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World volatility to continue

11/11/2011 @ 3:29pm

Although it appeared both the commodity and stock markets rebounded on the heels of positive news developments in Greece the last couple of weeks, the unfortunate story is that there are many chapters left to be told. Volatility will likely continue to be high, at least in the foreseeable future, as debt concerns in other European countries (namely Italy, Spain, Portugal and Ireland) come to light. These countries need time to get spending under control, people back to work, and earn a positive economic view from the rest of the world. 

So what is the big concern for the U.S. and other countries regarding the European crisis? If Greece were to default, it would in essence be bankrupt. This would imply that Greece would be unable to pay its workers, though more importantly there could be a run on banks, causing investors to withdraw euros. Greece would then revert back to its former currency, brachmas. This would create a huge currency devaluation and consequently a real internal problem. 

More importantly, for the world, there are a couple significant developments that could then occur. The domino effect of world panic could quickly ensue should Greece fail. Investors would face uncertainty, and therefore, likely exit markets throughout the world. This, in turn, could pressure prices for commodities and stocks. Other European countries in trouble would likely fall into a default mode as well, creating an even larger wave of uncertainty and fear. A potential repeat of 2008 could be at hand. 

It has been said that the current situation could mirror what occurred three years ago. The only difference is that you could substitute Greece in place of Lehman Brothers, though with more global consequences. 

So as the market twists and turns at every event that unfolds in Europe, one can see why investors are viewing each day as either new opportunity or one with major concern. Unfortunately, this situation is not likely to go away any time soon as Europe will be viewed as a ticking time bomb. These problems have taken decades to manifest and grow. Strong corrective action and the realization that, for many, a way of life will have to change in order to get back on track economically and financially, will be a challenge for millions. However, the good news is that these problems are exposed and being addressed. It's now probably a matter of patience, anticipating years rather than months, for a real turn around. 

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For those who are reading this Perspective and are farmers, keep in mind how fast commodity prices can fall apart. It's alright to be bullish, though make sure you have a strategy so that if Europe unravels, you are prepared. It might be helpful to remember 2008, in which corn went from the mid $7.00 range to under $3.00 in months. Purchase out-of-the money puts as safety valves. These could provide a huge level of comfort should Europe fail. 

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