Monday, 28 January 2008
Saturday, 26 January 2008
Fun in the off season
Who says the off season is dull! On Monday I was expecting a quiet day; with US markets closed nothing much will happen. Right. I turn on the TV to discover that Asian and European markets are down 5 %. Why? Interest rates are down and will go lower (even before Tuesday). The US economy may or may not be in a recession. There is no indication of any spread of malaise in China or other BRIC countries. ? The only credible reason is that sailing season is over. We need a little excitement!
Tuesday was another exciting day. Berenake dropped interest rates by 75 basis points before the US markets opened. This was the US central bank's response to the "recession". The Bush administration came out with a stimulus package. No denial here; no 'the economy is strong'. The US action showed a willingness to respond even before the stats showed that there is a recession. The US economy may or may not be in a recession. Political leadership must deal with a problem that people think is a problem. At least that is the case in the US during an election year.
The market was still spooked on Thursday so everyone blamed Trichet, the head of the European Central Bank. He wasn't going to lower interest rates in Europe. His reason is that there is no European recession. The US commentators were despairing and disparaging. Clearly Trichet just doesn't get it. "This is going to be the Trichet recession". At least no one noted that he was French. There were rumours that a major European bank was facing severe debt problems. The expert commentators went into hysterics: 'sub prime mess, financial contagion, wiping out of equity of all money centre banks'. "Do you know what that would mean!!!!" Whatever facts that were known were taken out of context. Hey, lets all panic!
It all ends up as the result of a rogue trader in France. His employer covers large positions in what must have appeared to the market traders as panic action. The 'market' didn't know what the cause of the despairate trades was, but decided it was better to panic too. Everyone, except Trichet, looks very foolish. The psychological contagion effect was well illustrated; an important example of how markets work. A little bit of 'fun' in the off season.
Tuesday was another exciting day. Berenake dropped interest rates by 75 basis points before the US markets opened. This was the US central bank's response to the "recession". The Bush administration came out with a stimulus package. No denial here; no 'the economy is strong'. The US action showed a willingness to respond even before the stats showed that there is a recession. The US economy may or may not be in a recession. Political leadership must deal with a problem that people think is a problem. At least that is the case in the US during an election year.
The market was still spooked on Thursday so everyone blamed Trichet, the head of the European Central Bank. He wasn't going to lower interest rates in Europe. His reason is that there is no European recession. The US commentators were despairing and disparaging. Clearly Trichet just doesn't get it. "This is going to be the Trichet recession". At least no one noted that he was French. There were rumours that a major European bank was facing severe debt problems. The expert commentators went into hysterics: 'sub prime mess, financial contagion, wiping out of equity of all money centre banks'. "Do you know what that would mean!!!!" Whatever facts that were known were taken out of context. Hey, lets all panic!
It all ends up as the result of a rogue trader in France. His employer covers large positions in what must have appeared to the market traders as panic action. The 'market' didn't know what the cause of the despairate trades was, but decided it was better to panic too. Everyone, except Trichet, looks very foolish. The psychological contagion effect was well illustrated; an important example of how markets work. A little bit of 'fun' in the off season.
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