Dead-cat... splat

6 min read

Markets love to roll out old pearls of wisdom, one of which, of course, has much to do with a deceased feline. Yes, even a dead cat will bounce if it is dropped from high enough.

But where, for heaven’s sake, is that dead-cat bounce?

The Dax, supposedly the measure of all things European, was to be found on September 19th at 9,799.26 points – on July 3rd it had peaked at 10,029.43 points but had already retraced in the August panic to just above 9,000.00 points. By close of business the day before yesterday, Monday, it had fallen to 8,812.43 points. Tuesday offered it the opportunity to do either a classic Tuesday reversal or to perform that gymnastic exercise which is the dead-cat bounce. In the event it rallied all of 12.78 points to close at 8,825.21 points. That is by all measures a modest and disappointing performance.

For those who are still looking for parallels of what is going on now to October of 1987 would do better to look at the trading pattern of the Dax than to that of the Dow or the S&P. I won’t bore with details, but suffice to say that the DAX peaked in early August, fell back, rallied again, and on October 12th 1987, then began a decline which would see it fall from 1,543.10 points to 945.90 points by November 10th – a drop of just under 39%. A similar move in the current context would call for the index to fall to just below 6,000.00 points which looks to be fairly unlikely. Unless you believe in that occurrence, best put the Crash of ’87 back into the box in which it belongs.

And yet, the technical picture we’re facing remains anything but pretty. The Dow’s inability to hang on to early gains yesterday will surely scare off any willing buyers other than index trackers who have to put pension fund inflows and the like to work, whether they want to or not. Bottom fishers will be holding their fire. Overnight, Asian markets have reasonably positive, but the gloom in Europe is now too pervasive to be trumped by a bit of optimism in Hong Kong or Tokyo.

Fitch has now also joined the party by putting sovereign France on negative watch, citing the now unavoidable ‘material increase in the budget deficit targets’ along with the equally inevitable reference to the negative consequences for debt dynamics.

More cloth

I was chatting late yesterday to Keith Mullin, Editor at Large at the IFR, and we were mulling (no pun intended) over where it had all suddenly go so horribly wrong. My own opinion is that Western industrialised nations had been living above their means for too long, and that the GFC, as it sparked in 2007 – I regard BNP’s announcement on August 9th 2007 that it could not value many of its assets as the starting gun, not the Lehman failure on September 14th 2008 – offered up a unique, once-in-a-generation opportunity for governments to put their fiscal house in order.

The pain of adjustment was, however, deemed to be too much to bear, so instead of cutting the spending suit to match the income cloth, the public sector balance sheet was simply geared up, and extra cloth was purchased on credit.

The fear is that now, after unparalleled government spending sprees, the global economic edifice has run out of flex and that if lift-off is not achieved, the recovery will simply plough into the swamp at the end of the runway.

There was much mirth over the Bill Gross “new normal” and his long duration bet. Who’s laughing now? More to the point, did his heirs at PIMCO mark his departure by stripping the long bet out of the portfolios? On the day he left, the long bond was trading at 3.21%. This morning we are looking at 2.97% – around a 4 point move.

All that aside, today should be a better day for markets, but it will take more than a half-way decent close to put the wobbles to bed.

The scare

I have, so-far, consciously steered clear of mentioning the Ebola scare which is keeping the statisticians in work when it comes to estimating what the economic cost of the crisis has been, is and will be. Frankly, my dear, I don’t give a damn. The human cost cannot be measured in dollars of GDP or percentages of trade balances and anybody who was long airline risk should have gone to see a shrink a long time ago.

What I would like to do, though, is to put the numbers which are so keenly being bandied about in a larger context: The Spanish Flu pandemic which broke out in 1918 and which lasted until 1920 is estimated to have affected around 500,000,000 people of which some 50,000,000 died. A century ago the world’s population was probably no more than a third of what it is now and the death rate is estimated to have been somewhere between 2% and 3% of the total, several times higher than the count of fatal casualties during the recently concluded World War. That does not make the Ebola outbreak any less horrible but please, let’s keep everything in proportion.

Anthony Peters