tony's blog

Thursday, May 13, 2010

When markets get things wrong!

It doesn't happen frequently first of all. Indeed, it’s fair to say the market's collective wisdom is far more perceptive than the views of those who individually constitute it. But from time to time it does get things wrong, losing touch with the real economy of people.

There is form for this. I am sure the credit crisis will be taught in years to come as yet another example of boom and bust along with Tulip mania in the 18th century and the South Sea bubble in the 19th century to name but two.

On a lesser scale but prominent to city watchers nevertheless, was the prediction of the bond markets on election night that a Tory majority was a racing certainty – even in the face of bookmaker odds and Exit polls. So what should we make of clamour among investors that a strong stable government is what the UK needs as soon as possible lest we all go Greek overnight?

The history of UK economic misfortunes is littered with self fulfilling dark prophesies from the markets but with their recent track record you can forgive people for not taking them as seriously as perhaps they should. Financial Services has burned too many bridges of late with the general public. Our politicians have been reminded to whom they are accountable and there is need for the newly formed Con-Lib coalition to prove itself to the people pretty quickly.

Having said this commentators readily admit that the chaos in Europe is affecting markets far more than the seemly transition of power here. Indeed our politicians are behaving in a way you certainly could not guarantee of the markets - it’s all very grown up.

The ongoing misfortunes of our European neighbours are more serious than the transfer of power at home. After all, prior to the election, all the parties (and electorate) were already committed to cuts and reducing the deficit. The arguments now are about timings and priorities, not the need to deal with it. The markets will continue to point out that this instability is difficult. What do they want, an easy life? Time to earn their corn methinks! The message to the markets is, we hear you but wait your turn.