Editor’s note: This article was first published in May 2012, as news commentary from 14 May 2012, at the height of the euro crisis. Krugman’s warning about Greece leaving the euro and the market moves of that week are from then. Greece did not leave the euro.
Today we woke up to a bombshell from Nobel Prize-winning economist Paul Krugman. He may be labelled a “populist”, but to be honest, in the past he said what was going to happen and, as we can see, it is happening down to the last detail. According to Krugman, Greece is preparing to leave the eurozone, and Spain and Italy could face a “corralito” (a freeze on bank deposits and withdrawals).
Having consulted several experts, the truth is that some see Greece’s exit as imminent, others as unlikely but possible, and others as very likely. Put together some concrete facts, namely some sovereign wealth funds pulling out their investments, Berkshire Hathaway, the company run by the well-known Warren Buffett, cutting its exposure, and finally today’s opening of the main US stock markets, which opened sharply lower as money poured out of equities on the back of the bad news coming from Europe, and the truth is… it’s worrying… then again…
It would be worth analysing how much was bet today against the eurozone, and specifically against the Italian and Spanish indices. Today, some institutional investors have made a fortune from the market fall. If it were finally confirmed that Greece is not leaving the euro and that the situation has been somewhat exaggerated, the big funds could make a killing, because at the prices the markets have been left at, it’s a bargain.
We have been seeing stock market moves that make no sense for some time now. On Thursday, Spain was nowhere near the end of the crisis, so a rise of almost 3% made no sense. Of course, it made even less sense for it to close in the red the following day, since the situation was no more chaotic than the day before. In fact, Thursday saw extraordinarily high trading volume compared with what we have grown used to lately. The investors who bet on a good moment, or on the IBEX bouncing back into an upward trend, have lost money as of today. Whoever bet against the IBEX took it all.
As we explained in a previous article, Apple is worth more than all the IBEX companies put together, so the big funds can move the index very easily. €100 billion and the IBEX is yours. I keep hearing that if you want to make money in the stock market right now, you have to trade intraday and bet on prices falling. When an independent trader bets on a fall, nothing happens; when someone bets billions on a fall, something happens… and a lot.
Just today I was told that if short selling were banned, there would only be one way left to make money in the stock market, and that would be upwards. So perhaps today’s news really just reflects the great confidence we have in Greece and in the sound Spanish financial system, and as for Italy… well… a few passing problems…
“A rumour is launched, it triggers a sell-off, and the panic makes the rumour come true. Later the rumour is denied and everything goes back to where it was, but along the way there has been a transfer of wealth: a little from many to the few who take advantage of these situations.”
Featured image: Commonwealth Club, CC BY 2.0, via Flickr.
