Op-Ed: Global market meltdown, as crash hits everyone's bottom line

The US recession issue has started a global rout on markets. Sellers are now wiping out years’ worth of gains to get their hands on hard cash. This is a large scale version of the market’s normal bailing out in uncertainty, but very messy.

“Buy in gloom, sell in doom”, is the proverb. The common wisdom is that this drop in the markets is “factoring in” a US recession, but it could be helping to cause one, and slow recovery to a crawl. Selling is based on avoiding losses and getting hard cash. Which is fine in theory, but these days the markets carry a lot of assets, far more so than in the 1987 crash. Some of the market losses are paper losses, but a lot more are real cash, and some big holes in people’s bottom lines are likely. In the US economy, the stock market is so big it’s a center of gravity for capital, in the world’s biggest economy. Most of the US economy is locked in with the markets in that the entire financial sector is geared to stock market investment in some form or other. Banks, trusts, funds, credit providers, mutuals, 401Ks and therefore practically all individuals and businesses are either directly or indirectly exposed to the market. The rest of the world isn’t quite as advanced, nor does it have as much capital, but it’s in a very similar position, just on a smaller scale. The effect of the American train wreck has been to cause pile ups around the world. In Asia, in particular, where money moves in and out of markets in large volumes and great speed, the effect has been savage. The Nikkei dropped 4% on opening. Australia, where Asian buying is a big market force, has also been hit pretty hard. The local effects aren’t a factor in this case. World markets are being hit by one single issue, the state of the US economy. The Australian Daily Telegraph and the New York Times have both come up with pretty much the same view of the situation. Bloomberg is one long tale of market crashes around the world. Europe has also taken some big, hard, falls. According to the New York Times, the usually insulated European market has had some of its steepest falls since 911: ““There is indeed some panic,” said Thomas Mayer, the chief European economist at Deutsche Bank in London. “What we’re seeing, in Europe and Asia, is that the markets are pricing in a recession.”

“The sell-off was evenly distributed from East to West, with indexes plunging in London, Paris, Frankfurt, Tokyo, Hong Kong, Seoul and Bombay. The Frankfurt Stock Exchange’s Dax index

plummeted 7.2 percent, its steepest one-day decline since Sept. 11, 2001. The 7.4 percent drop in Bombay’s Sensex index was the second-worst single-day tumble in its history.

Stocks followed suit when markets opened in the Western Hemisphere. Canadian stocks closed down 4.75 percent, and a key market index in Brazil was off 6.6 percent.” There is a natural tendency to oversell on the stock market, but in this case there’s another factor. Pulling out of markets allows reinvestment, and minimizes losses. Many day traders would have bailed out ASAP, probably ahead of the game in terms of actual profits. For funds and trusts, however, it’s not so simple. They usually can’t just bail out, not quickly, anyway, and the drop in prices is a direct hit on their asset values. Some of them borrow on the basis of stocks as assets, and those assets have now gone through the floor. Meaning that a lot of assets are now down below their prices, and real cash has been lost. That could cause some serious issues with investors, and does whatever nothing to help the credit situation, particularly in the US, where the new lending approach is super-conservative, and what you can and can't use as collateral really matters. So less credit, based on lower value assets, means less lending. The credit market is a big driving force for business investment, and that’s slamming on the brakes, very hard. Quite a few businesses just won’t be able to borrow, and new startup capital is going to be harder to find. That in turn means getting out of recession is going to be harder. For the market itself, this situation will soon become a “wait and see” position. For the rest of the world, it means inflation. Prices rise to offset losses and cost increases, as damage control kicks in. Unlike the US, where easing credit problems is the big issue, the rest of the world is having to deal with the increased credit problems and price rises by raising interest rates: “The turmoil will put even more pressure on the European Central Bank, which has charted a different course from the Federal Reserve by warning that it might raise interest rates to curb inflation, rather than cut them, as the Fed has, to ward off a recession. Mr. Mayer and others predict the bank will be forced into an about-face in coming months.

While Asia has been less buffeted by the credit crisis than Europe, the Bank of China now appears vulnerable, with analysts predicting it will have to write down the value of its American mortgage holdings.” Here you can see the global version of “What goes around comes around”. If China raises its rates, has to increase prices, and its goods become more expensive, that will be a further hit on the global inflation rate. Another theory getting put to the test, and not doing too well, is “decoupling”, that is the theory that European and Asian markets aren’t as dependent on the US economy as they were. It’s a cute theory, but globalization now means that American capital is tied in to the global economy, and what affects it affects the world. As writedowns approach plague proportions around the world, it’s not a working theory. Capital behavior in market crashes is an exercise in stopping losses. Nobody just hangs around feeling uninvolved, because they aren’t. It’s pretty damn stupid to assume that anywhere on Earth is immune to capital losses on this scale. In Australia, which is a very much export oriented economy, we’re looking at reduced capital for our buyers. Even if we were totally unconnected to the US economy, it wouldn’t matter. There are no purely “local” economies, any more. It also looks as though all those forests’ worth of books on the subject of globalization missed this one. The only mitigation in terms of how badly this situation has been misread is that it’s never happened before. Now is the time to stop prophesizing, and start dealing with some hard facts. The market will stabilize, and will recover, eventually. It may take years. The economy is dealing with a lot of very nasty outcomes, and a lack of ideas. As usual, nobody has a script for this situation. The response so far has been more reflex than rebuilding. No reassessment of methods has been even attempted. Interest rates aren't cutting it as much more than a bandaid. Recovery will depend on availability of capital, and limiting the damage will need to make inflation bearable. It's possible that some of the damage can be undone by decent trade results, but trading conditions have to be workable, not a minefield of added costs and charges. Suggestion: Get some original thinking done. New problems need new ideas, not just more monetarism and more drivel about "market forces". This mess won't fix itself.