Ire of Ireland way overblown

Yesterday saw another decline in worldwide equity markets.  This bias toward selling is supposedly because of continued nervousness about Ireland’s finances.  I discussed recently why I felt those concerns were unwarranted.  I continue to think that they are way overblown.  However, once traders, especially momentum folks, get a hold of a story they begin trading what they “expect” the news to be.  So if they expect folks to respond negatively to news out of Ireland then they begin to sell.  That selling momentum, in turn, leads to more selling by other momentum folks.  That tsunami can get so intense that even sovereign nations are forced to do something about it.  That is exactly what has happened today.

Witness the following from Ireland’s central bank governor Patrick Honohan, who also happens to be a governing council member of the European Central Bank:

“Our efforts, the huge sums of money that have been put in by the government to support the banks, have not generated sufficient confidence yet.

“The money is enough objectively but the confidence isn’t there and it’s partially not there because investors are concerned in general about the government finances and the future prospects for growth and employment.”

What I want to zero-in on is his use of the word “objective.”  As I said yesterday, objectively Ireland doesn’t needs these funds at all.  But investors’ behavior is roiling financial markets worldwide.  Those investors are looking for acquiesence on the part of Ireland.  Think of these momentum guys as being like a lynch mob – they will continue to riot until they get what they want, regardless of the logic or necessity of their actions.  The nation of Ireland clearly understands the situation and they are going to take this loan on despite their accurate assessment and insistence that they don’t need the money.  But look at how this is being done…

“I think maybe the best way to think about this is that this is contingent funding.”  The capital is probably not required at all, but it can be made available in the form of contingent capital funding that can be shown but not used.”

That’s a statement that came late in Mr. Honohan’s interview with Irish state broadcaster RTE Radio.  What he is saying is, “Alright, if you insist.  We will agree that if we need the money we will take it on.”  In other words, the real effect, like so much of what is going on in the world of finance right now, is psychological.

And that is the real story here.  Investors are more focused on their fears than on reality.  This tenuous situation is wrought from a global economy and financial markets that aren’t responding in accord with how the current generation of traders and investors have come to expect them to behave.  So these fish are out of their waters and that makes them nervous.  For me, this is an opportunity.  When the majority of people buying and selling stocks are prompted to do so by their emotions, it means that selling mistakes are made, and bargains can be had.

My prediction is that little or no money will ever be drawn from this “loan” by the Irish.

Jason