Two years ago, Saudi investors stood accused of immaturity and naivety in the way they reacted to the local stock market crash with their demands that the government compensate them for their losses. If they were naive in their expectations, it is as nothing to the accusation that can be leveled at investors worldwide in the last few days.
On Tuesday, with shares worldwide dropping through the floor, traders were in despair, fearing an international recession on the back of one in the US. But yesterday, they were euphoric as shares again surged following the US Federal Reserve’s interest rate cut. It seems as if international finance is in the hands of manic depressives.
Or sheep? Traders and investors are looking at what others are doing and saying — rather than making cool, logical assessments themselves, based on facts. That was seen clearly in the way Asian and then European markets rallied yesterday. The cut in US interest rates, the cause for the turnaround, happened on Tuesday, but the Asian-European surge was two days later. The Europeans and Asians waited to see how their US counterparts reacted. They turned positive only when they saw US traders back in bull mode. A straightforward case of following the leader.
These seesaw antics do nothing to reassure ordinary folk that bankers, financiers, investors and all those whom we credit with knowing and understanding the intricacies of global finance actually understand what they are talking about. That suspicion is amplified by the debate as to whether there is a recession ahead or even already happening — a debate that the world’s media have stirred up all the more because it makes good copy, although in doing so have made investors more nervous. A serious instance of debate generating heat not light.
There is no doubt about the financial costs incurred by banks around the world as a result of the US subprime crisis. But this is not the 1930s or even the 1980s. It is no longer the case that if the US sneezes the rest of the world catches a cold. Growth in China and India and the enormous potential in their domestic markets more than offset any slowdown in US economy. Moreover, it is a strange US recession when so many there report no downturn whatsoever in business.
Investors have always responded to rumor and hysteria — and traders are in any event not interested primarily in what happens next year or even next month; it is what happens in the next hour and next day that earns them their keep. Equally, any fool can make money in a boom; it is just a question of how much. A lot more skill is needed when the market is turbulent or crashing.
For the moment, this is turbulence — not a recession. As with the changed weather patterns, we simply have to get used to such turbulence as a fundamental factor in the new economic order that is truly global in its reach but still local in so much of its activity.
