The euphoria of earlier this week, which followed an announcement of the UK bailout by Gordon Brown, has seemingly finished – as it was feared to. Shares have yet again collapsed. Asia showed probably the worst results today, with the Nikkei dropping 11% on the 16th October. As I am writing this, the FTSE has fallen below 4,000 again. And Dow will be perilously close to its 8,000 mark.

Shifting sands: Investor sentiment, similar to voter sentiment, is a funny thing. Markets are driven by it, same as elections are won on the strength of popular feeling. However stock market sentiment is also fickle and impermanent, and prone to wild swings especially in troubled times such as now. We are nowhere close to being out of the woods yet. In the weeks to come, there will be significant market volatility, and the market will trend downwards. Perhaps my fears of FTSE at 3,000 have yet to be realised.

Credit crunch biting hard: Interbank lending is still pretty frozen, although short term rates have fallen a little – with banks still not keen to do any longer term lending. Despite all government intentions and declarations, banks cannot be forced to start lending against their will if they do not have confidence in their financial partners. Somebody compared this to “asking water to flow upstream” – just is not going to happen. The impact of this has already spilt out into the real economy: businesses are finding it very hard to refinance their existing loans. This will have a negative impact on the whole economy, reducing business activity and forcing some to cease trading altogether.

Recession: What is driving the stock markets plunges at this very moment are investors realising that we are heading full steam into a global recession – and the existing bailout funds will not be enough to prevent it. A lot of government money is being pumped into the banking system – yet as long as investors think we are heading for a recession, they will keep on selling, and the money will keep on burning up and vanishing into the bottomless pit. It’s a vicious circle which under the current financial system, only restored consumer confidence can stop – and we just are not getting any positive economic news for this to happen.

Let’s look at some numbers:

UK: now deemed to be technically in a recession due to last 2 quarters growth showing the economy has contracted

  • Retail sales fell 1.5% in September compared to a year before
  • Unemployment increased sharply in the last 3 months and now stands at 1.78m, or 5.7% of the  workforce
  • Additionally, UK inflation is at a 16-year high at 5.2% in Septeber, although it is expected to reduce as oil prices come down on the expectation of a recession and hence lower usage of oil

Prediction: unemployment to rise much more, especially as banks shed jobs, possibly rising to 6.5% mid of next year (source: Jamie Dannhauser, British economist for Lombard Street Research)

US: not technically in a recession at this stage, with only one quarter showing negative growth

  • Unemployment is rising, currently standing at 3.59m out of work, or over 6%.
  • Retail sales down 1.2% between August and September
  • Wholesale prices fell 0.4% last month

Prediction: unemployment to rise further, possibly to 6.7% (source: Dana Saporta, economist at Dresdner Kleinwort Securities in New York).

Does not look great, does it? That’s why markets are falling. Belts are tightened across the globe and Asian exporters are anticipating weaker demand from the likes of USA, which will feed their own downturn too. This year, Christmas sales are going to be very weak – with lots of bargains to be had!

Gordon Brown’s moment of glory over? It seems that Gordon Brown’s moment as the saviour of the world’s financial system might be over as the markets keep on tumbling down without control. It might prove a short-lived triumph that rather upset the French president Nicolas Sarkozy who was cross that Brown got the credit for it. Forbes have an entertaining article about who was behind the proposal that Brown takes credit as his.

At crisis times like this, it takes more than a few good speeches from one or two officials to restore faith in the system. And we do not seem to have any global leadership at present, able to make a lasting difference, that we can put our faith in.


Copyright 2008 by CuriouslyInspired