US and European consumers do not want to come to the party
Can one imagine how unmanageable the Namibian capital market would be if yields on government bonds came down by 11% on one day, only to jump up more than 9% the very next day. This is what happened to German Bunds this week but over there the capital market is so huge, gyrations like this, last only a fleeting moment.
Granted, daily moves in the capital market are not a big concern. It usually only features on the news radar when bond yields improve or deteriorate substantially over a number of quarters, thereby impacting the portfolios of long-term investors. But moves exceeding one percent on a daily basis are typically regarded as excessive, let alone moves exceeding ten percent.
Volatility in the American capital market was equally severe but the huge intra-day swings tended to be neutralised by subdued trading later in the day, on almost every day this week. Still, the cost of American government debt improved for the bond issuer, i.e. the American government, coming down to just over 2% after it dipped as low as 1.9% as some point during Wednesday.
This is one of the idiosyncrasies of the bond market one must not try and fathom but simply accept as fact. When yields increase, it is good for the investor in the form of a higher return. When yields decrease, it is bad for the investor but good for the issuing government or institution. This is just the way bonds work.
Regardless of the technicalities of bond trading, the capital market remains arguably one of the best indicators of general economic wellbeing or malaise. And when the largest bond markets in the world produce swings off the charts, then it is a clear indication of nervousness on the financing side. Bond yields come down when investors flock into this perceived safe-have instruments for the very simple reason that everybody wants them. Bonds are then described as becoming more expensive. The reverse is also true. Bond yields improve when investors relinquish their positions, liquidating their holdings with the result that the diminished demand causes the yields to increase to compensate for the (perceived) increase in risk. Bonds are then described as becoming cheaper, i.e. the yields improve, as happened with Italian and Spanish bonds this week.
Extreme volatility in both equity and bond markets returned with a vengeance last week, and it has not let up since. There must come across my desk at least four or five reports every day, analysing all angles of market events of the past two weeks. Fortunately, I am in the position to eye all these unpredictable, unstable unfoldings from the luxury of my office very far away from Europe and the US. But distance should not lull me into complacency as the one thing I learned from the 2008 financial crisis, is that eventually it strikes us as well.
When I read the many opinions of so many analysts, I can not help wonder how much common sense is actually required to realise recent events are just a natural outcome of growing financial instability. Five years ago, astute analysts warned, or should I say, made the common sense observation that one can not borrow oneself out of debt. Then came various financial machinations by central banks to try and prove this fundamental premise wrong. What followed was the new lofty levels of equity markets despite all indications to the contrary regarding the health of the global economy.
Another telltale sign of the inflated level of asset prices, is the reluctance of American consumers to join the spending spree. American jobless claims data indicates the lowest level in many years, yet consumer spending contracted marginally in September. Now that is an anomaly if ever there was one, and I assume it is also a nightmare for central bankers in the US as well as in Europe, where the consumer picture is even more dismal.
It is not possible to give an accurate, or at least safe, prediction of how long the turmoil will persist. In Europe, the ordinary person has been living on a knife’s edge for the past five years and I do not wish that uncertainty about one’s own financial future, on anyone. But I think all the attempts at inflating over-indebted, bloated economic structures, are futile and will remain so until a majority of individuals in both Europe and the US, realises debt can only be good if it is productive.
I am also under the impression that reluctant consumers have been seared so badly in the financial crisis and its aftermath, they will continue to shun the spending party. The powers that be do not realise what harm they are causing the developing world, and while I am all for stability coupled with responsible growth, I also realise this will not happen as long as the leading economies remain stuck in survival mode.