- The IMF warned Tuesday that "sovereign debt could trigger a ‘new phase' in the crisis".
- But sovereign debt is just the latest in a lengthening line of worries this bull has overcome.
- We expect more stories will surface, and a few of those will cause the bull to buck. Short and sharp, corrections are to be expected, but not dodged.
A volcanic pall has settled over Europe and grounded flights for a week. Complete with fire, brimstone, lightning, and billowing ash clouds, it's not hard to see why it may seem the end is nigh. (See here for an excellent photo essay.) Only adding to gloom, the International Monetary Fund (IMF) warned Tuesday that "sovereign debt could trigger a ‘new phase' in the crisis."
Is the sky really falling? Should we gird ourselves for acid rain and a plague of locusts? No, keep the faith. Human behavior after a crisis is as immovable as it is predictable, with most believing the recession has left an indelible mark. These are only the latest additions to the lengthening series of apocalyptic visions the bull market is feeding on.
What are a few other such worries markets have consumed since the bottom?
1. A tidal wave of ARMs would come due in 2010 and foreclosures would skyrocket. No such luck as rates continue historically low. Some of those resetting mortgages may even result in more manageable payments.
2. The commercial real estate crisis would replace the residential real estate crisis. Significantly less financial system exposure to commercial real estate and cautious, well-capitalized banks headed this one off at the pass. Now, investor demand for commercial mortgage-backed securities is actually surging.
3. Bank failures would hit fever pitch and overwhelm the FDIC. That banks would fail is no surprise—that the FDIC could contain the fallout isn't either.
Then there's that old story about sovereign defaults. It may seem Greece started it all—but in fact, Greece marks the third round of sovereign worries. First it was Eastern Europe, then Dubai, and only now the PIIGS. In the first two instances, some kind of bailout involving the IMF, an interested economic partner, or both eased the crisis. Greece has yet to ask for help. But should the open market fail them, a similar agreement is materializing. In all three instances, the crises were contained to their respective regions or even countries. And for all those countries in serious trouble, there are others who are getting fiscally healthier (as we've noted here before).
But don't take our word for it—what's the market had to say? Aside from a few minor setbacks, it has continued its surge from the bottom. We expect more stories will surface, and a few of those will cause the bull to buck. Short and sharp, corrections are to be expected, but not dodged. Young bull markets eat such fire and brimstone for breakfast.