Chickens coming home to roost

Apparently, investors lost hundreds of millions of dirhams in the UAE stock markets in the middle of last week. Then they gained hundreds of millions of dirhams in the day that followed. Except, of course, that they didn't, unless they sold or bought.

In the numbers game, what actually happened was that market capitalisations fell steeply, then rose again, in classic kneejerk responses to markets overseas. Unless you actually traded, you're left with the paper you had.

If you were invested in the market this time last week, went away, ignored the news, and came back, then none of it counted. If you're not day-trading and dedicated to the nerve-wracking process of making net returns on a 24-hour cycle, then you could be completely unruffled by it all. Have another soft drink.

All the panic and excitement, all the column inches, were really so much heat, not light. Of course, no one can ever be sure what happens next, and therefore some will react, but others will take a different view. And they are often the counterparties to the trade. Many of them know there is a pattern to these things.

Day one is the bad news, and stocks plunge. Day two there is likely to be reaction to the overreaction, partly reversing the decline. This week that was undoubtedly boosted by the emergency rate cut in the US, although that itself is double-edged news. Day three shows a moderation of the volatility as reflection sets in. Like a rock thrown in a pond.

Of course, it's not always like that. Right now the world is genuinely in a dangerous condition, with exchange-rate dislocation, payments imbalances between blocs, and a banking black hole sucking the life out of business.

The Fed's behaviour really does indicate that something is badly wrong. Interest rates, at 4.25 per cent, were not high. They were much too low for too long, in fact for years. Borrowing and consumption in the US ballooned, and easy money was made in property. The bubble needed pricking much earlier. Now the Fed is so concerned at the bang it would create that it dare not apply the needle.

The enlightening part of last week's turmoil has been the trashing of the hubristic Asian 'decoupling' story. Just like Europe's self-aggrandizing unveiling of the euro nearly a decade ago, that wishful thinking has been exposed for what it is. The world's other blocs could make their own way, but they'll have to depeg from the dollar first, and stop depending on selling to, or investing in, America to do it.

Mindset

Trouble is, America is still the freest business environment. Asia could do something about that too, but it will have to change a mercantilist mindset that has been ingrained for centuries.

In the Gulf region the key monetary policy issue must naturally return to the limelight. Whereas liquidity might be absorbed by government bond issuance in the UAE, if that plans gets off the ground, the sharp reduction of interest rates - in line with the Fed's shockingly desperate measure, and in the face of boom-related inflationary pressure here - constitute the opposite of what is required.

While the US authorities have compromised their credibility further by so obviously underwriting the stock market, as if Wall Street is entitled to a one-way bet, the Gulf countries have to reassess whether their policies should be equally suspect, albeit with a difference.

Revaluation will be the call, and yet any revaluation that might conceivably be applied, even though warranted in itself, would actually not be enough. The scourge of inflation is primarily a domestic issue, with import prices secondary only. Painted into a policy corner, there's no easy way out.

In the meantime, in this crazy, mixed-up world, what to do? For the little guy, maybe not much: sit tight. Like the big guys grandstanding and exchanging pleasantries up a Swiss mountain last week, keep smiling. You don't have to go anywhere or do anything to achieve that. Least of all flap.