Traders' views - Spread betting

Sustained economic recovery is all about confidence

By , 10 Jul 2012

If only we find it amongst the pessimism...It is remarkable in many ways to think that we are about to reach the fifth anniversary of the start of the financial crisis, and to mark the occasion a number of fresh initiatives have been announced or put in place in an effort to steer us out of the gloom.

Interest rates have been cut in the eurozone and also in China, the Bank of England is pumping another £50bn into the UK economy and the Federal Reserve is anxiously applying continual stimulus measures to generate lower long-term borrowing costs.

It is rather like the world economy is in the operating theatre and surgeons are frantically trying to revive the flagging patient, telling everyone to “stand clear” as they apply each shock treatment to the system in an effort to bring about stability and an eventual recovery.

Despite all these measures, the one key element essential to a sustained global economic recovery is investor confidence, and until the mood changes from pessimism to optimism, it is going to be an uphill struggle for everyone.

If you want optimism, some analysts thought we would see a second great depression to mirror the slump of 1933, but to be comparable, the US economy would have had to contract by 27% and the jobless figure rise above 25%. Despite output falling and unemployment rising, the figures thankfully have not got close to mirroring events that followed the Wall Street Crash and there was actually, despite the scepticism, some early decisive action taken by governments that helped to avert a much larger crisis.

The UK Banking system was almost certainly within hours of shutting down the cash machines if it had not been for a last minute weekend deal that saw the government effectively prop up the system and bail out the banks, despite the public outcry regarding this move, the chaos that a mainstream bank collapse would have caused would have been far worse to contemplate.

The fundamental change that has occurred as a result of the global economic crisis is that policymakers have come to realise that all their financial models used to make predictions and market forecasts were no longer relevant in the current economic landscape. We had entered virgin territory and decisions were starting to be made on what was actually happening in the markets rather than what should be happening. A good example of this strategy was the US government allowing Lehman Brothers to fold and then realising that the decision threatened the entire banking system, so they quickly intervened to nationalise Fannie Mae and Freddie Mac, the iconic mortgage companies that were symbolic of American homeowners dreams, and then went on to rescue the insurance giant AIG, forced mergers of giant retail banks and provided guarantees on money-market funds.

All the decisions were in effect re-active rather than pro-active but the key was to spread confidence across markets that a collapse would not be allowed to happen and that US model was copied in Europe to avert a sovereign debt crisis.

The problem we all now face is trying to get into a positive mindset that the worst of the storm is over. At this moment in time British companies have accumulated a cash pile of £700bn which equates to half of the economies national output, so if we could just all convince ourselves to start spending and investing again, these companies would not be as fearful about releasing the cash and increasing their output.

We all generally like to take an optimistic view if possible on most things, so if that can be translated to generate sustained confidence that a recovery is picking up momentum, we would all see the benefit probably quicker than expected. If only we had the confidence to believe that the economy is picking up, it probably would.

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