Market correction could lead nowhere or to oblivion

Dubai: We're not there yet, but it could yet become a case of deja vu all over again. The slump of Asian stock markets yesterday raised the spectre once more of a global shock, and those with a sense of history will realise that October 2007 has a certain, ominous resonance. The implosive events of 1987 and 1997 live long in the memory of those who witnessed them.

A general decline yesterday among Asian indices of around two per cent may yet amount to little more than a blip in the greater scheme of things. India's Sensex actually ended up, having overcome its initial, kneejerk reaction. Europe's markets didn't fare so well early on, but also picked up late. By retreating less than half a per cent in morning trading, US markets decided that the sell-off didn't amount to a hill of beans.

Still, the world's bourses may be flirting with a precipice, so that it might become a matter of which way the wind blows as to what happens next. Certainly, the economic climate globally has become increasingly turbulent in recent weeks and months.

The immediate trigger for the latest shakeout was remarks emanating from last weekend's IMF/World Bank meetings, suggesting that the US economy was heading further south, on the back of Wall Street's heavy decline last week. The export-oriented Pacific Rim countries are especially exposed to that prognosis.

Nothing very novel there, but nerves were already on edge. The lingering international credit crunch following the US subprime mortgage lending crisis, the chronic enfeeblement of the dollar, and oil prices soaring to record levels in nominal terms have instilled a degree of trepidation.

Writing on the wall

The writing on the wall is challenging, and perhaps indelible. A daily drip-feed of negative news has the potential to rock confidence sufficiently to turn general unease into a rout.

No-one can be sure how painful the squeeze on liquidity might become, as banks seek to retrench towards safer lending, against a backdrop of uncertainty towards riskier investment vehicles and their methodologies, and Western consumers especially face a loss of purchasing power with the phasing out of low-cost, fixed-rate mortgages. Both carry significant threats to economic growth.

The dollar's pending demise has become so well-known that it is part of the furniture in the world's economic living space, but is hugely threatening non-etheless.

Importantly, the Fed's room for manoeuvre is now severely restricted. If moderate interest rates were too much for an overstretched US economy, then the restoration of easier credit conditions now does the dollar no favours. The prolonged gamble with an easy-money strategy is now a busted flush.

Meanwhile, the prospect of a barrel of oil crossing the psychological barrier of $100 is quite disturbing for the Asian region, heavily-dependent on imported energy, which increasingly provides global locomotion. While there is a purely redistributive aspect to that phenomenon, in favour of the oil exporting-countries, the reality remains that shocks to real income in the Western world make headlines which can spook the markets, and can still derail economic prospects.

So it is not unwarranted to take a bit of doom and gloom on board. Yet, general corporate performance underlying all the price action may actually be ticking along reasonably well, and market valuations also are collectively within reasonable bounds. To that degree, the analogy with the historical precedents may be rather false, though intriguing.

The 1997 crash was an Asia-based correction traceable especially to currency crisis, the Dow's drop limited to around seven per cent. Black Monday, ten years earlier, was a worldwide collapse not traced to any particular root cause. Most markets fell by 20 per cent or more within the month.

The 1987 crash especially had an apocalyptic feel to it. In London, the horror was given graphic physicality by a weather front of hurricane proportions, and we made our way to offices in the City stepping round trees felled by the storm. Pure coincidence, of course, but Nature's reminder that anything can happen. Since we never know on any given day where is the inversion point between fear and greed, the same is true of markets. Anything can happen - and it just might.