Stock Markets Tumble - Recession Ahead?

Reluctant Hero · Stock Markets Tumble - Recession Ahead?

Stock markets across the world tumbled today as the threat of recession looms ever nearer. Is there anything that can be done to avoid it, or is it simply a case of when it happens, not if?

http://news.bbc.co.uk/1/hi/business/7199552.stm

Global shares tumble on US fears

Global stock indexes, including the UK FTSE 100, have fallen their most since the terrorist attacks of September 11 2001 amid fears of a recession.
The FTSE 100 index tumbled 5.5% to 5,578.2, wiping £84bn ($163bn) off the value of its listed shares.

Indexes in Paris and Frankfurt slumped by about 7%, while markets in Asia, India and South America also dropped.

Investors questioned whether a recent plan to boost the US economy would be enough to avert a full-blown recession.

Last week the US government announced a financial stimulus plan which would involve about $145bn in tax cuts to encourage spending.

US markets are closed for a public holiday on Monday and reopen on Tuesday but other markets worldwide reacted negatively to the US plans.

Francis Lun of Fulbright Securities in Hong Kong said the falls stemmed from disappointment that the US stimulus was "too little, too late" adding that investors felt "it wouldn't help the economy recover".

'Panic mode'

The worry is that tax breaks and spending measures will not be enough to boost consumer spending in the US, because deeper economic problems remain.

In particular, the slowing housing market and problems in the sub-prime sector - which lends to those with limited or no credit histories - has contributed to a slowdown.

"We're falling back into the crisis of confidence in the financial sector," said Hugues Rialan, of Robeco France.

"The banks have been reassuring the market over their exposure to US mortgage-related investments, but now we realise there is nothing reassuring about it," he said.

Finance firms were among the main fallers, with Dutch ING Group, Germany's Allianz and Swiss Re all falling about 10%, while Royal Bank of Scotland shed 8%.

FTSE100 - WORST DAYS
20/10/87 down 12.2%
19/10/87 down 10.8%
26/10/87 down 6.2%
11/09/01 down 5.7%
22/10/87 down 5.7%

Many shoppers are struggling under higher mortgage repayment costs, prompting default rates to surge, especially among sub-prime borrowers.

This has prompted banks to tighten their lending policies after losing huge amounts of investments linked to the US housing and mortgage markets.

Dominique Strauss Kahn, the head of the International Monetary Fund, said the global economic situation was "serious" and that all countries in the world were suffering in the wake of a slowdown in US growth.

The state of the US economy is crucial for many of Europe's and Asia's biggest companies because it is one of their biggest export markets.

FTSE100 - BEST DAYS
21/10/87 up 7.9%
13/03/03 up 6.1%
10/04/92 up 5.6%
15/10/02 up 5.1%
25/07/02 up 5.0%

Any slowdown in demand is likely to hurt corporate profit growth and push share prices even lower, analysts have warned.

But some analysts took comfort from the prospect of falling US interest rates.

"If interest rates are cut to the extent we and others expect, the likelihood is that today's share prices will look like silly values in 12 months' time, if not before," said Mike Lenhoff at Brewin Dolphin Securities.

Global trend

Markets in China, India, South Korea, Singapore, Taiwan and the Philippines all fell.

In Mumbai, the main Sensex index fell 1,408 points, or 7.4%, adding to an 8% fall last week. Hong Kong's Hang Seng slumped 1,383.0 points, or 5.5%, to close at 23,818.9. Tokyo's main Nikkei 225 index fell 3.9%.

We're in the danger zone now

Bob Parker,
Credit Suisse Asset Management

Learn about the 'bear market'

Australia's benchmark ASX 200 index closed down 2.9%, or 166.9, points at 5,580.4, which is its lowest level for a year.

It was also the 11th consecutive negative day for the index, the longest losing streak in more than 25 years.

"People are certainly nervous about a potential recession in the US spilling over to the rest of the world," said David Cohen at Action Economics.

So far this year, Japan's Nikkei has dropped 13%, the Hang Seng is down more than 14% and China's main Shanghai index has slipped almost 7%.

azzuri

when, not if.

the credit crunch is taking hold. hang on, we're due for a bumpy landing...

best things to be holding just now are gold and cash.

Holebender

Stock markets are fickle things and there's a lot of herd mentality involved. The best thing is to take a long-term view rather than worrying about day-to-day fluctuations.

Still, I wish I'd offloaded some of my company shares when they peaked before Christmas.

William_Cleland

On the bright side the world economy isn't as dominated by the United States as it used to be so a deep recession there doesn't necessarily mean a global depression.

azzuri

Doesn't matter though, the global economy still looks to the USA to lead the way and we have shadowed their ecomony during the last cycle, meaning the same problems they have now will arrive on these shores during the next 12 months.

Seems like Gordon Brown's 'no more boom and bust' line was just a load of s***e (no surprise there!).

the root of the problem is the FIAT money system we have, it's just paper backed up with absolutely f**k all. The way the banks can just print their way out of trouble eventually leads to these scenarios, IMO we need to return to the days of gold-backed currencies.

Reluctant Hero

US Federal Reserve cut interest rates by 0.75% today. Clutching at straws is the expression that springs to my mind.

http://news.bbc.co.uk/1/hi/business/7202645.stm

Holebender

That's such an obvious panic move that it will only feed the problem, not calm it. Still, I imagine other central banks will be forced to follow suit now.

William_Cleland

azzuri

azzuri

Like any sort of spoof, the 'Daily Mash' report has more than a grain of truth in it,

Reluctant Hero

Looks like the Fed's announcement has done nothing to halt the slide on the FTSE. At midday, it is down 100 points.

Says they are looking for the Bank of England to follow the Fed's lead, but there is no way they will do that. I guess, for the FTSE, it will be a case of where is the bottom.

William_Cleland

So much for staying out of the Euro and having a "special relationship" with the Americans, something incidentally that the average American stares at you blankly about if you mention it to them. Smile

Here's what George Soros thinks is about to happen:-

http://news.bbc.co.uk/2/hi/business/7204159.stm

"I'm not looking for a worldwide recession," he said.

"I'm looking for a significant shift of power and influence away from the US in particular and a shift in favour of the developing world, particularly China."

Reluctant Hero

Good article in the Guardian about what it is like to live through a recession.

http://www.guardian.co.uk/g2/story/0,,2245165,00.html

William_Cleland

New experience for many of you. Smile

If you have a safe predictable job particularly in the public sector it's not that big a deal and life goes on as usual. Not fun to be unemployed, however, so the trick is staying on the right side of that divide possibly by taking a job you normally would give the body swerve.

Red Justice

It seems the US and global capitalist system has met yet another crisis perhaps too much reliance on free market economics. I am not strong on economics so I will have to give an overview of my assessment.

I think we are going to see higher inflation in Scotland and the Scottish tourist industry could suffer big time particularly from the US visitors. A recession will hit borrowers especially those with mortgages as interest rates wll increase in the longer term and the banks could put a further squeeze on lending. Certainly higher inflation is bad news for the poor and working class which would be exacerbated by increased unemployment.

But what should be done within the constraints of capitalism? As I say I am not an economist but I think the US has relied for a long time on a deregulated free market and may have to go for a more regulated economy like during the times of Jimmy Carter. The US have some big problems in the housing market, using lower interest rates to chase all kinds of investment like mortgages, too much heavy taxation like the UK and probably like in Brown's Britain too much past reliance on credit.

The problem as I see it won't be solved by a shot in the arm like the US has done by cutting interest rates. The economic problems are needing long term solutions. Like ways of getting money in peoples pockets and new forms of investment like in green infastructure. I would like to see real investment in Scotland to boost our economy and us not have to rely on a false British free market economy. But we need a more regulated economy and infastructure investment. Why not start a massive building programme in public housing and get the construction industry going again? That is real investment not false investment like Brown's economics were particularly before he was PM. As a socialist I am for planning in the economy and tangible investment for infastructure. Financial markets for me are obscene when left to their own devices, create grotesque inequality. They don't regulate themselves so human beings need to regulate economies by real investment which would be best served by socialist planning. I am afraid the Scottish people are going to have to ride this longer term recessionn storm as they can often be their own worst enemy. The Murdoch press, capitalists or politicians in Westminster or London will not provide them with answers for this financial capitalist mess. As for the rest of the world then without a Soviet Union but still even with economies like India and China, Uncle Sam is the largest big gun and wants to rock as the world imperialist in wars and economy as the bourgeois liberals in the West will know and think.

As I pointed out I am not an expert in this but sense the capitalists in the US and London really need a long term recovery programme for the economy and not a mere sticking plaster like the US and Bush has done by a mere cut in interest rates.

As for Scotland we should break with London and create an Independent Socialist Scotland that can reinvest big time in infastructure for the Scottish economy. The choice lies with us Scots sink or swim over the next number of years.

agentmancuso

Holebender

"Red Justice", it's better to hold your tongue and be thought a fool than to open your mouth and prove yourself a fool. Really, you would have been better off just keeping quiet than posting the drivel above.

Red Justice

Reluctant Hero

The Fed are really going to town on US interest rates, cutting another 0.5% off it today! This is just 9 days after they reduced it by 0.75%. Think this quote sums this move up

azzuri

Bye bye toilet paper dollar... Wink

William_Cleland

They must be extremely desperate to get the Republican elected in November.

Holebender

It was a Republican who made this mess. Why would they want another one?

William_Cleland

Hilary Clinton winning combined with Democrat majorities in the House of Representatives and Senate would be a very interesting scenario. Reforms like universal health care would be very much on her agenda and that verges on communism as far as the type of people who run the Federal Reserve are concerned.

http://www.cnn.com/2007/POLITICS/09/17/health.care/index.html

Then there is the whole question of the neo-con agenda in Iraq...

Holebender

I'm sure as far as the Fed is concerned "it's the economy, stupid". They don't care the colour of the rosette, only the economic competence of the incumbent.

William_Cleland

It would be nice to think so but America doesn't work like that.

http://www.youtube.com/watch?v=kJ4SSvVbhLw

Reluctant Hero

The FTSE 100 took another hit today, dropping over 200 points on the news about Bear Stearns. Is there an end in sight, or are we in a spiral heading for recession?

http://news.bbc.co.uk/1/hi/business/7300017.stm

Markets rattled by bank worries

Markets worldwide recorded heavy losses in reaction to the emergency bailout of US investment bank Bear Stearns over the weekend.
Wall Street had a rollercoaster session, with the benchmark Dow Jones average ending in positive territory after tumbling in early trading.

European shares suffered most, with the UK's FTSE 100 index ending down 3.9%.

Investors fear that the collapse of one of Wall Street's biggest names means that the credit crunch is intensifying.

Banks hammered

US, UK and European banks were hammered: shares in Lehman Brothers fell 19%, UBS lost 10%, HBOS 12.7% and Germany's Commerzbank fell 6.8%.

At the end of the day the Federal Reserve is stepping up every time and creating a process by which the markets will be allowed to recover

Michael Williams, Tocqueville Asset Management

However, the Dow Jones ended up 0.18%, or 21.16 points, at 11,972.25 after tumbling 194 points at the start of trade as investors took heart from JP Morgan's takeover of Bear Stearns, which was backed by the Federal Reserve.

"Investment banks are getting their heads handed to them, but at the end of the day the Federal Reserve is stepping up every time and creating a process by which the markets will be allowed to recover," said Michael Williams at Tocqueville Asset Management in New York.

The broader Standard & Poor's 500 Index fell 0.90%, while the Nasdaq Composite Index, dominated by technology stocks, closed down 1.6%.

Earlier, France's Cac 40 closed down 3.5% and Frankfurt's Dax tumbled 4.1%.

Bush urges calm

US President George Bush attempted to reassure investors on Monday.

"We are in challenging times," Mr Bush said at a press conference.

But he added that the US authorities were "on top of the situation" but "when need be, will act decisively, in a way that continues to bring order to the financial markets."

"In the long run, our economy is going to be fine".

Under scrutiny after the steep fall in its share price, Lehman Brothers also attempted to reassure investors on Monday about its financial situation.

"Our liquidity position has been and continues to be very strong," Lehman Brothers said in a statement.

Asian stocks also fell, with Tokyo's Nikkei average closing 3.7% lower and Hong Kong's Hang Seng slumping 5.2%.

In Mumbai, the Sensex was down 6.5%.

Central bank help

Central banks have been trying to restore some confidence to the financial system.

On Sunday, the US Federal Reserve reduced its discount rate - the interest rate at which it lends to commercial banks - from 3.5% to 3.25% and offered to buy up the assets of other troubled banks.

The Fed is expected to lower its general interest rates on Tuesday by up to 1%.

To ease fears in the UK, the Bank of England on Monday made an extra £5bn ($10bn) available for UK banks to borrow.

Banks scrambled to access the funds and the Bank of England's offer was nearly five times over-subscribed.

"Given the money market conditions this morning, the situation is very serious and represents a new and unwanted twist to the credit squeeze," said Philip Shaw, chief economist at Investec.

"Five billion pounds represents a substantial sum."

Overnight inter-bank dollar lending rates have risen sharply in London to levels not seen since 11 September 2001, reflecting growing unease about the health of the US financial system.

The investment bank was forced to seek emergency funding from the US Federal Reserve last week and was sold over the weekend to JP Morgan Chase for a tiny fraction of its earlier value.

The bank got into trouble when other banks refused to lend it money over fears that it had too many bad debts due to the sub-prime mortgage crisis.

The Fed has agreed to take over up to $30bn of Bear Stearns' assets, removing the risk for JP Morgan.

The quick sale failed to calm investors' nerves who, this week, will receive earnings announcements from other big US investment banks, including Lehman Brothers, Goldman Sachs and Morgan Stanley.

"There is persistent credit uncertainty. Market players have been repeatedly let down which shows the sub-prime mortgage problems are so deep-rooted," said Atsuji Ohara, global strategist at Shinko Securities in Tokyo.

"Just buying an investment bank does not solve the problem," he added.

Dollar woes

Worries about the credit crisis and the health of the banking industry also undermined the dollar.

It fell to 95.72 yen, its lowest level in more than 12 years. The euro hit a record against the dollar, buying $1.5903.

The weak dollar boosted commodities, with oil rising to another record, light sweet crude traded at $111.80 before falling back.

The dollar is also falling because of the expectation that the US Fed will cut interest rates further, making it less attractive to hold dollars as opposed to other currencies.

Morph

i'm not great on economics. Is a recession caused by shareholder worries or is it something deeper?

Red Justice

Think the reality it is the credit boom and the personal borrowing that has been going on the bubble burst. I do not understand markets and admire Alex Salmond because he understands both economics and politics. I just don't like high interest rates or inflation. I like the idea of investment but not every one can have the resources, the capitalists don't always make it easy for the poorer classes to get through an economic crisis.

Cymro

It does seem quite frightening and interesting the same time. Never really payed attention to the financial markets before. I'm even fancing taking a course in Business Studies or Economics as a result of all whats going on.

Agree that it's wrong that economy seems to be built on so much debt. I'm guilty of falling into the debt trap over the last few years myself. 2007 was very difficult in terms of debts so am ensuring 2008 is a lot nicer. Have cleared all my credit cards, and am putting some extra money away to pay off a personal loan a bit sooner. My fixed rate mortgage comes to an end in 18 months so will be keeping a closer luck over the next year or so. Have increased my payments slightly to try and pay off my equity a bit more as we had a 100% mortgage. With prices coming down too I don't want to be with negative equity if I can help it.

Think it's a good thing that banks are more fussy about where the lend their money

Reluctant Hero

The official definition of a recession is a period of two or more successive quarters where the country's Gross Domestic Product (GDP) falls.

Gross Domestic Product is defined as Consumption + Gross Investment + Govt Spending + Exports - Imports.

So if people stop buying things in the shops, then consumption falls as does GDP, then companies start making people redundant, profits aren't as big as expected therefore the share value falls and pensions/endowments don't do as well as people thought and we have a pretty grim situation.

Scott2006

http://www.sundayherald.com/news/...dnews/display.var.2140424.0.0.php
THE RED MENACE
The world's markets gambled on financial alchemy. They lost.
By Iain MacWhirter
COME BACK Karl Marx, all is forgiven. Just when everyone thought that the German philosopher's critique of capitalism had been buried with the Soviet Union, suddenly capitalism reverts to type. It has laid a colossal, global egg and plunged the world economy into precisely the kind of crisis he forecast.
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(Iain MacWhirter puts forward a view that sees one man's experience of a world over 140 years ago as relevant to today where ease of access to knowledge and 140 years of advances is seemingly under threat... surely it would be under threat by better economists with a realistic world view of 2008 and a view as to how events will unfold in the mid to long term?)
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Karl Marx visited the British Library to collect the relevant data to produce his critique of the capitalist system.
The events of 1848 or any year where a malfunctioning governmental system fails to feed the starving or allow able and forward thinking people to earn an honest wage will grind to a halt and perhaps be overthrown by idealists.
Idealists need to be pragmatic when in government and lose the overt idealism - Mr G Brown has been on such a journey.
Mr Mugabe and his brand of socialism in the vein of North Korea one of allies is in much greater danger of collapse.
Mr Ben Bernanke is an economist who well understands the conditions of October 1929 and the strength and weakness of being in a currency attached to the gold standard.
Richard Nixon believed his economy in 1971 was large enough to sustain the value of its currency as a creator of wealth and removed the connection to the gold standard.
The top economists have access to data and data sets of information on the competeing models of the areas of the economy and the differing variables in those cycles - millions and billions of individual pieces of information more relevant than Marx in todays vibrant economy.
The intellectual economy will not suffer, the aids to Ben Bernanke will seek to utilise the best practise and with the greatest degree of forethought of how individuals and individuals firms should act when inflation hits the United States and other areas of the world. The world economy needs stability and growth that can turn todays cash at the government level into real assets over a 25 year time scale. Japan in the 1980s decided to fight the inflationary pressures by having low interest rates after their economy was over-valued previously in world terms. A few years of high inflation that Japan endured when growing fast in the 1960s had succeeded in the ruling cliques in politics and business endeavouring to avoid that repetition.
The British economy can best fight inflation when it comes by continuing to follow policies which outgrow the real inflation level at that time.
A balanced series of judgements of when to intervene to stop unwarranted abuses rising to affect agents of the macroeconomy is fully justifiable and beneficial.
Banks should plan to be around solving small liquidity cash flow transactions at the microeconomic level for the next many many years or so. They may not have a 25 year plan - but they most certainly can see living standards rise overall and as the capitalist system swaps knowledge and applied local understandings with long term investments in 'the means of production' of everything from housing stock and all the services and sectors of the economy in the real world in the years 2008 to 2032.
Inflation can be predicted a few months before it actually arrives - there any many factors which central government and its bankers will use to manage this phenomena that were never possible in 1929-1933 period and the slow period of marginal recovery before the second world war.
The UK needs accurate information gathering and politicians and business leaders helping to restore confidence in the underlying economy and retaining a competitive edge that will see real living standards improve year on year in real terms with a manageable amount of moderate inflation caused by counteracting the speculative players in mainly overseas trading partners.

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http://www.sundayherald.com/oped/...r_disappearing_act_from_brown.php
Another crisis, another disappearing act from Brown
Iain Macwhirter on Gordon Brown
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Gordon Brown knows whats going on at the macroeconomic level - $50 thousand billion dollars in the world economy but $750 thousand billion dollars in the economic bubble propped up by that $50 thousand billion seemingly swirling around at all levels of the lower part of the macro picture or the highest level of the microeconomic overview.
Inflation is almost impossible to avoid, so why should any politician that understands how the big picture seems to fit together undermine hard money and assets by saying anything at all?
The rich can ride out any recession and be only marginally affected.
If the world economy grows at 10% a year, which can only happen if a long recession is avoided, then most of the $750 thousand billion will become tangible assets in the next 25 years or so. Gordon Brown is only responsible for the next 2 years and by getting the economy to grow faster than inflation he will be doing as much as his level of involvement will allow him.

Iain MacWhirter quotes a few opinion polls but if you step back and see a longer trend - Labour look as if they will be 1 or 2 % lower than at the last election when the next vote comes around. The Lib Dems have a new leader who still has to shine - if he fails to impress the voters the LDems could lose 2 or 3%. The Tories are a rural and rich areas party - there are more rich but fewer rural areas as towns and cities swell in size - perhaps overall they can resonably expect to gain 3 or 4% - what might hold the Tories back is the view that economically Labour and Conservatives are much too close. Gordon Brown's Party might as well be called the Red Tory Party as socialism is seen as a poor brand just now or as a failed creed.
Poetry is a Romantic take on Reality.
I'd prefer Gordon Brown to read Machiavelli and quote from 'The Prince' rather than a form of words that sounds good but signifies nothing (a slight nod to Will Shake Spear).

Hazel

It is hard for a totally unlettered-in-economics person to put in words but we see what we see. I call it "trickle-down control". The top brass are in total control So long as we are willing to spend, they'll raise prices and keep calling us in. That glorious housing boom is a first-rate example. Anyone who has lived fifty years should have seen what would come and it did.

Prices? First it was oil for the oil barons. Now it is food. Eggs alone have risen from less than $1 to over $2 per dozen in the last month. They tell us it is a shortage of grain. But, why is there a shortage of grain? For the same same reason there is a shortage of oil. And, it isn't Planet Earth doing us in. Too much oil, too much grain, lower prices which mean less profit for the companies which mean lower bonuses for the CEOs.

The other side of the coin? They'll pay as little as they can and, if they find a new employee who is willing to take less than you are asking, you are out the door. Example. How many companies have moved from America to Scotland where they paid less and have now moved on from Scotland to another country where they can pay still less?

All right. I admitted I know too little about it; so, I'll stop but this first. Someone mentioned interest rates. I suppose lower (but not too low) interest rates are better for the overall economy but please do not forget that some people depend on those interest rates to buy food and pay rent or whatever. Not all who save are millionaires. Also, when the Fed does raise rates, banks very often do not pass the increase on to their customers.

Now, I'll go and let someone intelligent explain it. Hazel

Reluctant Hero

BoE cut interest rates to 5% today, but some mortgage lenders have raised their rates or withdrawn products.

http://news.bbc.co.uk/1/hi/business/7340142.stm

House prices have fallen by 2.5% in March across the UK, yet they continue to rise in Scotland.

http://news.bbc.co.uk/1/hi/business/7336010.stm

Rocky times ahead...

Reluctant Hero

The Herald is reporting that mortgage lending may be cut by half next year.....

http://www.theherald.co.uk/news/n...50bn_fall_in_mortgage_lending.php

No more 100% mortgages, no more 5 times your salary mortgages etc etc. Unless house prices come down, many people aren't going to be able to buy their own home.

Reluctant Hero

An absolutely excellent article by Iain MacWhirter in tomorrow's Sunday Herlad.

http://www.sundayherald.com/oped/...play.var.2192876.0.0.php#comments

Reluctant Hero

We face the deepest slump since 1990 according to the Organisation for Economic Co-operation and Development.

http://www.telegraph.co.uk/news/2...es-deepest-slump-since-1990s.html

Reluctant Hero

Another great article in the Herald tomorrow from Iain MacWhirter

http://www.sundayherald.com/oped/opinion/display.var.2356746.0.0.php

Reluctant Hero

The stock market entered bear territory yesterday. It is not looking good.

http://www.theherald.co.uk/news/n...of_Israeli_air_attack_on_Iran.php