By Clem Chambers, CEO of ADVFN
2011 will go down as a year of two halves. Up until July the FTSE100 steadily fluctuated around 5900,soon afterwards the index started a steep fall, reaching a low of 4946.27 – over 1100 points below its 2011high. This crash not only marks the story of 2011, but potentially the start of the next few years.
The markets had not seen as dramatic a fall since the Sovereign debt crisis hit the world in 2008 and the reasons behind this year’s collapse point to the start of a new economic era. One thing is for sure; the economics of the recent era are dead.
Before the slump the markets were already in a precarious position. Still faltering from the sovereign debt crisis, the first world’s economies had run out of financial road and a giant restructuring was necessary. Whilst nominally there is a lot of money in the world, more money than there ever has been, it had been corralled into financial instruments like bonds that run the risk of being annihilated through inflation, rising interest rates, recession and austerity.
After a period where the UK markets focus was on the government’s tough plans to reduce the structural deficit, they found themselves being thrown into a period of downgrades, collapsing governments and the Eurozone debt crisis.
Then disaster struck; August’s S&P downgrade of US debt threw a grenade into the bunker of the world economy.At the time the total value of the S&P 500 index, which amounts to the bulk of the value of US listed companies, was about the same scale as the total US government debt.
The downgrade from AAA to AA+ was a clear sign that a crisis had just arrived. Later in the month, a Eurozone debt struck the markets. French President Nicolas Sarkozy and German Chancellor Angela Merkel said a lot about nothing, and thanks to political inaction there was no sign of a recovery happening anytime soon.
The market fell heavily and fears grew around the Swiss Franc, a safe haven currency that was growing too strong against the Euro. The Swiss Government intervened by putting 80 billion Swiss Francs into its banks through fear of a recession, due to fears that a strong Swiss franc would damage its exports as the stability of European markets grew even more unsteady.
The volatility in stock markets was a reflection of uncertainty. The mood swings of stock prices underlined that the markets of the world didn’t know if they are coming or going.
The Dow, Dax, Cac-40 and FTSE all showed the same; extreme swings. Markets, be they foreign exchange, bonds or commodities, were all in trauma.
No-one believed Europe could let itself go up in smoke for the sake of political grandstanding, especially when a solution to the European credit crisis was unclear. But as the market fells and liquidity dried up, so the fear of collapse of Greece, Portugal, Italy and Spain felt more likely.
In this confusion the FTSE100 slipped below 5000. Big round numbers are psychological and this is the mother of psychological financial crises.The markets looked to the politicians, but they had a long wait.
As political confusion reigned in Greece and Italian interest rates reaching all-time highs the ECB dropped its base rate as a signal that it will come to the rescue of the European economy.
Banks rallied–some, such as the U.K.’s Barclays by as much as 20%. A huge sigh of relief was exhaled from Tokyo to New York.
Days later, the market wasn’t so sure. By the month end–October 31, fittingly–the market had become truly ‘spooked.’ Shocked by the news of Greece’s plans to hold a referendum on whether they choose to default on debt and leave the Eurozone initially sent markets into a free-fall, before Merkel and Sarkozy started to talk tough ahead of emergency Eurozone talks in Cannes led to a tentative rally on world exchanges.
The turmoil led to Greek Prime Minister Papandreou standing aside, shortly before Italian Prime Minister Silvio Berlusconi was forced to do the same thing after Italian bond interest reached 7%. Contagion was out of the bag in Europe, with economic factors leading to a landslide election removing the Spanish government.
As 2011 comes to a close the world’s Central banks have come together in the cause of rescuing the global economy. The US Federal Reserve announced that it was willing to pump vast quantities of cheap dollars into the system, leading to markets rallying in response. The response of the FTSE100 was instant; after weeks of losses it shot up by 168 points. Caution, one of the key attributes of modern times, returned the next morning.
Never forget though that if the market has to burn everything to the ground to get the west to create a sustainable economic model, it will. The market has no emotions like remorse, it cannot be beaten and it does not stop until there is equilibrium. If governments do not face up to the reality that state downsizing is here, the process will be a long drawn out and excruciatingly painful one that seems set to roll into 2012.
Clem Chambers is CEO of ADVFN, Europe's leading financial markets website, and author of 101 Ways to Pick Stock Market Winners.
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