The world’s equity markets continued their wild ride today. From Asia to Europe to the United States, equity values in all sectors plunged downward propelled by the inertia of uncertainty.
For the third week in a row world equity market charged up and down with historic volatility. The only clear winners were governments, particularly the United States who sold long-term debt at historic lows. The U.S. 10-year Treasury Bond remains below 2%.
While multiple theories continue to trickle forth attempting to address why equity markets are suddenly in such a state of flux, little consensus has emerged.
Ongoing worldwide economic market factors such as; European government debt, inflationary pressures in emerging markets and economic stagnation in the U.S. economy do not justify the wild ride the markets are yielding.
Monetarists are contending the actual “negative cost of borrowing” interest rates below the level of inflation accelerated by actions such as the U.S. Federal Reserve is causing rapid speculation due to the short-term borrowing costs.
Keynesians claim equity markets recovered based on policies enacted to supply necessary capital to banks as well as stimulus deficit spending. When those policies ended, economic recovery slowed with investors recouping their profits.
While either (or neither) theory may prove accurate, the wild ride is occurring world-wide with no equity market sector spared nor few commodity values exempt. Crude tumbled in price in lock step with equity markets on Thursday to a nine-month low.
Only Gold appears to temporarily be an asset whose value investors are not questioning. Consider the ramifications for gold, suddenly becoming the most valued asset in the world:
You cannot eat gold.
You cannot use gold as legal tender.
You cannot burn gold to heat your home or fuel your car.
Yet somehow this precious metal has appreciated in value more greatly than at any time in our recent history. Which leads me to the conclusion that there is a very real cause of the markets current wild ride: fear. Specifically,
Fear that austerity in Europe combined with gridlock in America and inflation in emerging markets is drawing the globe into a period of long-term stagnation if not recession.
Fear the promise of the Arab spring is leading to instability that could disrupt oil flow into both the Western world and China for many years to come.
Fear an aging European and America population are changing their consumption patterns significantly lowering global demand.
Franklin Roosevelt once noted, “There is nothing to fear but fear itself.” Yet I would be remiss to contend I am not afraid. The frightening truth of this of this essay is it was written near the end of the 2nd quarter of 2011 yet little has changed.
Europe continues to struggle agreeing to a fiscal effort capable of dealing with their debt crisis. America's “grid-locked Congress” appears more interested in hiding than leading. The Arab World is none the more stable a year after multiple revolutions.
All the while the markets continue to sweep up and down on the most marginal of news.
All the while the world waits for leadership to end our fear of uncertainty.