The relationship between the real world and the stockmarket can sometimes seem tenuous. The rout on financial markets is inescapable yet people are still going to work earning money, going to the supermarket or the pub to spend it, buying fridges, TVs and even luxury cars. Spring is in the air and football finals fever is building. In short life goes on.
So reconciling what is happening with sharemarkets around the globe, and trying to comprehend the mind-bending numbers that are tossed up regularly in the media about the size of losses or asset writedowns, is far from a straightforward exercise.
For the person on the street the problems besetting Wall Street investment banks seem a long way from life in downtown Australia. With the obvious exception of the bank employees who have lost their jobs, the gyrations of the sharemarket can appear strangely disconnected from everyday business.
With words like crisis, panic and financial contagion bombarding us via newspapers, websites and nightly news broadcasts it is no surprise that consumer and investor confidence has taken a battering. For the first time in 20 years bank term deposits top the rankings in consumer surveys as the wisest place to invest.
So the need for context — and a clear head — has never been more important. We know from previous market corrections/crashes that making emotional decisions in the heat of short-term events can simply turn bad to worse.
So a critical issue is whether you believe the financial market gyrations are a portent of bad things to come in the real world economy or that over time as confidence returns in company earnings that the sharemarket will return to realistic valuations based on the long-term growth in both our economy and the global economy.
There is no doubt those in the financial sector — notably US investment banks — have done a spectacularly good job at distancing themselves from the real world. Amazing profit growth within what has been dubbed the 'shadow banking system' in recent years has been exposed for what it is: increasing amounts of poor grade debt bundled up in a way that obscures the true level of risk.
Now that the default risk is there for all to see, suddenly we are faced with a system that is seizing up on itself. It's akin to driving a car with a fine engine but a gearbox that is struggling to engage the right gear.