The contagion touched nerves around the global markets in many angles; from the collapse of the commodity prices, crushing stock markets and the pains of discovering seasoned and polished fraudsters running ponzi schemes such as Bernard Madoff who had thrived under the veiled tranquillity of excess global liquidity and unimaginable poor regulation. (A ponzi scheme is a fraudulent investment operation that pays returns to separate investors from their own money or money paid by subsequent investors, rather than from any actual profit earned)
Lessons have been learnt, and the syllabus on investment markets will forever have core topics in explaining why “markets don’t roll on good times forever”.
The commodity prices recovering from their floors coupled with the optimism from the green shoots seen in the recovering global stock markets, and the sight of big global banks returning to making profit means therefore that men shall not allow markets to fail forever; forget what they preach in calm weather. The big hand of politics will always move to tamper with the capitalism concept of creative destruction.
Of course investors learn new lessons every day, but the biggest lesson learnt during the last 50 years is that governments and central banks shall always keep printing money, at times under the guise of “quantitative easing” to rescue failing markets.
The textbook theories and please-the-gallery guidelines about policymakers not intervening in free markets to guard against moral hazard shall, as it has been proven at a grand scale in the big world economies, always be selectively used, whilst they will be discarded on the basis of “this time it’s different” pretext.
Didn’t the Bank of England warn against bailing struggling banks in September 2007 after the European Central Bank, the US Federal Reserve and the Bank of Japan had started opening valves of liquidity in August of 2007 to ease the market crunch and save banks from collapsing?
Yes it did, reading from the same verses it thought were from the common banking Bible agreed ages ago by everyone, including the IMF. Albeit the verses being in bold print, the moral guidance was discarded in mass. Everyone, including the IMF, joined the new chorus, trumpeting the cause for decisive market intervention to stop the markets from collapsing.
Investors need to understand that stock markets, being the barometers of economic and political confidence, shall always be protected to ensure lavish perpetual flow of credit in economies during times of severe economic stress.
In such times, interest rates will therefore always be slashed to near zero levels to ensure that those with cash will constantly feel stupid in keeping the cash in the banks for safety reasons. Instead, they will always be compelled to invest it in any way to at least earn some return, in the process reverting to the same collapsed stock markets and pushing them up, and giving the false confidence that recovery would have dawned.
The banks on the other hand, in seeing the stock markets showing signs of life, will start letting credit flow in the economy once again, more so since the alternative return from risk free-assets would have been carefully managed to repulse them. Is it not the reason why the 3-month Libor is at 0, 27% per annum, whilst the 10-year US government bonds are at only 3, 34%? Yes it is, to chase banks from keeping liquid safe assets, but instead invest in the economy and let credit flow continue to give life to the markets, and of course give the impression of good policy.
The lessons are therefore clear. Opinions, no matter how long held, don’t stay constant forever. They will always change and drift to reflect the fundamentals of survival on the ground. A few years ago Private Equity funds wouldn’t gamble with African markets because of the views, mistaken at times, that the African markets drift very randomly due to poor fiscal discipline, civil wars, poor infrastructure, low incomes and so on.
Today, don’t the same aspects of poor infrastructure, low but rising incomes and inefficient markets create the huge appetite for PE firms targeting internal rates of return of above 25% in the short term in Africa, far better than the near zero bond yields obtainable today in Europe, Japan and the USA?
Whilst the syllabus on investment markets will forever have core topics in explaining why ‘markets don’t roll on good times forever’, it will have a mandatory conclusion on why ‘markets shall not fail forever as long as men live’. So where does this leave the investor?
The conclusion is difficult, but it’s clear that policy makers cannot be trusted to keep long held traditional opinions, whilst the ‘too big to fail’ political mentality will always reward and insulate excessive risk taking behaviour by capitalists and their managers on obscene performance-based reward systems. In the end therefore, investors will always be insulated from market failure, whilst volatility, although sometimes getting to extremes, will always smoothen in the long run in a defined positive trend.
lMuchemwa is an economist based in Tanzania.