So, why is the current crop of market sell-offs happening? And how worried should we be?
To answer the first question, let me ask you a question. Here it is — who is the central bank boss in the US?
I bet many of you would have come up with the name Bernanke. Some of you might even know his first name — Ben.
Now try this — who is the European Central Bank boss? I reckon most Aussies would come up blank.
Well, that’s my point — this guy, Jean-Claude Trichet, has gone missing in action and the eurozone has copped a drubbing as a consequence. And because we’re a global economy and world stock markets are interconnected like never before in a computerised, internet age, our shares and wealth have suffered because of Trichet’s stupidity.
That could be a tad harsh. Let’s call it pathetic leadership, which is in stark contrast with the efforts of Bernanke in navigating the US into a recovery.
Job not done
Of course, the job isn’t over and this whole escape from Great Depression Mk II battle reminds me of the challenges of Iraq.
I recall on James Valentine’s radio program I made the argument that the US and its partners would bowl over Saddam Hussein and his band of cutthroats and a wise ABC listener rang in and made the point that winning the war is the easy bit. The tough job is managing the peace. That’s where the global economy is now — we’re managing the recovery and the debt hangover after getting drunk on over-borrowing.
Trichet has worried me since early 2008. Around the same time I was bagging our Reserve Bank for raising interest rates but when the penny eventually dropped for our Bank, the European central bank was still raising and was slow to cut.
The UK’s Gordon Brown realised how exposed his banks were miles before Trichet and his team and this was a prelude to their mishandling of Greece and the EU’s bailout.
On 6 May, he told the press that his ECB would not buy bonds from the likes of Greece and the next day stock markets spat the dummy. Then after the French president, Nicolas Sarkozy, gave him a few well-chosen words of advice, he changed his tune.
This is why the euro has been trashed — he’s the keeper of the currency and he looks like a prized goose and a stuffed one at that!
Trichet has remained a captive to the anti-inflation school, which ordinarily I think is a good school to go to but these are abnormal times demanding abnormal policy decisions.
Here in Australia, we could let our central bank boss give vent to his preoccupation with inflation until the market you know what hit the fan last week. Now he can’t rely on the big rise in export prices to justify his interest rate rise. And if the market madness continues, the next rate move will have to be down.
My guess and hope is that Europe shows some leadership this week. Markets become less jumpy and concentrate on economic and corporate profit readings.
However, if Europe continues to fall into the nincompoop Trichet trap this week, the markets will sell off, derailing the economic recovery and setting Europe as well as even the US up for a double dip recession.
I still believe we can beat this scenario but I hope I see some smart Euro moves early this week.
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