Volatility choses direction: down

This is not a pretty picture:

 Index  Last  Change
FTSE 100 5,393 -3.43%
DOW 11,384 -4.31%
S&P 500 1,200 -4.78%
FTSE Eurofirst 300 992.72 -3.39%
Nikkei 9,296 -3.77%

but it is a true one and overnight things got worse. In fact it prompted the FT to change their main title from “global stocks sell-off accelerates” to “global stocks sell-off deepens”. This must be serious and it is.

At times like this there are few things that matter.

First, how we got here? This is an easy one. We have been here, in a global slump, since 2008.  What has happened was that private sector demand was replaced by government demand and losses of the private sector transferred to the government. All we see today is just the result of markets, finally, punishing governments for their terrible solutions since 2008.  Especially the EU leaders, whose stubbornness to deal with the sovereign debt problem swiftly has put in danger the entire euro project.

Still there is one more issue on the table since 2008: China. There, the excessive spending to build ever and ever bigger projects has started to create cracks in the market economics Chinese style. Inflation is a real threat and attempts to cool it will lead to sub par growth for China which will spell trouble for commodities prices and global growth.

Second, is this the bottom? Here the answer is always tricky.I would go with it depends. I know not a surprise answer coming from a guy with economic training. But here I do believe that it depends. Especially on two things.

Short term the main issue to follow are the data. If the data come soft (today’s labor data in US is one such information needed) in the next few weeks than this is not the bottom. And the stars are aligning that way since even export driven Australia has seen it’s growth forecast lowered last night and expects lower inflation. *For the traders (and former colleagues) out there tread with care today. It might get real bumpy.

Longish term, it all rests with the politicians and their decisions.  I am not sure what new schemes they will come up with but few things I can guess: there will be (as said by me continuously) a debt restructuring in EU that will include a big name like Spain or Italy, China will slow down and  hopefully not get to a halt, we will have higher taxes across the globe and thus subdued growth for few years ahead.

How does this impact Romania ( I live here, currently, after all)? The second wave in the current recessionary environment will impact Romania. There is no doubt about it in my mind. If you remember in October 2008 among the chorus of analysts and politicians claiming Romania will be spared from the wrath of global market I was alone in saying the opposite. And this time will not be different. Well, a little different as we got a bigger government debt and weaker, yes much weaker, banking and private sector.

The channels through which we will feel this slowdown are the usual and then some. For the “usual” I refer to external demand retreat which will impact revenues from export and depress further investments by exporting companies. Or the lack of funds available for investments in Romania which in the short term will push governments yields higher and long term will keep this economy below potential growth and still primitive. Or, and this might sting a little, the actual closing of few businesses in Romania which remained eternal promises, in terms of profits, for the investors behind them. I do not rule out here banks, yes I do expect few banks to get out of Romania and few to simply declare bankruptcy.  There is one way out of this, I hope they do not dare, namely the government nationalizes some subsidiaries of foreign banks.

However, the biggest risk I see and with really long term effects is a cocktail of NBR interventions to protect the RON and in the same time a nice global liquidity crisis for EUR and USD.  This combination will push money market rates on the local economy again to stratosphere with dire consequences for the real economy. This is the tsunami which second time (remember remember the October 2008) will be sure to push Romanian economy to shed some big losses.  But will Romania default? There is a big chance they will keep inflation high for a long time which in some books is described as a form of default.

I am sorry I am such a downer one week after we had such great fun with IMF and the President and whomever. As I see it they have their lies to tell and I have my job to spot them.




One thought on “Volatility choses direction: down

  1. “As I see it they have their lies to tell and I have my job to spot them.”

    Your last sentence made me laugh. Great job! I should find one like it too. )

    I found your blog today and I’m impressed by the quality of your posts so now I’m a subscriber.

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