No one knew how bad the typhoon would be: they just knew they had to get home and prepare. The CitySuper supermarket in the IFC mall was accordingly flooded with people from nearby offices - all of whom were trying to stock up on food. CitySuper is a luxury supermarket û and normally a very pleasant place to shop û but typhoon Pabuk turned it into a scene from a disaster movie. The store was so overrun that every aisle turned into a giant queue.
By 5pm - around two hours after the 'typhoon 8' flag was hoisted - most people were safely at home (or in a bar) and watching out of their window for the coming storm.
It never came. And four-and-a-half hours later the 'number 8' flag was replaced with a 'number 3'.
I see some parallels between this incident and what I have been observing for the past fortnight in the financial markets. If you substitute the subprime meltdown for typhoon Pabuk, you have two events where sudden bad news was thrust on the population. In both cases, no one knew how bad it would be, but in the absence of good information, they assumed the worst.
Assuming the worst they stood in irrationally long queues in CitySuper (queues which they never would have contemplated joining on a normal day). And assuming the worst about subprimeÆs contagion effect they were dumping stocks in Asia that only a month before they had been extremely bullish about - and doing so at a time when CiscoÆs boss, John Chambers, was saying this was the best global economy he had ever experienced as a businessman.
Pabuk was a storm that never happened. As to the subprime debacle, we are still waiting. To use the previous typhoon analogy, we are all now sitting at home, looking out the window watching for the storm's impact.
The main problem is information, or lack of it. We continue to fall back on our worst fears because we donÆt know how bad, or contagious the US subprime crisis will be. The data that is emerging sounds scary. Subprime losses could be $100 billion. But that in itself is not very useful information. If that loss is shared by 5,000 financial institutions, that implies they are each in hock for a mere $20 million. However, that gets to the very point: we donÆt know how many institutions are involved, and the deficit of information leads the human mind to think instead of worst case scenarios, such as a major investment bank failing, for example.
There is one price signal that I have been watching carefully: gold. If you believe this is indeed a very severe crisis - one that will derail financial markets and lead to a severe economic slowdown - this age-old commodity is one that people through history have bought at such times.
Yet the price of gold has continued to move in the range of $650-$680 (per troy ounce). If there were fears of a pending crisis, you would have expected it to break through $700 at least and be heading upwards each day.
The fact that gold has oscillated rather than surged (in fact yesterday it saw a big decline) could be interpreted thus: the markets still believe this crisis will be contained. The futures market meanwhile is predicting US interest rate cuts. Perhaps it is assumed that these will save the day? Or at least put a floor on market falls, and set the stage for a recovery.
Information problem
Markets require good information to function properly. What is evident is that in periods of extreme dislocation, such as the current one, the quality of information becomes very poor, or even non-existent. Markets do not function properly.
Markets also function on expectations, but expectations are apt to be confounded. The people of Hong Kong, for example, found typhoon Pabuk much milder than they expected.
Current expectations in the market are bleak. But will the current subprime crash actually strike at the real (global) economy and provoke a genuine financial crisis? The honest answer is I donÆt know and in the past fortnight, I havenÆt spoken to anyone that knows either. In this period û where clarity is so patently lacking û I keep thinking of a quote that related to Lord Palmerston and the Schleswig-Holstein crisis: ôOnly three people had ever understood the problem: one was Prince Albert, who was dead; the second was a German professor, who had gone insane; and the third was Palmerston himself, who had forgotten it.ö
A couple of days after Pabuk, I returned to the CitySuper supermarket. It was once again the usual pleasant shopping experience, with its normal three minute queues. I tried to cast my mind back to the chaos û one might say æneedlessÆ chaos given how limp Pabuk proved û that the typhoon had provoked. It seemed somehow hard to imagine, given the air of normality that now pervaded.
Will our own markets, like CitySuperÆs aisles, return to normal in the coming weeks û making this seem like a nasty blip û or is something worse ahead û akin to one of the severe typhoon 10s that hit Hong Kong in the 1960s? I wish I knew. In the meantime I will be keeping an eye on the price of gold.
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