Animal spirits were improving last week,
according to Barron’s.
The idea of animal spirits was introduced to
the dismal science (a.k.a. economics) in the late1930s, courtesy of John
Maynard Keynes. In The General Theory of
Employment, Interest and Money (a dreary title that surely could have
benefitted from an injection of animal spirits), he wrote:
“…a large portion
of our positive activities depend on spontaneous optimism rather than on a
mathematical expectation, whether moral or hedonistic or economic. Most,
probably, of our decisions to do something positive, the full consequences of
which will be drawn out over many days to come, can only be taken as the result
of animal spirits – a spontaneous urge to action rather than inaction, and not
as the outcome of a weighted average of quantitative benefits multiplied by quantitative
probabilities.”
In modern times,
Keynes’ idea blossomed into the field of behavioral economics, the study of
human psychology on economic decision-making. One of the animal spirits that
influences decision-making is confidence (another is overconfidence) which can
drive stock markets higher.
Last week, easing
measures by the European Central Bank (ECB), a cease-fire agreement in Ukraine,
optimism about negotiations over Greek debt, and better than expected earnings
for many companies, helped improve investment sentiment in Europe for the
fourth straight month, according to Reuters. Many European markets moved
higher.
In the United
States, strong fourth quarter earnings, improving oil prices, and good news
from Europe helped push markets higher as well. Reuters reported the
CBOE Volatility Index (VIX), Wall Street’s fear gauge, hit its lowest level for
the year on Friday.
more greek drama. You know things are getting contentious in the Eurozone when the newly-elected
Greek Prime Minister, Alexis Tsipras suggests Germany may owe Greece war
reparations.
Talk of
reparations is a distraction from the real issue which, according to Financial Times, is the possibility that
Greece will need a third bailout when the current one expires. Yet, the new
prime minister has promised to end austerity measures. Members of his
government have described those measures, which were implemented before
Eurozone leaders would agree to the first Greek bailout, as “fiscal
waterboarding.”
You may
recall the euro crisis. Back in 2009, the European Union (EU) insisted France,
Spain, Ireland, and Greece reduce their budget deficits (the difference between
what a government spends and what it receives in taxes). The Eurozone set a
limit for debt (the accumulated value of deficits) at 60 percent of gross
domestic product (GDP) which is the value of goods and services produced by a
country.
In December
2009, Greek debt was $442 billion or about 113 percent of GDP, according to the
BBC. After the discovery of
irregularities in Greek accounting and a flurry of concern Greece would have to
leave the euro, the country implemented an austerity program to reduce the
deficit which included severe cuts to public spending. The program was well
received by the EU, and EU leaders agreed to a major bailout for Greece which
included writing off about 50 percent of the country’s debt.
In recent
days, the Greek people have been cheering as their new government reverses the reforms
implemented by the previous government and talks tough with Greek creditors. The
Greek government is seeking additional financial assistance from other Eurozone
countries but insists it will not adhere to the reforms previously in place.
Eurozone leaders have expressed willingness to extend the current bailout as
long as Greek fiscal reforms remain intact. Negotiations have begun to bridge
the gap.
Greek market
performance shows not everyone is impressed with the new government’s stance.
The yield on three-year Greek bonds had risen to 17 percent at the end of
January, and bank shares had lost significant value. The Economist reported:
“So back to the markets and the game of chicken being played
between Greece and the EU. A Grexit [Greek exit from the euro] might cause
problems for the EU in the form of losses for the ECB and others on bad debts…
But, as we have seen, Greek financial markets are tanking. So investors clearly
feel the EU has a stronger hand to play.”
It seems to
be a good time to reflect on an old saying: Beware what you wish for; you just
might get it.
Weekly
Focus – Think About It
“You don't
develop courage by being happy in your relationships everyday. You develop it
by surviving difficult times and challenging adversity.
-- Epicurus, Greek philosopher
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