Opinion

Anatole Kaletsky

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.

This history, on its own, might not be worth remarking, since three events hardly qualify as a “pattern,” if it were not for some fundamental explanations suggested by this experience.

The three previous breakouts, in 1925, 1954 and 1980, have occurred at intervals of roughly 30 years and it is now 33 years since the last such event. So the mere passage of time suggests that a new structural bull market may be due around now. More importantly, the alternation between bull and bear phases has been related to political and economic upheavals of historical proportions. The three long-term bear markets of the 20th century were related to World War One and the Russian Revolution, the Great Depression and World War Two, the great inflation and the energy crisis of the 1970s. The transitions to bull markets happened when these crises were subsiding, even though few contemporary observers realised this at the time. In 1954, there were still widespread fears of a return to pre-war depression and even of a victory for communism in the Cold War. In 1980, almost nobody expected inflation to be tamed by Ronald Reagan and Paul Volcker or for the oil shock to go into reverse. Yet investors on Wall Street got wind of these improvements and stock market prices started to set new highs well before the good news was confirmed. Could something similar be happening today?

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.

Who will get credit for Britain’s economic turnaround?

Anatole Kaletsky
Jul 5, 2013 17:38 UTC

Mark Carney, the former head of the Bank of Canada who has just taken over as governor of the Bank of England, presided Thursday over his first monthly meeting of Britain’s Monetary Policy Committee (MPC). The meeting produced no change in monetary policy, yet Carney is already being hailed as Britain’s economic savior. The BBC even paid him the greatest compliment that any middle-aged white male could wish for, when it compared his appearance and hairstyle to George Clooney’s. Carney may continue basking in this adulation because he is lucky enough to be in the right place at the right time.

He has arrived at the BoE at the precise moment when the economic figures have started to suggest that the British economy is pulling out of its longest and deepest recession on record. One of the main reasons for this turnaround has been a sudden pickup in housing prices and mortgage lending, the traditional driving forces of the British economy. This improvement, in turn, has reflected a bold new government-backed borrowing program, whereby the British Treasury is guaranteeing up to £600,000 of new mortgage debt for anyone who can put up 5 percent of equity into buying a home. While this audacious policy attracted surprisingly little attention in the media when George Osborne announced it in his March budget, British homeowners and bankers were quick to catch on. As a result, house prices are rising rapidly across Britain, mortgage lending has rebounded to its highest level since the Lehman crisis and homebuilders’ shares have almost doubled. And all this is before the government incentives are expanded from newly-built houses to secondhand properties and remortgages in January 2014. For the moment, house prices are being bid up by cash-rich buyers who are front-running the government subsidies, in the confident expectation that a full-scale property boom will begin in 2014.

Given the powerful response to the government’s mortgage subsidies, the additional quantitative easing that was widely expected from Mark Carney’s “monetary activism” may no longer be required. It may be enough for the BoE to provide commercial banks with liquidity to finance the government’s planned credit expansion and to keep short-term rates near zero. Instead of trying to persuade the hawks on the MPC who repeatedly thwarted his predecessor Mervyn King’s requests for more QE, Carney may succeed in reviving the British economy simply by making a few speeches — the “forward guidance” he used in Canada to convince investors that interest rates would stay near zero for several years ahead.

Are markets making another blunder?

Anatole Kaletsky
Jun 20, 2013 14:50 UTC

In the four weeks since Ben Bernanke first mentioned that the Federal Reserve Board might start to taper its program of quantitative easing (QE) later this year, more than $2 trillion was wiped off the value of global stock markets — and probably far more from the value of global bonds, which is harder to estimate.

On Wednesday Bernanke spent almost an hour answering press questions to try to clarify the Fed’s policy on interest rates and QE. The result was a further steep fall in equity and bond prices around the world. Does this mean that Bernanke did not really want to signal to, and pacify, financial markets and was trying, instead, to prepare investors for higher interest rates and tougher times ahead? Or is it possible that the market has simply misunderstood his comments, both at Wednesday’s press conference and in his statement on May 22?

I have argued repeatedly in this column for the last interpretation — that tapering would not begin before the end of this year and that financial markets have misinterpreted the Fed’s intentions, partly for reasons connected with the vested interests of analysts and traders, whose livelihoods depend on convincing the world that economic policy is highly volatile and uncertain. If monetary policy were predictable and stable, which is essentially what Bernanke has promised, then the status and salaries of Fed-watchers in Washington would be hard to justify and the profits of short-term macroeconomic speculators would disappear. But maybe this view was simply wrong.

When illogical policy seems to work

Anatole Kaletsky
Jun 13, 2013 15:23 UTC

It’s cynical, manipulative and hypocritical – and it looks like it is going to work. How often do you hear a sentence like this, to describe a government initiative or economic policy?  Not often enough.

The media and a surprisingly high proportion of business leaders, financiers and economic analysts seem to believe that policies which are dishonest, intellectually inconsistent or obviously self-interested in their motivation are ipso facto doomed to fail or to damage the public interest. But this is manifestly untrue. The effectiveness of public policies and their ultimate desirability is in practice judged not by their motivations, but by their results.

Which brings me to the real subject of this column: the improving outlook for the world economy and why many economists and financiers cannot bring themselves to acknowledge it. Let me begin with a striking example anticipated in this column back in March: the boom in house prices and debt-financed consumption that the British government is pumping up in preparation for the general election in May 2015.

What’s behind the spooked stock market?

Anatole Kaletsky
May 30, 2013 16:14 UTC

Strange things have been happening in the world economy and financial markets this week. While that sentence could be written almost any time in the past five years, since the outbreak of the global financial crisis, the strangeness this week has taken a particular form that reveals more than it confuses.

Almost all the economic news recently has been favorable, or at least better than expected. U.S. home values have risen more than at any time since 2006, job losses are down and consumer confidence has been restored to pre-crisis levels. Japan has enjoyed its fastest growth in years, with evidence mounting of stronger consumption and rising wages. Even in Europe, the outlook appears to be improving as policy shifts away from austerity and toward growth, with the European Commission no longer pressing governments to hit their deficit targets. Meanwhile, the European Central Bank hints at the possibility of negative interest rates and other extraordinary stimulus measures. But financial markets have reacted to all this good news by becoming more volatile – panicky, even – than at any time this year.

Although the U.S. stock market briefly hit a record high on Tuesday, prices quickly slumped. Meanwhile, Japanese shares have suffered their steepest fall since the 2011 tsunami. Most importantly, bond markets have collapsed the world over, pushing long-term interest rates in the United States, Japan and much of Europe to their highest levels in more than a year.

The many interpretations of Ben Bernanke

Anatole Kaletsky
May 23, 2013 16:05 UTC

Federal Reserve Board Chairman Ben Bernanke testifies before Congress in Washington, May 22, 2013. REUTERS/Gary Camero

On Wednesday in Washington, Federal Reserve Chairman Ben Bernanke presented congressional testimony that repeated, virtually word for word, statements about U.S. monetary policy he has been making since last September.

The Federal Reserve, Bernanke said, would continue buying $85 billion of bonds monthly until it was confident of reducing unemployment to 6.5 percent. The scale of these purchases might be increased or diminished – but only if and when such shifts were warranted by economic statistics. Now, he said, there is no case for a change in either direction.

The radical force of ‘Abenomics’

Anatole Kaletsky
May 17, 2013 04:35 UTC

Japan’s Prime Minister Shinzo Abe in the cockpit of T-4 training jet at the Japan Air Self-Defense Force base in Higashimatsushima, Miyagi prefecture, May 12, 2013. REUTERS/Kyodo

‘The 3.5 percent gross domestic product growth announced by Tokyo Wednesday suggests that Japan may be the fastest-growing economy in the G7. Since the Tokyo stock market hit bottom exactly six months ago, the Nikkei share index has soared almost 80 percent. Meanwhile, the yen has experienced its biggest six-month move against the dollar. All these events appear linked to the election of Shinzo Abe and the regime he has installed at the Bank of Japan.

Even after 20 years of stagnation, Japan remains the world’s third-largest economy, with a 2012 GDP of $6 trillion, equal to France, Italy and Spain combined. Financiers, business leaders and economists everywhere are starting to ask the obvious question: Is Japan finally taking the truly radical action required to fix its economy and end its “lost decades”?

Has a new long-term bull market begun?

Anatole Kaletsky
May 9, 2013 16:06 UTC

Two months ago, when Wall Street first approached a record high, I warned about the dangers of “stock market vertigo” – a condition that combines the fear of buying shares at unsustainably high prices with the equal dread of not buying shares at prices that will never again be on offer if the market soars to permanently higher levels.

At that time the world’s most closely followed index, the Standard and Poor’s 500, was still bouncing along the top of a trading range that had held since the bursting of the Internet bubble in March 2000. There was no way to know whether the market’s next big move would be a plunge back toward the middle of this 13-year range or a rise to new and significantly higher records. On one hand, improvements in the U.S. economic outlook and political situation at the end of last year suggested that a breakout was more likely than the last time the index came close to its 2000 peak ‑ in late 2007, when the subprime mortgage crisis was just starting and George W. Bush was still president. On the other hand, the European crisis looked as bad as ever, China seemed to be slowing, corporate profits were stalling and investors were well aware of the huge losses suffered by people who got sucked into the market when it hit similar levels in 2000 and 2007. There was no sure way to resolve this dilemma two months ago, and there still isn’t, since prices in financial markets are always balanced, by definition, between bullish and bearish expectations that are roughly equal in plausibility.

But the market’s behavior sometimes suggests an answer – and this week appears to present such a case. In the week since last Friday, when the United States reported much stronger than expected employment growth, the S&P 500 has moved more than 4 percent above the 13-year trading range defined by the 2000 and 2007 highs. This breakout has been confirmed by the Dow Jones industrial average and by broader Wall Street indexes, such as the Wilshire 5000 and the S&P equal-weighted index. And while share prices in most other countries are still far below their 2000 and 2007 levels, the Tokyo stock market has taken off like a rocket and Germany’s DAX has matched Wall Street’s ascent.

Renewed optimism can be a double-edged sword

Anatole Kaletsky
May 2, 2013 15:22 UTC

This is a critical week for the world economy and financial markets, especially in the United States. Friday’s U.S. employment report will signal either a renewal of the economic recovery or, much more likely, will confirm that the economy is sinking into another seasonal “soft patch” for the fourth time in four years. Despite this risk, stock prices on Wall Street are at record highs, suggesting that equity investors see this slowdown as nothing more than a temporary obstruction on the way to a sustained recovery, just as in the summers of 2010, 2011 and 2012. So should we prepare for more anxiety about a double-dip recession, or can we feel confident that this summer will be followed by an autumn of strong recovery, as in the past four years?

I had an excellent vantage point this week from which to assess this question: the global conference of the Milken Institute in California, which brings together 1,000 business executives, politicians and financiers in a U.S. equivalent of the Davos economic forum, transplanted to the warmer and even plusher surroundings of Beverly Hills. Clearly, there was anxiety about the flagging recovery and the self-inflected damage caused by January’s payroll tax hike and the unplanned cuts to public spending caused by the sequestration process. But there was also a palpable resurgence of optimism about America’s long term prospects: the opportunities created by 3 billion new global consumers; the U.S. track record of innovation and enterprise; the magnetism of U.S. universities for global talent; the promise of energy independence; the transformational opportunities from “big data” and robotics; the prospect of liberalized immigration policies; and, encompassing many of these issues, a sense that the hyperpartisan warfare in Washington over healthcare, taxes and public spending had reached a point of exhaustion. Both sides, it seems, might be ready for a ceasefire, if not yet a lasting peace.

A surprising highlight of the conference was an amiable hour-long discussion between two of the most partisan antagonists in Washington’s political dramas ‑ Senate Majority Leader Harry Reid (D-Nev.) and Eric Cantor of Virginia, the ultra-conservative leader of the Republican majority in the House of Representatives. This ended with both politicians agreeing that there might be scope for a deal on the U.S. budget and thanking the Milken Institute for bringing them to California so they could talk to each other constructively in a way that simply isn’t possible in Washington. Similar sentiments came from leaders of both parties, ranging from Tennessee Republican Senator Bob Corker’s appreciation that “President Obama has put himself to the right of the House Republicans on entitlement reform” to Senator Bob Casey, a Democrat from Pennsylvania, saying that “so many people have become intolerant of hyperpartisanship – this is an even bigger issue for voters now than unemployment.”

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