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Financial May-hem

>> Tuesday, May 15, 2012

May is the month for mother's day so first and foremost, Happy Mom's Day!

On the financial front, May 2012 seems to be an eventful month for the Euro zone. A new French leader has been elected in power who threatens to ratify the financial treaty due to growing dissent from the population because of the austerity measures. This was followed by Greece difficulty in forming a coalition. Even Bank of England is keeping interest rates to their near zero range.

One thing financial markets dislike is uncertainty. Rule of thumb is that uncertainty carries risk and with increased risk, a higher premium is required to take on more of it. With the road ahead unclear, and the summer holidays approaching, believe most would look towards taking their bets off the table.

This reminds me of a recent term that has attracted a lot of hype, "known unknowns". These known unknowns will be placing markets into a lot of turmoil for the coming weeks. That much we do know.

However, what we should be afraid of are the "unknown unknowns". These are events we are not even aware of to factor into our financial decisions, they may include but not limited to: Natural disasters like Earthquakes, volcanic eruptions, or tsunamis; Epidemics like SARS, or mad cow disease; A major company involved in financial scandal; Mad men launching nuclear strikes or crashing down buildings; maybe even mass believing that Dec 2012 is the end of the world.

Well, in my opinion, we are aware that markets are at a tipping point right now due to the known unknowns. How the market will tip depends on the unknown unknowns now. If nothing happens, we may be able to ride out the uncertainty unscathed. But if the unknown unknowns happen, it will serve as a trigger to tip markets into a dire spiral.

For my own bets, I will be taking some profits and placing new bets on hold. Some may say that herd instincts will not make you money. I do agree to a certain extent, as once markets are at its tipping point, whatever is going to happen next, it will happen fast and that is where the quick money can be made (or loss) in a short span of time if your bets are in the money (or out of the money).


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