The market, at times, can be the worlds best predictor of the future. Most times, the market has reacted ahead of events that would have normally caused a sell-off, because the outcome was “Priced-In”.
One of the less proven theories with the market, is the one of the self-fulfilling prophecy. Where rumor and speculation that may be 100% off base, actually cause the outcome to occur.
For example, a blog can say Morgan Stanley is going bankrupt because of it’s exposure to European debt. Traders then tank the stock to all-time lows on that fear, people withdraw funds from their accounts because of fear …ect. Ultimately the company may have to resort to the outcome that was predicted, not because the blog was right, but because of what the rumor and speculation caused.
This maybe the case with the European Debt crisis. Over the past week, we have seen bond yield rise in Italy to obscene levels. Monday we saw the Yields rise in other European countries such as Spain and France. Is this a self-fulfilling prophecy?
As these yields rise, European countries will find it much more expensive to pay off their debt. We are starting to see a trend that may be unsustainable, and result in at least a few of these European countries going default.
I guess only time will tell!!