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  • Bring out the guns

    Posted on November 10th, 2011 Peter Tjernström No comments

    As Italian 10-year bond yields were edging over 7%, stock markets around Europe and in the US were gradually falling. At the same time Italy’s head of state, Giorgio Napolitano, felt compelled to assure the markets that there were no doubts that Silvio Berlusconi would resign and that the Italian parliament would soon (“in the space of a few days”) pass austerity plans.

    Economists around the world are now quite unified in their judgement, namely that the only possible solution to this immediate crisis is for the ECB to bring out the big guns and intervene massively in the bond market.

    In difficult situations like these, one shall always bear in mind that the best investments are made when everyone is pessimistic about the future and running away from the stock market. So is this a good time to buy shares? No. We are not there yet. The two most fundamental reasons why:

    1) Stock markets are up since the beginning of October. Markets have edged on good performing quarterly reports and hopes for a Greek solution. And even if some stocks seem like good buys in the long run, it’s always better to buy even cheaper. Things will quite certainly get worse before they get better.

    2) The ECB and European leaders can not keep up with the pace of global markets. And if the ECB won’t save Italy, no-one will. In this way Italy will default  simply because it will be cut off from the credit markets. If Italy defaults – the end of the Euro zone?

    You can expect a lot of market turmoil in the next few weeks, so instead of waiting for those big guns to come out – drop your shares and stay back for a while.

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