Stock markets around the world remain in free fall. Itâ€™s not surprising to readers of this blog â€“ thereâ€™s plenty to be pessimistic about.
There are two big changes underway. The long term change is the shift in economic power from west to east, from an Atlantic centred world to the economies of the Pacific Basin; from the EU and east coast USA to west coast USA, India and China. In the process 2,500 million poor people gradually come to the consumer party, creating huge extra demand for energy, food and raw materials of all kinds. This argues for long term investment in commodities and commodity producing economies, and in the fast growth economies of the East themselves, but only when the price is right.
The short term change is the collapse of some of the debt structures built up in the US and Europe in the heady days of easy money and rapid expansion between 2001 and 2006, as erratic Central banks shift uneasily from being too loose to be being too tight. Simultaneously the fast growth economies of Asia are catching the inflation bug. So they too are entering a phase of credit tightening and interest rate rises, which will slow them at the same time as the credit crunch slows or stops the western world. This should produce both lower growth and some respite to the vertical climb of commodity prices. It has already produced sharp falls in many Stock markets despite the good growth of many underlying economies.
There is only one major Central Bank clearly fighting recession rather than inflation â€“ the Fed. The rudderless Bank of England lurches from mistake to mistake under the unsure Darling. It first created the inflation with interest rates that were too low, then it created the credit crunch in the UK by starving the money markets of liquidity, next it started to put interest rates down, then it panicked about inflation and decided it had to keep interest rates up. Its performance has been a bit like a drunk trying to walk in straight line along the money motorway, whilst trying to avoid the fast moving vehicles of inflation and recession. The European central bank allowed inflation to get out of hand by adopting too easy a policy. Ever since it found out its mistake it has stubbornly refused to change rates at all. Maybe it understands that Ireland and Iberia need very different rates from Germany, but there is nothing they can do about that.
We are in for more bad news over the summer, as the Asians tighten the screws to curb inflation, and as the West learns more of the damage from its own erratic monetary policies and the resulting credit crunch. It seems likely that the US will be the first major economy to experience any upturn in fortune, given the consistent policies to avoid slump. The tax cuts, liquidity injections, easier money policy and low interest rates all point in the same direction, and at some point will bring the economy round. The balance of payments is improving rapidly, consumers are saving and rebuilding their balance sheets, and the dollar is beginning to strengthen.
The UK remains in the weakest position of the major economies, along with Italy. The UK still has both an overborrowed government sector and overborrowed consumers, a weak currency and a fiscal position deteriorating all too rapidly. Several years of falling competitiveness, rising taxes and little investment in infrastructure has left it in a bad place, made worse by the erratic money and banking policies pursued by the regulators and the Central Bank. The RPI and the CPI soared again this month, and there is worse to come before the inflation subsides. There is plenty of deflation in the clothing and shoe shops, in the estate agents window and in the commercial property market, but plenty of inflation left at the petrol pump and in the food market. Redundancies in building, construction and finance are now coming all too rapidly, and will be followed by other sectors as the consumer squeeze runs its full course.
The falls in the Chinese and Indian Stock markets have already been large, but we are still in the early stages of the tightening in these countries and cannot be sure how far the authorities take it before they, like the US, turn their attention to reflation again.
(Regulatory notice- This blog is not offering investment advice)