International Finance Topics

Written by tolumi

Friday, 05 December 2008 10:41

International Finance Topics

Michael Wilson considers the theory that new technologies are rewriting our
traditional rules for measuring stock market value

There was a time, and a very good time it was too, when the financial markets knew the rules and didn’t break them. If the Dow Jones Industrial Average happened to be up, then you could usually be reasonably sure that the bond markets would soon be moving along strongly and that bond yields would inevitably fall as a result. If the pound was strong, then you could safely assume that there wouldn’t be much of a call for a rise in London’s bank rates.

Conversely, if somebody told you that Americans were raising their spending twice as fast as their earning power permitted, or that Tokyo was having to recycle ten-year-old bonds it couldn’t afford to redeem, you’d probably run a mile.

International Finance Topics & The Financial Experts

So maybe you can’t really blame the financial experts for coming up with such a weird-sounding collection of explanations, now that stocks are soaring worldwide but bonds are slumping in favour of cash. They look at the way the industrial world is running at full tilt and at full employment, despite a 150 per cent rise in oil costs, and they wonder at the fact that inflation rates are remaining low despite rampant consumer spending, and they realise that they have lost their bearings. But they need to cover their backs somehow.

So they mutter darkly that the world markets are ‘dislocated’, and that all the normal rules of economics are in suspense. Wall Street is just running on hype, they say, and those gullible American investors are buying every word of it because they’ve been duped into believing this stupid ‘New Paradigm’ theory instead of using the brains God gave them. When they do decide to cover their positions they go for cash deposits instead of investing in bonds, which would at least give them a capital gain if everything went belly-up. Mark our words, the sceptics say, it’ll all end in tears. They’ll wish they’d read their economics textbooks some day soon.

International Finance Topics & The strange Phenomenon

It wouldn’t be so bad if this was just an American thing, but the same strange phenomenon is happening in other places as well. There’s simply no rational explanation at all for the recovery in Japanese stocks, they say, given that Tokyo’s current economic fundamentals are scarcely better than they were five years ago (and by some accounts, worse).

The sinking of the euro last year was just plain bizarre, considering that the newly-launched currency had the backing of 300 million people, including the world’s second-biggest net exporter, Germany - and that the dollar, the euro’s biggest rival, wasn’t exactly in great competitive shape itself.

Meanwhile those blasted Chinese have somehow managed to escape the currency devaluation which everybody - but everybody - agreed was coming last autumn, even though Beijing’s export industries are still being decimated by cheap competition from elsewhere in the region. And another thing. Every time the pound gets stronger, the Bank of England raises interest rates again just to make it stronger still. Dammit, doesn’t anybody believe in fundamentals any more?

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