Yesterday's breakdown in the London Stock Exchange was a fitting metaphor for the state of the entire financial system. As one problem is apparently solved so another rears its ugly head.
The Federal Reserve flew in to 'save the planet' by nationalising Fannie and Freddie, but UK investors couldn't even get in to sell their rebounding banking shares, because the LSE computers imploded at the vital moment.
As trading finally restarted, London joined markets around the world in the relief rally. But anyone who genuinely believes that Hank Paulson's move to guarantee the US housing market is the end of our woes is kidding themselves...
The stock market party looks a little premature
"Today's meltdown from the LSE couldn't have come at a worse time," said Sejal Patel, a London-based trader at CMC Markets. It's all a bit of a disaster for the idea of the all-singing, dancing, 24-hour trading, etc, second-biggest market in the world that on one of those days it really needed to work properly... well, er, it didn't. "Pretty poor", said Simon Denham of Capital Spreads.
Exactly. But sadly, also typical of today's financial systems. Look at the US mess. The American property market seemed to be solid enough when everyone was making loads of money. But there was a huge fault line running right through the house.
Emboldened by Fed chief Alan Greenspan and his never-ending supply of cheap money, lenders and borrowers threw common sense out of the window, dishing out vast sums to people who had no hope of repaying. As a result, the works have been completely gummed up by a near-$550bn subprime write-off, said S&P last Friday - and the end total could prove even higher still.
So the US authorities jumped to the rescue of Freddie and Fannie with taxpayers' cash. While the first-up 'expert' view is that nationalisation is good because it'll re-establish some stability, the fact that this has happened pre-election (as my colleague John Stepek pointed out yesterday (see: The Fannie and Freddie bail-out: bad news for us all)) shows just how bad things are. And now that the risks have been dumped on the public, it will be much harder to hide the losses.
The move isn't likely to help US house prices, because it won't make life easier for millions of Americans struggling to repay mortgages. It won't reduce the massive stock of unsold American houses - 4.7m at the last count and the equivalent of over 11 months supply, roughly twice a 'stable' market level, according to the National Association of Realtors. It won't cut unemployment, which has now climbed to a five-year high of 6.1%, nor stem foreclosures, which at 2.75% of all home loans are at their highest since records began 29 years ago.
So the stock market party looks a little premature. And what's more, European traders shouldn't be cheering either - eurozone companies are facing a whole other set of problems.
Europe's companies have been spending more than they earn
One of the best barometers, eurozone consumer confidence, has nosedived within recent months. That suggests that the downturn in annual output, which shrank in the second quarter for the first time since the single currency started life 10 years ago, is the start of a lengthy trend.
And now lots of corporate concerns are building up, too. "European companies may be living on borrowed time", says Simon Kennedy at Bloomberg. "A decade of investing more than they've earned in profits has loaded corporations in the 15-nation euro area with debt, leaving them a thinner cushion than their US and Japanese counterparts as the world economy slumps".
In other words, eurozone companies have been living beyond their means. The shortfall between profits and investment for Europe's non-financial corporations rose to 4.5% of annual output last year, reckons Citigroup, compared with 3.6% for their counterparts in the US. Take out companies in Germany, where earnings still outstrip investment, and the gap swells to 6.6%.
It all means that Europe's non-financial companies are burdened with 5.3 trillion euros ($7.6 trillion) of debt, equal to about 57% of the euro-zone economy, up from 48% before the 2001 slowdown and compared with 46% in the US, according to the Federal Reserve and the European Central Bank.
Enough figures. You get the picture. As Europe's companies feel the debt pinch, so will we all. "The size of the debt imbalances makes it very difficult to envisage a strong euro-zone economy over the next year or so," says Dresdner Kleinwort's London chief economist, David Owen. "It increases the risk of recession." Deutsche Bank analysts agree, predicting that investment will shrink in 2009 for the first time in seven years, so that the eurozone's economy will grow just 0.1%.
And the cause? Too much cheap credit, of course, says Deutsche Bank. European companies are now "under attack from both sides''. Profit margins are being squeezed by slowing demand, high fuel costs and rising wages, while at the same time banks - once so keen to lend - are now trying to rebuild their own balance sheets by tightening loan standards and demanding higher interest rates.
It's no surprise that eurozone manufacturers' confidence dropped in August to its lowest level since May 2005, and that production expectations were the weakest in almost seven years.
This is a great opportunity to sell
It all adds up to a shedload more pain, with less investment and fewer jobs across Europe. As for share prices round the world, yes, they might rally for a day or two as some 'short' traders - i.e. those who had sold shares with the intention of buying back lower down - have had to close out their positions, prompting a temporary rally. That's a good opportunity to dump any retailers, property stocks or banking shares you're still holding on to.
But don't be fooled. That short-term fix across the Atlantic won't help Europe in the slightest. Nothing has changed, apart from US taxpayers being loaded up with a long-term potential mega-bill.
After recovering from a breakdown which halted trading for more than six hours, UK shares ended Monday sharply higher, with the FTSE 100 index climbing 3.9%, 205 points, to 5,446. Banks were among the top gainers after the Fannie and Freddie takeover, while oil stocks were also higher on fears that Hurricane Ike will shut down production in the Gulf of Mexico.
In Europe, shares were also higher, with the German Xetra Dax up 2.2% to 6,263 and the French CAC 40 gaining 3.4% to 4,340.
US markets also ended higher, with the Dow Jones Industrial Average rising 290 points to 11,510 and the wider S&P 500 gaining 25 points to 1,267. The tech-heavy Nasdaq Composite gained 13 points to 2,269.
But overnight the Japanese market gave back some of yesterday's gains as traders rapidly realised that the bail-out isn't going to cure the slowing global economy. The Nikkei 225 fell 1.5% to 12,439, and in Hong Kong the Hang Seng slipped 2.2% to 20,328.
This morning Brent spot was trading at $101 a barrel, spot gold was at $799, silver at $11.97 and platinum at $1,305.
In the forex markets this morning, sterling was trading against the dollar at 1.7571 and against the euro at 1.2441. The dollar was trading at 0.7084 against the euro and 107.75 against the Japanese yen.
And this morning, the Royal Institution of Chartered Surveyors reported that house prices continued to fall in August. The number of surveyors and estate agents reporting falls exceeded those reporting rises by 81 percentage points, compared to 83 in July. Average sales per agent were down to 12.7 in the past three months, the lowest since the survey began in 1978.
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