As government after government around the world dig into their coffers to bail out failing banks and companies, it is sentiment that is now leading markets and not the other way around. Whether in developed economies or in the Gulf, it no longer seems that pure economics and government-intervention mechanisms, however rational, might be sufficient to induce the “green shoots” of confidence and market revival. Complex market blowouts and recessions are no longer to be entirely solved using mathematical modelling and pseudo-scientific assumptions.
The reason is simple. For such modelling to be applicable, standard economic analysis has to assume that economic agents – investors and consumers – act perfectly rationally. Under such scenarios, optimum predictive equilibrium-based outcomes and models can be derived.
But life is not so simple. If real life followed the route map set out by economic theory, why is there no rush to borrow when rates are at near zero? And why are depositors, savaged by low returns on bank deposits, not returning to the real economy and buying depressed assets? In the climate of fear now gripping the world, share prices will be marked down and consumption expenditures postponed. Rallies can be short-lived if confidence retreats, and when that happens market gains are shed with a vengeance. The world’s ailing stock markets, and the savage losses in Gulf bourses, testify to this. People need more assurances. The Gulf is experiencing another rally due to the “feel good factor” following the meeting of the leaders of the Group of 20 leading and developing nations in London and the sheer size of the US$1.1 trillion (Dh4.04tn) package related to IMF programmes. If the promised funding does not materialise quickly, then despondency and selling will return.
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