Opinion

Anatole Kaletsky

Here’s what it will take to trigger the next stock market correction

Anatole Kaletsky
Aug 21, 2014 22:57 UTC

Traders work on the floor of the New York Stock Exchange shortly after the market's opening in New York

As Wall Street hit another new record Thursday, it is worth considering what could cause a serious setback in stock market prices around the world. Since I started writing this column in 2012, I have repeatedly argued that the rebound in stock market prices from their nadir in the 2008-09 global financial crisis was turning into a structural bull market that could continue into the next decade.

Asset prices, however, never move in a straight line. It has been more than two years without even a 10 percent correction and five years without a 20 percent setback. This cannot go on.

Sometime in the not-too-distant future, investors are certain to suffer some big and painful losses — even if I am right in expecting equity prices to continue rising in the long term. What kind of event is most likely to end this bull run, or at least interrupt it with a setback of 20 percent or more?

Bull figures are pictured in front of the German share price index DAX board at the German stock exchange in FrankfurtThe obvious answer is a major economic crisis, such as the near-breakup of the eurozone in 2011-12 or a U.S. recession. Another possible trigger would be a substantial increase in interest rates.

All the worst bear markets in living memory — 1973-74, 1980-82, 2000-02 and 2007-09 — occurred after a series of rate hikes by the Federal Reserve, and monetary tightening is the most widely discussed investment risk today. But on closer inspection, neither economic fundamentals nor monetary policy looks like a serious threat, at least in the year ahead.

Can central bankers succeed in getting global economy back on track?

Anatole Kaletsky
Aug 15, 2014 22:24 UTC

Stanley Fischer, the former chief of the Bank of Israel, testifies before the Senate Banking Committee confirmation hearing on his nomination in Washington

Why is the world economy still so weak and can anything more be done to accelerate growth? Six years after the near-collapse of the global financial system and more than five years into one of the strongest bull markets in history, the answer still baffles policymakers, investors and business leaders.

This week brought another slew of disappointing figures from Europe and Japan, the weakest links in the world economy since the collapse of Lehman Brothers, despite the fact that the financial crisis originated in the United States. But even in the United States, Britain and China, where growth appeared to be accelerating before the summer, the latest statistics — disappointing retail sales in the United States, the weakest wage figures on record in Britain and the biggest decline in credit in China since 2009 — suggested that the recovery may be running out of steam.

As Stanley Fischer, the new vice chairman of the Federal Reserve Board, lamented on August 11 in his first major policy speech: “Year after year, we have had to explain from mid-year onwards why the global growth rate has been lower than predicted as little as two quarters back. … This pattern of disappointment and downward revision sets up the first, and the basic, challenge on the list of issues policymakers face in moving ahead: restoring growth, if that is possible.”

Yellen’s remarkably unremarkable news conference – and why it’s a good thing

Anatole Kaletsky
Jun 19, 2014 20:03 UTC

Yellen holds a news conference following two-day Federal Open Market Committee meeting at the Federal Reserve in WashingtonJohn Maynard Keynes famously said that his highest ambition was to make economic policy as boring as dentistry. In this respect, as in so many others, Federal Reserve Chair Janet Yellen is proving to be a loyal Keynesian.

Yellen’s second news conference as Fed chair conveyed no new information about the timing of future interest rate moves. She gave no hints about an “exit strategy” for the Fed to return the $3 trillion of bonds it has acquired to the private sector. She told us nothing about the Fed’s expectations on inflation, employment and economic growth — not even about the board’s views on financial volatility, regulation, asset prices or bank credit policies.

Yellen refused even to repeat, or repeal, her earlier answer to a question about the meaning of the “considerable period” she expected between the end of tapering and the first rate hike. At her first news conference, Yellen responded to a similar question by blurting out “six months.” This caused an eruption of volatility in financial markets — that lasted about five minutes.

No reason for these stock market jitters

Anatole Kaletsky
May 8, 2014 21:49 UTC

anatole -- unhappy trader

“Sell in May and go away.”

This stock market adage has served investors well four years in a row. Every year since 2010, stock markets around the world have suffered significant corrections between a high reached in May and a low in the summer or early autumn: by 15 percent in 2010, 19 percent in 2011, 9 percent in 2012 and 5 percent in 2013, as gauged by the Standard & Poor’s 500.

Given that the Dow Jones Industrial Average hit its highest level ever on April 30, while the S&P 500 peaked less than 1 percent shy of its all-time record, it may seem sensible to follow the seasonal adage. Regardless of one’s views about the long-term prospects for the world economy.

That is precisely how financial markets have behaved since May 1. In the past week, investors around the world responded negatively to what have been, by any standards, extremely favorable economic figures from the United States, Britain and even Europe.

Janet Yellen’s moment

Anatole Kaletsky
Mar 18, 2014 15:37 UTC

When Janet Yellen chairs her first meeting of the Federal Open Market Committee Tuesday and Wednesday, she will be presented with a once-in-a-generation opportunity that even her predecessors in the world’s most powerful economic position have rarely enjoyed.

Not only can Yellen alter the guidance on interest rates with which the FOMC has been steering global financial markets. Beyond that she could do something far more profound and exciting: transform an entire generation’s way of thinking about economics, market forces and the role of government in achieving and maintaining prosperity.

To start with the obvious, Yellen will almost certainly change or simply abolish the unemployment “threshold” of 6.5 percent announced early last year as a reference point for the FOMC to start considering the possibility of higher interest rates — perhaps setting a threshold of 5 percent or so. More radically, she could supplement the objective of lower unemployment with a range of other indicators that will need to improve before the Federal Reserve even considers any monetary tightening: for example, accelerating gross domestic product growth; strengthening productivity trends and eliminating the excess capacity in many industries that is now discouraging investment, hiring and productivity growth, as well as holding down corporate pricing power.

A central banker’s ‘license to lie’

Anatole Kaletsky
Jan 30, 2014 21:43 UTC

Federal Reserve Chairman Ben Bernanke, who retires this week as the world’s most powerful central banker, cannot be trusted.

Neither can Janet Yellen, who will succeed him this weekend at the Federal Reserve.

And neither can Mark Carney, governor of the Bank of England; Mario Draghi, president of the European Central Bank, or any of their counterparts at the central banks of Turkey, Argentina, Ukraine and so on.

The end of the Fed’s taper tantrum

Anatole Kaletsky
Nov 21, 2013 15:03 UTC

Following Wednesday’s publication of the Federal Open Market Committee minutes, we now know that a reduction in U.S. monetary stimulus could be on the agenda for the next FOMC meeting on December 19. How much does this matter?

When the Fed unexpectedly decided not to “taper” in September, the markets were stunned and gyrated wildly, although investors had only themselves to blame for being wrong-footed in this way. Ben Bernanke had made crystal clear his reluctance to reduce monetary stimulus as long as the U.S. economy appeared to be weakening, which appeared to be the case throughout the summer. By December 19, the situation may well be very different, since the economy will probably be improving and the U.S. fiscal stalemate may well have been resolved. If such improvements happen, the Fed will have no compunctions about wrong-footing investors again, in the opposite direction, as this column suggested last month.

So what will be the impact on the world economy and financial markets if the Fed decided to taper as early as December? The answer is, not much. As long as the Fed stands by its commitment to keep interest rates near zero for the foreseeable future, tapering will have no major economic impact. Therefore its financial significance should also be marginal, except insofar as investor psychology overwhelms rational economic analysis.

Central bank stimulus is here to stay, but what if it fails?

Anatole Kaletsky
Nov 14, 2013 16:29 UTC

If anyone still doubted that central bankers all over the world will keep interest rates at rock-bottom levels, those doubts should have been dispelled this week. Janet Yellen’s statement on Thursday to the U.S. Senate that the Fed has “more work to do” to stimulate employment, and that “supporting the recovery today is the surest path to returning to a more normal approach to monetary policy,” capped a series of surprisingly clear commitments to easy money from central bankers this week. On Wednesday Joerg Asmussen, a member of the executive board of the European Central Bank, and Ewald Nowotny, the Austrian central bank governor — both of whom had previously been reported as voting against last week’s surprise ECB rate cut — said that they might in fact support further rate cuts and even negative interest rates, as well as the possibility of breaking the taboo against U.S.-style purchases of government bonds. And Mark Carney, the Governor of the Bank of England, reiterated more strongly than ever that any early increase in British interest rates was out of the question, despite the fact that the outlook for the British economy has turned out to be much better than the BoE had expected.

But what if these zero interest rate policies produce disappointing results in the year ahead, as they have in each of the past four years? What if the world economy fails to spring back to life or just plods along with sub-par growth, despite all this stimulus, as has happened in each of the past four years?

With luck, these questions will not need answering because fiscal austerity has acted as a powerful headwind to economic recovery in the U.S., Europe and Britain and these budget consolidation efforts are now being relaxed. The new records on Wall Street and other stock markets suggest growing confidence among investors that monetary stimulus will finally deliver decent levels of growth next year — and this does indeed seem likely. But what if the optimism turns out to be wrong? What if the U.S. and Britain fail to grow by at least 3 percent next year, and what if Europe stays stuck with sub-1 percent growth and mass unemployment? In that case, the monetary and fiscal policy experiments since the Lehman crisis would have to be judged as failures — and that judgment would open the way to much more radical ideas than zero interest rates and QE. Such radical ideas would be of two opposing types.

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