The Jury is Out
It looks as if the expectation expressed here last week, that the phenomenal financial meltdown of 2008 would run its course before the end of October, is actually occurring. However, any hope that the massacre would quietly peter out was in vain; on the contrary, the final accord was in line with the overall theme, in that it saw another massive selling wave which did indeed carry all the main markets to new lows. Then, perhaps inevitably, came a violent reaction in which the same markets that dropped by daily margins of 5% or 10% earlier in the week, soared upwards by similar margins in the second half of the week. Tokyo generated the most extreme of all the extreme moves – slumping to 26-year lows and then rising by a staggering 30% over three successive trading days.
None of this is good news – not the sickening slide and not even the equally giddying jumps. The volatility makes the markets inaccessible to all except risk junkies.Worse still, from a wider perspective, is the fact that equity markets were by no means the only area of the financial markets to indulge in this lunatic and frenetic hyper-activity. Currency markets also went off the rails over the last ten days, with major currencies recording moves of as much as 5-7% in a single day’s trading. As one analyst noted, “I don’t usually look at long-term charts on a day-to-day basis, but when currencies are moving 10% in a week, it becomes necessary”.
The rebound is, of course, a reaction – a ‘technical correction’, in professional parlance – to the huge falls recorded over the past month or two. Inevitably, no sooner did the sell-off end then the chorus of ‘the worst is behind us’ started up again – the same tired mantra, the same broken record. As a simple remedy, when you read or hear any of this kind of thing, ask the following question: did this person or this institution warn in advance that the market and the economy were about to fall of a cliff? If the answer is not a definitive yes, pay no attention to anything they say. That immediately excludes all the investment houses and big banks (with a few, honourable, exceptions such as Steven Roach), whose analyses of the economy and the equity and bond markets continue to be party-line, self-serving, cheer-leading clap-trap.
So where do we stand now? The answer is, on very shaky ground. The markets themselves have collapsed entirely and would not be functioning at all, were it not for mind-boggling amounts of money being pumped into them by governments – first and foremost, the Federal Reserve and US Treasury, but virtually every once else is on board now, from London to Beijing. In other words, the idea that the markets can manage on their own has been tried and found wanting. Hence the spate of articles and programmes on the general topic of ‘the death of capitalism’. Whether capitalism is dead or merely in poor health will take time to find out, but in the interim it is the nation-state – also written off as dead but a few years ago, the supposed victim of globalisation – that is endeavouring, individually and in organised frameworks such as the IMF, to keep the wheels turning in national, regional and global economies.
Will this effort succeed? We had all better pray that it does, but right now there is no way of knowing. The good news is that the huge efforts have so far prevented a total meltdown of the global financial system, although we were on the verge earlier this month. If this improvement continues and a gradual stabilization takes place, then it will be possible to move to the next and more difficult stage of trying to address underlying problems – without triggering another avalanche, earthquake or whatever metaphor you prefer. But let’s remember that so far no fundamental problems have been solved and, in the absence of solutions, they continue to fester and get worse. At some point, they burst into the open as ‘crises’, whether in specific sectors or countries, that then receive emergency responses – which are usually the wrong ones to deal with the real problems, but the only ones available by that stage.
The next few weeks are likely to see relative calm – born of exhaustion. They will also see the first serious global consideration of real solutions to real problems. But before these can be implemented, come December or, at latest, January, the fire brigade is likely to be called out again.