Early in the month it seemed the uber-bears were resting after testing our ability to stay calm in the face of highly pessimistic forecasts of stock market volatility, even crashes. We were wrong as the former Governor of the Bank of England in a new book has said “another meltdown is certain after the failure to reform the system since the 2008 crisis”.
What’s Good?
When the FTSE 100 (a good proxy for an international index) fell below 5,683 we were told that this confirmed a Bear Market. The FTSE 100 continued to fall to an end of day figure of 5,537 on 11th February although the absolute low was 5,499 during the day. The index has since risen to 6,096 on 26th February and Société Générale (PA:SOGN) has forecast an end of year figure of 6,400. However, such a forecast is akin to wearing a blindfold, throwing a dart and hoping for a double top. It is possible but the odds are long.
Andrew Roberts – Royal Bank of Scotland (LON:RBS)
As reported in Citywire on 12th January, the investment bank in a note to clients said: “Sell everything except high quality bonds.” The note explained that RBS’s primary fear was that the world was heading for a deflationary crisis, with 20% wiped off global stock markets and oil falling to $16 a barrel. Roberts also said: “China has set off a major correction and it’s going to snowball. Equities and credit have become very dangerous and we’ve hardly begun to retrace the ‘Goldilocks’ love-in of the last two years.”
Albert Edwards – Société Générale (SocGen)
After RBS told investors to “sell everything” the SocGen perma-bear forecast that in a worst case situation the S&P 500 (in some respects the US equivalent of the FTSE 100) could fall by as much as 75% from the 2015 peak, and all-time high, of 2,128. He based his analysis on the relationship between the S&P 500 index and the Shiller P/E ratio. Edwards has said: “If I am right and we have just seen a cyclical bull market within a cyclical bear market then the next recession will spell real trouble for investors.”
Mervyn King – former Governor of the Bank of England
In his new book (The End of Alchemy) he has warned that the world is on the cusp of another crash because regulators have failed in their attempts to reform the financial system in the wake of the last crisis. “Another crisis is certain and the failure . . . . to tackle the disequilibrium in the world economy makes it likely it will come sooner rather than later.” In his view, “Only a fundamental rethink of how we . . . organise our system of money and banking will prevent a repetition of the crisis.”
So What?
The FTSE 100 fell to 5,537 on 11th February and has risen 10% to 6,096 since then. The prophets of doom have their headlines but a rational view suggests cautious optimism.