No white knight has yet appeared to rescue a floundering world economy. Options are running out for politicians as markets continue violent swings, fear takes hold and recession seems a certainty. There is no one riding to the rescue of the world economy this time. While it could be argued the relatively decisive co-ordinated political response in 2008 helped to avert a global economic downturn, the prospects for such a rescue operation this time around are limited for several reasons. Top of the list is the fact the banking crisis has become a sovereign debt crisis. With the transfer of the problem from banks to governments has come an almost lethargic response to what sensible observers might classify as a potential Armageddon. The prospect of a US default is not so much driven by an inability to pay but more by a Congress that could just decide not to pay. That uncertainty is adding to fear levels. Decisive leadership from the White House seems a faint hope, particularly as President Barack Obama becomes more distracted by re-election concerns as well as trying to bring to heel a House full of right-wing Republicans who do not have the word ‘compromise’ in their lexicon and are bent on dismantling many of the policies Democrats hold dear. A question mark also remains over whether the US will instigate quantitative easing three (QE3). This did not really work for Jaws so it is unlikely to work for the Federal Reserve. Nevertheless, there is little anyone seemingly can do in the US to stimulate an economy that remains stubbornly unresponsive. In Europe the situation is even worse. The hand-wringing and political quagmire that the eurozone nations have sunk into seems fated to continue forever: Lasciate ogne speranza, voi ch’entrate. Growth is slowing dramatically. Consumers are voting with their euros and not buying goods. Manufacturing has moved into negative territory for the first time since 2008. There is little faith now that there will be an economic turnaround. The optimism of the first half of 2011 has been replaced by collective pessimism. No one is talking about a second half recovery. Everyone is talking about a double-dip recession. Germany’s engine pulling along the rest of Europe seems to have run out of fuel. As usual the European response to calamity is to propose totally inappropriate solutions. In typical manner the leaders of the grouping, France and Germany, continue to have their gaze firmly fixed on the horizon while they trip over the obvious calamity at their feet. First an ineffective shorting ban on financials to stem the run on bank stocks. It did not work in 2008 and did not work in 2011, particularly as the UK and US sensibly declined to join the witch hunt. The idea of imposing a transaction tax is equally ill timed and just plain silly. Far from doing anything positive, it would further push markets into a slump and just the very mention of it sent another shiver through exchanges. Why no one has called in the International Monetary Fund is a mystery. With Germany rejecting any collective eurobond solution and more than one big member (Spain, Italy and possibly even France) teetering on the edge of catastrophe, people should be asking the question of what actually happens when a eurozone country defaults. It is not beyond the realm of possibilities. China has not appeared willing or able to turn on the juice and nudge global economies along a growth path. Indeed, some of its recent policy announcements could hinder rather than help prospects. Just slower growth in China will have a negative impact from countries hoping for a continuance of the double-digit figures of recent years. Amidst all this turbulence hedge funds have had a relatively good year. Although performance is lacklustre for many, returns are still better than what the markets are giving investors in most cases. Assets continue to flow into the industry, too. But August may have changed that. Some are expecting a spate of fund closures in the wake of such volatility. Hopefully managers have learnt that imposing gates, suspending redemptions and creating side pockets is not necessarily the way to win investor confidence. The big question now is if this is a repeat of 2008, will there be an equally debilitating withdrawal of cash from hedge funds across the board or will investors hang tough and trust managers to navigate the dangerous waters better than any other option on offer....
Start a FREE trial or subscribe to continue reading:
Start a 4 week free trial
Try Risk.net's premium content for a limited period. Register now for your FREE trial to one of our leading brands.
*not available to previous trialists or subscribers.
Log In or Subscribe Now
Subscribe to Risk.net Business now to access all our premium news & features content for 1 year.
Pay by Credit Card for immediate access.