Markets get slammed by Greek debt worries and US job numbers.
You can't say this day was never coming. It was the day when world stock markets freaked out and fell precipitously.
Why the panic?
Any number of factors appeared to be at play…
1) Greece
A day after Greece's plan to narrow the budget gap won European Commission backing, the country's biggest union approved a strike this month, and tax collectors began a 48-hour walkout.
This is on top of the one-day strike planned by main public-employee union. Seems like the Greek unions aren't a big fan of increased fuel taxes, an increased retirement age, and the government backtracking on a promise to raise wages faster than inflation.
Hard to blame them really, although they don't realise their actions may plunge the Euro into crisis and drag world stock markets down even further. Still, they don't care anyway. The slogan for the latest strike is "people come first, markets and profit second."
It's not their fault their government has gotten itself into one almighty pickle of debt. And from their perspective, they don't care one jot if their pain is shared across the globe.
Any odds on when the first riots will hit the streets of Athens?
2) Spain & Portugal
Nobel economist Paul Krugman said that "the biggest trouble spot isn't Greece, it's Spain."
According to The Telegraph, EU economics commissioner Joaquin Almunia "helped trigger the panic flight from Iberian debt by blurting out that Spain and Portugal were in much the same mess as Greece." Oops!
Piling on top, in The Telegraph Julian Callow from Barclays Capital said the EU may to need to issue a guarantee for Greek debt. "If not contained, this could result in a 'Lehman-style' tsunami spreading across much of the EU." Yikes!
The uncertainty is killing the markets. The lack of an obvious solution doesn't help.
Slashing budgets and public services doesn't help. An EU bail-out may stop the rot in the short-term, but at the same time will undermine confidence in the euro, and certainly have unintended consequences.
As we're seeing now, bail-outs are like a good drug -- they give you a big high when they first kick in, but ultimately leave you nursing far bigger problems.
3) US unemployment
Initial US jobless applications came in at 480,000, the most in seven weeks, and worse than expectations.
"The jobless claims number was definitely disappointing," said Cliff Remily of Thornburg Investment on Bloomberg. "Investors are skittish. They've been looking towards a recovery in 2010 which may not be as strong as expected."
Tell me something new. The US, like the UK, have been throwing the kitchen sink at the recession. Massive government spending, resulting in record budget deficits. Near zero interest rates. Flooding the market with money via the printing presses.
It's brought us back from the brink of economic collapse. It has saved us from the second Great Depression. But it hasn't saved us from a rather large recession.
There is still 10% unemployment in the US and the Euro zone. The UK's unemployment level stands at close to 8%, with the government expecting the jobless to stay above 2m well into the decade.
This recovery will take time. The stock market has already priced in the recovery. Expect 2010 to be a challenging year for investors.
4) General Panic
Panic breeds panic. A day like yesterday makes everyone nervous.
The market hates uncertainty. It hates it when it can't see an obvious solution to a problem.
"The credit crisis has evolved from a corporate credit crisis to a sovereign credit crisis," said Kevin Shacknofsky of Alpine Mutual Funds on Bloomberg. "The banks got bailed out by the governments, but who will bail out the governments? It is a scary proposition."
"There's a lot of noise about the UK or Spain being downgraded," said Arturo De Frias, banking analyst at Evolution Group (LSE: EVG) on Bloomberg. "There's a massive loss of confidence in everything that is Europe. There is contagion from Spain, Greece and Portugal".
Yesterday Barclays (LSE: BARC) plunged 7.8%, Lloyds Banking Group (LSE: LLOY) dropped 6.8% and Royal Bank of Scotland (LSE: RBS) fell 5.8%. Ouch.
Make It Happen
Full-blown crises come largely out of a lack of confidence. We've seen it many times before, most notably in the collapse of sterling in 1992 and the demise of Bear Sterns and complete collapse of Lehman Brothers in 2008.
Once you lose confidence in something, it's very hard to regain that confidence. It doesn't just magically happen. Something has to change into order to make it happen.
Until the change or action comes, don't be surprised if the market continues to wobble.
More on the economy and the markets:
> If you're in the market for buying shares, consider opening an online broker account with The Motley Fool's Share Dealing Service. You can buy and sell shares in real time for a flat rate of just £10. Click here to find out how you can open an account for free today. There is no obligation to trade.
