Before I had a small child of my own to deal with I simply couldn’t understand why parents made such a fuss about toddlers getting overtired. As far as I could see tired was good – the more tired you can make a child the quicker it goes to sleep, right?
Now I get it. Sure, a very tired child goes to sleep. But let it have that last ride on the carousel, let it stay up for just one more DVD episode of In the Night Garden, or to see its late-working parent for a mere five minutes before bed and it won’t sleep. Not at all. Instead it’ll go beserk around the time you are making it a nice warm bottle of milk. And then just when you think you’ve calmed it down something else will set it off. Next thing you know it’ll be midnight and your own night’s sleep will have been comprehensively ruined.
You’ll know where I’m going with this I’m sure, but there is really is a parallel to today’s markets here. It’s been a very eventful few months for the global economy, but still everyone’s hoping that the markets will just calm down and let us all go back to the comfortable relaxed world of recent years where share prices have simply advanced steadily, with every minor dip a buying opportunity.
But like an over-stimulated child, there’s just no way the markets can calm down with everything that’s been going on. In recent years, they’ve binged on the cheap credit being pumped into the global financial system by central banks, who have acted like over-indulgent parents, rather than the fair but firm disciplinarians we needed them to be.
And now that the cheap credit bubble has burst and the free supply of money has dried up, we’re seeing the consequences – the tantrums are starting. First the revelation that the US sub-prime crisis was spreading far beyond the original borrowers sent markets reeling back in August.
More recently, there’s been the fear that bond insurers would lose their credit ratings, leading to even more write-offs for the big investment banks (if the bond insurers lose their credit ratings, so will the bonds they backed, leading to forced sales by some investors, which will in turn hit prices). On top of all that, there’s all the chaos caused by Societe Generale’s ‘rogue’ trader Jerome Kerviel. That’s a lot of distractions for an over-excited market to cope with.
The Federal Reserve and the US government are now trying to stop the tantrums by administering more cheap credit – most commentators expect the Fed to follow its emergency 0.75% cut with a further 0.5% rate cut this week, while the US government is working on $150bn worth of tax cuts.
Unfortunately, this is a bit like trying to shut your child up with candy floss when they already feel sick. And indeed, where once the mere mention of rate cuts would have sent markets soaring, they have continued to fall even in the face of all this extra stimulus. The newspapers at the weekend were all saying that the markets are a ‘buy for the brave’. But I’d be more inclined to leave buying these markets to the stupid – there are plenty more tantrums and sleepless nights for investors ahead this year.
First published in The Evening Standard 29/1/08