I saw a wonderful cartoon this week, which had two kids (one of whom is holding a needle close to a balloon) approaching a balding middle-aged man reading one of the financial newspapers, with the caption "Watch him jump". Replace the adolescents with today's politicians (actually scratch that, most politicians are still adolescent at least as far as their mental growth is concerned) and the balloon as burst; you have the perfect picture of what happened in the markets.
Anyone looking for the "new normal" doesn't have to look too far from the events that drove this week's trading so far. In summary, academics and economists (reportedly there is a difference between the two) have been searching for a "new normal" for the world economy as it attempts to recover from the crisis of 2007.
What they are missing is that the "new normal" isn't going to be defined by the relative economic growth of various countries or the dynamics of inflation; what will define it (as is increasingly becoming clear) is the return of absolute, gut-wrenching volatility that makes investing a permanent state of siege. In that environment, investor behavior is reactive rather than proactive and surprises abound on both the up and down directions.
Welcome to a new world where the definition of order is a state of continued chaos.
What caused this meltdown?
