Tuesday, 19 February 2013

Stockmarkets and Bond markets can be wood-ducks sometimes

When I was at business school we looked at heaps and heaps of studies which showed that when companies announced plans to reduce costs, usually by sacking workers, their share price rose on the announcement. ( For the uninitiated cutting costs and becoming more efficient are not the same thing). A year later when costs had risen and profitability had fallen wella the share price had fallen as well.

( Update. For those who are slow on the update when companies announce a plan to cut costs what usually happens is that over time costs usually rise!)

It was almost deja vu when Oliver Blanchard showed us last year that when countries announced austerity plans their bond spread to German bunds narrowed. However as the results of austerity permeated the economy and we saw both the Budget deficit/GDP and Debt/GDP ratios blow out, usually quite badly, then what happened? The bond spreads widened! Fancy that.
See also this confirming Blanchard. Classical economics gives us another epic fail!