The great global deleveraging continues. In a world that has become addicted to debt fuelled growth, the idea that readily available credit may no longer be available, has scared many into facing the truth; credit is not free and should never have been priced as such. Over the past few weeks markets have continue to sell off, outlook for production and consumption are all bearish and thus oil continues its volatile ride losing $2 overnight to its current level of $58 a barrel. (Month to date it is down over 40% in USD terms and more than 62% in euro terms).
Gold is currently trading at $730, it is in a range between $720 and $760, with volatility decreasing, a break to the upside is looking technically possible. Consumer driven inflation worries are abating somewhat with the decrease in the price of oil. Systemic issues are still prevalent and recessionary fears are growing. The markets are trying to quantify the extent of the world’s first truly post globalisation recession.
The markets are increasingly been driven by fiscal sound bites – who is getting bailed out, where will the line will be drawn, who is too big to fail? Banks first, industrial monoliths next? These headlines will likely weaken the capital markets by replacing qualitative analysts with policy watching.
Sterling has seen further weakness as international investors begin to shun the currency once seen stable; this has been predicated by stronger yen and a significant unwinding of the hitherto one way bet carry trade, where leveraged vehicles borrow in yen and invest in higher yielding sterling assets. The question now is not if the UK is going to go into a recession but rather how long will one last and how deep will it go. Any and all asset classes that have benefited from or rely on cheap credit will suffer.
A cursory review of the Financial Times will confirm that the bears are firmly in control of the editorial strings, doom is in and it is striking fear at the heart of our economies. Few know what lies ahead, uncertainty is becoming the norm, and consumer confidence is moving from a sense of bewilderment to outright dread.
Economies are generally cyclical – they ebb and flow with the general public’s perception of risk and reward. Yes, they can be affected by extraneous factors: an oil find, a currency collapse etc; but generally speaking, they oscillate around the long term mean. It is only when governments get involved and artificially manage the cost of credit to within politically acceptable thresholds, that inefficiencies begin to build in the system. Throw into the pot a measure of globalisation, poor or non-existent regulatory oversight, little or no effective internationally accepted accountancy standards for corporates with global foot prints, and you get the mother of all financial storms.
Below you will see a humorous yet telling chart that depicts the rise and fall of investor emotions. The question is where are we now and how long will we be here.