Markets crash – uncertainty reigns

August 9, 2011

Global Macro

The Dow finished down 5.55% for a fall of 634 points, the S&P fell 6.66% and the Bourses of Europe were off around 4.5% across the board. The AUD got hammered dropping 2.3% and is sitting at 1.0202 or more than 800 points below last week’s highs and the ASX 200 futures traded down another 3.87% or 156 points overnight.

There is carnage everywhere as investors lose faith in the direction that policy makers are taking us and indeed in the policy makers themselves and critically the institutions of policy making.

Trust, Confidence and Certainty are the Holy Trinity of feelings and emotions that underpin the very fabric and cohesion of our daily lives. They are also the Holy Trinity that underpin of economic lives and the outlook for the economy. Thing down town Sydney or San Francisco as opposed to down town Mogadishu

So while all the talk over the last few days has been about the downgrade of the Sovereign rating of the United States the reality is that this has just been the tipping point when in fact the discussion should be about the destruction of trust, confidence and certainty in the developed westerns world’s policy makers and the impact that is having on our economies and our markets.

When the GFC first hit with a vengeance back in 2008 Central Bankers and politicians rode to the rescue backstopping flailing banking institutions, cutting interest rates, dumping money into their economies and running deficits to underpin growth. These response eventually gained traction and in March 2009 markets started a bounce and economies picked up from the stimulus.

That was a text book rescue (at least after the US Political finally passed TARP after that first hiccup).

People, consumers and markets Trusted politicians were trying to do the right thing, had Confidence they knew what they were doing and while the Certainty of outlook was still limited the fact that the first two parts of the trinity were satisfied meant we all tried to move forward.

But the constant bungling of the European situation over the last year or so by the European political and mandarin classes and the more recent unseemly punch up in the US Congress over the lifting of the Debt Ceiling has served to undermine the Trinity in a way that I think many politicians and market commentators are failing to pick up on.

Indeed the big story yesterday was the supposed G7 initiiatives to ride to the rescue of markets. Indeed the ECB rode into the bond market buying the bonds of Spain and Italy. THIS IS SOMETHING THEY SAID THEY WOULD NEVER DO. So imagine how startled the horse were when this happened. Now it would be unfair to breate politicians for not trying to fix things and then bashing them up for trying something new but as someone who like to think of themselves as a behavioural fiance/economics person I would posit that from a behavioural standpoint this action only served to highlight how dire the situation has become.

So while this action helped drive the rates down on Italian and Spanish bonds early and even had European Bourses in not too bad shape it had no enduring impact on markets as we can see with the Dow and S&P’s big swan dive.

For me the big story of the last year has been the loss of confidence in policy makers and the reduced impact, in a positive sense, they are having on markets. It’s not really Greece, Portugal, Ireland or Spain. It’s not the US debt situation per se but rather the fact that populations all over the world are now losing confidence in the compact they had with the political class. They are wondering if their entitlements will be there when they need them in a few or many years yime because every time a politician turns around they talk about a lack of money and need to cut back on spending. The compact seems to have been broken. This undermines the Trust and Confidence that populations of consumers have in their future and increases unCertainty.

By definition it means more saving and less spending as people put money away for their now more unCertain futures. That means weaker economic outcomes in the future and this, not the US debt downgrade is why markets are melting down. It is going to be hard to turn this around in a hurry. There is no easy fix if as I suspect this is a structural change and an unwinding of the post World War II economic model. Perhaps a big call, but only time will tell.

I’ll be back later with an update on the AUD, currency markets genrally and equities.

greg@lighthousesecurities.com.au

www.twitter.com/gregorymckenna

This blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.

If you do need economic, investment or financial advice we are happy to help.

Please Email the team at Lighthouse at info@lighthousesecurities.com.au or Greg directly on greg@lighthousesecurities.com.au

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