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Market black holes and the real economy

Terry smiling headMaybe those scientists who claim to have found the answer to how the universe was created could lend a hand to working out what is going on in global equity markets.

There are certainly a lot of gravitational waves and black holes in investors’ portfolios and today’s lift in London shares may be only a temporary relief in what is turning into a long journey into the unknown.

Some £35 billion was wiped off FTSE100 company values yesterday alone and with so many indicators in the red it seems the ride will be a rocky one for some weeks, or even months.

But how does all this square with the real economy?

Some commentators fear a repeat of the 2008 crash, though the circumstances are different. There are worries that the banks, which are now at the epicentre of the decline, are still unreconstructed, carry too much debt and will struggle to make decent returns in a low interest, low inflation economy. Barclays has seen more than 30% wiped from its value since the start of the year.

However, the build up of debt is not on a scale that led to the 2008 meltdown, and the bank’s capital reserves are now in better shape to cope with another crisis.

A more acute concern surrounds the central banks – the Bank of England, Federal Reserve, European Central Bank – and their ability to convince investors that they really know what they are doing. Short-term flip-flopping on interest rate policy, and equally short-term changes in ‘guidance’ do not instil confidence. Nor do casual warnings of recession, as Federal Reserve chairman Janet Yellen hinted yesterday. Mark Carney, her counterpart in London, seems to change his mind about expectations at every meeting.

On top of all this is a slowdown in growth which in turn means there is too much oil chasing too few buyers. To that extent, the ending of sanctions on oil-rich Iran could not have been more more badly timed.

Yet the world economy is actually in good shape. China is still growing at 5-6%, India has just reported 7% growth, and the US remains – at least for now – in expansion mode. At home the CBI is among the latest to trim its forecasts for the UK, but only from 2.6% to 2.3% for 2016. Employment is rising, and unemployment falling. The low oil price is actually a good thing for many companies and for consumers.

British car manufacturing exports have hit a new peak and a recent KPMG/Markit Tech Monitor said the number of technology businesses in Scotland has risen by 43% in the last five years, the fastest growth in the UK outside London.

Pyreos, an Edinburgh-based infra-red sensor developer, has today unveiled a target to triple turnover from the United States within the next two years.  Dundee learning company Insights last seek announced expansion into the Asia market.

Examples like these suggest a disconnect between global stock markets and the real markets where things are made and delivered.

One problem is the way in which modern stock markets are now run on technical lines, rather than on the old fundamentals of company performance. Complex financial transactions and automatic trading play a big role in how they work. On top of that, hedge funds are said to be shorting a lot of stock, and they are being followed by other traders tracking the markets.

Of course, we all take a lead from how the markets perform and if they fall it creates a sense of panic and loss of confidence.

It will eventually correct itself as economic imbalances work their way through the system and traders are sufficiently persuaded that the bottom has been reached. It will create a big buying opportunity and those same financial mechanisms will kick-in to drive the markets upwards.

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