Synchronised sinking

Guest Blogger Lindsay Williams

Greece provided a useful diversion, as the world watched its taxi drivers pelting the cops with pieces of what might have been chunks of the Olympic village (what a disaster the 2004 summer games turned out to be) in protest about something which I’m sure has by now escaped most of us, although I’m equally sure it was something to do with some state parachute being removed and them being faced with the appalling prospect of working harder and longer in a more competitive environment. Who knows? but it gave the bears an opportunity to roll out the Eurozone break-up argument as an excuse to sell a bit of stock her and there, while giving the bulls, who know no better, the chance of nibbling away at lower stock market levels.

Markets have been characterized by volatility of late, but that volatility has been contained within well-worn trading bands

When it became clear that Europe wasn’t going to present them with a range-buster, traders started to  focus on the date of the expiry of an agreement that covered the amount of debt the world’s largest economy was allowed to hold. Suddenly, and thanks to the media, every one of them knew that the debt ceiling was $14.3 trillion and that at midnight on August 2nd it would have to be raised or the Chinese wouldn’t get their interest payments and the ranger at Yellowstone National Park would have his log cabin’s water cut off.

Now, at last, here was a story to get one’s teeth into-the mighty US about to default, and so began the selling.

The selling baulked at the idea of driving the S&P500 or Dow Jones down through key support levels, but at least the game of ping-pong had extended the boundaries of the table and tested the resolve of the protagonists. Everyone knew of course that at the eleventh hour, the Sword of Default Damocles would be clutched by the politicians from both Republican and Democrat camps, and both would claim victory. But that was all part of the game. This was WWF, political style; fixed from the start but hell, they put on a darned good show.

Phew! Thank goodness for politicians, and the world can again sleep soundly having been saved once more by democracy and reason.

Cynics (how DARE they!) might argue furtively that both sides of the US political system are acting in the spirit of self-preservation, and merely buying time knowing that a default isn’t particularly good for cushy career prospects no matter which party they claim to represent. Economic cynics (they’re the worst) might conceivably be scratching their heads and pondering a system that has provided trillions in free money that has yielded not prosperity for all, but an unemployment rate close to double figures, that has failed to ignite a desperately  depressed housing market, managed to produce annual economic growth figures of only a fraction over ONE percent for the world’s largest economy, but has seen ‘banks’ like Morgan Stanley produce rather spiffing corporate results.

On the realization that the spending has proved to have failed spectacularly, and that the latest plan seems to be to try the other alternative of cutting back on profligacy (a condition for the raising of the US debt ceiling), the head scratchers can be forgiven for doing a passable impression of a kennel of dogs with fleas.

Canny traders sold into the TV pundit induced debt ceiling panic, then turned positions around and bought, safe in the knowledge that an agreement would be reached, and the Land of the Free, home to the world’s largest economy, would again prosper as a flag-bearer of hope and economic freedom.

That strategy lasted about half a day, because the diversion of the debt ceiling debate was suddenly replaced by the truly dreadful global manufacturing data that was released with startling synchronicity on Monday August 1st.

In America, the purchasing managers’ index fell to a two year low of just above 50 index points, and way below experts’ predictions of 54. In the UK, Russia, Australia, and South Africa readings came in below 50, indicating a contraction of factory activity. The fall was most dramatic in South Africa, with an index reading of 44.2, down nearly 10 points.  China’s PMI is perilously close to contraction, at 50.7.

And yet as I question the relative market calm in the markets of the world’s stock exchanges , I keep hearing the phrase “It’s about the earnings, stupid”. Short-term, this bold pronouncement may be right enough to keep the market range-bound as companies like banking giant HSBC delivers better than expected results and its share price rallies. This occurred on August 1st. But what accompanied those numbers was the news of 30,000 (THIRTY thousand) job cuts over the next couple of years. Forgive me for continuing to be stupid, but 30,000 less wage packets isn’t going to help an economy expand, nor a bank grow its customer base and deliver robust and market pleasing numbers.

HSBC cited rising costs as a reason for the savage pruning of staff. Cynics (not them again) might cynically wonder if it knows or  fears something horrible for the world economy once the era of cheap money disappears to the annals of disastrous economic follies. More importantly, and more realistically, it has probably seen the folly in inglorious working order every day for over two years, and starkly exposed in early August in the form of stuttering global factory figures.


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