A Mad World

Niall Ferguson, the Laurence A. Tisch Professor of History at Harvard University, has a very interesting opinion piece in the Telegraph that is seriously worth taking a moment to read. There is a mammoth disconnect in risk assessment going on in financial markets. The financial world is paying no attention whatsoever to world events and appears to be completely out of touch with reality. It is not because of their financial acumen, either. The financial types appear to have paid no attention at all to the antics at the UN of two thugs, Ahmadinejad and his sockpuppet Chavez. Or rioting in Hungary. Or a coup in Thailand. Or pretty much any other developments in the world.

All of which might lead you to think that this must also have been a pretty disastrous time in the world's financial markets. Madmen in charge of two of the world's major oil producers. A military coup in Thailand. Rioting in Budapest. A reforming Russian banker gunned down. There was a time when just one of those stories would have sent a spasm through emerging markets. Oil prices would have jumped. The Thai baht would have collapsed. Hungarian bond yields would have soared. The Russian stock market would have tanked.

Not a bit of it. The price of crude oil for November delivery fell 5 per cent last week, even as Messrs Ahmadinejad and Chávez were holding their rant-fest. On news of the coup in Bangkok, the Thai currency declined by little more than 1 per cent against the dollar – nothing compared with its spectacular gyrations during the Asian crisis of 1997. Investors in the Hungarian stock market are not having a great year, it's true, but recent political events have barely registered. If you invested in Budapest two years ago, you have still nearly doubled your money.

To see just how far politics and economics have parted ways, just consider which of the world's stock markets have done best so far this year. In pole position is Morocco (up 58 per cent in dollar terms since January 1). Next is none other than Mr Chávez's Venezuela, up 49 per cent. In third place is Indonesia, where three Christian men were executed on Friday for their part in sectarian violence, sparking riots (34 per cent). Russia, where it is bankers who get the bullet, is not far behind on 32 per cent.

Back in January, a prudent investor, aware of the many political dangers that beset this mad world, might have elected instead to invest in secure, developed markets. But the US stock market has risen by less than 5 per cent this year. That of the world's next largest economy, Japan, is down more than 1 per cent. And the world's worst performer? New Zealand, which must be about the safest place in the world, unless you are a professional rugby player. Its stock market is down roughly 10 per cent.

Ferguson goes on to show how incredibly badly investors have been performing in this mad world. Making some really, really bad choices. Frankly, this is not a good sign that the world financial markets are paying any attention whatsoever to world events. Quite frankly, that is not a good thing.