Expert View: The real 'golden rule', Gordon, is don't interfere

The City is far from convinced about Mr Brown's economic talent
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The Independent Online

Such corrections are more common than you might think, but they rarely turn into proper bear markets. And as far as I can tell, this looks to be one of the 90 per cent of corrections that is for buying rather than selling. While the markets are currently trying to stabilise, it is important to scrutinise the fundamentals before going back in. The lesson of history is that the brief periods of euphoria cause people to overlook what's important amid a rush of money. When the excess money flows out, it is the quality that recovers first; the rest has to offer proper value.

The financial press has been full of the usual "explanations" to do with American interest rates, collapsing US consumption, slowing growth, economic imbalances and so on. As ever, these tell us nothing about the markets and everything about the particular obsessions of the commentator. To a man with a hammer, everything looks like a nail. The reality is that this has been entirely to do with the internal dynamics of markets and almost nothing to do with conventional economics. We tend to refer to these as liquidity events: the excess liquidity that had moved into all financial markets over the previous six months decided to head out.

When markets move sharply, it is almost always down to someone being a forced buyer or a distressed seller, and that is almost always because the cost of their borrowing has changed. So if we are to find a cause, we need to look at the price of money. And it is not the US Federal Reserve nor the European Central Bank that is to blame, nor even particularly the Bank of Japan. The real culprit here is actually the G7. In an announcement at the end of April, it proved it had fully bought into the conventional wisdom on global imbalances and the "need" for the dollar to go lower against Asian currencies. I have said on previous occasions that I regard this theory as being as full of holes as the average Swiss Cheese, but that is of no matter. As far as foreign exchange traders were concerned, they were being given a green light to sell the dollar and buy Asian currencies, secure in the knowledge that the central banks wouldn't trip them up with any intervention. The problem with all this, of course, was that pushing the yen up in value created an issue for all the people who had spent the past six months using cheap yen to finance their trading positions. Here is your rise in the cost of capital. You interfere in markets at your peril.

This political interference is nearly always good for traders and bad for national exchequers, and the fact that this particular episode is being led by Gordon Brown - the man who sold 80 per cent of the UK's gold reserves at $235 per ounce when the price is nearer $700 now - has been taken as particularly good news by the traders.

Whisper it quietly but the City is far from convinced about the Chancellor's economic and financial talent. Sure he made the Bank of England independent, and while that was undoubtedly sensible, its significance is greatly exaggerated.

More important, the dubious accounting behind Private Finance Initiatives, which appear to keep government borrowing down but actually end up raising the cost of capital, fool no one in the City. The fudging of the economic cycle to justify the "golden rule" on borrowing is equally dubious.

Of course, if you bought gold at $235 or are involved in a PFI project, you think he's great. But then George Soros probably still sends Christmas cards to John Major and Norman Lamont.

Mark Tinker is a director of Execution Stockbrokers. Mark.Tinker@Executionlimited.com

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