July 14, 2008 | posted by Michael Baxter in Markets | comments (0) |

And so the FTSE 100 hit bear territory. At close of play on Friday, it was 21 per cent below last year’s high point.

It is a little curious, but the Dow Jones is also down from its high point by almost exactly the same margin.

When you think about it, the US economy is in a right royal mess. The latest mess to come on the heels of the previous mess is, of course, the troubles of Fannie Mae and Freddie Mac.

And the amount of money entailed is just staggering. The US government is to ask Congress for unlimited authority to prop up the two financial institutions. It may need an awful lot. The not so dynamic duo guarantee more than $5.3 trillion worth of mortgages. To put that in context, US national debt is only $9 trillion.

It is not surprising they are in so much trouble. As mortgage defaults surge, they are left picking up the bill. But, they really can’t be allowed to fail. At least, not go bust. That really would be a disaster for the US economy that could set back an economic recovery for years and years. So, money has to be dished out – money that makes the Northern Rock bail out seem like a walk in the park. Even the US government will notice this one.

And yet, with the terrible fear dangling like the sword of Damocles, the Dow Jones suffers no more of a disaster than the FTSE 100.

In fact, in a way, the Dow’s performance is better. Last year, the Dow hit an all-time high. The FTSE still failed to climb above the 6,930 mark seen on the last day of the last millennium.

Right now, the Dow is 21.6 per cent down from its all-time high, set last year. The FTSE 100 is 24 per cent down from its all-time high, set on 31 January 1999.

The truth is, the FTSE 100 has not just entered bear territory at all; it never left it in the first place. And its dreadful performance of the last few weeks is a reflection of the lack of confidence by the City in the banks and builders. And that, in turn, is a reflection of how much faith the City has in house prices.

June 30, 2008 | posted by Michael Baxter in Markets | comments (0) |

Hearing the latest scores from the markets seems more interesting then listening to the football results these days, such is the frequency with which records get broken.  Then again, when you look at the daily changes, these seem more like the cricket results.

The Dow Jones had another bad day in the field on Friday, seeing another 106 runs scored against it.  This follows a 358 innings put in by the bears on Thursday.

It certainly seems to be the case that the bears have got some fast bowlers in their side at the moment, while the Dow has got a batting line up which could not even make the England team.

In fact, with just one day to go, the Dow appears to be on course for suffering its worst June since the 1930s. At close of play on Friday, the Dow stood at 11,346; that’s 1,291 points below the end-of-May price, or 10 per cent down.   It is also 2,817 points down on the all-time high set last October, meaning it is 20 per cent down.

But, frankly, the real surprise should surely be that the market rose so high in the first place.

Last autumn, the economic news was pretty grim, but the traders on Wall Street seemed to have their head firmly buried in the sand.

They returned their head to that position in April and May this year, when the Dow shot up, at one point passing 13,000.   George Soros warned at the time he expected markets to see another dip, and he was dead right – although, frankly, you didn’t need to be a financial guru to think markets had gone too high.

And so the comparisons with the 1930s continue.  And yes, it is like that decade; there are many parallels, but, really, there is no reason yet to think it will get anywhere near that bad.

The 1930s saw a series of quite inept policy mistakes.  Banks went bust in their droves, authorities were far too slow to grasp the seriousness of the situation.  No one can accuse Mervyn King and Ben Bernanke of not taking it all seriously.  In fact, Bernanke probably knows more about the 1930s depression than anyone else alive; that is what he specialised in during his days working in academia. 

The bail-out of Northern Rock, criticised though it was, shows why this is not like the 1930s.

If banks were allowed to collapse, leaving depositors with no way of getting their money back, then it would be like the 1930s.   Fortunately, it seems unlikely this will happen.

June 23, 2008 | posted by Michael Baxter in Markets | comments (0) |

As the green shoots of spring first started to show, the roller coaster ride that is the stock markets seemed to come to a halt.

On the 10 March, the Dow fell to 11,740, just 18 points up on the 14 December 2000 level, the peak from the previous boom, before dotcoms bust.

But then, the index just went up. Talk was that we had passed the halfway mark in the credit crisis, that more than half of all the total number of related write-downs which would eventually be announced had been revealed.

And the Dow soared– hitting 13,058 in early May. Sure, the index was well down on its all-time high of 14,164 set last October, but at least it was within 10 per cent of that peak.

The FTSE 100 hit its nadir a week later. On 17 March it had fallen to just 5,414, 1,500 points below the all-time high of 6,930 set on the last day of the last century.

By 19 May, the FTSE was standing at 6,376.

It seemed the great bear run was over.

But one dissenter was George Soros. You may recall, at the time he made headlines when he talked about the worst financial crisis since the 1930s, about how we were paying the price for 25 years of policy mistakes – of over reliance on the rate of interest.

He also predicted a second dip in the stock markets.

Well in some parts of the world, in China for example, the markets have just gone down and down since then. But then the Chinese stock market was a bubble. It had bubble written all over it. We said so. Lots of people said so. Some Chinese people said, “In China it is different, you are applying Western ideas to China.” But, of course, it was a bubble, and it has burst.

But it was supposed to be like that in the UK and US. P/e ratios are low. In fact, so low have p/e ratios fallen, that Barratt actually saw its market capitalisation fall below projected profits for the year.

But while house builders have seen their share price fall – quite ridiculously, really; people say Gordon Brown did not fix the UK’s roof when the sun was shining, but what about house builders. They have had ten years of plenty, and now analysts are panicking over their stability.

But, at close of play on Friday, the Dow stood at just 11,842, just 140 points above the year low. The FTSE 100 was down to 5,620, 200 points above the year low.

And this is one of the curious things of this saga. It is now eight and a half years since the FTSE 100 peaked. The Dow is only just over the peak from eight years ago. This, at a time of falling house prices.

The collapse of asset prices is symptomatic of a 1930s-type crisis – which was characterised by deflation.

Now, stock markets are not good at telling the future. Economist Paul Samuelson once famously said: “The stock market has forecasted 9 of the last 4 recessions.”

The recent surge in stock prices, on the verge of such a major economic slowdown, also seemed daft.

It took 25 years for the stock market to recover from the 1929 crash. It does sometimes feel as though the stock market has still not recovered from the 1999/2000 crash.

The housing boom that followed that crash may have just disguised the true story.