As I write this article, the FTSE is a little over 6000, pretty much as it was when I was writing for the last issue of The Whistler. Not that interesting in itself, but having been down by some 400 points in the 2 months between, it shows the volatility – to which I referred in my previous article.
There are many factors involved in what moves the markets, but recently eyes have turned to Greece. The markets are not worried about Greece, the country; nor particularly about Spain, Ireland or Portugal (the so-called PIGS). What does concern them is the affect that the problems in these countries may have on the banking system within the Euro-zone. The Governor of the Bank of England, Sir Mervyn King, summed it up by saying “the direct exposure of any of the British banks to Greek debt is negligible. The unknown is anyone’s indirect exposure. It is nigh on impossible to trace the tree all the way through – what happens if a British bank has lent to a French bank who has lent to a German bank who has lent to an Italian bank who has lent to a Belgian bank, which is about to go under because it cannot take the losses on its portfolio of Greek debt?” The answer is that no-one knows.
Such is the way of modern banking, and the reason why Greece had to be bailed out. We have no way of knowing what the effects will be of any such event; a default by Greece might have been a non-event or might have triggered something worse than the Lehman Brothers crisis, the effective pinnacle of the Credit Crunch. The markets are still scared, and the banks themselves are unable to judge their own possible exposures, and it is clear that they are being very wary of lending to each other. This contributes to the unwillingness of the retail banks to lend to their consumers, by way of business and personal loans and mortgages. Which, in turn adds to the sleepy state of the mortgage market, another factor that depresses the profits of all those businesses that are linked to the buying, selling, building, refurbishing, furnishing of houses. Hence, keeping the share prices of such businesses low, and providing a depressing backdrop to the economy.
Another wild card in this uncertainty of markets is that of commodity prices. This is where everyone really should admit that they haven’t a clue as to what will happen. Whilst there is no doubt about the principles of supply and demand, there is a considerable amount of speculation in this area too, and some markets are starting to look a little frothy.
A bail out for Greece, or any other Euro-zone country, can only be a temporary remedy. A country that loses money will not stop doing so unless it changes its economic ways. Until countries can reorganise themselves so that their revenues can exceed their expenditures, there will be no deep-rooted and sustainable stock market recovery. Mind you, there are too many vested interests, especially Chinese, to let a full-blown Euro crisis develop. There may be some doubt as to the accuracy of the data, but the Chinese authorities have shown us a picture of their inflation, stabilising, at little over 5%, and their growth is still extraordinary by Western standards. Retail sales are rising at 17% pa and fixed asset investment by over 25%. We, as a trading nation, are arguably more dependent than ever on China, India and the rest of Asia – witness the recent visit by the Chinese Premier to the UK. Given some reasonable economic data though, markets want to go up. As Robert Browning said, “A man’s reach should exceed his grasp, or what’s a heaven for?” On that cheery note, I’m off. Have a sunny, smiley summer, and let’s hope the markets do too.