Very interesting article (over the weekend, US Print edition, Financial Times) that really hints at the dynamism at the heart of the global financial system and how it impacts, and is impacted by, local economic conditions. You have to first understand that the amount of money flying around the world (measured in trillions of dollars) related to currency and investments, every day, is four or more times the amount of money spent on actual global trade- as in buying and selling goods and services. In other words, you have for more opportunities to make, and lose, money in the currency trade than in any specific aspect of global trade.
Due in part to some recent positive economic data in the US, and also somewhat negative data from emerging economies in terms of slowing growth, investors in currency and bonds (government debt, as opposed to company debt), are switching their investments. They can, and very quickly too, disinvest in one country’s currency and reinvest in another. Thus the Indian rupee has declined in value and theUS dollar has increased. Ordinarily, in years long past, this process had been much slower to evolve. In today’s global financial system this shift can now take place in hours or even less, and so the impact of such a change can hit local currency conditions immediately, even before those governments can notice the real change and do,something about it.
Local economic conditions in the US, and a slight loss in confidence in the growth prospects in another country, can tilt the overall ‘market’ (for market, read ‘investors’) confidence for long term returns, and so the currency values and, more importantly, their differential fluctuate very rapidly. As the moves are spotted, other investors follow and so what was a trickle becomes a landslide and market watchers (spanning currency and stock market trades) use colorful terms like, “the market capitulated today” that is code for a significant swing in value (4% in the case of the Indian Sensex share index last Friday).
The global economy is very well connected it seems. And the result on you and me? Not too much day to day, though the firms we work for may trade globally, and may even hedge their costs and investments globally, so those swings do impact their behavior, even short term. Our CFO’s might be concerned, which then makes the CEO concerned too. It makes for a fascinating, dynamic environment.
But the real funny part of this concern the data used to drive these global shifts. It does not take much to spook a market. The US recently re stated its GDP by adopting a global standard, that appears to inflate it throughout its history. Market watchers continually second guess Chinese economic data since the mechanisms used to capture the data, or publish the data, are not completely trusted by everyone. Then there is the timing issue. Some of our government systems and processes have not changed in years, and are geared to large cycle or batch routines, such as a monthly consumer price index, or confidence indicator in purchasing and so on. So there is a lot of data, neigh, there is big data abound. And this nervous data makes markets nervous. And off we jolly well go.
Did you notice how growth is now being reported in the euro zone last week? How long will that last? I think it was quoted as a “robust 0.7%” or something. Not exactly confidence building was it. And let us not forget the underlying imbalances in Europe remain. Growth will help gloss over the cracks, but cracks there remain.