By: Dr. Mike Campbell
Probably, the most valuable commodity in the world is not gold, crude oil or diamonds, but confidence; and it is in mighty short supply right now. Investors in the world’s stock markets fuel economic growth by providing the demand which drives a company’s growth and allows it to borrow money to expand, either through classic bank loans or by going to the market with a bond or stock issue.
Right now, investor confidence is the lowest it has been since the global financial crisis and there is increasingly loud murmuring about a dreaded “double dip” recession. The global financial crisis itself was caused by a loss of confidence within the financial sector triggered by debt doubts. That time, the “herd” was spooked by the sub-prime crisis when it was gradually realised that many financial institutions had bought a lot of “securitised” bad debt. Sub-prime meant that money was lent to businesses and individuals who (arguably) could not afford to borrow it in the first place. For the privilege, these lenders were charged higher interest rates to cover the perceived risk- well it was obvious how that would end. Sub-prime securities were rated as investment grade debt vehicles by the ratings agencies, of course.
The current unpleasantness has been triggered by the sovereign debt crisis in Europe and the USA – although Japan will surely join the club sooner or later. The ratings agencies consistently gave national government bonds investment grade status for years – it takes time to run up a tab of $15 trillion. Now, the same ratings agencies have got jittery about the debt mountains and have started to warn of impending calamity. This has sent sovereign debt interest rates higher (making a default more likely) and has drained confidence from the stock and forex markets.
Major world markets saw double digit falls last week and only yesterday, the Nasdaq fell by a further 6.9%; the Dow Jones by 5.6%; the Dax by 5%; the CAC by 4.7% and the FTSE by 3.4%. These markets are continuing to fall. At some point, there will be a rally as investors see that key stocks are too cheap to resist. The question is whether this will form a resistance or a support level – in other words, will confidence finally return to the markets?