Selling pressure on stocks around the world has been historic. It seems like the selling will never stop. Governments, regulators, and exchange officials around the world have been unable to stop it despite drastic efforts.
Russia shut its stock market three times in the past two months.
Indonesia closed the doors on its exchange “indefinitely” a few weeks ago (it has since reopened to even steeper losses).
Those two moves in small far-off lands could be nothing compared to what happens next.
Professor Nouriel Roubini, of New York University, has become a macro-economic expert. In 2006, Roubini warned of the bubbles forming in the U.S. housing market and credit troubles ahead. He now predicts the global financial markets will be shut down.
He thinks investors need a breather to sort it all out and make more rational moves. According to Roubini, that is the only way to stop the perilous fund redemption, forced selling, more redemption more selling cycle.
For instance, futures trading on the U.S. market were curbed because before a recent market open the S&P futures reached “circuit breaker” levels. Circuit breakers are trading halts put in place after 1987 to help prevent major stock market crashes. Trading halts are triggered during market mood swings when declines reach particular levels at particular times in a regular trading day.
They have been put in place at most of the world’s exchanges. They are there to ensure traders and investors take a breather. However, they remain untested. Even the trading halts in Russia and Indonesia couldn’t stop the bleeding. But the halts could go a long way to stop any panic selling. Roubini, former senior adviser to the White House Council of Economic Advisers and the U.S. Treasury Department, suggests if investors increase panic selling pressure, policy makers may need to temporarily shut down financial markets for one to two weeks.
On his website Roubini says,
We have reached the scary point where the dysfunctional behaviour of financial markets has destructive effects on the financial system and - much worse - on the real economies. So it is time to think about more radical policy actions and government interventions...
What matters now is only flows - rather than stocks and fundamentals - and flows are unidirectional as everyone is selling and no one is buying as trying to buy equities is like catching a falling knife. There are no buyers in these dysfunctional markets, only sellers and panic is the ugly state of this destabilizing game.
Some people are calling Roubini an alarmist and some a realist. We at Q1 Publishing believe that emerging market economies are facing tougher times than most people realize. China’s export growth will likely suffer a further slowdown. Some Chinese factories have closed their doors as a result of the global financial crisis. Standard Chartered Bank (China) released China’s GDP forecast reporting a reduction in China’s GDP for this year to 9.6% from 9.9%. China’s 2010 GDP forecast looks no brighter placing the growth estimate at 7.1%.
The commodity markets have shown how quickly demand has evaporated for raw materials.
Australia’s mining-heavy economy is feeling the pain. Since July, the Australian dollar has dropped almost 40% against the U.S. dollar. Last Friday, the AUD dropped to a five-year low against the U.S. currency.
Shares on the Australian Stock Exchange (ASX) are doing just as badly. On Monday, the benchmark index S&P/ASX200 was down 60.2 points to 3809.2, a four-year low. The downslide capped off a rough year for the mining share-laiden ASX, which has watched its entire market value collapse more than 40%.
As markets continue to tumble, the Darwinian evolution of economics will carry on. Hedge funds have already started to disappear. Roubini predicts that “things will get much worse before they get better.” He is probably right but the question remain ... how much lower will the stock market go?
