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Crisis talk is in the air again.
Markets had a generally positive start to 2019, but further gains have been hard to come by as markets increasingly price in weaker global growth and a negative outcome to the ongoing trade talks between the US and China.
The fact that Brexit is going down to the wire, following three years of negotiations to effectively prevent a hard Brexit, has done little to increase confidence.
Locally, markets remain under pressure from disappointing company results, the ongoing power crisis and uncertainty about President Cyril Ramaphosa’s grip on the ANC and government.
Eminent Financial Times commentator Martin Wolf recently warned that further financial crises are inevitable.
It may be impossible to avert another market setback, he contended.
Many factors that caused crises in the past are seemingly in place now, including falling bond yields as investors flee to safe-haven investments.
The world has not experienced a crisis since 2009 with the Great Recession, which was preceded by the Dot-com bubble in 2001 and the East-Asian crisis in 1997.
Financial crises are usually preceded by massive imbalances in the financial system.
The Great Recession of 2009 followed on a booming US housing market, characterised by sub-prime mortgage lending by banks.
When interest rates rose, customers defaulted, causing a spiralling-out effect as banks went bust under the large debt yoke.
The 2001 crisis occurred due to the over-inflated valuations of tech companies, much like the present reality with Facebook, Apple and Amazon.
Today the wealth gap is even more pronounced than then, leading to gains by populist politicians globally.
Central banks usually react to crises by making money cheaper again.
Interest rates are lowered and market liquidity is increased by printing more money.
And so, economies are artificially stimulated. That has been the tried and tested strategy over the past few decades.
The US Federal Reserve (Fed), and other central banks, have been quite successful with this as inflation remains subdued.
But the challenge remains to address the unsustainable build-up of rising asset bubbles, usually the result of cheaper money.
When the Fed talks about “normalising” monetary policy by hiking interest rates, the bank is actually building in future safeguards against another financial crisis.
That means they can then lower rates in the event of a crisis, and so put the economy on a revival path again.
Up to now, the European Central Bank (ECB) and the Bank of England (BoE) have failed to emulate the Fed.
Plans to hike rates, and wind down any asset-purchasing programme, are in place, but are constantly stymied by weak economic data and ongoing uncertainty about Brexit.
In these circumstances any rate-hiking strategy will be premature as it would damage the EU economy in the tighter monetary environment before it has recovered under the looser conditions.
With the US leading the “normalisation” process, European economies are particularly vulnerable in handling any new crisis, made worse by recent weak economic data from Germany.
Growth in China is also levelling down.
President Donald Trump’s administration is particularly worried about this as a stronger dollar is widely seen as one of the main precursors of the 2009 Great Recession.
Asian money inflows into the US at the time kept the dollar strong, affecting US exports negatively.
Chinese and Japanese investors snapped up US assets, thereby increasing valuations to risky levels.
Against this backdrop the Trump administration remains worried about the growing US trade deficit and as the dollar trades at annual highs against the euro.
Looser monetary policies benefit equity markets, but could exacerbate the gap between the wealthy and others even more.
Sharp falls in equity markets will be the result of any future crisis.
In 2008 the Dow retreated 33.8%, and the JSE All Share fell 25.7%.
But now the Fed has some ammunition to address any crisis by reducing rates, which have risen to between 2.25% and 2.5% after years of near-flat levels.
This is a luxury the ECB does not have as rates remain close to zero.
Corrective actions by the Fed should boost markets again in the event of a crisis.
That is the theory, but such steps may not have the same positive effect as in the past. At least initially.
The fear factor has grown measurably, with the rush to safe-haven investments indicative of the lack of trust in central banks at present. On the positive side, the digital economy has lowered business costs.
The dominating tech companies sit on huge piles of cash, despite the monopolistic nature of Facebook, Amazon and Google.
This is a major difference with the 2001 crisis, where profit growth was lacking in a fragmented environment.
But this ostensible positive environment has yet to benefit the average worker’s pocket.
For the moment the Fed holds the balance. But forces may be building up that could be out of its control.
Maarten Mittner is a freelance financial journalist and a markets expert.
This article originally appeared in the 4 April edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.
