Greek debt protestIt may seem tough to fathom now, but few things struck terror in the hearts of investors like the tiny Greek economy did at the beginning of this year. However, the country's dire financial conditions have healed better than most would have imagined.

While Greek debt woes generated plenty of catastrophic headlines, the country's equally remarkable turnaround has taken place out of the spotlight. Greek sovereign bonds have rallied sharply since the summer, and countries ranging from Norway to China have signaled their support.

The lessons for investors, of course, extend well beyond just the Greek economy. Nowadays, markets and media cycles lurch from one potential crisis to another at a velocity seldom seen before. But the next crisis du jour about to slam the financial markets – from the certain implosion of commercial real estate, a run on the dollar or impending sovereign debt crisis – has a way of correcting itself that's easy to overlook at the height of the hyperventilation.

We're Doomed!

Greece, for example, was seen as proxy for many larger Southern European economies, and prominent economists made blaring pronouncements declaring that a painful wave of defaults and deflation were inevitable. Armies of analysts took to the airwaves to declare that the euro was doomed as images of deadly riots on Athens streets were broadcast around the world.

It was easy to overlook that the highly unionized Greek public sector has a long history of rowdy demonstrations that frequently spin out of control. After all, most pundits were too busy racing to edge out rivals in anticipating where events might lead.

The striking steadying of Greece's financial position over the last several months has taken place with far less fanfare. Greek bonds have rallied a hefty 10% since the summer as yields tumbled 13%, far ahead of the rest of the eurozone.

Rating downgrades for sovereign debt in the region are sure to hammer markets. But Moody's (MCO) recent constructive comments on Greece following the country's largely successful belt-tightening don't seem to be having nearly the same impact on the upside. Similarly, widening credit default swap spreads and offhand comments by politicians in marginal European countries like Hungary can send markets reeling. But a recent tightening of spreads amid renewed investor confidence gets a lot less attention.

The Rise of Hedge Funds

Part of the disconnect, of course, has to do with longstanding human biases. While fear and greed are frequently cited as two ends of the pendulum, the former may be a far more powerful emotion.

But the shifting nature of the financial markets and the perverse incentives of doomsayers at times also play an increasingly important role.

The rise of hedge funds over the last decade, for example, has been staggering. The industry will have an estimated $2 trillion under management by year-end. When it came to the stock market, many of Wall Street's old guard were considered too cheery. But hedge funds by contrast often find betting against assets far more lucrative than attempting to shuttle investors into vehicles like mutual funds.

This major shift in who controls capital is likely leading to more alarmism, and the constant rumor-mongering at the height of the Greek crisis was very suspicious.

The rise of high-frequency trading and vehicles like electronic trading funds mean momentum tends to be self-reinforcing to a degree never seen before. Yet, while computerized trading drives prices to extremes and tries to take advantage of hair-splitting discrepancies, those swings are nevertheless interpreted as the verdict of judicious investors -- much as they might have been 50 years ago.

When panic strikes, investors are bombarded with catastrophic interpretations of events. But in reality, the market often is telling investors far less than the pundits and those who profit from mayhem would lead investors to believe.

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Restructuring debt is not recovery. It is kicking the can down the road. California is doing the same thing, and the results for them will eventually be catastrophic.

October 17 2010 at 3:16 PM Report abuse rate up rate down Reply

Maybe we can send Obama over there for some OJT.

October 17 2010 at 1:49 PM Report abuse rate up rate down Reply

Yes, and they cut government! What is our leadership doing...expanding...following the same road Greece and other countries took. More stupidity from the liberals

October 16 2010 at 12:43 PM Report abuse +3 rate up rate down Reply
1 reply to Jen's comment

Have you looked at the employment figures? Most jobs being lost right now are in the government sector. The last time jobs were lost in government was under Clinton. Under Republicans the numbers always skyrocket. Besides, can't wait until you need something and there is no one to turn to. Remember that military personnel are included in government worker numbers. Remember also that Bush did TARP which was included in his $5 trillion deficit, just to add to the GOP deficit numbers from the election of Reagan. More stupidity from your corporate overlords or is it FOX?

October 17 2010 at 5:36 PM Report abuse -1 rate up rate down Reply

Please good news in a sovereign states’ financial standing getting publicity in the USA. Just as financial sharks indigenous to North American, waters are planning a political coup based not on the courts this time but money manipulation. Good job Greece Keep it up!

October 15 2010 at 11:13 PM Report abuse rate up rate down Reply

do the Greek people feel so very "recovered"? is so why were they rioting in the streets TODAY??? because of austerity measures. so that cant have anything to do with this so-called "recovery" right???

October 15 2010 at 8:45 PM Report abuse +4 rate up rate down Reply

The secret of the Greek recovery is feta (hint: It's not the Federal Emergency Trade Act... Actually, it's a smelly, crumbly, delicious cheese).

October 15 2010 at 5:16 PM Report abuse rate up rate down Reply

Whenever I hear of, yet another crisis, I wring my hands in mock-distress, then I tell them to call me back, on Monday... 9 times out of 10, the "crisis" has resolved itself, by then. Unless you actually see smoke, smell it, feel heat and see the hair on your arms melting, it's just the fire department wanting another raise. Life 101 is something that they don't teach you in college.

October 15 2010 at 4:20 PM Report abuse +1 rate up rate down Reply

I couldn't agree more. The question that needs to be asked however is why - who benefitted from the hype and the extreme negativity on both Greece and especially the Euro. The latter is back at over 1.40 dollars, about where it was before this man-made crises. Since I do not expect people in the media (WSJ, FT, etc.) to fabricate such stories to further their own personal investments, how did the money folks (the hedge funds and whoever else) who made a bunch of money on this, get the media to do their dirty work by publishing these totally overblown and incurate stories???

October 15 2010 at 2:13 PM Report abuse +1 rate up rate down Reply
1 reply to blueheron's comment

probably because the media folks work for the money folks

October 17 2010 at 5:14 PM Report abuse rate up rate down Reply
Lee Gibson

Thank you for this valuable reminder that our greatest enemy as individual investors many times is the irresponsible media. When it isn't the hedge funds, of course.

October 15 2010 at 2:09 PM Report abuse +3 rate up rate down Reply

I'm afraid the author confuses temporary relief with a permenant solution. The Greek government is still spending more than it is taking in, and will for the forseeable future, adding to an already backbreaking debt load. The entire crisis was started because Greece was not going to be able to make payments on its debt as it comes due. What happens when the next large repayment is due and the Germans are unwilling to fund a bailout? What if one of the PIIGS defaults or one of the US states (IL or CA)? The debt markets will be closed to insolvent sovreign issuers and the crisis will be worse than it was before. The near term crisis was averted, but no long term solution has been created

October 15 2010 at 12:58 PM Report abuse +1 rate up rate down Reply
1 reply to Chris's comment

You got it right!

October 17 2010 at 3:40 PM Report abuse rate up rate down Reply