Friday, May 7, 2010


New York suffered its largest price drop ever yesterday, with the DJ dropping almost 10 percent before closing at a price level about 3 percent below levels from Wednesday. What was going on?

The media are spreading reports that it was probably a technical failure, but at the same ...time other journalists and market analysts are analyzing, and deducting conclusions as if it was something easy to explain economically. It was of course the crisis in Europe, where the support lobby for Greece was - once again - not showing the strong cohesion that markets need. A critical observer of European Union politics would add: 'But what is new there?' If there is one thing we can learn from the EU, it is that the joint currency is not exactly supported with national central banks and governments that treat the ECB and its directives and recommendations as 'the only way forward'.

The EU is therefore not as far as the US with its dollar. Added to this the fact that the US seems - as usual - to leave the Global Crisis quicker behind with stronger signs of recovery and we can understand Euro weakness. But beware: Euro weakness is probably for 50 percent the Greece story and for another 50 percent the improvements in the US, i.e dollar recovery and not a drop of Euro.

When we say Greece, we do also incorporate the potential threat that Spain and others might be affected. But we shouldn't exaggerate. It was indicative that exactly on the same day that markets plunged, Spain came out with reasonably good economic figures.

And also: never forget that in all short-term analyses the impact of currency problems and its effect on national debt burdens can easily be calculated. Numbers that we can derive almost within hours. On the other hand, the resulting drop in the value of Euro will also ensure European exporters a comparative advantage vis-a-vis competition from the US and Asia. This compensating effect is not so easy to calculate. And not just that, it will take some time before it becomes visible in the results of exporters.

Thank God, we don't have to wait before markets will realize that. Financial markets do normally not just follow economic signals after the fact. They are supposed to lead economic developments by 6 to 12 months. We are therefore confident that - conditional on some kind of solution for struggling European nations like Greece (be it via EU itself or the IMF) - things will move back to a focus on real economic data that indicate that we are leaving the crisis behind us.

But with a weaker Euro and a stronger dollar and nervousness in the Western world in general, our interest in selected Emerging Markets is only growing further.

Later today or tomorrow we will bring you our small long-term analysis, where we try to deduct a group of nations with the potential to take at least the first steps on a path that could make them the next Singapore.

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