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This is a guest post on trading from Tusk Trader (check out the newly launched site: www.TuskFund.com), an experienced Bay Street trader who will be writing here until Tusk’s own blog is set up. Tusk had a front row seat to the twists, turns, and almost collapse of our capital market systems a few years ago and provides a unique perspective you won’t find anywhere else. For most people, financial literacy is the elephant in the room. Let Tusk Trader help change that. If you are on twitter, make sure to follow Tusk at @TuskTrader
I think Greece will default. This is not a unique view as many market participants think the same thing. A second common belief right now is that the market has essentially priced in that happening. I am very uncertain that the market has done that. The financial world has not seen a default of this size before and I do not think every permutation of what is going to happen can be extracted and viewed in a financial model.
The markets can do a fair job of pricing in events like a credit crunch, European banks struggles or GDP declines. As a trader, I am most concerned about what we do not see coming. The list of what events occurred in the past when a country defaulted (Russia 1998, Peru 2000, etc.) will not give a solid view of what the financial world will be in for when Greece actually defaults. The complexity of a Euro country defaulting resembles a science experiment and as a trader, I want to have on safety glasses, protective clothing and have access to a study table to duck under when sparks start to fly or when something explodes out of a beaker.
I do not think that every trading day will be crazy and manic as a Greek default works its way through the system, but I do think there will be some big event driven trading days where uncertainty will reign supreme. There are a number of moving parts that will not always move as expected. The currency risk alone is uncharted territory. The currency you hold your assets in could end up be the biggest determining factor of their growth potential. From a trading perspective, the flight to currency safety could be the pathway to chaos for the equity markets.
The size of the Greek problem also gives me shivers. The last major default the world dealt with was Argentina in 2002. It was for about 80 billion dollars. Greece is sitting around 500 Billion Dollars. That is a massive number.
I think the market has miss priced these surprises coming. I have no crystal ball that will tell me what these surprises will be but I do know that they are coming. We are looking at 420 Billion dollars worth of uncertainty.
And just to add some more numbers to your thoughts, if Spain defaults that would be approximately 1.05 Trillion. Italy would be 2.7 Trillion.