Markets 4-8 May 2009

A good week on the markets as confidence begins to return.

FTSE: 4462.09 (up 218.87 or 5.2%)
DOW: 8574.65 (up 362.24 or 4.4%)
£: $1.5230 (up 3.19¢ or 2.1%)
£: €1.168 (down 0.71¢ or 0.6%)
Oil: $58.19 (up $5.77 or 11.0%)
Oil: £38.21 (up £3.05 or 8.7%)
Oil: €42.67 (up €3.16 or 8.0%)
Gold: $907 (up $22.5 or 2.5%)
Gold: £595.64 (up £2.35 or 0.4%)
Gold: €665.09 (down €1.59 or 0.2%)

Big increase in the price of oil (sign of confidence), in the UK stock market (given that, in dollar terms it went up almost 7.5%) and several other indicators of economic well-being.

Despite this, you cannot say the worst is over. A similar rally occured in 1931. Only time will tell when this is over, but last week was 4th in a row where the FTSE rose, and the 8th in 9. Fear is passing, perhaps giving the current market levels a better scale of realism, as the "panic" of February seems to pass. Of course, come June, we might find a different story.

ECB still throwing stones

Imagine this crisis as a plane bombing the global village (which here is represented by an actual village). It approached the US first (I guess their house overlooks the town from the side from which the bomber approached, but that isn't important), and they threw everything they could at the situation, starting with dramatic cuts in interest rates (from 4.75% in September 2007 to 0-0.25% in December 2008, where it has remained ever since). It is not zero precisely due to technical difficulties with maintaining rates at that value (what they set is a target rate). They have since bailed out the banks (TARP, TALF and various other programs) culminating (or perhaps not) with the stress tests that most of the leading banks passed, according to reports today. They also had a massive stimulus bill in their budget, acting as a boost the economy. This, in my metaphor, amounts to firing every available anti-aircraft weaponry at the plane.

In Britain, we were slower to acknowledge the threat. In July 2007 rates were raised to 5.75% and only started dropping in December 2007, finally reaching 0.5% in March 2009. We lead the way on "saving the world........'s banks" and also had a "stimulative" budget, running a whopping 12% deficit for two years. This amounts to using all available anti-aircraft weaponry, except starting with lower stocks. Consider also that Gordon Brown did much of the shouting about the peril we were all in.

In Europe, they are still throwing stones. The ECB started cutting rates in October 2008 from 4.25% and are STILL cutting, and in a position to cut rates. Today they went from 1.25% to 1%. Given that European economies are suffering every bit as much as British and American ones, it beggars belief that the ECB hasn't done more, sooner. Euro-zone governments have been less forthcoming in their stimulus packages too, although in Ireland's case it is because potential lenders won't give them any money. They must be assuming that the Americans, Brits or possibly the Japanese, Chinese or others will shoot this plane down for them. Put simply, they aren't doing their bit to help defend us all from a decade of penury.

Cameron campaigns for BNP

Cameron urges 'vote for change'
"enough is enough"; tell Gordon Brown "what you think of him"; "letting our politics descend into a quagmire" and a few other incendiary quotes are listed in the BBC article.
Audio is available here

Why printing money doesn't necessarily cause inflation

Paul Krugman, most recent Nobel laureate for Economics, shows on his blog a lesson from Japan on how increasing the money supply, even by very large amounts WILL NOT CAUSE INFLATION IN A LIQUIDITY TRAP. The key graph I'll include below.

Whilst during a period of inflation, such a monetary expansion would have made things much worse, in a situation like Japan's since 1990, or the Western world's since last summer, it is all you can do to prevent massive, destructive deflation.

As ever, the Onion knows the way forward

Nation Ready To Be Lied To About Economy Again

Includes such gems as:

"[A]n overwhelming majority of citizens said they believe that, during these
extremely uncertain times, our leaders have a responsibility to come
together,
sit the American people down, and lie through their teeth about
everything from
misappropriations of taxpayer dollars to the severity of the
credit crisis."

Or,

""Please, treat me like a child. Treat me like a five-year-old," Sacramento
resident David Cooke, 64, wrote in a letter to Congress."

This will almost certainly be quoted by other, more respected Economist bloggers. I'll edit this post to link to them, then.

Toxic assets

Sorry, but it had to be done.