Saturday, April 17, 2010

The Icelandic Volcano and its possible fallout

The unpronounceable and unspellable volcano in Iceland has been spewing ash for 3 days, from 5 different plumes, straight into the stratosphere.  The wind is blowing the ash, containing microscopic shards of glass, into the cruising height of all jetliners -- upto 30,000 feet. The airline schedules all over the world have been disrupted already. What are the likely secondary effects?

The closure of airports for 4 days post 9/11 offers a precedent. It created a downward spiral, catalysed US's entry into two wars in two faraway countries, knocking the economy on steroids that the US was, and still is, into a recession that lasted 2 years, and is arguably still in it.

While there are no more wars likely in a world already tired of wars, there are dangers, real ones, for economies on the brink of bankruptcy. Economies like Greece, Spain, the UK -- they are all very fragile today. The UK is going into an election with uncertainty about political outcomes.

If the airline industry reel for over 2 weeks, we might just see a couple of economies in Europe slipping back into a recession that will probably last quite a bit longer than the ash plume from the volcano.  If that happens, count on Europe as a whole being dragged into a recession, with knock-on effects on the currency rates, that will filter across all stock markets in the world.

I am very worried -- if the perception as above is shared by enough persons operating in capital markets worldwide, rcession and stock market crashes will become a self-fulfilling prophecy. I have covered myself -- yesterday I sold all the shares I held. Will wait for a month for the downward spiral to happen -- if it does not, I will re-enter the markets.

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