Why stock markets will keep crashing
By
Associate Editor
David Stevenson Oct 16, 2008
Print this article
Can $250bn buy you a fully functional financial system? It seems not.
Europe's financial authorities shovelled a quarter of a trillion dollars into the money markets yesterday, "in the latest move to restore their proper functioning", said the FT.
But stock market investors didn't seem too grateful. European shares crashed yet again, with the UK leading the way down. Add in some bleating bankers, and it seems 'the system' is still a long way from being fixed…
Everything’s falling apart at the seams again
You have to feel a bit sorry for all those Euro-politicians. Sure, they were rather preening themselves in front of the cameras last weekend in the smug way that politicians do, but after years of failing to agree on very much at all, they'd finally - or so they thought - hit the jackpot.
Between them they'd put together the biggest bank bail-out in history, with the top line guarantees trumping even the Americans by some way. Yet what happens? Just three days later and everything's falling apart at the seams again.
European shares took another good hiding yesterday, with the German Dax dropping 6.5% and French CAC crumbling 6.8%. And leading the (downward) charge was good old London with a slide of more than 7%. That wipes out at least half of the gains made since Monday.
It also meant that the $250bn dollop of dollars from the Continent's central banks, despite all the "coordinated effort" and "unprecedented joint action", proved more or less to no avail. The cash managed to force money market rates down a bit – at that price, you would have hoped it would do at least some good – but that was about it.
Investors are realising governments can't stop the recession
There's clearly another gremlin in the works. And it's a very big one at that. The immediate fears about the complete collapse of the financial system may have been assuaged a little, but investors are now realising that, regardless of what governments do, we're facing a recession – and it could go global.
"European investors have thrown in the towel," said Karen Olney at Merrill Lynch, adding that the majority of fund managers believe the Eurozone economy will shrink over the next 12 months. Meanwhile, 'junk bonds' – higher-risk company debt – are "now pricing in the worst recession since the Great Depression", said John Lonski at Moody's Capital Markets. And over in the US, Wall Street got walloped overnight, with the Dow down 733 points, nearly 8%.
Enjoying this article? Sign up for our free daily email, Money Morning, to receive intelligent investment advice every weekday. Sign up to Money Morning.
So no surprise, then, that nine out of the ten biggest FTSE 100 fallers yesterday were resource stocks, which would be among the hardest hit if the world economy really hits the buffers.
Mega-miner Rio Tinto was a classic case. Despite the company reporting that it had produced more than ever before, and professing confidence that China's domestic growth would strengthen demand for its products, dealers didn't want to know.
Rio saw its shares slump 17%, while its prospective partner BHP Billiton plunged 15%. "The forthcoming recession will be severe and we see a marked global contraction in commodity demand," said Ivor Jones at Evolution Securities.
Bankers just won't do as they're told
On top of this, the details of Gordon Brown's much-praised banking bail-out are being picked at by those it was meant to save. The Prime Minister has signed us up – British taxpayers, that is – into sinking £37bn to save a trio of banks in dire straits. Yet having bitten his hand off for all that loot only last weekend – and, so we thought, foregoing the right to pay dividends as a quid pro quo - the bankers have started moaning that the terms of the deal aren't fair, and that they should be allowed to keep on paying out dividends just like they used to.
"In an international context, the UK funding is being priced higher than in the rest of the world", said Robert Talbut at Royal London Asset Management. "The removal of any form of dividend payment does not make investment in the stocks any more attractive". Maybe so, but the lenders agreed to it. Now they're insisting that because the Americans are just handing over vast amounts of money to financial firms virtually free, the British government should do likewise.
Typical bankers. They want their cake, and yours too. But this little local difficulty simply highlights a big underlying problem.
A very nasty recession is on the way regardless of the politicians' latest headline-grabbing plans. The bankers may have caused many of the problems with their errors and their greed (aided and abetted by central banks and governments, of course). They may indeed be "yesterday's men", as Nick Cohen put it in the Evening Standard. But they're still very full of themselves.
And now that they know that the government will keep throwing money at them "to get lending going again", you can expect them to do what bankers do best – negotiate favourable terms for themselves. Anyone who expects them to just toe the line and do what the politicians tell them, "for the common good", is suffering from a severe delusion.
We're likely to see quite a few more bad days in the stock market while that message hits home.
Our recommended article for today
Cheap state money got us here, can the state get us out?
Central banks' low interest rates stimulated both supply and demand for the same dodgy products which politicians now blame bankers for promoting. So should we be giving governments more regulatory powers?
Published in
Economics
| More
articles
by
David Stevenson
Related articles
-
By Bill Bonner, May 25, 2012
-
By Bill Bonner, May 24, 2012
-
By Bill Bonner, May 22, 2012
-
By Bill Bonner, May 21, 2012
FREE - MoneyWeek's daily investment email
Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.
Sign up FREE to Money Morning here.