Market "Carnage"

The More Things Change, The More They Stay the Same

The Sage of Omaha, one Warren Buffett has a useful analogy to describe the antics of sharemarkets.  Mr Market, says Buffett, suffers severely from bi-polar disease.  One day Mr Market will show up radiating ebullient confidence.  He will avidly buy shares at whatever price, because there's endless blue sky ahead.  But the next he might show up thinking Armageddon has definitely come.  

With Britain's vote to exit the European Union, Mr Market entered the gloom of depression.  Stock markets tanked.  Down, down, down.
 But, as always, those investors attuned to Mr Market's affliction, pricked up their ears, opened their eyes, and thought that some great bargains might be found.

Roughly US$2 trillion was wiped off global stocks after Britain's shock vote to leave the European Union sparked carnage in sharemarkets from New Zealand to London.  In case you're having trouble getting your head around that - two trillion is two thousand billion. And remember, one billion is one thousand million.  Wall Street had its biggest sell-off in 10-months overnight, with the S&P 500 share index dropping 3.6 per cent and the Nasdaq plunging 4.1 per cent. [NZ Herald]

One of the reasons for the strong reaction was that Mr Market had, whilst in a manic phase, persuaded himself that Britain was going to vote Remain.  Therefore investment assets had risen in price, anticipating the beckoning blue skies.  Even the bookies--the sharpest pins in the cushion, we were told--were pricing in a rejection of Brexit.  So much for bookmakers reading the entrails.

But no.  Mr Market crumbled.

The surprise result sent markets into a state of flux, prompting concerns about the outlook for the world economy.  Britain's pound plunged to its lowest level against the greenback since 1985 yesterday before making a slight recovery.  The big British bank stocks took a US$100 billion battering, with Lloyds, Barclays and RBS plunging as much as 30 per cent, although they cut those losses nearly in half later in the day.

Investors sold riskier assets such as shares while seeking refuge in the US dollar and other safe havens such as gold and US Treasury bonds.

But maybe Mr Market is seeing risks well beyond Brexit.  After all, the world is awash with funny money.  Quantitative easing has flooded the world with coin.  A good deal has filtered its way into global stock markets and debt markets over recent years.  Meanwhile, economic growth and productivity on Main Street has remained startlingly anemic.  Mr Market had long been in a manic phase unrealistically seeing bright blue skies everywhere.

But the resulting market carnage over the Brexit vote does not capture the actual effects of a British exit from the EU.  It's not anywhere near that bad.  So if markets retreat and stay that way, it will not be due to Brexit but to factors far more substantial and systemic.  Like rising debt levels of both government and non-government sectors in the West and in China.  If so, it will be yet again a "recession we had to have".   Alas, some things never change.