The three witches

6 October 2011

The three witches

For anyone who didn't catch my end of quarter review on Money Channel last Friday, here's the transcript: It's been a real roller coaster quarter. Even if you look at just yesterday's trading in the States, we saw the markets open up 260 points simply because in Europe, Germany had approved a bill that I think most people always thought was going to get approved, and actually it doesn't really do anything about fixing the structural problems, but it delays the problem - we don't have to have a big fight about it today; we don't have to make Greece default today. It doesn't fix it, but at least we can ignore it for another few days or maybe a couple of weeks, and that sent the markets shooting up 260 points. Then they came flying down around 350 points, on the Dow Jones, so it was 100 points down. Then just in the last hour of trading it shot up another couple of hundred points into positive territory. And this kind of volatility is really extreme. Just as for the Hang Seng a 21% loss on the quarter is extreme. That kind of intra-day volatility almost looks like an oscilloscope reading of your heart beat on the screen in a hospital. It almost looks like that. It doesn't really know which way it's going, and I think there's a problem that markets are looking for direction. They're terrified about all the bad news but they're hoping for good news, and they're really looking for direction. All of this is just getting exaggerated by a lot of effects like the fact that we're reaching the end of the quarter (and month and week - triple witching!), but also a lot of the electronic trading, the high frequency trading that goes on in US markets in particular is just exaggerating it, so when we get a lot of volatility that's coming in because people don't know what the economic environment is and what the investing environment is, that's really just getting magnified and getting exaggerated by things like the high-frequency trading right now.It doesn't seem very fair that emerging markets have been so affected. A similar thing happened in 2008, and what we saw then was the Asian and emerging markets actually in some ways took a harder pounding even though they were in good shape. If you look at Thailand's balance sheet, it's actually in pretty good shape. The sovereign debt levels are under control. Reserves are at pretty comfortable levels. The currency looks strong because of that. The trade figures actually look pretty strong. Exports remain ok despite the appreciation of the Baht over the last decade. Everything here is actually pretty strong, and yet places like Thailand were the places that really got badly beaten up in 2008. One reason for that is largely to do with capital flows. Whenever we see any form of fear or panic, people do tend to rush back into the global reserve currency, which is the US Dollar. They tend to rush back into the risk-free asset, which, even despite the downgrade, is still the US T-bill, so I think in uncertainty people go looking for safety, and whether it makes sense or not, the knee-jerk reaction is to go and buy T-bills. I think that's the first problem.It's also something of a triple-witching problem that Thailand's facing right now because the second issue is that it looks like there's a capital flow issue. It looks like there's actually, bizarrely, a shortage of US Dollars in the world. They've been producing so many US Dollars over the last three years, it seems unbelievable and inconceivable that there would actually be a shortage, but the problem is so much of this new capital is locked up in US bank balance sheets and is not being lent out. The velocity of money, the circulation of money is really really slow, so even though more money is being created, it's actually not being used, it's not being circulated, so in emerging markets or in any markets where we actually might need Dollars to go and settle Dollar commitments, there's a real shortage of dollars, and that's something that's started to impact the exchange rate, which is why we've seen the Baht pushed from just under 30 to somewhere close to 31 ½ now. The third problem is the fear of Chinese slowdown - we're looking at that right now and Chinese policy responses to the headwinds facing the world's second largest economy will dictate immediate market direction, globally, for China, for Asia and for Thailand.To watch the piece, please visit http://www.dcs-digital.com/moneychannel/list.php click on News@ 10.00 P.M. and then the date of the broadcast (30th September) and advance the slider to around 53 minutesEnjoy your day!

Paul Gambles