July 16, 2008 | posted by Michael Baxter in Markets |

Well, we know Ben Bernanke is good at spelling.   He was after all the champion speller of all of South Carolina, when he was a boy.   We also know he knows a lot about the 1930s depression.  As an academic he made his name for his work on that sad economic epoch.   But now his list of skills has grown.  For yesterday he added to that list the “ability to talk the bleeding obvious.” 

He was speaking to the Senate Banking Committee, and really he said nothing that all but hopeless optimists and residents of Mars who had just popped down for the day didn’t already know.  But it was enough.    Carnage on Wall Street continued. 

When markets are optimistic they only need the slightest excuse to buy.    Last autumn, the view circulated around economic circles that the economic prospects were so bad that the rate of interest may need to be slashed to get the economy moving.    “What was that?” asked the markets.  “Did someone say rates are going to be slashed? We better buy.”   And so it was, that on the brink of economic and banking disaster, markets went out to play as if all their Christmases had come at once.

But now, it just takes a whisper, a tiniest hint that maybe things are really not all that good, and down go markets, falling like a brick over a very steep cliff.

This is what Benrnake said: “The economy continues to face numerous difficulties, including ongoing strains in financial markets, declining house prices, a softening labor market, and rising prices of oil, food, and some other commodities.”    Ummm, oh yeah, so it is.

He added: “The financial headwinds on spending and economic activity have been compounded by rapid increases in the prices of energy and other commodities.”   Lets think about that.  Ahhh, yes, that is right too.

Then, in a brilliant leap of intuition that mere mortals can only dimly comprehend, Bernanke linked the high price of oil and food to consumer spending, and said he expects this to “be restrained over coming quarters.”

And that was it. With words like that it was panic.

Actually, it wasn’t really a freefall so much.  The Dow was down 93 points, the FTSE 100 fell 129 points.    These days falls like that seem quite modest.  But the point is this.  The Dow is now down almost 400 points this month.  The FTSE 100 has fallen 454 points.   Both indices are around 23 per cent lower than their 2007 highs.

It was banking that was really feeling the heat.    The FTSE all share banking index fell to its lowest level in ten years, the time of the collapse in Long Term Capital Management.   RBS was down 7.1 per cent, HBOS 4.4 per cent, Barclays 3.4 per cent. 

But it wasn’t just in the UK.  Some European banks would have been delighted to only suffer falls of that scale.  Fortis, the Belgian–Dutch bank, saw shares fall 11.2 per cent.

As banks keep finding their cupboards are bare, they look elsewhere for more money.  Now fears are growing  that sources of finance are drying up.  That is why Alliance and Leicester couldn’t say yes to Santander fast enough.  That is why Bradford and Bingley was so grateful to see its big bank shareholders cough up with some money.

And you know that in times like these, all kinds of problems will come out of the cupboard.     It is always that way.  After the 1929 crash, wave after wave of scandal hit the headlines.  After the stock market crash earlier this decade, WorldCom and Enron made the headlines.   Now, traders are nervously looking every which way for the next scandal. 

Yesterday, Fortis denied Dutch authorities were carrying out an investigation into the bank.  It is irrelevant if the rumour is true or false; all it takes is a rumour, no matter how unfounded, and shares fall.

It seems that right now, news is bad for the markets.  It doesn’t matter what the news is.   If the news is bad, markets fall;  if the news is quite good, markets fall.  If the news is Bernanke still thinks the same as what he thought last month, the markets fall.

In his book, Age of Turbulence, Alan Greenspan said: “History is replete with waves of self-reinforcing enthusiasm and despair, innate human characteristics not subject to learning curves.”

And that is what we are seeing now.  Bernanke may speak the obvious, but markets never seem to see the underlying, but obvious, truth.    It is human nature that exaggerates trends and creates economic cycles.  And market reaction to news, be it good or bad, just illustrates that this is so.