Mar­ket melt­down is all about mood

The Pak Banker - - OPINION - An­thony Hil­ton

THE world's fi­nan­cial mar­kets spent most of last year wait­ing for the Amer­i­can au­thor­i­ties to raise in­ter­est rates and cel­e­brated when the move fi­nally came in late De­cem­ber, be­cause it sig­nalled that the US econ­omy had fi­nally shaken off the ef­fects of the 2008 fi­nan­cial crash. But a week can be a long time in stock mar­kets. In Jan­uary traders de­cided the world was not claw­ing its way back to health af­ter all; it was headed into the abyss of an­other global re­ces­sion and the Fed­eral Re­serve's rate hike was a cat­a­clysmic mis­take which could only make things much worse.

This is not ir­ra­tional. Any­one with a sense of his­tory has to be struck by the sim­i­lar­ity in how the global econ­omy has moved since 2008 when com­pared with its re­cov­ery from pre­vi­ous fi­nan­cial dis­as­ters brought on by bank­ing fail­ures in the 1890s and the 1930s.

Credit Suisse econ­o­mist Jonathan Wil­mot has plot­ted the data from th­ese ear­lier fol­lies and the way the charts fit to­gether is un­canny. What it shows is that while the re­cov­ery in the 1890s was plain sail­ing, the re­vival in 1930s Amer­ica was stopped in its tracks for a rea­son which sounds un­com­fort­ably fa­mil­iar. Think­ing the pa­tient had re­cov­ered, the US au­thor­i­ties put up in­ter­est rates in 1937, eight years af­ter the ini­tial 1929 Wall Street melt­down. They were too early and too op­ti­mistic. The shock brought on an­other heart at­tack.

Thus the de­bate to­day comes down to a sim­ple dif­fer­ence of view. Will we con­tinue grad­u­ally to get bet­ter as we did in the 1890s? Or is it 1937 all over again, with in­ept pol­i­cy­mak­ing eight years on from 2008 set to in­duce an­other heart at­tack in our global econ­omy?

The fear that the de­fil­i­bra­tor is in the hands of in­com­pe­tents ex­plains the speed with which the mar­kets' glass has gone from half full to half empty, but the re­sults are still bizarre. The much ad­mired Chi­nese econ­omy is no longer so ad­mirable. The slow but ob­vi­ous re­cov­ery in the eu­ro­zone is no longer sus­tain­able. The be­lief that there were more gain­ers than losers from low oil prices is no longer cred­i­ble. That is what mar­kets would have us be­lieve but this change of sen­ti­ment comes with­out any shift in the un­der­ly­ing data.

The ef­fect is real enough: mar­kets keep on fall­ing and it is be­gin­ning to change be­hav­iour. Chan­cel­lor Ge­orge Os­borne has been forced to aban­don his plan to sell off the Govern­ment's re­main­ing share stake in Lloyds; Deutsche Bank has been forced to is­sue calm­ing state­ments about its fi­nan­cial health. Bank of Eng­land econ­o­mist Andy Hal­dane muses on whether this is the third and fi­nal leg of the fi­nan­cial cri­sis - af­ter Amer­ica's sub-prime melt­down and the near col­lapse of the euro, is it now the turn of the de­vel­op­ing world to fall apart?

Yet if you don't work in fi­nance it is hard to see what the fuss is about. The Bri­tish econ­omy may not be as good as Os­borne likes to say it is but it is do­ing rea­son­ably well even if the ex­port per­for­mance is dire and man­u­fac­tur­ing is suf­fer­ing from the shut­downs in the North Sea. Com­pa­nies are not shoot­ing the lights out but out­side the en­ergy sec­tor they are still re­port­ing good prof­its. Un­em­ploy­ment con­tin­ues to fall and, in Lon­don at least, there is no short­age of jobs.

The fall in oil prices is good news - un­less you live in Aberdeen - be­cause the money that used to go to fill­ing the car can now be spent on other things. There are hardly any bank­rupt­cies, the shops are full of goods and the cus­tomers are full of cheer.

What is odd is not just that mar­kets see it dif­fer­ently but that the di­ver­gence is so marked. The mar­ket is not just flash­ing red, it is pan­ick­ing to an ex­tent seen only three times this cen­tury - in 2001 af­ter the dot­com crash, in 2008 af­ter the fi­nan­cial crash, and in 2011 when it looked like the euro would col­lapse. In each of those ear­lier times the dan­ger was ob­vi­ous. This time noth­ing much has hap­pened, or not yet any­way. How­ever, there is al­ways an ex­pla­na­tion, al­beit one that does not show the mar­kets in a good light. Fi­nance is a young per­son's game and a huge num­ber of re­spon­si­ble jobs in the City are held by peo­ple in their twen­ties and early thir­ties.

The last rate hike was in 2006. So if you want one rea­son why things have gone so sour look no fur­ther than the fact that right around the world a wor­ry­ingly large num­ber of peo­ple con­trol­ling bil­lions if not tril­lions of as­sets have never be­fore seen in­ter­est rates go up. When the Fed fi­nally made its move at Christ­mas th­ese peo­ple had no idea what would hap­pen nor how they should re­act. This ig­no­rance made them vul­ner­a­ble, scared and much more sus­cep­ti­ble to panic. They have not dis­ap­pointed. Un­for­tu­nately, it mat­ters be­cause if the falls dam­age busi­ness con­fi­dence it could cre­ate the very re­ces­sion mar­kets are wor­ried about.

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