Hong Kong skyline 311.
(photo credit: Courtesy)
Occasionally, the world works in a logical manner, so that developments in the political, economic and financial spheres fall into a clearcut and straightforward pattern that even housewives and children can understand and appreciate. This is obviously one of those times.
Take the overall global scene as a starting point. The dominant themes in the economic sphere are those of ongoing recovery in key developed economies and, in the developing world, of expansion. These themes are echoed in the financial markets, where we find equity markets continuing their two-year-old rebound from the crash and shaking off the brief bout of panic that was triggered by the Japanese earthquake/tsunami/ nuclear disaster.
This is very much what one would expect. After all, oil prices are approaching $120 a barrel in Europe and are about $105 in the US. This represents a hefty tax on consumers and a massive transfer of resources from productive developed economies to corrupt and backward oil-producing countries such as Libya, Iran, Venezuela, Nigeria and the Gulf states.
Furthermore, inflation is rising in almost all countries, eating away at personal income and wealth and aggravating already severe disparities between rich and poor – because poor people and poor countries are much more vulnerable to inflation, especially when this is led by food and commodity prices.
More generally, the political trends at work – revolution and violence across the Arab world, the imposition of spending cuts and austerity programs in many European countries – are strongly positive factors for both investors (owners of companies) and consumers (buyers of their goods), so it’s only natural for stock markets to remain buoyant in these circumstances.
Of course, not everyone can share equally in the benefits of this benign environment. Japan has suffered the worst month in its history since 1945, with the degree of both the human and economic damage unknown – indeed, still extending. Specifically, the situation at the group of damaged nuclear reactors is still fluid, in every sense of the word. Assessments of the immediate danger to the affected region and to the rest of the country, let alone the rest of the world, seem to change several times daily.
These factors help explain why the Japanese currency surged immediately after the disaster to record highs against the US dollar and why the Bank of Japan orchestrated a massive intervention conducted by itself and other leading central banks around the world, which succeeded in weakening the yen.
After all, the currencies of countries that suffer simultaneous multiple disasters do tend to strengthen, and when a country’s government and corporate sector lose as much credibility as did those of Japan over their fumbled handling of the disaster, it’s only natural for foreign investors to rush to buy that country’s currency and securities.
The shock waves from Japan were felt in Europe, too – especially in the export-dependent German economy.
But the sell-off in the German stock exchange and the brief bout of
weakness in the euro versus the dollar have largely been reversed. This
is as it should be, given the massive political defeat inflicted on
Germany’s ruling coalition parties and the consequent severe weakening
in the political strength of both Chancellor Angela Merkel and Foreign
Minister Guido Westerwelle, the heads of the governing parties.
Developments elsewhere in Europe provide further support for the
optimistic outlook implicit in investors’ behavior: the Portuguese
government collapsed last week, after failing to push through parliament
a further package of austerity measures. Portugal is expected to have
no choice but to apply for help from the European Union: be bailed out,
in a word. Its credit ratings have been cut twice this week, and it has
indicated it will shortly announce that its budget deficit in 2010 was
larger than previously reported. In short, the entire Greek syndrome is
playing out again, this time as farce...
Back home, Israel is basking in the fruits of its economic success, and
its financial markets reflect this happy state of affairs. Share indices
on the Tel Aviv Stock Exchange are once again near all-time high
levels, and the shekel is very strong. Anyone can see that this is
entirely justified because – in addition to the points mentioned earlier
(such as unrest across the region, high and rising oil prices and so
on) – Israel has very specific advantages. These include rockets falling
on civilian areas on a near-daily basis and other long-standing
security issues. But there are new issues as well.
Much the most important of these was highlighted in David Horovitz’s
column last week: the threat that a Palestinian state will be declared
and recognized by most of the world. This will open the way to a
sanctions campaign against Israel, with potentially huge impact on the
In light of these prospects, what else could savvy investors do other
than pile into Israeli shares and stock up on shekels? It all makes
perfect sense. Especially on April Fool’s Day.