The Revenge of the Markets

Keeping the fear alive

“I used to think if there was reincarnation, I wanted to come back as the President or the Pope or a .400 baseball hitter, but now I want to come back as the bond market. You can intimidate everybody,” said James Carville, President Bill Clinton’s political advisor.

The Russian stock exchange collapsed by 40% in response to Prime Minister Vladimir Putin’s scathing attack on Mechel, a steel-maker. And that was before Lehman Brothers declared insolvency, Merrill Lynch was bought out, and the US-government bailout of AIG dried up interbank lending.

On top of the Russian state-led dismemberment of energy companies Yukos, and BP’s Russian operations, as well as the war in Georgia, the Russian stock exchanged has lost more than 60% of its value since May.

Russia has halted trading almost daily to try and ease out the sell-off and pumped over $ 50 billion into its three largest banks to try and avoid a run. The Russian army may be able to scare its neighbours, but the markets are scaring everyone.

Over $ 3 trillion in value has been wiped off US exchanges as share-prices plunged; 15% of the value of US listed companies in a matter of days. To put that in perspective, that is twice the entire value of Russian-listed companies, and almost four times the value of all South African-listed firms.

As the terror has taken hold, investors are selling their shares the way that depositors withdrew their money from Saambou Bank back in 2002. No plan, just don’t be the last one standing when the music stops.

The markets have become profoundly, almost terminally, unstable.

Oil prices, which had risen as a result of shortages caused by substantive economic growth, have fallen dramatically. Not as a result of improved production efficiency, but through the expectation by manufacturers that consumer demand will fall, and that they will need less inputs, fewer staff and pay less wages. A cheaper pump price for petrol is not a sign of victory over inflation, but of the tremor waiting to hit employment.

Companies are doing their best to appear as boring as possible in order to avoid the attention of panicked investors who would use any sign of instability as an excuse to dump their stock. The clear winner has been Warren Buffett’s Berkshire Hathaway investment fund, which has actually risen by almost 5% in the past week. Buffett greeted the collapse of the last bubble over Internet stocks with the words, “We have embraced the 21st century by entering such cutting-edge industries as brick, carpet, insulation and paint. Try to control your excitement.”

Into the middle of the carnage steps the ANC and their internal squabbles that threaten to bring down the South African government. After over a decade of strict economic policies that have done much to make South Africa appear as stable and boring as possible to ensure that investors feel comfortable here, politicians are now doing an awful lot to attract attention right at the most inopportune moment.

A recent study by Carmen and Vincent Reinhart analyses the economic experiences of 181 countries from 1980 to 2007. They find that high capital inflows are associated with a higher likelihood of economic crises. “Bonanzas in developing countries are associated with procyclical fiscal policies and attempts to curb or avoid an exchange rate appreciation; very likely contributing to economic vulnerability... with more volatile macroeconomic outcomes for GDP growth, inflation, and the external accounts. Slower economic growth and sustained declines in equity and housing prices follow at the end of the inflow episode.”

In other words, the arrival of investment is not a time to celebrate and assume that the party will last forever, but the critical time for further economic reform and restraint.

By the time the ANC hierarchy realises this, their BEE shares may be worth less than the Zimbabwe dollar.