Opinion

Anatole Kaletsky

The markets and Bernanke’s “taper tantrums”

Anatole Kaletsky
Sep 19, 2013 16:22 UTC

So it was, after all, a storm in a teacup. Financial markets around the world have been going through a series of “taper tantrums” since May 21, when Ben Bernanke first mentioned the idea of gradually reducing or “tapering” the Federal Reserve Board’s monetary expansion. Throughout these four months, I have argued in this column that financial markets had grossly exaggerated or completely misunderstood the significance of Bernanke’s comments. This has turned out to be the case, as evidenced by the huge moves in share prices, currencies and bonds on Wednesday after the Fed announced that it would do exactly what Bernanke had suggested all along — namely, nothing.

The Fed’s decision not to cut back on its $85 billion of monthly bond purchases, even by some small symbolic amount such as $5 billion, stunned the markets — but only because analysts had refused to believe what Bernanke, along with most other central bankers around the world, was saying throughout the period since May 21. The Fed chairman repeatedly stated that tapering would begin only if and when there was consistent evidence that U.S. employment conditions were improving. Bernanke also stated that, even after tapering started, the Fed would not allow U.S. monetary conditions to tighten and would keep short-term interest rates near zero for a very long period — at least until 2015, and quite possibly beyond.

Why, then, were investors so surprised when the Fed officially implemented exactly what Bernanke had promised? And now that the Fed has put its money where Bernanke’s mouth was, how will the global economy and financial markets react?

The first question can be answered partly by the sociological forces discussed here back in May. Market expectations are dominated by traders whose job is to speculate on financial volatility and by Fed-watchers who are paid to pontificate on monetary policy shifts. These two powerful vested interests find it hard to justify their incomes by saying that nothing much is going to change in monetary policy for months, or even years, ahead. Another possible answer is even simpler. As noted here after the second “taper tantrum,” when Bernanke tried to clarify his May comments but succeeded only in provoking another wave of bearish speculation, there are times when financial markets make big mistakes — and since 2009 these mistakes have all been on the side of excessive pessimism.

Which brings us to the second, more important, question about the impact of the Fed’s unchanged policies on the world economy and financial markets. The immediate financial response was to bid up stock prices on Wall Street to a new record and boost bond prices, while pushing down the dollar to a seven-month low against the euro and an eight-month low against the British pound. The reaction among economists will probably be to downgrade expectations of U.S. economic growth, in line with the Fed’s new forecasts, which now predict growth of 2 to 2.3 percent this year, instead of the 2.3 to 2.6 percent range published three months ago. Economists in other parts of the world are likely to follow suit, downgrading this year’s expectations more or less in line with the U.S. forecasts.

Dalian Man

Anatole Kaletsky
Sep 11, 2013 21:02 UTC

The Davos economic forum, held every winter in the Swiss Alps, allows its participants to look down at the world from above: topographically because of the high-altitude location, but also symbolically, because of the high incomes, high status or high-minded rhetoric that characterize the jet-setting global elite dubbed “Davos Man” by the American political scientist, Samuel Huntington. This week, however, I discovered a sub-species of Davos Man with a very different perspective. At the “summer Davos” that the World Economic Forum now organizes every year in China, participants look at the world sideways, from the East instead of down. The shift in viewpoint is striking, even for people who travel frequently to Asia, as I do, but rarely experience such total immersion in the eastern elite’s hopes and fears.

The biggest surprise at this week’s Dalian forum was the East-West divergence of opinion on the economic outlook, both in the months ahead and in the very long term. Western economists mostly believe that developing countries in general, and China in particular, are threatened by serious financial crises as U.S. monetary policy begins to be tightened, probably as soon as the Federal Reserve Board’s meeting next week. The consensus view is that emerging economies have invested and borrowed too much, taking advantage of the Fed’s easy money and will now face painful deleveraging similar to what Europe and the U.S. experienced five years ago. This deleveraging means, in turn, that the glory days for developing economies are probably over — and most of these countries, perhaps including China, may never escape the “middle-income trap” that has prevented further progress in many developing economies. The trap starts to hobble growth when per capita incomes rise to around $10,000 and many of the obvious opportunities for catching up with Western productivity are exhausted. China’s is $9,160 according to the IMF.

When I travelled to China this week, I expected obsessive discussion of the recent shift of economic sentiment against developing countries and the resulting collapse of bonds, shares and currencies in most emerging markets this year. And indeed warnings of ruinously compounding debt burdens and dangerously unsustainable investment bubbles did dominate Western presentations, both in Dalian and at an earlier academic seminar in Shenzhen, organised by Tsinghua University and the Institute for New Economic Thinking.

Syrian intervention invokes Europe’s history

Anatole Kaletsky
Sep 5, 2013 14:51 UTC

The prospect of Congressional approval for a U.S. attack on Syria is probably good news for the world economy and financial markets, since the impact on the oil price of an intense but strictly time-limited military action is likely to be a classic case of “buy on the rumor and sell on the news.” History suggests that the moment U.S. bombs start raining down on Syria, oil prices will pull back and stock markets around the world will rise. But what about the bigger picture? How will a U.S. bombing campaign affect the stability of the Middle East and global geopolitics?

To consider these questions it helps to recall that the main principle underlying the United Nations Charter is non-intervention by foreign governments in the affairs of sovereign states. Morally, this principle is hard to justify. It conflicts with the “duty to protect” civilians from barbarous treatment by their own rulers, which Western governments have invoked when crossing international borders in response to massacres in former Yugoslavia, Sudan and Sierra Leone — and should have invoked, with hindsight, to stop Hitler in the 1930s and prevent the Rwandan genocide in 1994.

Why, then, is non-intervention still recognized as the bedrock of modern international law? A standard answer is the Peace of Westphalia — a series of treaties in 17th century Europe that legally enshrined national self-determination and inviolability of borders for the first time. But why should the world today still be bound by these 400-year-old ideas?

A guide to the upcoming financial hurricane season

Anatole Kaletsky
Aug 29, 2013 15:42 UTC

As the summer holidays wind down, the world is again moving into the financial Hurricane Season, which coincides uncannily with the meteorological hurricane season in the North Atlantic every autumn. Most great financial crises have occurred in the six weeks from late August to mid-October, for reasons I discussed in this column last September.

This year, exactly on cue, the seasonal risks are again building up: war in the Middle East; a watershed decision in U.S. monetary policy, plus the announcement of a new Fed chairman; a German election that could make or break the euro; the long-awaited “third arrow” of Shinzo Abe’s Japanese reform program; another internecine conflict over the U.S. budget and Treasury debt limit that could result in a government shutdown or even a temporary default. And I am not even counting probable policy upheavals in China, India, Brazil, Indonesia, Turkey and other crisis-ridden emerging economies, whose timing is less certain but which could also fall within the next few months.

The consolation is that confidence is likely to return to the world economy and financial markets if the political and financial storms blow over without too much damage. To gauge how the world is likely to fare under this barrage of uncertainties, consider them in turn.

Let the great economy spin

Anatole Kaletsky
Aug 22, 2013 21:43 UTC

On the way to my holiday in Italy this year, I had an epiphany about the state of the world economy. I stopped for lunch in the truly miraculous Piazza dei Miracoli in Pisa, where Galileo Galilei is said to have dropped cannon-balls from the Leaning Tower to test his theories of motion. A few years later, Galileo invented the telescope to amass the detailed astronomical observations that were needed to prove beyond reasonable doubt the heliocentric theory of the universe — the idea that the earth revolves around the sun and not the other way round, as the Bible implied. Galileo was famously tried by the Inquisition for this heresy and decided to recant, presumably inspired by what happened to his fellow-mathematician Giordano Bruno, who was burnt at the stake for similar ideas. But after mechanically recanting, Galileo muttered under his breath the rebellious phrase for which he is still renowned: eppur si muove — “and yet it moves.”

As I enjoyed my lunch in Pisa, Galileo’s defiantly optimistic words echoed through my mind. “And yet it moves” seemed perfectly to describe what I had felt about the world economy and financial markets since the crisis of 2008.

For the past five years, the media and financial markets have resounded with prophecies of doom. Economists have strained to prove why life would never be the same again; why bankruptcy was inevitable for great nations such as Italy, France, Britain and even the United States, Japan and China, and why the pre-crisis decades of prosperity would have to be followed by an era of repentance — or else a Biblical Day of Reckoning would be upon us.

Bezos needs to reinvent a business model, not journalism

Anatole Kaletsky
Aug 15, 2013 15:21 UTC

It is now a week since Jeff Bezos, the founder of Amazon,  announced that he was buying the Washington Post, in what could be the most exciting case of convergence between the new media and the old since the merger of AOL with Time Warner. But how might Bezos re-launch this venerable flagship of U.S. journalism? And what could his ownership of the Post mean for news businesses around the world?

These may seem strange questions for a column devoted mostly to controversies in public policy and economics, but newspapers today are a declining industry comparable to the steel and shipbuilding industries in the 1980s, and employ even more people at higher wages. Newspapers are therefore of great economic significance, not to mention their importance to democracy. Yet public discussion often assumes that journalism is technologically doomed. The Internet, it seems, is ineluctably turning news and analysis from a thriving industry, gainfully employing millions on decent incomes, into an unpaid hobby for philanthropists or self-promoters who will earn their living by other means.

From an economic standpoint, this fatalism is unjustified. If quality news and analysis have significant value to customers, then the people providing these services will eventually find ways to get paid. It is often claimed that the news has become worthless because Internet distribution involves zero marginal cost, but this is poor economics. The true cost of news lies not in distribution, but in the research, composition, selection and editing required for high quality writing. These costs are as high as ever today.

Mark Carney abandons Thatcher-era supply-side policy

Anatole Kaletsky
Aug 8, 2013 14:35 UTC

The era of laissez-faire monetarism is over, as the world moves by small but inexorable steps towards a new kind of Keynesian demand management. One after another, governments and central banks in the leading economies are accepting a responsibility for managing unemployment that they abandoned in the 1970s, during the monetarist counter-revolution against Keynesian economics. On Wednesday it was Britain’s turn, as Mark Carney, the new governor of the Bank of England, joined Ben Bernanke in making the reduction of unemployment his main monetary policy goal.

Carney was until recently Canada’s top central banker and was headhunted by the British government specifically to inaugurate a new era of “monetary activism.” On Wednesday, at his first official press conference, he lived up to this billing.

Instead of merely promising to keep British interest rates near zero for a predefined period of a year or two, as had widely been expected, Carney did something bolder and intellectually more controversial. By announcing that the BoE would not even consider any reduction in monetary stimulus until unemployment fell below 7 percent, Carney deliberately broke a taboo that has dominated British economic policy since Margaret Thatcher’s election in 1979.

The global return to pre-crisis growth strategies

Anatole Kaletsky
Jul 25, 2013 15:24 UTC

Margaret Thatcher used to say that “There is no alternative” to whatever policy she believed in. But there is always an alternative to banging your head against a brick wall — you can stop banging your head against a brick wall. The G20 Finance Ministers’ meeting in Moscow last weekend may have marked such a moment of revelation, when governments around the world gave up on fiscal and financial austerity, and recognized that growth based on consumption, borrowing and rising house prices is better than no growth at all.

It is now nearly five years since the Lehman crisis and throughout this period politicians and economists have been obsessed with avoiding the mistakes that supposedly produced the crisis. They have been trying to reduce debts, both in the public and the private sectors; to make their banks behave more cautiously; and to “rebalance their economies” away from their over-dependence on consumption, services and finance in favor of supposedly more sustainable economic activities such as saving, exporting and manufacturing. The virtues of saving, exporting and manufacturing are so much taken for granted these days that it is easy to forget the novelty and implausibility of the rebalancing concept.

Until 2007 conventional wisdom among economists was that manufacturing nations like Germany and Japan should restructure their economies to resemble the U.S. and Britain. It was only after the Lehman debacle that economic fashion shifted decisively against Anglo-Saxon “bubble” economies, based on debt-fueled consumption, property speculation, financial engineering and other frivolous service activities like coffee shops and computer games. Instead every nation has tried to emulate the solid virtues of the Germanic economic model, powered by exports, investment and manufacturing. Angela Merkel’s slogan that “you cannot cure debt with debt” has become an international motto, despite the fact that central banks were printing money like there was no tomorrow, and governments have committed themselves to deleveraging by homeowners, banks and the public sector, all at the same time.

The new long-term bull market ahead

Anatole Kaletsky
Jul 18, 2013 15:06 UTC

The bull market in global equities that started in the dark days of early 2009 passed a historic milestone this week. When the Standard & Poor’s 500 Index closed on Monday at 1682.5, this did not just represent a new record high and a full recovery from the swoon that Wall Street suffered after Ben Bernanke’s “tapering” comments in late May. More importantly, Monday’s record close marked the first time this key Wall Street index exceeded by more than 10 percent its peak at the climax of the last great bull market in March 2000.

Why is this important? Because a breakout this large from a trading range that has confined the stock market’s movements for many years is historically a rare event. In fact, there have only been three occasions in the past 100 years when prices have risen 10 percent above previous long-term peaks (which I define as peaks that have remained unbroken for at least five years). Each of these major breaks —  in July 1925, December 1954 and October 1980 — has confirmed a structural bull market and been followed by very large gains for long-term equity investors: 189 percent from 1925 to 1929, 245 percent from 1954 to 1973 and more than 1,000 percent from 1981 to 2000. Of course, past performance is not necessarily a guide to future results and three events are insufficient to draw statistically reliable conclusions. Nevertheless, the shattering of Wall Street records this week seems significant in several ways.

The S&P 500 is by far the most important stock market index and tends to set the direction for all other markets around the world — and history reveals that large breakthroughs, like the one that occurred this week, are very different from marginal new highs, which have been much more common and have often given false signals. There have been dozens of cases where long-standing records were broken by 2 or 3 percent and several of these were followed by large losses instead of further gains. This happened most recently in 2007, when the S&P 500 squeaked through to a new high just 2.5 percent above the 2000 record and then promptly collapsed during the Lehman crisis.  By contrast, large breakouts of 10 percent or more have consistently produced large gains.

Were Bernanke’s comments a fire drill or a false alarm?

Anatole Kaletsky
Jul 11, 2013 14:14 UTC

Whenever Alan Greenspan was praised for delivering a clear message on U.S. monetary policy, he liked to reply something along the lines of: “If you think that, you have misunderstood what I said.” Ben Bernanke prefers the opposite approach. On May 22, he triggered one of biggest financial panics since 2008 by raising the possibility of reducing the Fed’s record-breaking monetary stimulus, while admitting that he had no idea when to start this process. He spent the subsequent six weeks trying to clear up the mess that he had created by explaining in painstaking detail the precise timing and conditions under which “tapering” might or might not take place. In the process he created even greater confusion and financial volatility. It now appears that he would have done much better for the world economy — and for his own reputation — by saving his breath and imitating Greenspan’s obfuscation.

The Fed minutes published on Wednesday revealed so many divergent opinions on the conditions, timing and even direction of any change in monetary policy, that all the recent speeches and press conferences on tapering could reasonably be described as white noise. Which raises the question of why investors reacted so strongly to all this confusion. Recent market behavior around the world suggests an explanation: while Fed tapering was not in itself a very important issue, Bernanke’s comments acted as a financial alarm bell, drawing attention to risks in the world economy that were forgotten or ignored. When we hear a fire alarm we naturally ask ourselves three questions: Is it a false alarm? Is it a fire drill? Or is it a real fire — and if so, where?

Similar questions may shed some light on the tapering scare. For the U.S. stock market, Bernanke’s May comments were clearly a false alarm, since the Fed was nowhere near a decision to tighten monetary policy, as we now know officially from the minutes. It is not surprising, therefore, that U.S. equity prices have rebounded to their pre-Bernanke record highs. But looking beyond the U.S. stock market, tapering speculation seems more like a fire drill than a false alarm.

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