What are the markets telling us?

Recent days have seen a big sell off in world equity markets.

Markets are never wrong, but they can change their mind tomorrow. Like daily elections, they represent the combined wisdom of everyone involved. We trawl through them , trying to interpret them, because they are the best indicator we have of what people think will happen next, and what might happen next.

If you look at what forecasters and many individuals say will happen, there is no great need to worry. The official wisdom says the US economy will continue to recover, the Chinese and Indian economies will grow rapidly, and even the larger European countries will edge forward. No-one expects a run on a major bank or a repeat of the severe financial dislocation of 2008. Expensive property in London keeps attracting rich buyers, fine wines and precious metals reach new giddy prices and company profits look much better than at the bottom of the recession.

So why is there so much worry? It is true the Euro crisis is far from helpful. Countries which are not sovereign should not issue so much “sovereign” debt, as they can’t print the money to pay it back. It is true the Chinese authorities have been squeezing their banks to try to control inflation, and the rest of the world now feels the wash back from their actions. Some recent US figures have implied slowing, with some fearing double dip.

I suspect the main problem that underlies it all is the continuing perversity of the major countries in their approach to bank regulation. At the very time when they say they want a recovery, and when they forecast one, they are still demanding ever higher levels of cash and capital from the banks under their control. As a result, money growth is still too low in the West to pay for a decent recovery. You always notcie a shortgae of money first in the financial markets. If these governments truly want a decent recovery they should mend their ways in their approach to the banks. They may not love the banks, but they need them to spread some more money around to finance higher growth.

Sterling continues upwards against the dollar, as markets feel more reassured about the trend of the UK deficit.

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16 Comments

  1. APL
    Posted July 2, 2010 at 8:00 am | Permalink

    JR: "Markets are never wrong, but they can change their mind tomorrow."

    A small but critical correction. FREE markets are never wrong.

    We do not have free markets, we have had continuous government intervention. Intervention such as QE, which has artificially supported both the stock market and the equity market in the UK. Intervention by the EU for example to artificially support the market in Greek, Spanish and Irish government debt. Intervention to artificially support the price of the Euro against the Swiss frank. Intervention to 'support' asset prices using the TARP in the US and the BoE asset purchase scheme in the UK.

    In short we do not have free markets, we have an unstable tottering construction the foundations of which has been undermined.

    Do we see unpredictable instability? Oh yes!

    The whole edifice of the equity structure has been artificially supported and at the same time its foundations undermined, with for example the US purchase of GE equity in preference to GE bonds.

    • simon
      Posted July 2, 2010 at 10:38 am | Permalink

      I share your disdain for the intervention in markets .____The bail out of the profligate by the prudent is another unwelcome intervention and is everywhere . ____If people think the state will pay their mortgage interest when they become unemployed there is no incentive for them to choose a house THEY can afford with the ups and downs of life with the result that prices get puffed up further . I won't even get started on paying people to have children and paying immigrants to come over here____The statement (Free) "Markets are never wrong, but they can change their mind tomorrow" is open to dangerous misinterpretation .____If a market is considered a barometer of peoples opinion then by definition it cannot by definitiion be wrong .________This is not the same as saying that the market always arrives at the best short term or long term solution .
      The problem I have in my line of work (database design,management of data) is that the market is so ill informed and badly educated that it is incapable of discerning properly so functions innefficiently .

  2. christina sarginson
    Posted July 2, 2010 at 8:39 am | Permalink

    I think there is a lot to worry about from what I see and hear. The problem is trust in my opinion. People have lost trust in what they thought was solid and reliable, the banks have shown they can make massive mistakes and the people have paid for that, as far as the markets go they are very changeable and one wrong work can affect the growth and the economy so people are worried.

  3. Iain
    Posted July 2, 2010 at 10:20 am | Permalink

    I disagree, politicians are too fixated on the banking collapse, which for me was a symptom of a wider ill, the structural imbalances built up in the world economy. What we had was a world economy built on consumption and debt, mostly centred in the US and UK, the bank failures were the result of this, and you might say the bank failures corrected this, but its a solution to nothing to seek to get back on the same debt and consumption merry-go-round by the same countries. If the world economy is going to get back on its feet then something has to change. The US and UK can no longer be the consumers and borrowers of last resort, just as the countries that have been amassing the surpluses can no longer be allowed to do that. Just trying to pump prime the banking system in the West to get the debt and consumption merry-go-round going again isn't a long term solution, its just the same old same old which has landed us in this mess. The engine of growth has to come from the surplus countries, yet I don't see Western politicians laying down the law to these surplus countries to play their role, no they have been happily fobbed off with an anaemic rise in the Chinese currency.

  4. Iain
    Posted July 2, 2010 at 10:21 am | Permalink

    As for sterling rising against the dollar, it should not be viewed by the Government as some economic Oscar awarded to the Government by the market, it should be viewed as a disaster. HOW THE HELL ARE WE GOING TO RESTORE OUR MANUFACTURING BASE AND EMPLOY MORE PEOPLE IN THE PRIVATE SECTOR WHEN IMPORTS ARE MADE CHEAPER BY A RISING STERING?

  5. StrongholdBarricades
    Posted July 2, 2010 at 10:36 am | Permalink

    With a market as volatile as present, you can be fairly certain that the market makers are making huge profits from their activities.

    We probably do need to look at the micro detail to actually see if the conditions are being exacerbated by market makers without any real facts available, otherwise they are all just charging about lemming like awaiting the next scrap of "research" or gossip

  6. Sally C.
    Posted July 2, 2010 at 10:53 am | Permalink

    'Expensive property in London keeps attracting rich buyers, fine wines and precious metals reach new giddy prices'

    Don't you think that these are signs of a continuing asset price bubble? Too much money chasing too few assets.

    House prices in America have dropped sharply and could drop further despite record low interest rates and massive support from the Federal Reserve, Spanish property prices are tumbling and even French property prices are subdued relative to the UK. How long do you think that we can buck that trend?

  7. StevenL
    Posted July 2, 2010 at 11:10 am | Permalink

    "Recent days have seen a big sell off in world equity markets."

    I'm led to believe that the way market makers work is that they lower the price to find the buyers, for every sell there should also be a buyer.

    "Markets are never wrong"

    They are never right either. There is no such thing as a right or wrong opinion.

    "No-one expects a run on a major bank or a repeat of the severe financial dislocation of 2008."

    Not sure you're right. There are bears out there. I think most people expect an era of more central bank and government intervention to stop this happening as banks need to roll over debts. Only the OBR expect lots of GDP growth.

    "Expensive property in London keeps attracting rich buyers"

    Always will do. You never played 'Monoply'?

    "fine wines and precious metals reach new giddy prices"

    So people would rather buy non-income speculative assets than trust currency-based debt or stocks? We've seen this before in the late 70's / early 80's leading up to the Reagan/Volcker policy of destroying dollars to beat inflation / restore confidence. Can you imagine what would happen this side of the pond if a US leader did that again?

    "company profits look much better than at the bottom of the recession."

    Well, yes, they took quick action to sort it out. Does the labour market look healthier? It's easy to keep costs down at times of high unemployment.

  8. Lucy Parfait
    Posted July 2, 2010 at 11:31 am | Permalink

    The problem with the many forecasters that are saying everything is OK is that they are the people that didn't see the last crash coming. Everyone assumes that we will get a "recovery". My question is a recovery to what? Property bubbles?, Massive debt?
    We are not in a recession, we are in a depression which is totally different. A recession is a temporary blip in economic growth. A depression is a correction and movement to a different economic balance.

  9. Steve
    Posted July 2, 2010 at 3:14 pm | Permalink

    Well, for a change it's not the UK and the pound that is being hammered. Somebody must think that the coalition is doing something right. 🙂

    I suspect that a lot of the worry is being fomented by the usual left-wing economists and financial commentators, the deflation doomsayers if you will. Personally I've yet to detect even the slightest possibility of deflation in the UK, rather the opposite is our problem, as discussed by Charlie Bean and Adam Posen.

    By the way, why on earth do we need Americans like Posen (or American-based, like the misguided neo-Marxist Blanchflower) on the MPC? Surely by now we can all see that they have made an utter mess of their own economy? Perhaps Mr. Osborne should consider appointing a Chinese economist instead! 😉

  10. JimF
    Posted July 2, 2010 at 6:34 pm | Permalink

    So why is there so much worry?____It is part of the price of QE.__People are worried about which asset class is safest. Whilst money is being printed, that isn't safe. Equities have suffered shocks recently and could again without more QE. Commodities, fine wines, precious metals perform best in an inflationary environment and we are in a pseudo-deflationary one. Property inflation hinges on money availability and pricing and that is in question.
    Until there is more stability in the prices of all asset classes people will worry. There is little the UK Government can do in isolation about this, except set the trend as they have done in the past couple of months on debt bank regulation and cutting costs rather than printing money.

  11. Alan Jutson
    Posted July 2, 2010 at 9:05 pm | Permalink

    The markets appear to be telling us that not all is well, we still have long way to go before things get better.

  12. Mark
    Posted July 3, 2010 at 12:57 am | Permalink

    The BoE is now telling us that it anticipates a reduced availability of mortgages as banks struggle to find wholesale funds to replace maturing debts. Given that the UK is still suffering from bubble prices for residential housing (including for rents and housing benefits, although less marked than houses per se), I trust you don't think this is a bad thing.

    Wholesale funds can only come from those who have funds to spare – which means borrowing abroad to finance paying more for houses – or from printing money. Since the BoE and the Treasury has already tipped over £500bn into housing via printing schemes, there can be little surprise that funds are being crowded out from industry and enterprise.

    We need to segregate our problematic property loans – perhaps into specialist banks called "building societies" who will adopt the conservative lending policies that will see the housing bubble unwind. In the same way some continental banks may need specialist arms that handle lending to profligate governments, while others may also need other special segregated arms for particular kinds of debt. Then normal commercial banking might resume in the rest of the industry.

  13. Lindsay McDougall
    Posted July 3, 2010 at 7:52 am | Permalink

    The markets are telling us that they expect profits to fall for a time as the deficit is reduced. It's no big deal; they will bounce back.

    As for sterling's rise, when will it be safe to go for broke and target zero inflation? Then people would be forced to end self deception. Perhaps in 2013.

    Please don't quote Japan at me. Japan has had falling prices (this is not being advocated), a massive fiscal deficit and accumulated government debt, and an ageing and declining population. Japan's GDP per capita figures are better than their GDP figures. UK has a rising population (about 0.4% per annum) so for us GDP per capita growth is less than GDP growth.

  14. ThousandsOfMilesAway
    Posted July 4, 2010 at 8:38 am | Permalink

    Nothing to worry about? Cor blimey, guv!

    Technically, a lot of damage has been done by the recent drop. They said in the US that the 'flash crash' was a fat finger error (laughable); we've since taken out that low (surprise) and now we've taken out the low that took out the low, all with increasing volume and momentum.

    We may bounce from here or close to here, but this looks very much like the beginning of a resumption of the decline.

    True, markets in Europe don't look anywhere near as bearish as Stateside, but ultimately it's unlikely they will remain disconnected for long.

    This may well be one to cut out and keep along side Michael Fish's infamous 1987 'there will be no hurricane' forecast…

  15. George Rowley
    Posted July 7, 2010 at 3:32 pm | Permalink

    I dont think we should put our trust in the markets. It seems to me that it is rather like putting our trust in roulette wheels. We know they will also spin etc, but the outcome has an element of chance (albeit governed by physics).

    Do the markets really reflect our reality or are we being governed by complex events that we dont understand or know how to control.

    It may be my ignorance but I do feel that we are "fooled by randomness".

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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