SUMMARY. Did you spot the headlines last week on co-ordinated action by the world’s central banks to help the eurozone? This was not a solution, but it has bought a bit of time for politicians. This Friday (9th December) we will begin to find out if they are using that time wisely.
Did you spot the headlines last week on co-ordinated action by the world’s central banks to help the eurozone?
“The biggest coordinated show of international financial force since Sept.11 2001” said the Wall Street Journal. Sounds as if the central banks have finally got their act together? Perhaps not. This was actually a quote from December 2007, after which the US stock market fell 53% to March 2009.
Similarly with another round of coordinated action in October 2008. This time the stock market fell 34% to the 2009 low.
Such central bank action at best buys time, for others to come up with complete solutions to the underlying problem (too much debt and insolvent banks, both then and now).
Pimco’s Mohamed El-Erian thought you could look at that recent action in two ways. Either it is the first plank in the road to a comprehensive solution for the eurozone, which will culminate in the 9th December EU Summit. Or, they had to act as the global banking system was very close to seizing up in recent weeks; and this would have been assured by a result on 9th December which was more likely than not to be another disappointment. We will see very soon.
Looking back over the year, most stock markets were drifting sideways and up a bit until August; then the eurozone went into a tailspin and the rest of the world with it.
The UK stock market is currently down a little over 2% year to date, but has been much lower and within a few weeks could be much lower again. In contrast the better corporate bond funds have been steady throughout (now up in excess of 4%), and the absolute return funds (for example from Insight and Standard Life Investments) are up a touch, which is respectable after such a year.
As we peer into 2012 we hope for sharp falls. Yes this might sound bizarre, but a cleansing is required to deal with all of the eurozone uncertainty and get prices to levels which are uncompromisingly cheap. From that point we can all make decent returns from our investments.
Of course writing this ahead of the EU summit this Friday is dangerous! It is very unclear what might emerge. But Angela Merkel is perhaps the best guide. She has continued to stress in recent weeks that there is no quick solution. We would add that there is no painless solution, though this is lost on so many political leaders wanting re-election in 2012 (such as Sarkozy). Politicians and politics remain the most obvious risks as we enter 2012