The markets were delighted with this autumn "Fassnacht". Two years after the worst financial crisis of the post-war period came to a head, the Basel III accords marked a decisive first step towards deep-running, structural changes. One can criticise stretching the accords' implementation over nine years, which of course seems very long, but would it be realistic to move faster with after-shocks of the credit crunch still reverberating? Beyond the mixed impression conveyed by 2010 so far, we can only note that this summer brought a measure of seriousness starting with some real budget discipline in Europe and ending with a concerted plan to shore up banks' capital ratios. Let it go on record that meanwhile in America the Federal Reserve continues to feed pep pills to an economy that seems a shadow of its former self, and that is worrying. Yet we should not play down a major collateral consequence: interest rates are being kept at rock-bottom. Thus, those with money can have confidence in future investments. 2011 could actually bring some pleasant surprises even though many forecasters are saying the opposite.
In a declining, hollowed-out economy like America's saddled with 20% underemployment, raising interest rates would be suicidal. The emerging countries, whose currencies are local in scope but pegged to the dollar, are exploiting the situation. So is Europe with its high value-added products and luxury industry. The sharpest swings in the markets these days are indeed in currencies, but even so everyone is putting their cash to work with the end of the year approaching. Precious metals, commodities, equities and fixed income are taking off helter-skelter, in seemingly aimless counterpoint to the month of May when they all tanked.
Caution tells us that at some point we should take our foot off the accelerator, but as long as markets around the world go on dancing to the Basel carnival music with Ben Bernanke playing the trombone while raining down dollars from his helicopter (he promised he would), the party will roll on.
Frédéric Binggeli
Banque Privée Edmond de Rothschild S.A.
18 October 2010