I have been getting an endless parade of press releases from fund managers and brokers this week explaining why the sharp falls in markets around the world are nothing more than an ‘expected correction’. This is extremely irritating. First, there is no such thing as an ‘expected correction’. If everyone expected a correction, it would be in the price and there would then be no correction. Second, the use of the word ‘correction’ is in itself slightly odd. It is used by brokers and fund managers to suggest that any falls in stock prices are not in any way related to fundamental problems, but instead to faintly technical issues that will soon sort themselves out.
But that isn’t often the case. A fall in prices may be kicked off by a technical trigger of some kind, but it usually reflects a fundamental problem in a market too. There has been much talk about how falls in the Chinese market really shouldn’t have caused much bother elsewhere. The Shanghai exchange is just for retail investors, said one analyst. It’s tiny and prone to volatility, said another. Others pointed out that the Chinese market is ‘shallow’ and so can’t reflect the complex realities of the country’s economy, and several made much of the fact that China’s markets have already risen 30% this year – so a 9% fall means little.
This may all be true, but the mini-crash in China did mean something to the world’s investors. Until this week, everyone was lon¬g everything and had been for some time. The idea of risk had disappeared from most market-related conversation and complacency ruled. China reminded the market that there are always risks, that stocks can fall as easily as they can rise. This then meant that for the first time in a long time, traders actually started to see the problems that have been staring them in the face for months.
They noticed that sales of new homes in the US fell nearly 17% in January – the most in any month in 13 years; that the subprime mortgage market is in meltdown and the credit market across the US is at risk; and they noted that new home construction fell 19%. Why build new houses when you’ve clearly got far too many already? US manufacturing also fell in January for the second month in a row and GDP growth came in at 2.2%, largely, as it turns out, thanks to falling new home construction. No wonder the Dow fell 3.3% on Tuesday.
When you get this far away from a recession, said Alan Greenspan this week, “pressures build up for the next recession and we are beginning to see those signs”. He went on to say that it is possible that we could see a recession towards the end of 2007, but that “most forecasters are not making that judgement”. Most forecasters may, of course, be right, but let’s not forget that they spent most of last year saying that the housing slump was a temporary thing, something that would land softly, last a month or two and have no real effect on the wider economy. Given how that worked out, perhaps we should all be bracing ourselves for recession in the US and for the repercussions that will bring.
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