FTSE 100 5870.08, - 125.93 (- 2.1%);
DJIA 12197.35, -144.48 (-1.17%);
NASDAQ 100 2290.48, - 17.10 (- 0.74%).
Markets running scared yesterday: possible defaults by Greece and Ireland; increased reserves requirements for Chinese banks; and an unprecedented "negative outlook" for US government debt.
Nothing new here so I am not sure if any of this should be a surprise to anyone or if the prospects for recovery have changed (unless overly optimistic) for any of the economies outlined.
So much for the efficient market theory though, where all information is anticipated, weighted, and factored in! (wikipedia.org: Efficient-market_hypothesis)
If anything China continues to show the way, as it has done in recent years, by taking precautionary action to prevent their economy overheating and trying to maintain longer term growth, which is more than can be said for many of the Western economies who continue to focus on profits today.
China may miss this goal but are at least taking responsibility for their actions rather than adopting a hands off approach and continuing to pump out everything that they possibly can to profiteer in the short term.
This gives them a chance of maintaining growth in their still booming economy. In fact their actions may even help to safeguard the global economies that they serve by easing off the accelerator and moderating growth.
Much better to have steady year on year growth rather than the extreme boom and bust cycles created by the "must have it now" culture that pervades western capitalism.
Additionally, easing the brakes on Chinese growth and consumption should bring some temporary relief to the commodity price inflation that again, seems to be a result of short term speculators driving futures pricing over the next 3 to 6 months.
Strange then that this news out of China should be one of the negative news streams that triggered market retreats and serves only to illustrate the sense of short termism that pervades global markets.
Moving on, I can only think that the possible default of sovereign debt will be a risk for some time to come and it seems slightly mad, or naive, that this should be a surprise to anyone particularly where there is so much resistance to the actions required to bring economies back onto a more normal keel.
I say more normal as it is clear that many Western economies have not been able to see through the "Emperor's new clothes" that many of our global banking behemoths have paraded before us.
Our leaders gladly signed up to, and sought to maintain their own status by aligning themselves with the new paradigms and even claiming that their "prudence" and soft touch regulation was creating a "golden" age of wealth and prosperity for all.
Wealth built on credit - hmmm!
If something is too good to true then it generally is.
Too many of us, and our governments, have sought to spend everything whilst hoping that "our assets" (generally property and wages) continue to inflate at a rate that would diminish our debts and top up our spending sprees.
We want low inflation (or even deflation), on the goods we buy, but high inflation on our assets. Not sure I know how that can work as someone gets exploited somewhere - out of sight is out of mind perhaps?
Iceland, Greece and Ireland have all had their recent days in the sun but there is probably no country that has not taken steps down this path lined by cheap credit and speculation.
Taken as a whole, Japanese companies and stock markets (natural disasters aside), continue to tread water following the implosion of their own 1980's bubble in commercial property (but no property escaped) which inflated to a point that has not been re-attained in the 20 years that followed the central banks "belated" attempts to cool inflation.
To quote from the www.nytimes.com: Bubble burst quickly, but the pain lingered.:
"At the market's peak in 1991, all the land in Japan, a country the size of California, was worth about $18 trillion, or almost four times the value of all property in the United States at the time..."
"...Now the land in Japan is worth less than half its 1991 peak, while property in the United States has more than tripled in value, to about $17 trillion."
At some stage the debts have to be repaid and, as with companies, cashflow remains the key.
Moving onto the US, well, Standard and Poors have actually maintained their AAA rating on US credit worthiness but, quite rightly, has warned that unless the US undertakes some action to reduce its debt levels then it will be increasing the risk that its debt will become unmanageable and unserviceable from current revenues.
Again, why is this a surprise.
We have also got to remember that, like everyone else in a position to know better, Standard and Poors (and other rating agencies) failed to warn against the same conditions (but arguably more extreme), that preceded the "credit crunch" so, of course, after the event, they are going to react to any shadows that they see, and for some time to come.
Were they afraid of upsetting the golden goose prior to the credit crunch and are they crying wolf now, who knows?
But, as long as they openly voice an opinion then, at least there is a chance of it not happening as preventative actions can be taken!
There are a few facets to this:
- firstly at least most of the tangible debt is now visible and centralised with government not a myriad of companies trying to hide it. As mentioned earlier Standard and Poors (and their peers), failed to identify debt risk when it was hidden amongst hundred of subsidiaries so well done to them now for stating the bleeding obvious!
- secondly, additional debt has (supposedly), been utilised by the government to protect the economy, companies and their markets, and the money cycle.
Indeed, every market stumble in the last couple of years has triggered new appeals for more quantitative easing and low interest rates.
When I say it like that, it sounds like a child working out how to manipulate its parents to its own advantage!
But, at what point does the parent cotton on and understand that they are being manipulated?
- the US is also such large economy (population: 300 million) with a manufacturing base that there is a lot of sustainability about its money cycle... if it can maintain employment.
At this stage the debts and losses of the credit crunch have only been collected and held with government rather than being paid back and recovery remains the measure of success.
But, it remains to be seen how many recovering companies dodge their tax responsibilities when it comes time for governments to pay back the debts. I can't see many of them thinking "bigger picture" then!
Too many of them seem to thrive on parasitic exploitation rather than the symbiotic relationship required!
Finally, looking ahead, it feels like much of this year will continue to be a bumpy ride for stock markets. It won't help sentiment that we are also moving into the middle segment of the year (April to September) that I tend to think of as the "doldrums" when markets seem to trade sideways and directionless anyway, unless some significant event occurs to tip the balance one way or the other.
But, if global economies and governments can implement some sensible corrective actions to reduce debt now, then every day that passes will bring the day when some level of economic stability will be restored (until the next greed driven bubble of course) which, as ever, means that there could be buying opportunities for those with a longer term outlook.
Article links:
- www.citywire.co.uk: Markets tumble as S&P warns of US downgrade
- www.thisismoney.co.uk: Market turmoil as debt crisis hits US
- www.citywire.co.uk: S&P US debt warning: what it means for markets
- www.nytimes.com: Bubble burst quickly, but the pain lingered.
- wikipedia.org: Efficient-market_hypothesis
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