It’s called ‘de-leveraging’ in that way financial markets have in giving things terms that confuse the rest of us.
Essentially it means revaluing absolutely everything, not just houses and other property but loans, bonds, commodities, businesses, whole industries, even national governments.
And at the moment the financial markets are saying they’re aren’t worth anything. Or not as much as we all thought a short while ago anyway.
In the US the board of Citigroup, just a short time ago the biggest bank in the world, is meeting today to consider putting the bank up for sale as its share price heads towards the floor.
This despite hot denials from the company that it’s in trouble and the decision of one of its biggest investors Prince Alwaleel bin Talal from Saudi Arabia to take his stake up from four to five per cent (it didn’t cost him much, so depressed is Citi stock, just $250m).
But the markets have seen lots of Middle Eastern types throw money at bank stocks recently (they’re doing it at Barclays now, albeit for a juicy 14 per cent interest rate) only to lose it.
In the past couple of months Citi has raised about $75bn in extra capital, so it should have enough to tide it over. But the markets (maybe temporarily) have decided that the banking business model is bust so, yesterday anyway, they were selling Citi to extinction.
Even oil is now trading at below $50 a barrel as demand drops in the global slowdown, but nobody disputes that demand will rise over the medium term and we’ll run very short of the stuff some time over the next few decades. So oil should be a one-way bet then? Not at the moment.
Yesterday the US Dow Jones index of big companies fell by 5.56% to 7552, nearing just half of its 14000 peak of just 18 months ago. The London FTSE100 is below 4000, against a peak of 6700.
Dow futures in New York this morning were 293 points up, suggesting that there’ll be some bottom-fishing by investors later today.
Recently these bumps have been a ‘dead cat’s bounce’, a rally before further falls.
If something positive emerges on Citi (such as an interested buyer) or the US Senate finally agrees on a bailout for the Detroit motor industry (it’s still arguing the toss but it’ll do something) then we might see a big rally in the markets.
But a sustained rally will need investors to start valuing the things we mentioned above, the old certainties they don’t appear to believe in any more.
[Image Attribution: notcub]