Just like me, you all have seen the stock market plunge over the last couple days. The Dow Jones Industrial Average has fluctuated between 9700 and 11200 in the course of 3 months, or a band representing more than 15% of its value. Has the economy changed that dramatically? Quarterly results of enterprises keep coming in and most are reasonably positive. Employment is slowly starting to recover. Exports increases. So, what’s the issue? Why such variations.
Oh and by the way, if you want the whole picture, you should also look at the currency evolution (e.g. Euro/USD) and the oil price. In my mind two things play an important role, first rumours and second speculation. many rumours are floating around and as the global nature of the market makes it more complex, more difficult to understand, many decisions are made with gut feel rather than with true knowledge of the situation. Let me give you an example. Greece fundamentally cheated in underestimating their dept. Not knowing the exact situation resulted in a large amount of alarmist rumours, resulting in the Euro being hit hard.
First, lets look at some facts. The Greek depth is estimated at the end of 2011 to be around 150% of GDP, surpassed by countries such as Japan (189.3% estimated in 2009). Has the yen been under pressure lately?
Second, resulting from this revision of the Greek debt, the Euro is put under pressure by the speculators, pointing towards its disaster and dismantling. It’s all about the end of the Euro. There are a couple interesting elements to take into account. Who remembers that the Euro/USD conversion rate is still a little higher (1.25 when I write this) than it was at introduction of the Euro (1.18). Actually the Euro went as low as 0.8252 on October 26th, 2000.
So, all this being said, rumour was fuelled by alarming articles in the press. And speculators jumped on this to make money. Businesses have been struggling to manage to keep the course in the middle of this variance. Knowing that the international money transfer for speculation is many times larger than the one for business, the question whether something needs to be done to stabilize the market, has to be raised.
Yes, there is a recovery, but it is still a frail one. Should we allow speculators, only out there to make money, to potentially ruin the recovery, and with it ruin the savings of the general population. All of this under the motto of the free economy?
If we add to this the variability in the price of raw materials, manufacturing companies need to take this variability into account. Having spent the last year reducing costs within their enterprises and across their supply chains, they have become way more vulnerable to these erratic movements. They really need to increase visibility on what is happening to ensure profitability remains down the line. That’s not easy as it requires the set-up not just of business intelligence systems, but also of closer and more positive relationships with the partners in their ecosystems. And that takes time.