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How the Market Works

Oil Prices and the “Greek Contagion”

Posted by kdadmin on July 20th, 2015.

Oil Prices and the “Greek Contagion”

Currently, the media fluff about oil prices is that it’s Greece’s fault. Are you kidding? What about oversupply? What about the Saudi’s uninterrupted production schedule? What about Iranian tanker oil? There’s more to this story, people.

Greece is neither a producer nor a large consumer of oil, but the chart (and the media) would suggest that its performance (designated by the ETF – GREK) is somehow directly correlated with the price of Oil (designated by the ETF – USO). The argument here is that the contagion effect (one market goes down, and others follow), or, more accurately, the FEAR of a contagion effect is why oil is tanking. This flawed logic goes one step further and claims that the reason that the European stock market hasn’t positively responded to the ECB’s (European Central Bank’s) injection of funds into the economy is because of fear that Greece will exit the EU. This is all conjecture, and not well supported conjecture at that. This is not how the market works. It’s simply an example of 20/20 Blindsight.

If you have eyes, you can see that the chart indicates otherwise. Oil (USO), is down 55% in one year. Greece (GREK) is down 52%. Russia, once thought to be directly correlated to oil, managed to decouple from oil’s plummet in mid January and is only down 25% (RSX). But, most importantly, Europe (VGK) is up over 7% since the ECB started pumping cash into the economy on March 9.

While I would argue that VGK’s 7% response to the ECB, in four months, is pretty good, I would still imagine that the primary reason the the European market hasn’t exploded up is because it’s trading at all time highs, as measured by the FTSE.

While it’s not all blue sky and roses for the European Union, there is simply no reason to get your undies in a bunch. Greece certainly doesn’t pose the problem that the media would have you believe. Neither for investors in the USA, nor in the other, stronger EU countries.

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