(By Jeffrey A. Miller) I feel no panic about Europe.
This is a typical test. Every long-term investor considers the question of risk tolerance and understands that markets will fluctuate for mysterious reasons. So far, so good.
Then, when the event actually happens, it is accompanied by a cacophony of fear mongers -- all claiming that this is "the big one."
How can the average person tell the difference?
Knowing What to Ask
The first step in critical thinking about a problem is asking the right questions. How about these?
- Is there systemic risk? By this I am asking whether we have another "Lehman event" where there is a lot of unknown counter-party risk and the credit system freezing up.
- How big is the problem? Let us suppose that Greece defaults on debt. Or leaves the Eurozone. What is the worst case?
- How do political events affect the prognosis? We have election results where leaders and parties less willing to accept austerity have done well. What does this mean?
- If some countries back off from "extreme austerity," what will be the response? Will other institutions step up? Can there be a new bargain?
- If everything goes wrong -- absolutely no mitigation from the ECB, the IMF, or other participants --what will be the effect on the European economy?
- If the European economy falls into a deeper recession, what are the implications for the US economy?
- If the US economy is weaker, what does it mean for corporate earnings?
The Superficial Answers
Most of the commentary we see has three steps:
- Some problem in Europe
- Cockroach/contagion/domino
- Disaster for the world
This type of commentary ignores any policy reaction, and also often insults the leadership of European nations, the IMF, and the ECB.
This approach is popular and gets a lot of page views since there is an active response network making these the most popular media sites -- whether blogs, online MSM, or TV. It is an easy story, playing to preconceptions and simple analogies.
The Danger for Investors -- and What to Watch
As is always the case, fanning the flames on these stories is what drives ratings and page views. When the market dips, it seems to provide a confirmation of accuracy, even though the evidence is skimpy.
It is challenging to refute. You must write an article about what is not happening!
It is doubly challenging since some of the best sources are the big-time private research firms. Their business models are based upon fees, not page views. This means that most investors -- including readers of "A Dash" -- do not have direct access to this information.