08/03/2013 at 5:29 pm

This year’s positive start was strengthened again today by better-than-expected data on US employment. Markets have continued to shrug off the messy political situation in Italy and the UK downgrade a couple of weeks ago. For the time being at least, sentiment is taking the relative robustness of America as its example and putting the problems of Europe to one side.

We have been here before. Almost exactly a year ago we saw good data from the US on the one hand and a sovereign default from Greece on the other. At the time this blog asked: who will win the tug of war: the US, or Europe?

The answer – eventually – was the US. Greek elections last spring plunged markets into a familiar state of uncertainty, but 2012 as a whole passed without various long-awaited disasters and constructively for risk assets overall. Part of the reason for this is of course that time is a healer (as well as an essential ingredient in the transmission mechanisms of monetary policy).

In any event it seems an apposite moment to consider a few of the anniversaries we’re passing this March.

First of all, 2007. It was at the beginning of this year that movements in something called the ABX index began to draw the attention of a few structured credit professionals. This index – then a new product – tracks the prices of sub-prime mortgage-backed securities. Coupled with occasional news of fraud and other problems in the origination market, it was telling a select crowd of market pariticipants that something was going very wrong. It was a forerunner of a huge slew of CDO and other ratings downgrades in the summer which would begin to widen interest in the subject of American mortgages.

2008. By the spring of this year, some smaller banks were being bailed out (Northern Rock, Bear Stearns), confidence was sagging, recession was dawning and stock markets had begun to suspect that something was amiss. Plenty of complacency still lingered though: oil was rising to new records, RBS was still rated Aa1 and Chancellor Darling announced in his budget speech that “the British economy will continue to grow through this year and beyond.”

2009. In March this year we were all doomed. Unprecedented crisis, leading to unprecedented recession, had brought about unprecedented debt and everyone by this stage was feeling a level of pessimism which was utterly without precedent. Those few banks which had not been nationalized had stopped lending. Ratings company staff had gone into hiding. Iceland had gone bust. Stock markets had collapsed through the floor. And then the recession ended, confidence returned and the MSCI World Index ended the year 27% up.

2010. For most of the year’s early months, optimism persisted. We knew that various countries were on the verge of posting eye-wateringly abysmal budget deficits for the previous year, but the recession was over! Recovery was on the way! Then the ratings companies, who had suddenly become rather less obliging, began to suggest that it wasn’t just little out-of-the-way places like Iceland that were vulnerable to default after all. Shortly after Easter, S&P junked Greece and the first eurozone bailout programme was born.

And now, here we are. It has been an interesting few years. Not wishing to read too much into it, but it is the same markets and observers who were so slow to spot that something was wrong in the first place that have been equally cautious in more recent times of entertaining the idea that things also go right.

The same tug of war we wrote about a year ago is still being played out. The further we get from the financial crisis and its historic events, the closer the contest gets to being decided – in favour of one side or the other.


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