Bull & Bear
Bull & Bear: two opposing market views
Whether you're a 'glass half full' or a 'glass half empty' type of investor, freelance journalist Michael Baxter discusses the latest economic, company and investment news from both optimistic and pessimistic viewpoints.
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15/05/2012 - Bull and bear: In the eye of a storm?
In the eye of a storm?
All hell didn't really break out yesterday. Sure we saw some very interesting movements in the markets with an awful lot of selling in some areas and buying in others, but the media headlines were overdone. Markets have still not got their collective intelligence around what is really going on. And that is why yesterday was more like a dress rehearsal than the real thing. The news on the latest GDP figures relating to the two big economies that make up the euro were perhaps better than expected, not that that is saying much. But what we are seeing at the moment is being charged by the electorate; Real Street as opposed to Wall Street is making the moves. And yesterday, it was the vote in Germany's North Rhine-Westphalia area that proved pretty momentous. But there is something else going on, there is a deep rooted issue that needs to be addressed and the Austerians who see tax cuts as the answer to everything have yet to realise this. But a report out from the National Institute of Economic and Social Research (NIESR) this morning, really does hit the nail on the head.
Markets flock to safe havens
The great sell off yesterday was not that bad. Sure some stock indices saw greater falls than others, but the big ones, the Dow, the FTSE 100, Dax, and the big markets in Asia saw falls that pretty much fell into the bracket that we might call normal. The FTSE 100 was down 110 points yesterday, hardly the stuff that panics are made of. Although it is worth mentioning that the index also fell below the end of the 2011 price.
Spanish banks appeared to have taken the biggest hit, but the only real surprise is that it didn't happen sooner.
However, yesterday also saw money flood into so called safe havens. So the yield on German ten year bonds, or bunds, fell to just 1.47 per cent. The US equivalent dropped to 1.78 per cent, and in the UK the yields on ten year treasuries fell from 1.96 per cent, which was pretty close to an all-time low, to 1.88 per cent, which is easily the UK's lowest ever for this asset.
The UK is benefiting on two fronts: Osborne's resolve in imposing austerity is making the markets happy; and the fact that the UK has its own central bank which has proven to be so willing to play with the monetary accelerator otherwise known as quantitative easing.
Sterling also climbed yesterday, rising to 1.2543 euros to the pound. Sterling hit its highest level relative to the euro since October 2008 a few days ago. It has risen since, but it has to rise still further before it passes the highest level since the September of that year.
Meanwhile oil fell some more, US sweet crude, for example, dropped from $96 to $94. As recently as May 1 it was trading at $106.
But in the indebted euro area, bonds yields rose. In Spain, for example, the yield on ten years rose to 6.24 per cent.
All in all then a busy day with the markets, but it is hard not to draw the conclusion that the full reaction to the latest turmoil in Greece, Spain and the rest is yet to occur.
Germany and France avoid recession
But while money floods into the UK, it is Hollande's France that avoided recession - not that François Hollande had anything to do with it. The French economy expanded by, well it neither expanded nor contracted - growth was a big fat nothing in Q1 this year. But growth for Q4 2011 was revised downwards from plus 0.2 per cent to plus 0.1 per cent.
So while France is limping along bottom, at least it has avoided the UK's fate and not fallen into recession.
That assumes you believe the stats, of course. Don't be surprised if by the time statisticians have finished fiddling around with their data it is the other way round, and it turns out the UK avoided recession, but France fell into one. Certainly, the Purchasing Managers' Indices (PMIs) suggest it is more likely to be that way round.
Bull: As for Germany, the economy expanded by 0.5 per cent in Q1 this year. It had contracted by 0.2 per cent in Q4 2011. The figures were better than expected. Even statisticians will struggle to revise a 0.5 per cent expansion into negative growth, so it really does seem as if Germany is out of recession territory.
Bear: But the latest PMIs were pretty unequivocal. Across Europe, including the UK, April was worse than March. At the time of writing, markets are actually rising thanks to the good news on German and French GDP. In view of the above, it is pretty hard to believe these rises will not be reversed soon.
Anti Austerians win in Germany
But the markets can huff as much as they like. The likes of George Osborne and Angela Merkel can puff as much as they like. But by the hair of their chinny chin chin, it is the electorate who will ultimately decide the fate of austerity and the euro.
Things have not gone the Austerians' way in Greece, or France. Now even the Germans have followed.
In the election in North Rhine-Westphalia state the centre-left Social Democrats won with 40 per cent of the vote. 'Spiegel' magazine said of the victor - Hannelore Kraft, the SPD governor of the state - that: "The very best news for the SPD and the Greens from Sunday, however, is that it showed that Merkel’s CDU can be defeated. Self confidence among Germany’s Social Democrats has been in short supply as the party suffered through years of losing elections and members. But the North Rhine-Westphalia vote is the third time in recent months that the SPD and Greens have joined forces to triumph over the center-right. Merkel has lost some of her shine as a result and Röttgen, once seen as the CDU’s crown prince, has been left lying in the dust." See Germany’s Social Democrats Return to Relevancy
The real point here, however, is that Ms Kraft stands for growth over austerity. She is not exactly a Hollande supporter, but she is about as close to that as you can realistically expect in Germany.
But if Greece really does exit the euro, and if the likes of Spain and Portugal follow, leaving what's left of the euro/deutsche mark rising fast, then the call for less austerity in Germany will become overwhelming.
NIESR says lower income households were the big borrowers in boom
But it fell to the National Institute of Economic and Social Research (NIESR) to make the telling remarks this morning.
"Low to middle income households were reliant on borrowing to fund much of their spending for more than a decade before the financial crisis," according a report for the independent think tank the Resolution Foundation and authored by NIESR.
The report reveals the full extent of the increase in borrowing and deterioration in household savings rates in the run up to the 2008/09 crisis, with the poorest 10 per cent outspending their income by 40 per cent by 2007. Given that only a minority of the poorest are homeowners paying off their mortgage, it is highly unlikely that this was counterbalanced by an increase in housing wealth.
The report also found that during the 10 years from 1997 to 2007, spending grew faster than incomes across all households, but this was much more pronounced for the poorest groups. For the bottom 10 per cent, incomes grew by 17 per cent while spending grew by more than twice as much (43 per cent). Even middle income households found themselves falling behind, with incomes growing by 33 per cent and spending by 46 per cent, resulting in a negative savings ratio for a full ten years before the crash. The highest income households also saw their incomes grow by less than their spending over the period but still retained a positive – although declining – savings ratio.
Jonathan Portes, Director of NIESR, said: "This research suggests that there may well have been a connection between the rise in income inequality in the years preceding the crisis and the rise in household borrowing, particularly for those on lower incomes."
And yet the Austerians believe the key to solving this crisis lies in big governments and lower taxes. In other words exacerbate the imbalances that may have created the crisis in the first place.
Around the Internet
This carton appearing on Paul Krugman's 'New York Times' column is worth a peek, especially if you fancy looking at the lighter side of the austerity debate : see Raygunomics, conscience of a liberal
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