Tuesday, July 26, was 10 days ago from this time of writing. Still within living
memory... so let’s take a brief walk down memory lane.
On Tuesday a week
ago, a barrel of crude oil, West Texas International blend, sold for just over
$100 on the New York futures market. The Nasdaq Composite Index was around
2,850, and the Dow Jones Industrials was roughly 12,750 – both of them just off
their highest levels in the long and powerful rally that followed the 2008-09
market crash. The Dow Transportations Index, widely viewed as one of the best
indicators of the current and future state of economic activity in the American
economy, was trading at around 5,450, slightly down from its all-time record
high of 5,600 hit earlier in July.
I repeat, the “trannies” made an
all-time record high last month. Across the pond, things were also looking good.
The Swiss stock market index was above 6,000, and the DAX index in Franfurt was
trying to regain 7,400, having been as high as 7,500 earlier in the
But things were not looking good that Tuesday, long ago, last
week. In Italy and Spain the bond markets were crumbling, and the shares of the
big banks were pulling the rest of the market down after them. Even so, the main
Italian index was above 19,000, and its Spanish counterpart had just fallen
below 10,000 points. The (second) rescue package for Greece, announced only a
few days earlier, was falling apart before it had even been put into
Now fast forward to Thursday. Around noon in New York, the same
barrel of oil could be had for $88. The Nasdaq had fallen to 2,600 points, but
that drop of 9 percent or so was relatively mild compared to its domestic and
foreign peers. The Dow Industrials hit 11,550, and the Transportations – which
always move further and faster – fell below 4,800 (that’s a drop of some
In Europe, however, things were much worse.
Thursday saw yet
another day of sharp falls in almost every European bourse. For comparison’s
sake, the Swiss index was below 5,300, and the German DAX was just above 6,400.
The Italian market was looking at the 16,500 level from below, and the Spanish
market was doing the same for 8,700. There was little variation between the
bourses, from Lisbon to Helsinki, despite the huge differences in economic
performance among the different European countries.
highlights the fact that what has developed, spread and intensified over the
last 10 days – indeed, over the past month or two – is a bona fide panic, which
has expressed itself, in the equity markets, as a crash. The mere fact that
markets went down day after day with barely a pause – in the United States for
eight successive days – is chilling testimony to the severity of the state of
affairs in the European and global financial system.
But the equity
markets are not the epicenter of the crash; they are merely the reflection of
it. The true financial epicenter is the bond markets, where Italy and Spain have
been literally driven out of the markets; both have now announced that they have
suspended sales of their government’s bonds, at least for the rest of August.
They have thus joined Ireland, Greece and Portugal as being unable to access the
markets – or having to pay so high a price to do so that they would rather not,
unless and until they have to.
Although these decisions are seemingly
voluntary, they are equivalent to an executive who resigns before his boss
actually fires him. They confirm, if confirmation was required, that the euro
zone – the European Monetary Union project – is collapsing.
incredibly, as the contagion rages and destroys one after another of Europe’s
bond markets – though not the British, which is the largest and most liquid –
the US government bond market has registered a phenomenal rise. Only a week ago,
the US was supposedly on the brink of default, thanks to the extraordinary
obtuseness of its political leadership.
Now, by dint of granting itself
the right to borrow trillions more and making vague and almost meaningless
promises to cut its spending, the US has apparently regained its role as global
safe haven and attracted huge sums into its government bonds – although, as
things stand, the chances of Uncle Sam repaying its 10-year and 30-year bonds
are doubtful, to say the least.
How, then, is the rise in US Treasury
bonds to be explained? The basic answer is that the big money managers – pension
funds and the like – simply have to put their money somewhere, and, at the end
of the day, there is no market that offers the size and liquidity that
characterizes the US government bond market. The next-biggest market is Japan,
where yields are even lower than in the US – and the number three is Italy… firstname.lastname@example.org