Anthony Peters is a strategist at SwissInvest
Yesterday evening, instead of watching the telly, I sat and watched the markets spiral out of control. There were no resistance points because there was nobody prepared to offer resistance. The Dax had gone negative for the year on Monday and yesterday the Dow and the S&P followed suit. Whether or not this rout in equity markets makes sense is a moot point but there is one phenomenon which I find particularly striking in the sovereign debt crisis.
The 2008 crisis was a crisis of capitalism. The 2011 crisis is a crisis of socialism and especially of the form of Euro-socialism which Margaret Thatcher so disliked. Let me explain. I was listening to a discussion on the radio in which there was talk of the fiscal union which might be the most obvious first step in search of the solution to the European sovereign debt crisis. One of the panel replied that urgent steps were needed now and that this possibility would take the sort of time which we do not have. We might not have it now but we have watched our politicians faff around for well over a year achieving absolutely nothing. They are now very gently beginning to think about closing the barn door but not until well after the horse has bolted, the crops have withered, the farm has been foreclosed or the folks have emigrated.
What we are seeing in the debt crisis is the failure of an ideology which determines that if we believe hard enough and for long enough that we are all equal, that we will become equal. In a way, that is what the single currency project was trying to prove. Its DNA was the denial of difference, the ideologically driven enforcement of “one size fits all”. Britain, even under the guidance of the invisible Scotsman who abolished the boom and bust cycle and saved the world and who is of a highly traditional strain of socialism could not and would not join that club. But they sat in their little garden in Brussels, smoking whatever and dreaming up new projects while the largest and most dominant one was beginning to fail. They had the chance to put it right and, in their self-congratulatory and self-satisfied hubris, they blew it.
What they forgot is that they have to sell their debt. The market is their customer and any business which forgets that in order to succeed you have to cater to the customer, is doomed. Anyone who ever entered a department store in the Communist Soviet Union will know what I mean; we determine what you get to buy and when and that is it!
2008 was capitalism gone wrong; now socialism is on the block. Over the past fifty years, European social politics has created a culture of entitlements, a belief that if one spends enough, that all differences between individuals, regions and countries can be smoothed over. The curve is hugely digressive and marginal returns diminish until they become all but invisible as tax euros, pounds or dollars are poured into the machine to assuage ideological (and in many case idealistic) consciences. The warning signs have been in the markets since the Sovereign CDS market and the SovX Index began to squeal, but the powers that be decided to try to face it down. How many crisis meetings of the European leaders took place where nothing was achieved. Now it might be too late.
As 2008 was a crisis in capitalism which did not spell the end of it, so 2011 will not spell the end of Euro-socialism – but it should be a pretty chastening experience. As politicians tried to introduce regulations to rein in the excesses of capitalism, so the markets will now draw some lines in the sand which will tell the political leaders something about reining in some of the excesses of social democracy.
Of course, none of this is particularly helpful if you are long equities which have gone leaping over a cliff or were planning to retire in the next couple of months (or years). There was an old joke which they used to tell which went that if you see a politician leap off a building, follow him for there was bound to be a load of money to be made on the way down. This time, if a politician leaps off a building, walk away.
Alas, it is that time of the week again. All that remains is for me to wish you and yours a very happy and peaceful weekend. May you, while the stocks in your portfolio are looking a bit sick, have better luck with the stocks (Matthiola incana) in your garden.