How else do you explain one of the most depressing weeks in recent years. Riots on a scale not seen since Toxteth in 1981 and investors who appear to be utterly confused as to what they want!
Common sense
Back in the Middle Ages people were a lot smarter than we tend to give them credit for and many believed that astrology was bunkum, preferring a common sense approach to life, something the markets could do with.
It seems odd to me that so much weight is placed on the views of the rating agencies when they have failed so badly in the recent past. Sub-prime mortgages wrapped up and sold as AAA-rated investments and failure to see any problems at Lehman Brothers are the two most recent examples.
And the fact is that a rating change does not have any bearing on the actual situation, the US is not more risky now than before the rating change. Some may argue that the perceived level of risk has changed and therefore real risks have changed but this seems to be heading down the astrologer route.
What has been interesting to observe is the way the markets have changed their focus seeking out where they see the next economic problem. Only a few weeks back it was the ‘next’ Greek bailout plan that was the centre of attention, then it was the US debt ceiling and now? Well this is where investors seem very confused.
Alchemy the solution
On the one hand they want so see austerity measure implemented, costs cut, budget deficits reduced and so on…..but they also want economic growth. Generating economic growth while cutting costs to the extent the markets want is like walking a tightrope. It seems probable that when debt-to-GDP levels pass a certain point it becomes an impossible balance to achieve and this is where Greece, Ireland and Portugal appear to be. The end result of this situation is default. The UK however is likely to achieve this balance.
However investors can’t have it all ways, weak sovereign finances leads to cost cutting but not strong economic growth; they have to accept that their demands for cost cutting will result in slower growth. This expectation of slower growth is what is punishing global stock markets.
But the galling thing is that none of this is new news; all the facts and figures about the state of the Italian, Greek, UK, US economies etc have been known about for a long time. So why the obsession now?
Hence turning to the ‘planets’ for an answer. It seems to me that the markets have only themselves to fear and hopefully it won’t be too long before common sense exerts itself again. If not, gold will keep rising in price and we’ll all have to start practising alchemy and try turning lead into gold.
