October commands a special place in stock market sentiment. According to folklore, it is the month markets are most likely to crash, or some such other cataclysmic event takes place. It scarcely needs saying that in practice this is not what happens most years, but this doesn’t stop investors worrying.
The Great Crash of 1929 began in October, as did, 100 years ago, the destructive phase of the Russian Revolution, an event that dramatically reshaped the course of history.
It should not surprise, then, that the internet message boards have rarely been as alive with doom-laden warnings of an impending stock market meltdown, possibly combined with some seismic geo-political event, as they are right now.
The hobgoblins, werewolves and perma-bears are out in force. Jim Rogers, the investment guru who co-founded the Soros Quantum Fund, is convinced it’s the big one this time, though he has admittedly been saying this most years since the financial crisis. “Expect the worst crash of our lifetime,” he’s quoted as saying by Longview Economics’ Chris Watling.
The law of the stopped clock nevertheless dictates that Rogers has to be right at some time. Could this be his year? We can know when stock markets are overvalued; by historic standards, they are quite seriously so at the moment. But predicting the exact timing of any correction is always going to be largely guesswork.
Normally, there are two key drivers of rising asset prices. One is growth prospects, which as theInternational Monetary Fundpoints out in its latest World Economic Outlook, have improved globally quite sharply over the last year; the higher the growth, the greater the potential earnings capacity of any given asset, and the greater the wealth for spending on them. The other is interest rates; the lower the yield, the higher the price.
Post the financial crisis, there has also been a third; since then, the world’s leading central banks have pumped trillions of liquidity support into markets, buoying asset prices. Nor have these purchases been confined just to government bonds. The Japanese and Swiss central banks have also bought equities, and even the Bank of England has bought bonds in Apple, a company that scarcely needs the added bonus of official support. Markets have been doped to an unprecedented degree.
The bad news for stock markets is that this phase may be drawing to an end. The Federal Reserve has already raised interest rates a couple of times, and is now openly discussing balance sheet contraction. The Bank of England also looks odds on to raise interest rates next month. For its part, the European Central Bank is about to begin tapering its liquidity support. What happens as the steroids are withdrawn is anyone’s guess.
In a valedictory interview with the Financial Times last week,Wolfgang Schaeuble, the outgoing German finance minister, warned that spiralling levels of debt and liquidity had become the biggest risk to the global economy. It’s hard to disagree. His observation echoes similar warnings from both the IMF and the Bank for International Settlements. Risk taking in financial markets is again at excessive levels.
Yet there is an irony in all these exhortations. For if financial markets look stretched to breaking point, the real economy hasn’t appeared so good in years. Even the UK, where Brexit uncertainty is casting a pall, is benefiting from the warm glow of a world economy that seems at last to be staging a broadly based, and sustained, recovery.
The long-awaited global recovery is finally taking root, says the IMF, which with the exception of Britain, has further revised upwards its predictions for growth this year and next. Measured by GDP, some 75pc of the world is reckoned to be experiencing an upswing – the broadest-based acceleration since the start of the decade. We should perhaps be a little careful with these forecasts.
Historically, the IMF has proved a surprisingly accurate contrary indicator, such that when this global lender of last resort turns optimistic, it’s generally time to be pessimistic.
The IMF is a peculiarly poor predictor of crisis and recession. It also might be said that Christine Lagarde, the IMF’s managing director, is a bit late with her advice, which is to take advantage of the growth spurt to “fix the roof while the sun is shining”. Scarcely anyone ever takes any notice of this cliched old counsel, not least our own government, which has supposedly been “fixing the roof” for the past seven years but still sports one of the largest twin budget and current account deficits in the OECD.
The dispiriting reality is that genuine supply side and fiscal reform only happens in the depths of crisis. Politically it becomes impossible when things start to recover. Having already been through the pain, electorates are rarely in the mood to suffer more of the same when sunlit uplands come looming into sight.
One might also quarrel with some of the IMF’s proposals for roof fixing. Its economists have been taking a look at measures that might counter some of the negative impacts from technology and automation, and with quite breathtaking naivety conclude that Jeremy Corbyn is right that increased taxes on the better-off could be the solution. New IMF research suggests that some advanced economies, including Britain, could easily raise top rates of taxation, presumably with the intention of improving handouts to low earners, without damaging growth.
The IMF is a peculiarly poor predictor of crisis and recession. It also might be said that Christine Lagarde, the IMF’s managing director, is a bit late with her advice, which is to take advantage of the growth spurt to “fix the roof while the sun is shining”. Scarcely anyone ever takes any notice of this cliched old counsel, not least our own government, which has supposedly been “fixing the roof” for the past seven years but still sports one of the largest twin budget and current account deficits in the OECD.
The dispiriting reality is that genuine supply side and fiscal reform only happens in the depths of crisis. Politically it becomes impossible when things start to recover. Having already been through the pain, electorates are rarely in the mood to suffer more of the same when sunlit uplands come looming into sight.
One might also quarrel with some of the IMF’s proposals for roof fixing. Its economists have been taking a look at measures that might counter some of the negative impacts from technology and automation, and with quite breathtaking naivety conclude that Jeremy Corbyn is right that increased taxes on the better-off could be the solution. New IMF research suggests that some advanced economies, including Britain, could easily raise top rates of taxation, presumably with the intention of improving handouts to low earners, without damaging growth.
October commands a special place in stock market sentiment. According to folklore, it is the month markets are most likely to crash, or some such other cataclysmic event takes place. It scarcely needs saying that in practice this is not what happens most years, but this doesn’t stop investors worrying.
The Great Crash of 1929 began in October, as did, 100 years ago, the destructive phase of the Russian Revolution, an event that dramatically reshaped the course of history.
It should not surprise, then, that the internet message boards have rarely been as alive with doom-laden warnings of an impending stock market meltdown, possibly combined with some seismic geo-political event, as they are right now.
The hobgoblins, werewolves and perma-bears are out in force. Jim Rogers, the investment guru who co-founded the Soros Quantum Fund, is convinced it’s the big one this time, though he has admittedly been saying this most years since the financial crisis. “Expect the worst crash of our lifetime,” he’s quoted as saying by Longview Economics’ Chris Watling.
The law of the stopped clock nevertheless dictates that Rogers has to be right at some time. Could this be his year? We can know when stock markets are overvalued; by historic standards, they are quite seriously so at the moment. But predicting the exact timing of any correction is always going to be largely guesswork.
Normally, there are two key drivers of rising asset prices. One is growth prospects, which as the International Monetary Fund points out in its latest World Economic Outlook, have improved globally quite sharply over the last year; the higher the growth, the greater the potential earnings capacity of any given asset, and the greater the wealth for spending on them. The other is interest rates; the lower the yield, the higher the price.
Post the financial crisis, there has also been a third; since then, the world’s leading central banks have pumped trillions of liquidity support into markets, buoying asset prices. Nor have these purchases been confined just to government bonds. The Japanese and Swiss central banks have also bought equities, and even the Bank of England has bought bonds in Apple, a company that scarcely needs the added bonus of official support. Markets have been doped to an unprecedented degree.
The bad news for stock markets is that this phase may be drawing to an end. The Federal Reserve has already raised interest rates a couple of times, and is now openly discussing balance sheet contraction. The Bank of England also looks odds on to raise interest rates next month. For its part, the European Central Bank is about to begin tapering its liquidity support. What happens as the steroids are withdrawn is anyone’s guess.
In a valedictory interview with the Financial Times last week, Wolfgang Schaeuble, the outgoing German finance minister, warned that spiralling levels of debt and liquidity had become the biggest risk to the global economy. It’s hard to disagree. His observation echoes similar warnings from both the IMF and the Bank for International Settlements. Risk taking in financial markets is again at excessive levels.
Yet there is an irony in all these exhortations. For if financial markets look stretched to breaking point, the real economy hasn’t appeared so good in years. Even the UK, where Brexit uncertainty is casting a pall, is benefiting from the warm glow of a world economy that seems at last to be staging a broadly based, and sustained, recovery.
The long-awaited global recovery is finally taking root, says the IMF, which with the exception of Britain, has further revised upwards its predictions for growth this year and next. Measured by GDP, some 75pc of the world is reckoned to be experiencing an upswing – the broadest-based acceleration since the start of the decade. We should perhaps be a little careful with these forecasts.
Historically, the IMF has proved a surprisingly accurate contrary indicator, such that when this global lender of last resort turns optimistic, it’s generally time to be pessimistic.
The IMF is a peculiarly poor predictor of crisis and recession. It also might be said that Christine Lagarde, the IMF’s managing director, is a bit late with her advice, which is to take advantage of the growth spurt to “fix the roof while the sun is shining”. Scarcely anyone ever takes any notice of this cliched old counsel, not least our own government, which has supposedly been “fixing the roof” for the past seven years but still sports one of the largest twin budget and current account deficits in the OECD.
The dispiriting reality is that genuine supply side and fiscal reform only happens in the depths of crisis. Politically it becomes impossible when things start to recover. Having already been through the pain, electorates are rarely in the mood to suffer more of the same when sunlit uplands come looming into sight.
One might also quarrel with some of the IMF’s proposals for roof fixing. Its economists have been taking a look at measures that might counter some of the negative impacts from technology and automation, and with quite breathtaking naivety conclude that Jeremy Corbyn is right that increased taxes on the better-off could be the solution. New IMF research suggests that some advanced economies, including Britain, could easily raise top rates of taxation, presumably with the intention of improving handouts to low earners, without damaging growth.
The IMF is a peculiarly poor predictor of crisis and recession. It also might be said that Christine Lagarde, the IMF’s managing director, is a bit late with her advice, which is to take advantage of the growth spurt to “fix the roof while the sun is shining”. Scarcely anyone ever takes any notice of this cliched old counsel, not least our own government, which has supposedly been “fixing the roof” for the past seven years but still sports one of the largest twin budget and current account deficits in the OECD.
The dispiriting reality is that genuine supply side and fiscal reform only happens in the depths of crisis. Politically it becomes impossible when things start to recover. Having already been through the pain, electorates are rarely in the mood to suffer more of the same when sunlit uplands come looming into sight.
One might also quarrel with some of the IMF’s proposals for roof fixing. Its economists have been taking a look at measures that might counter some of the negative impacts from technology and automation, and with quite breathtaking naivety conclude that Jeremy Corbyn is right that increased taxes on the better-off could be the solution. New IMF research suggests that some advanced economies, including Britain, could easily raise top rates of taxation, presumably with the intention of improving handouts to low earners, without damaging growth.
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