posted on April 29, 2016 14:21
After rallying strongly in March, world markets have been steady in April. Investors are now hoping that much of the volatility is behind us and that things will settle down a little. Sadly, I feel that is a vain hope and we can certainly expect more volatility for some time to come.
One of the key sources of this volatility is the short term thinking in world markets which, over the years, has increased to the extent of being a virtual dominant factor in the modern day. Day trading, speculation and derivative strategies drive much of the related activity, with (often-wild) automated swings strongly influencing volumes and therefore prices. Hedge funds are implicit in this as an example. As much as anything else, because there is no clear direction, intra-day trading is driven by news flow.
Although I have mentioned this many times before, I cannot over-emphasize how important it is to keep the goings-on in perspective. After the Second World War, many imbalances had built up in the world economy. Sure, there were ups and downs, some of them marked and severe, but on average there was never a real clean out. What prospered, particularly after the oil crisis in the 70s, was rapidly expanding trade globalization and a decreasing interest rate environment. This combination provided a tailwind which history now considers being the greatest period of prosperity the world has known, typified by the Bull market between 1982 and 2000/1.
When this blew up into the Dot-Bomb Bear market , instead of (this is only my opinion) allowing a recession to normalize things, along came Alan Greenspan who started printing money out of thin air which, under Ben Bernanke, became Quantitative Easing (QE).
The Great Recession presented us with an opportunity to weed out some of the imbalances which, to be accurate, has occurred, but QE took things off in another direction. One of the social consequences of the long period of prosperity I mentioned earlier was widening of the gap between the Haves and the Have-nots around the globe. QE accelerated this exponentially since 2008 and exacerbated what was already becoming the social unrest/migrant crisis we are living with.
One of the unknowns now is geopolitical risk. Ethnic tensions are at breaking point, with millennia-old battles resurfacing. We can only but wait and see how they play out this time around as they have done so often in the past.
This, together with economic uncertainty, makes investors increasingly short-sighted in the face of it. We are experiencing the consequences of that, together with the instant nature of news-flow allowed by modern technology, as the high levels of current volatility. Your guess is as good as anybody’s as to how long it will last, but, as long as it does, the volatility will continue.
Interestingly, I am hearing fund managers increasingly talking positively about world growth, led by the US, extending to Europe, South East Asia and beyond. Make no mistake, there is still much downside risk, but the clouds are starting to break up. Slowly they will clear and blue sky will emerge. It could go into the next decade for this to happen, but I am in the camp of those who believe the sky is not falling in and that we should hold onto our long term strategies.
More next time