If communism’s worst moment was the fall of the Berlin Wall, capitalism’s was the fall of Lehman Brothers and the resulting financial meltdown.
In a matter of months the global market value of listed companies imploded from $54-trillion to just $28.8-trillion.
That is a lot of money — $26,2-trillion — to lose, critics pointed out. Just imagine all the good that could have been done globally with that money, fighting disease, combating poverty, providing housing and education.
But the stock markets are back to where they were before Lehman’s collapse.
Wall Street traded at a two-year high and the FTSE at a two-and-a-half-year high this week. The JSE was trading at a market value of $821-billion, twice its post-crash low of $400-billion.
There is nothing surprising in markets losing some of their value and then regaining lost value. This is what they do even though most participants would prefer less cataclysmic movements than those of recent times.
But what is noteworthy now is that the markets are roaring back while gold, which traditionally responds well to uncertainty, is trading at near-record levels of about $1 400
an ounce.
One factor driving this is demand by Chinese investors worried about inflation. World Gold Council figures reported by the Financial Times show that retail demand for gold in China jumped 70% in the year to September.
But the new-found love of gold is nuts, according to über-investor Warren Buffett.
“If you put all the gold in the world together, it would be 67 feet [20m] on each side and be worth about $7-trillion,” Buffett said, according to the Wall Street Journal.
“I could look at it and it would look back at me. I don’t view this as a good investment. I could buy all the farmland in the United States for $6-trillion and have $1-trillion left for walking around money. Buying gold is not an investment; it is an investment in fear,”
he said.
Gold may being driven by fear but the stock markets are roaring back even as the financial news continues to be dogged by uncertainty, especially debt concerns in Europe.
The headlines are full of the challenges the European Union (EU) faces — the European Central Bank is to double its reserves, EU leaders continue to plan a new financial rescue system for the eurozone and opposition leaders in Germany have called for the limited introduction of eurozone bonds to show the world that the EU’s economic and monetary union is irreversible.
But leading commentators are warning that the rescue packages put in place to fix Greece’s budget deficit and Ireland’s banking crisis are only prolonging the pain rather than fixing the underlying problem.
George Soros, writing in the FT, said: “The authorities are determined to avoid defaults or haircuts on currently outstanding sovereign debt for fear of provoking a banking crisis.
“The bondholders of insolvent banks are being protected at the expense of taxpayers. This is politically unacceptable. A new Irish government to be elected next spring is bound to repudiate the current arrangements.”
Soros said a second problem is that high interest rates on rescue packages make it impossible for the weaker EU members to improve their competitiveness vis-à-vis the stronger ones.
Economist Nouriel Roubini puts the issue more starkly. The private losses of the banks have been socialised through government bailouts, growing the debt problem which ultimately has to be dealt with.
The FT reported this week that yields on Spanish debt approached euro-era highs amid concerns that the eurozone’s fourth-largest economy could yet be forced to seek an emergency bailout.
Spain managed to sell €2,5-billion in short-term debt but had to pay a percentage point more in interest than just a month ago.
Another key economic indicator, oil, is trading at a robust $90 a barrel.
The rand is a muscular R6,80 to the dollar, the JSE is at heady heights and its fear index, the South African Volatility Index (Savi), is low.
Moneyweb’s Julius Cobbet writes that, while the Savi has risen above 50% at times of market turmoil, it is now relatively benign, in a low-stress range below 25%.