In the mid to late 1980s a particularly nasty disease afflicted the UK cattle herd. The illness was called bovine spongiform encephalopathy or more commonly, mad cow disease. The infection through an agent called a prion, could be passed on to people and ultimately may be presented as the incurable and hideous Creutzfeld-Jacobs Disease or CJD. CJD could present itself in people many years after being exposed to tainted beef. As you can imagine, the price of beef in the UK fell through the floor. I remember a news interview with a shopper buying beef at the local supermarket. The interviewer asked the housewife if she was worried about CJD she said she was but who could turn down beef at these prices?
An interesting parallel is presenting itself on the stock markets right now. The markets are gripped with fear of “contagion” from the sovereign debt crisis which is raging, mad cow like, in Europe right now. If Greece defaults on its debts, the world’s shaky confidence in the Euro would take a nose-dive. The ramifications of a Greek default on the rest of the Eurozone, the wider EU and the global financial community are uncertain, but could be little short of catastrophic. Add to this picture the fact that the world’s faltering recovery from the global financial crisis seems to be slowing, threatening the dreaded “double-dip” recession and you can see why the world’s markets have just experienced one of their worst quarters in a decade. Major markets experienced heavy falls from nearly 12% (Nikkei) to almost 26% (Dax). Certain sectors, notably the financial sector (i.e. bank stocks) have seen nearly half of their book value evaporate over the last three months.
Markets are cyclical beasts and an upturn will happen sooner or later. Like the story of the UK housewife, banking stocks may be exposed to sovereign debt, but at these prices who can afford to resist them? With that said, I suspect that the markets still have a way to fall before they hit the bottom – but if you time it right, there are killings to be made.