16 Oct 2014

Why the markets are frightened

The post-Lehman Brothers crisis never really went away. The measures taken to revive the economy worked in the US, and eventually in Britain, but they are flagging in Europe and Japan. And we are now in a much more fractious world.

“Political risk” is high, and confidence in political leaders to sort things out is not – and there are some potent causes for concern.

The big picture is bad: This is the FTSE 100 since 1992. The three peaks on the right hand side are the dotcom boom and bust, the run up to Lehman Brothers, and then the recovery driven by the Bank of England printing £375bn and giving it to banks. Draw a line along the top of the three peaks and the value of shares has gone nowhere since S Club 7 were in the charts.


Deflation is haunting Europe: The red line shows inflation in the Eurozone, now down to 0.3 per cent. Below, you can see a whole batch of countries already suffering year on year price declines. Nobody in the EU is hitting the 2 per cent inflation thought to reflect normal growth. Deflation is bad because it shrinks people’s wages but not their debts. It’s what turned the Wall Street Crash into a depression in the 1930s.


The European Central Bank needs to act: The purple line shows that by 2012 the ECB had pumped 3 trillion euros into the Eurozone economy to stem the crisis. As these short term bank loans were repaid, that’s down to 2 trillion euros. The ECB boss Mario Draghi wants to raise it back to 3 trillion, but the measures announced so far fall short. He wants to do “quantitative easing” (QE) – printing money – to the tune of 900bn euros. But the German government is resisting, and German opposition parties will challenge any move towards QE in the courts.


Germany’s export machine is stalling: Germany is the Eurozone’s success story – and this long-term graph shows how much of that’s been built on exports. But a slowdown in China and sanctions imposed by Russia are hitting Germany hard. Its top 30 companies created 36,000 new jobs last year – but outside Germany, compared to only 6,000 inside, according to the economics institute DIW. The old model that brought prosperity is running out of steam and there’s political resistance to a new one.

16_graph_2_wGreek bond yields are spiking: The Greek parliament needs to elect a new president in February but the government doesn’t have a majority, and may fall. Most opinion polls give the far left party Syriza an eight point lead – and Syriza is pledged to renegotiate and even repudiate some debt. So the political crisis in Greece is back on. The original canary in the coalmine of the entire crisis is once again looking drowsy.


 Follow @paulmasonnews on Twitter