Friday, August 10, 2007

Black Friday as Financial market chaos continues

Shares are still tumbling on the worldwide stock markets, the FTSE 100 having dropped 200 points in so far today, 10% down from July.

The reason for the current crisis seems to be that BNP Paribas bank in France suspended trading in 3 investment funds linked to sub prime lending in the USA housing market.

The knock on from this is general concern that there may be some kind of tightening of world wide credit reducing the amount of money available to fund takeovers.

It seems to follow from this that what is going on is the bursting of a speculative asset bubble, where traders had valued share stock on the basis that there may be a takeover bid rather than the intrinsic value of the company itself. Now the market thinks that takeovers are less likely they are readjusting their positions accordingly. However clearly the central banks are very concerned. The European Central bank has pumped in €156 billion in the last two days to prop up banks. The sums are vast.

Seems fair enough, and nothing to panic about. But there is another lurking concern that a credit crunch will reduce spending in other areas causing a recession. This sort of thing irritates me. What is happening is the heard mind of the financial markets running around like headless chickens either overvaluing certain types of assets or over correcting when they get their fingers burnt a bit.

One area which may be affected is the will of banks to lend money in mortgages at the sort of silly multipliers that they have been. That would cause a slow down in the housing market, which would be no bad thing if it is gentle.

Still, the fundamentals are still reasonably good, and if we can persuade the markets to calm down we will be alright. Given government and consumer debt and borrowing, we could be in real trouble if there is a hard crunch.

The BBC has this, whilst the FT has this.


Timothy said...

"The fundamentals are good"

I hear this a lot, but what does it really mean? All I can make out is that it means the wheels haven't come off yet.

After reading the extracts from Larry Elliot's recent book (in the Guardian, "Fantasy Island" I think), I would say that the fundamentals of the economy, particularly in Britain, are *not* good.

Elliot's analysis is essentially this:
1. We had a stock market/dotcom boom.
2. This burst, leading to rate cuts to keep the economy afloat, which helped support a debt-boom (particularly mortgages)
3. Inflation was kept in check due to the one-off effects of outsourcing manufacturing to China. This effect is now ending.
4. So rates need to rise to choke off inflation, but that pulls out the support to the debt-boom that has kepo the economy afloat.

Ironically, it is arguable that we are relying on mass immigration to keep the economy afloat. This, and the extra demand for rented accomadation has helped to support buy-to-let. If the buy-to-let investors were to get seriously stressed then the property market would collapse compeltely.

I've no idea how long this will totter on in this manner, but whichever way I look at it, the fundamentals look rotten.

loadofoldstodge said...

Fair point, Timothy, but this is of course one of the main arguments AGAINST the kind of immigration control or embargo that many would like to see.

There's also of course the fundamental principle of free-market liberal capitalism that economies and markets function best in a climate where the free movement of BOTH labour and capital exists.

I don't see the economic circumstance under which cheap labour would not be drawn to the capital. It's been happening for a good few hundred years so far...

Graf von Straf Hindenburg said...

So it's started, Benedict.

Benedict White said...

Timothy "The fundamentals are good" refers to things like employment, interest rates trade and so on.

That said, Elliot is right that those fundamentals are pants. (I could not find the article on his blog, could you post it please?)

Load of old Stodge, the problem with your analysis on immigration is that you ignore the asset price increase it causes (house price rises) and the fact that some services become hard pressed whilst wages are dperessed.

Graf von Straf Hindenburg " So it's started, Benedict"

With a bit of luck, no. If we go down, we go down very very badly.

CityUnslicker said...

There will be many twists and turns yet. i think this is thebeginning thouhg; can't see a big rally next week to recover the position.

Even Goldman's is very exposed now.