Friday, January 23, 2009

Enough talk of the recession already

Everyone knows that most of the world's major economies are in recession now, or if they're not, their economic growth has slowed significantly. Given the exposure of our banks to bad debt (brought on by a mixture of idiotically bad lending by the banks, and idiotically imprudent spending by their debtors - i.e. the rest of us!), this is hardly surprising.

However, there is one more factor that is really important in how we look at our economy, and that stock prices, and so much of the stock price of a company is based not on their balance sheet, their order book (in those rare companies in the UK that actually make something these days!), or their actual assets (fixed, personnel, or intellectual), but upon the confidence investors have in the company. Take a look at Apple over the last two years (compared to the Nasdaq and Dow Jones indexes). There's a massive dip in Apple shares in Feb 2008. Why? They'd just released the 32GB iPod, they were leading the market for legal music downloads with the iTunes store, and the video store was doing well too; the future looks seriously rosy. So why did their shares drop from $199 (Dec 28, 2007) to $119 (Feb 25 2008) - a 40% drop in 2 months!

I can't find any logical reason in the news archives, and the Nasdaq and Dow Jones (also shown on the above graph) show only a gentle slide at that time. (Dow dropped 1000 points (7%) and NDQ 321 points (12%) over the same period). This is confidence at work. It often has no discernable connection with reality outside of the trading floors of London or New York.

More recently, many many investors have lost confidence in the shares of the banks, with some reason, it appears. But something that is really, really not helping matters is the continual talk of economic doom and gloom by every news organisation I come across. Do these people (Robert Peston, I'm looking at you!) not realise the harm they're doing? Surely it's time to start either doing something to help, or at least coming up with real solutions. Fundamentally, the global economy is still producing plenty of goods. Global warming provides all sorts of opportunities for innovative thinking about ways to invest in our future. The world won't stop spinning on it's axis just because a few bankers mis-incentivised their traders and lenders so that it was in the traders' and lenders' interests to make extra-risky decisions.

Stop being part of the problem, and start finding the solutions. Look for the good news in the economy, and help me look forward to listening to BBC Radio 4's Today Programme tomorrow morning instead of dreading what new depressing statistic is being published to make me fear for my job in the finance sector.

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