I'm not sure about this, and want to make my prediction so that I can come back and read this post in a year or so and see how far off the mark I was!
Through my limited knowledge of the financial markets, it's clear that most equity investors flee the scene at the first sign of trouble. When bad news surfaces on Bloomberg or the secondary news channels, share prices tend to fall as people sell up, afraid that their investments are going to fall in value. At this point, they become like lemmings, jumping off the proverbial cliff one after the other, leaving the 'danger' behind.
The graph above is a short term view, but illustrates the willingness of individuals to abandon any investment plans they had in particular firms in bad times, and the effect that this has when everyone gets the same idea.
However, apparently if you look at a graph of the same indexes over one year you would see them levelling out along the bottom of the chart. I looked this up and came up with this:
One year FTSE-100 Index (Blue) vs Dow Jones
I suppose if you blur your eyes a bit, then the performance of the equity market in the UK and the U.S. has been 'bobbing along the bottom' for a few months.
But does this reflect that from here, the only way is up? Personally, I think not.
My view is that some people think that the worst is over, and that those investors are therefore more willing to hold onto their stocks because if the prices don't go down, they will go up and that obviously means profit. Others are stepping into the market, buying up shares in companies whom they think have hit rock-bottom, in the hope of making a few quid when their share prices recover.
This is all very nice, but the equity markets aren't the defining factor in how the world's financial system performs. Many BigCo results are showing this in full, bright technicolour for all to see.
Take Toyota, who posted their first loss in history recently. That's not all down to equity markets.
That's mostly down to Joe Public not being able to buy a car because he can't get credit. Joe was made redundant recently, and his bank can't afford to risk lending him the money because the bank itself hasn't got as much available credit as before. That's caused by the interbank lending market falling to lows which are unheard of, so ordinary high street banks have a lot less cash to lend to people in the first place. And because of the gung-ho lending of the past few years (which caused the 'Credit Crunch' in the first place), reducing risk is now the number one priority of every lending company in the market. So because Joe is 'between jobs' he is too risky to lend to.
If Joe Public can't buy a car, then the chances are that tens of thousands of other people will be in the same position. So Toyota sell a crapload less cars than they thought they would, they have a lot less cash to pay the manufacturers who make the car parts, they can't afford to repay the huge debts they've run up because they thought they were going to keep making profits and weren't worried about cash flows, and their entire business and all its dependent companies begin to struggle.
The manufacturers then have to make redundancies of their own, and the whole vicious circle begins again. This domino effect has been seen throughout the world, and I don't think we've come to the end of it, unfortunately.
Everyone knows that the key goal of most governments is to get the banks lending to one another again, and to pump money into economies - and small businesses in particular. I think this will take time, so my prediction is that we'll begin to come out the other end of this downturn sometime in the middle of 2010, after you first see reports of growth in the UK's GDP (therefore officially marking the end of the recession).
So for me personally, it's a case of battoning down the hatches, trying to hold onto my job and trying to manage what little resources I have as best as possible. But it's important to try not to stop spending completely. If everyone is ultra-careful with their money and never buys anything except life's necessities then there won't be enough money flowing around the economy, and the situation gets much worse.
Of course, spending money like a crazed person is not good - but if everyone tries to act normally and spend money if they can then businesses will begin to recover and the economy will strengthen once again.
No comments:
Post a Comment