Two months into 2012, it has been a challenging start to the year for travel. The current winter season has been tough although sales for this summer appear about in line with capacity, so no disaster.
How do we reconcile the relative sluggishness in the travel market with the apparent confidence in the financial markets, with leading share indexes close to post-financial crisis highs?
The FTSE All-Share index, which includes the major UK-listed travel companies, was about 4% higher month on month in January.
The FTSE 100 rose a further 2% in February and was up 1% on the first day of March. World stocks are about 25% up since hitting a low last October.
A belief that a new banking meltdown has been averted by the debt deal with Greece is one reason. The European Central Bank’s long-term refinancing deal with major banks in December is another. Signs of improvement in the world economy, though mixed, provide a third.
A perceptive article by Financial Times columnist John Authers last Saturday suggests two further, underlying reasons that should give rise to caution in any assessment of the situation.
Authers points out the ‘high’ in the markets is not quite what it seems. For a start, “world stocks as a whole remain 7.5% below their post-Lehman high” (i.e. their highest point since the collapse of Lehman Brothers in September 2008).
US stocks have ridden higher than most and a big reason for that is a sharp depreciation in the relative value of the dollar – not something we are overly familiar with in the UK since the current rate close to $1.60 to the pound compares with $1.40-$1.50 in 2009.
The dollar has nonetheless fallen in value and, since the dollar dominates world trade and markets, that has inflated the price of stocks.
Measured against the value of gold, world equity prices have fallen 65% from their peak and barely recovered from the lows of spring 2009. Measured against the Swiss franc, stocks are down about 40% and against the Japanese yen by 47%.
Authers argues: “The US currency has weakened in great part thanks to the easy money policies of the Federal Reserve.”
This is the US version of the Bank of England’s quantitative easing (QE) – the latest tranche of which the the Bank of England announced last month, taking the total spent so far to £325 billion or £12,500 for every UK household.
So according to Authers: “Much of the recovery is down to the ‘money illusion’ created by weakening the dollar.” This is another way of saying the dollar has been devalued, unnoticed by us since the pound has sharply devalued as well.
He notes a second underlying factor: “Stocks fall whenever systemic risk appears to be rising and gain whenever central banks give the market what they want.”
Share prices fell 17% in 2010 when Greece first went into crisis, rallied 35% when the Fed promised a new round of ‘easy money’, fell 26% when that ended and so on.
They fell when default by Greece appeared inevitable last autumn and rose after the European Central Bank made huge sums available to banks.
Authers argues: “History suggests this pattern could carry on for decades . . . It is what tends to happen after financial crises force big asset crashes . . . waves of fear and hope take hold successively while markets’ fundamental move is sideways.”
This attaches a Catch 22-type conundrum to the current confidence in the markets: “If easy money succeeds in reigniting the economy, that stimulus will be withdrawn.”
The devaluation that has driven up share prices has also contributed to a devaluation of household income - most obviously through inflation outpacing earnings - and that is hurting spending, including on holidays.
In passing, it is worth saying something about the Thomas Cook share price given the over-reaction every time it moves.
The company’s shares rose 23% on Wednesday and 42% last month which sounds impressive but is not. Yesterday its shares fell 20%, a move the London Evening Standard reported under the headline: “Thomas Cook starts to plunge”.
Put another way, Thomas Cook fell 5.75p yesterday to 25.25p after rising 5.25p on Wednesday and 3.75p on Tuesday. The company was up 10p overall in February (76%) against a rise in the FTSE Small Cap index (of which it is a member) of 156 points (5%).
A rising tide raises all boats, but the effect is more noticeable on a dinghy (and by that I mean no disrespect to Thomas Cook, merely a comment on the current share price). Add in some short-term speculation and the dinghy is liable to bob about.
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