Monday, September 10, 2007

Recession - Market Indicators?

We all have certain things that we look at in the market place on which to base our opinions. We gather the evidence and the numbers and write it up in our presentations to investors or management.

I do, however, have a tendency to look at different market indicators, let me give you an example. No I am not going to bore you with Fibonacci, Head and Shoulders, RSI or other charting terms (but I do reserve the right to do so in the future), I am going to share with you an experience to prove a point.

In the late nineties I was traveling to my humble desk in the City, looking forward to my usual healthy breakfast of a cup of hot chocolate and a chocolate croissant from a well known, and hideously expensive, eatery.

Now it is important for me to point out that a few days before, the Asian Crisis was reaching fever pitch, but was yet to really affect the London markets significantly.

Imagine my horror, as I walked into my breakfast stop off, to find that all… not some… all of my favorite chocolate delight had disappeared off the shelves. I panicked… was I late? Had my watch stopped? Or worse! Had they actually discontinued this particular speciality off the menu. After much frantic questioning it appeared that all had been bought and, sadly, consumed in an “early rush”.

I settled at my desk with inferior fare and had a eureka moment.

Clearly all the brokers from the buildings surrounding me had got in early. Either they had been told to do so or had been compelled to do so. Now brokers being brokers, they get in early because they can make a killing, or they can avoid been killed.

Thus I wrote my report on how the Asian Crisis was going to hit….big.

When I was proved to be correct my bosses had no idea that the humble chocolate croissant had saved the day.

I tell this particular story because today I had a similar experience but not, sadly, involving a tasty chocolate morsel. Today it was my French teacher. Before you go and get hot and bothered imagining a skimpily dressed waif with a French accent I can tell you the reality is, shall we say, not that.

My French teacher is a suburban mum married, two kids and is, I would guess, middle income. It was interesting therefore that today she came out and told me she had watched the news and we were all going into a recession, and could I explain to her, in French, why this was the case.

Now I paid little attention at French in school and have been studying for approximately six months, so trying to explain that "the sub prime mortgage market has had troubles which has had a knock on affect in world markets which, coupled with recent US unemployment data, may force the Federal Reserve bank to cut interest rates which, I hope, may stave off a full blown recession" was a little difficult.

I just said "Les gens ne peuvent pas rembourser leurs prêts et intérêt en Amérique" Which, roughly translated (as it was roughly formulated) means 'People cannot pay their loans and interest in America'.

Looking unimpressed with my grasp of both French and Economics she said 'OK, Bien'.

Putting aside my poor French, what is interesting as a market indicator is the perception of my French teacher that the culmination of all the news out there at the moment is that she believes we are going into a recession. Bare in mind we are in Switzerland, one of the richest nations on the planet with more mechanisms to halt internal recession through cutting taxes etc than anywhere else. But this lady still thinks we are going into recession. "Are you going to tighten your belt" I asked. "oh yes we have cancelled a second holiday and have decided to put more away in savings than we would have before this all came about" she responded.

That to me says a lot of things. Whatever commentators are saying about the recovery of the markets and that this is a correction, it would only take others in the middle income bracket to be thinking and doing the same things and we could bang in trouble.

The press could be issuing a self fulfilling prophecy. It's like the old saying "Give a dog a bad name and sooner or later he will live up to it". The press have a lot to answer for here and should be managed like no other time in history by market players. Information moves fast, and so does reaction to it.

I am not suggesting that we all sing a happy song and tell everyone that it will be OK, but if a middle income French teacher in Switzerland can watch and listen to the press and conclude that it is recession time, so can many, many others..

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