Stock markets slipped back a bit yesterday. Gold went up a bit. And the dollar rose.
It wasn't a rout for stocks by any means. It could just be put down to profit-taking. But investors could be forgiven for feeling just that little bit more nervous.
One thing that rattled the markets was signs that Europe's recovery is flagging. The eurozone-wide Purchasing Managers Index (PMI a measure of business activity) fell sharply. Business is still expanding, but a lot more slowly than expected.
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But the most obvious worry of the day was once again, Ireland. The country's second-quarter GDP was down 1.2% year-on-year. That fuelled another spasm of fear about Ireland's ability to prop up its ailing banking sector and also remain solvent.
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It's not a worry that will go away any time soon...
This is why bankruptcy was invented
The latest slump in Irish economic growth won't make it any easier for the country to shrink its massive deficit. At 11.6% of GDP, Ireland has the biggest budget deficit in the eurozone. And that's before you worry about bank recapitalisations.
The pseudo-Keynesian mob will blame it all on 'austerity' and say that it's a lesson we need to heed in Britain. But this is nonsense. As we've said before, Ireland's economic problems aren't a case study on the battle between austerity and Keynesianism (whatever Ed Balls says). All Ireland's situation demonstrates is that once you get into a big enough hole, there's just no easy way out of it.
Ireland's situation is what bankruptcy was invented for. It's why bankruptcy is a core part of the capitalist system. The old quote goes that "capitalism without the threat of bankruptcy is like Christianity without the threat of Hell".
But that's a pretty negative spin, particularly in these more liberal days. I'd like to think of bankruptcy as being more like confession for the financial system. A company or an individual holds up their hands, confesses their financial sins, pays a penance, and then goes away to hopefully sin no more. It's an uncomfortable and perhaps painful process, but in the end the slate is wiped clean, we all learn from our mistakes, and everyone can get on with their lives.
Ireland is daring the markets
But if you go on trying to pretend the problem isn't there, or that there's a way around it if you can just keep juggling the figures for long enough, then all you do is draw out the pain. And you're constantly daring the markets to call your bluff.
As Mark Schofield at Citigroup told the Financial Times: "The Irish bond markets are vulnerable to a sell-off because of the continuing worries that the government has bitten off more than it can chew over tackling its banking problems."
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Yesterday's big leap in Irish government bond yields just demonstrates this vulnerability. The ten-year yield rose to 6.34% (in other words, the price of Irish government bonds fell). Meanwhile, the gap (spread) between the Irish ten-year yield and the yield on a similar German bund jumped to 4.16 percentage points (or 416 'basis' points). That's a record since the launch of the eurozone.
What investors really seem to be fretting over is the notion and it genuinely seems to be no more than a rumour right now that certain bondholders (although only the riskiest ones) in Anglo-Irish Bank might be forced to share some of the Irish taxpayers' pain. We're likely to find out more about that next month, but until then, the general uncertainty will keep the market jittery.
You can't trust the major currencies stick with gold
And of course, when Ireland falls out of the spotlight, there are plenty of other candidates still to take its place. Greece is an old hand at being part of "European debt crisis" headlines. But there's always Portugal and Spain sitting in the background, hoping no one will notice them.
So the eurozone is rightly or wrongly still seen as the tinderbox for the next financial crisis. Meanwhile both the Federal Reserve and the Bank of England are still threatening to hit the printing presses again at the first sniff of deflation. And this morning, there are more rumours that the Bank of Japan has been intervening in the currency markets. There's scarcely a major currency on the planet that you can trust as a store of value.
Given all that, it's little wonder that gold is within a whisker of $1,300 an ounce and silver has managed to hit a 30-year high. It's impossible to claim that gold remains a contrarian investment. It was discussed on the Today programme on BBC Radio 4 yesterday, and it's making its way into the weekend money sections more and more regularly. But the case for buying the yellow metal hasn't changed. You can read more about it in Bill Bonner's column in the latest edition of MoneyWeek, out today: Is the bull market in gold over? If you're not already a subscriber, subscribe to MoneyWeek magazine.
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