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Voters rarely trust politicians. Neither do markets, and for good reason.
Politicians as a whole are not always the most predictable group. They can often be predictable in what they might say, but unpredictable in what gets actually accomplished.
Some answers to complex problems seem obvious to markets and yet not so obvious (or desired) to the political set. Two major elections occurred this past week, one in Greece and one in France. Both countries now have new leaders (Greece has a coalition of sorts) and they have both swung to the left of where they stood a week ago. It is not just the swinging that is causing the markets grief, but it is the uncertainty of the swing. Markets can price in bad news but uncertainty and potential chaos is what creates market turmoil.
France’s new leader, Hollande, says he will halt the austerity momentum in France and “grow” his way out of the problem. The markets heard his comments and have very little faith in his ability to follow through on his plan or any faith his plan will work. Hollande seems proud of how much he disagrees with other European leaders; a very unsettling point for the markets as the European Union attempts to cling to fiscal solvency. Greece has added a great deal of political uncertainty to it’s already heightened problem of running out of money in 5 weeks time. The new Greek leader, Tsipras, says he opposes the strict austerity imposed as a condition of the European handouts. Fairly elected leaders have a right to attempt to make changes, but I have yet to hear about his plan to pay the bills in 5 weeks when the well will run dry. The market is truly sitting at attention, straining in an attempt to figure out what this guy’s plan is.
Saying no to austerity is not a plan. With a fiscal ticking time bomb occurring in that country, saying no to austerity is nothing more than a political bumper sticker.
Politicians create market uncertainty for two reasons. Firstly, market participants spend their time trying to decipher if the politician in question will attempt to do what he or she has promised and secondly, will the politician be able to achieve what he or she has promised? Failure can happen both in the area of lack of intent and in lack of achievement. European leaders big (Lagarde) and small (Tsipras) need to work together to bring certainty back to the markets.
With the antics occurring this week, that seems unlikely.