the world setting the ‘planned stage’ for a one world currency is the next event that the masses will not be prepared for.

This will result in another 50% correction, so I guess they need to prop the S & P to 3,000 so that the 50% drop will be to 1500 which is where QE Infinity was introduced to prevent the complete and imminent collapse of the system that would have occurred otherwise. This is speculation, but I believe this is what is happening.

I think Dr. Bernanke is well aware of this, and wanted out well in advance of this outcome.

    Jani Ziedins February 23, 2015

    As you alluded to, QE helped us pull out of the great recession. Following the financial crisis, banks were not lending. The Fed had to step in to fill the void to prevent the downward spiral of a shrinking money supply. The trick to avoiding the scenario you mentioned is withdrawing the excess liquidity in a prudent manner. The money printing ended last year and the remaining debate is over contracting the money supply before the reinvigorated lending market expands the money supply to unhealthy levels. If done poorly we will suffer another economic meltdown, but so far it appears like the fed is threading the needle and so far all the predictions of inflation have failed to materialize.

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