Global Agenda: Worlds apart

Here in Israel, the financial markets are not influenced in the slitest by political crisis.

By PINCHAS LANDAU
May 4, 2007 03:40
3 minute read.
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The deepening political crisis has impacted the financial markets, pushing down both the stock exchange and the value of the local currency, as concerns mount that the dramatic improvement in the country's economic performance in recent years could be in danger. In Turkey, that is. Here in Israel, the financial markets have effectively blown a loud raspberry at the political crisis, by refusing to pay it any attention. The moves this week on the local stock exchange - mostly upward - have been determined primarily by what happened the previous day on Wall Street and, to a lesser but still significant extent, by news from specific corporations (Africa-Israel, Teva etc.). Many people, both in the financial sector and outside it, are at a loss to understand, let alone explain, this extraordinary disconnect between politics and business. To say that it merely extends the state of affairs noted during last summer's war in Lebanon is not an answer, rather the opposite: Why has the Israeli economy and financial system become immune to political developments and even to war? Before attempting an answer, let's broaden the picture. In Turkey, a leading developing economy, the reaction has been more "normal," although a far cry from the traditional huge volatility seen in that country (most recently, this time last year). But political paralysis is not a monopoly of the Middle East, or even of emerging countries.

  • France, as discussed in previous columns, is facing a crucial presidential election, which could go either way and have major consequences to economic and social policy. That has not prevented its stock market marching relentlessly higher in recent days and weeks.
  • The UK is impatiently awaiting the resignation of its prime minister although there, at least, the short-term succession seems clear. But the local elections underway at this time of writing may result in the UK losing the U part of its name and entering uncharted constitutional waters. You wouldn't know any of that from the trend on the London Stock Exchange or the pound sterling.
  • The US is in worse political paralysis than either Turkey or Israel because its system doesn't allow for early elections. Its economy is in worse shape than that of the UK and most other G7 countries. But the Dow Jones Industrial Average hits new record highs almost every day. In short, whatever is going on is actually a global phenomenon, of which Israel is only one example. But what is going on? There are three main explanations on offer, which may actually complement and support each other. The first is that in the globalized economy, governments don't matter so much, or perhaps even at all, so that domestic political crises have little to no impact on corporations or investors. The more globalized you have become, the less important your politics is - and Israeli business is now very globalized (ie Africa Israel and Teva). The second line of reasoning is that "economic fundamentals" are very good in Israel or wherever. In other words, growth is strong, inflation is low, unemployment is falling and the economic data generally is very positive. Given all that, the political shenanigans become background noise and have no impact. Lastly, there is the "money makes the world go round" approach. The world is currently characterized by very high levels of liquidity, meaning that cheap money is available in virtually unlimited quantities. This liquidity is driving markets and business activity generally, and is able to effectively neutralize the negative impact that would normally stem from political crises. It is, of course, possible that the explanation is none of these, but something else. But there is an explanation, because the phenomenon described above is too widespread to be fortuitous or flukey. To suggest that everyone has gone crazy is tempting, but unhelpful - because most people don't want to be considered crazy and because analysts are trained to assume (believe) that people act rationally. To suggest that all the people around the world who bought shares this week are irrational is, in effect, to demand that all analysts be fired because their tools are irrelevant or useless. You won't find many supporters for this thesis. One could argue, however, that people are behaving rationally in the current environment, although this behavior is irrational in the context of accepted behavior patterns. The availability of so much money, which effectively guarantees that there will be a greater sucker to buy your shares/bonds/ house from you when you are ready to sell, allows you the luxury of breaking all the rules of "normal" behavior. As an explanation, it makes sense - but propounding it won't make you friends, let alone influence people under the influence of liquidity intoxication. landaup@netvision.net.il

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