Global Agenda: Fundamentals

The Israeli markets will sink along with everyone else, but when the dust settles the positive fundamentals will still be there.

By PINCHAS LANDAU
August 2, 2007 19:42
3 minute read.
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No, this is nothing to do with hirsute religious fanatics - ours or theirs - or even clean-shaven ones from the Bible Belt. This is to do with economic fundamentals, which have been much talked about these past couple of weeks, as the global financial markets have been roiled by "the sub-prime crisis." Given the severity of the upheaval underway, enormous efforts have been (and are being) made to calm people down. Everyone from Finance Ministers to the captains of industry and titans of finance has been pushing the message that there is nothing really to worry about, because "the economic fundamentals" are OK. Indeed, not only are they OK, they are good. Good? They have never been better! These wonderful economic fundamentals are variously attributed to: the global economy; the American, European or whichever country is being discussed; the banking system or corporate sector of the said country or region; this or that large company. The spiel has been played out in Israel no less than in any other country so that, for example, a senior member of the local financial fraternity was quoted as saying that the Israeli share market ought not to be suffering hefty losses, since most of the big companies in it were in great shape, i.e. had "strong economic fundamentals." As a generalization, this kind of talk should be disregarded and even dismissed with contempt. Its overt aim is to dissuade panicky investors from selling their holdings and thereby make things worse - for the markets, rather than for themselves. More often than not, this aim is objectively desirable, because the panic is blind and the selling is unjustified. Nevertheless, no notice should be taken of this chorus of calmers-down since its primary motivation is the self-interest of the speaker and/or the organization that pays his/her salary. However, even a statement of reassurance made from the wrong motives may be true. A financial market, or markets in general, may be subject to panic selling for whatever reason, yet the economic fundamentals of a specific country or company may indeed be sound - and even impervious, to a greater or lesser degree, to the selling wave underway. This state of affairs cuts in both directions. On the one hand, the fact that the fundamentals are sound does not represent a reason NOT to sell - because the selling may be justified in the context of the market, irrespective of the inherent strength of the company or country. Conversely, just because a company's shares or a country's bonds or currency fall in price does not in any way mean that its economic fundamentals have deteriorated. This is the case with regard to Israel. The strength of the Israeli economy in recent years is not due to transient factors or to a cosmetic make-over. Israel's economic fundamentals are genuinely strong - much more so than those of the US, the UK and many other developed economies. The reason is not hard to find: the rapid growth here since 2003 has not relied on consumer spending and the growth in consumer spending has not relied on borrowed money. Israel is a surplus economy, meaning that its overall relationship with the rest of the world shows a surplus that is steadily rising. At the household level, Israeli households are not mired in debt and not hooked on consumer credit to maintain and expand their spending. American, English, Australian and other households are - which is why their economies are fundamentally flawed and vulnerable to precisely the kind of credit crunch that has now so spooked the global markets. The Israeli markets will sink along with everyone else, but when the dust settles the positive fundamentals will still be there. landaup@netvision.net.il


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