Nobody knows what is driving the latest outbreak of market nerves
All we know is that a slowdown is certain but what is utterly unknown is how many months or years that calamity lies in the future
A trader on the NYSE. The main worry is another recession. All we know is that a slowdown is certain but what is utterly unknown is how many months or years that calamity lies in the future. It has become a cliché to repeat Nobel Laureate Paul Samuelson’s joke that markets predict nine out of five recessions.
Commentators are scrambling to provide explanations for market turmoil. They should be put out of their misery: nobody know’s what is driving the latest outbreak of nerves. The usual suspects have been lined up: China, Greece, oil prices, an economic downturn and/or an emerging market meltdown.
The main worry is another recession. All we know is that a slowdown is certain but what is utterly unknown is how many months or years that calamity lies in the future. It has become a cliché to repeat Nobel Laureate Paul Samuelson’s joke that markets predict nine out of five recessions.
Some suspects can be dismissed out of hand. The idea that Deutsche Bank might not be able to pay its debts is simply daft. Even if it is in that kind of trouble, which is doubtful, there is no way that the German government would let a bank of such systemic importance renege on its obligations.
It is fashionable to forecast low economic growth. It’s an easy forecast to make since much of the world is indeed growing slowly. Most forecasts are usually simple extrapolations of recent trends. They are right until the trends change, which they always do, usually without warning.
Forecasts of weak growth have recently been given weight by an eminent US economics professor, Robert Gordon, who has declared an end to the era of rapid economic expansion. Less scholarly types, the ones who write financial newsletters, have adopted an apocalyptic tone: they encourage us to buy land in isolated places and to stock up on barbed wire, tinned food and guns (for those that can get to Texas).
We can’t forecast. Every time an analyst projects some number for growth they are whistling in the wind. God invented the decimal point to make economic forecasters look silly. Governments that base fiscal strategy around rosy forecasts should think again. Our own finance minister promises to spend the fruits of future growth. He would be better advised to wait for growth to materialise before making any commitments.
The favourite bugbears of eminent economists and dystopian commentators are debt, demography and the idea that technological change is over.
On government debts, at least, it is possible to be more optimistic than the doom merchants. Government bonds bought (via quantitative easing,) by just about every central bank will never be repaid. They might as well have been cancelled - although the associated Bundesbank conniption means that the ECB will never publicly admit to this. But government debt is a lot less than we think it is. Technology pessimism is baffling: how can the claim that progress is over make any sense? And we need to remind ourselves that low global growth is not the same as a recession.
Is the policy locker is empty? Surely interest rates can’t go any lower and governments can’t boost spending? So, if recession hits, nothing can be done. This is wrong. There may be little will to do much more, but there is plenty that could be done in principle. More QE (and more imaginative QE) is possible, interest rates can go very negative and even the Germans might be persuaded to loosen the fiscal purse strings. Austerity was always a choice, not an imperative.
It might just be another bout of market madness. Trend following forecasters have their counterparts amongst investors. Jumping on the latest fad is the preferred technique for swathes of day traders, algorithmically driven hedge funds and the latest robo-advisers. The majority of investing decisions are now taken by machines. And whether it is a human or a robot making that decision, herding is getting worse.
Fingers are pointed at exchange traded funds. These enable, for example, ‘short’ bets: I can sell, in a heartbeat, shares in every quoted company in the world, using leverage if I am so inclined. And I don’t have to own those equities in the first place. Lots of people are doing precisely this. Because they believe everybody else is.
There is lots to worry about – but there always is. While we must never be complacent, our only guide to the future is the past, which teaches us that markets go up and down, often violently, often for no good reason, but mostly around a gently rising trend. There is no fun, or much point if you think about it, betting on apocalypse.