Opinion

The Great Debate

from Anatole Kaletsky:

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

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.

from Anatole Kaletsky:

Markets: Exuberance is not always ‘irrational’

A pedestrian holding his mobile phone walks past an electronic board showing the stock market indices of various countries outside a brokerage in Tokyo

With the stock market continuing to hit new highs almost daily despite the appalling geopolitical disasters and human tragedies unfolding in Ukraine, Gaza, Syria and Iraq, there has been much head-scratching about the baffling indifference among investors. Many economists and analysts see this apparent complacency as a symptom of a deeper malaise: an “irrational exuberance” that has pushed stock prices to absurdly overvalued levels.

The most celebrated proponent of this view is Robert Shiller, the Nobel Prize-winning, Yale University economist who is often credited with predicting both the 2000 stock market crash and the bursting of the U.S. housing bubble. Shiller may or may not have deserved a Nobel Prize for his academic work on behavioral economics but as a practical guide to investing, his approach has been thoroughly refuted by real-world experience.

Robert Shiller, one of three American scientists who won the 2013 economics Nobel prize, attends a press conference in New HavenShiller’s status as an investment guru owes much to the timing of his book “Irrational Exuberance,” published just days before the collapse of Internet and technology stocks in March 2000. What is less widely advertised, however, is that for decades, both before and after that predictive triumph, the stock market strategy implied by his analysis has turned out to be plain wrong.

Sluggish investment will hamper recovery

– John Kemp is a Reuters columnist. The views expressed are his own –

Unable to rely on the wounded consumer, the outlook for U.S. growth in the next three years depends on business investment and exports to take up the slack when stimulus programmes wind down.
Ultra-low interest rates will help. But with the economy struggling to work off a huge overhang of unused real estate assets, and not much sign of investment elsewhere, investment spending is set to remain sluggish, condemning the economy to a weak recovery in the medium term.

Federal Reserve Chairman Ben Bernanke and other senior U.S. officials have already warned the rest of the world can no longer rely on over-indebted U.S. consumers as the principal source of global growth. There is no choice but to rely on investment and exports to take up more of the burden.

from MacroScope:

Step aside capitalism, how about leverageism

Our recent post on the End of Capitalism triggered much interest and comment.  There were plenty of diverse views, as one would expect. But one thread that came out was that what we are now seeing is not true capitalism (nor, of course, is it old-style communism). Ok, but what is it?

Anthony Conforti suggested in a comment that we need a name for what is happening,:

The first step in defining a new economic paradigm is coming up with the proper terms…new words to define a new economic environment. As words, “capitalism”, “communism”, “socialism” may now be inadequate to describe the emerging economic reality. We need new nomenclature. Any thoughts?

from MacroScope:

Crisis? What Crisis?

The title of this post is taken from two sources. One was a headline in British tabloid, The Sun, in January 1979, when then-prime minister James Callaghan denied that strike-torn Britain was in chaos. The second was the title of a 1975 album by prog rock band Supertramp that famously showed someone sunbathing amidst the grey awfulness of the declining industrial landscape.

Are we now getting blasé about the latest crisis? Not so long ago, perfectly respectable economists and financial analysts were talking about a new Great Depression. The world was on the brink, it was said. Now, though, consensus appears to be that it is all over bar the shouting. The world is safe.

Wealth managers at Barclays have gone as far as telling their clients to get over it.

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