Don’t for a moment think the market knows what it’s doing.
The 3.5 per cent surge on the Dow Jones this morning (the rise faded to under 3 per cent by close) was said to be the result of an historic consensus of the G20 leaders meeting in London and the easing by the Federal Accounting Standards Board of mark-to-market accounting rules in the United States.
Neither of those things actually happened. There were a lot of press conferences designed to push some spin, duly reported.
But in fact the G20 agreed on nothing but irrelevancies and the FASB changes, to the extent that they are remotely comprehensible, appear to be very minor indeed.
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That doesn’t mean the market will quickly reverse once the emptiness of the G20 and FASB communiqués is revealed. The market is actually rallying because investors see some green shoots in some of the global economic data coming out lately: whether the rally holds is entirely a function of whether those shoots become seedlings.
If they don’t, then the abject failure of the greatest assembly of global leaders in 60 years to agree on substantial fiscal stimulus will not help.
Yes, they did agree to give another $US750 billion to the IMF, to tighten financial regulation and to name and shame tax havens (that is, to give them some free publicity).
But on fiscal stimulus there was nothing but a round-up of what was already going on, including, it seems, some double counting. Where the communiqué drafters got $US5 trillion in existing stimulus from can only be guessed at.
The disagreement between Germany/France and the rest of the world over whether governments should keep borrowing and spending remains unresolved; no G20 consensus of expanded, coordinated fiscal policy could be announced.
But any optimism that US President Barack Obama could swan into London and cajole German Chancellor Angela Merkel into changing her mind was always misplaced. She is impervious to his charms, especially after the charming French President Nicolas Sarkozy supported her.
And anyway, everyone knows she is right in the end: indebted, deficit countries can’t just keep borrowing and spending trying to prop up demand. At some point the piper will have to be paid.
It’s the surplus countries — Germany and China — that have to do the heavy lifting, but Germany’s arms are folded across her chest and China is focused on investing in mines and infrastructure to prepare for the return of Anglo-Saxon demand for its products in the distant future.
So in London there was no agreement on restructuring the world economy to produce a better balance between the consumers and the exporters, and for the surplus countries to build domestic demand.
As for the change in US financial accounting rules, there is no detailed press release from the FASB – just a telephone conference with journalists, apparently half way through the meeting the officials had to cut it short and go back to the meeting room. They said the details would be out next week.
I listened to the entire press conference in deepening confusion. There was a hilarious section where Floyd Norris of the New York Times was trying to understand what was being announced and eventually he gave up in frustration before reporting it straight.
In general the reporting suggests that FSP 157-e (FSP stands for “FASB staff position” — that is, it’s not an accounting standard) has been changed to allow slightly more discretion on the part of banks to decide whether a market for a certain asset is “distressed” or not.
The US accounting standards require companies to value their assets at “fair value”, except that when there is not an “orderly market” for the assets the accountants can use a model based approach to valuing the loan or security rather than “distressed” market values.
There is also a change to the OTTI (other than temporarily impaired) processes, which is a hugely complicated provision that allows some losses to be shunted off into various corners of the P&L statement. It seems, if anything, to have been tightened.
I have devoted a couple of hours this morning to trying to figure out what has changed — hours I will never get back. I think it is all just spin. The FASB is trying to get a hysterical Congress off its back while maintaining some independence, as well as what it regards as the integrity of fair value accounting.
But maybe the FASB has opened the door by a crack in a burning nightclub, and the panicking patrons will now force it open the rest of the way.