Markets in Turmoil: Stuck in Perennial Gloom?

The Bank for International Settlements in Basel

The Bank for International Settlements in Basel

Economists at the Bank for International Settlements are convinced that financial markets are in for a rough ride for a while to come – despite a recent recovery of equity prices. And are offering some insights into how we could reach a more stable situation.

Equity markets are the perfect playground for doom merchants and professional optimists alike: with only a few days of rising stock prices turning the tide after the erosion that marked the first weeks of the year, hopeful voices are back in fashion.

In his latest market insight, GAM Chief Economist Larry Hatheway gives four reasons for why he believes the recent declines were excessive. He's convinced the situation is far less bleak than it may have seemed only days ago.

Lack of Confidence

Luiz Awazu Pereira da Silva, an economist and deputy general manager at the Bank for International Settlements (BIS) in Basel, would presumably frown upon Hatheway's opinion. The BIZ published a research paper in early February, where he concludes that the turbulences on the markets are here to stay for a while to come.

The world economy and equity markets are stuck in what he describes as «relatively mediocre low growth» and a «gloomy and volatile environment», fostering a «lack of confidence» among investors.

What Is Sustainable Growth?

Pereira da Silva believes that «markets still cannot firm up their expectations about what is the post-crisis long-term sustainable growth rate» is: «Thus markets remain unanchored, held more than ever hostage to the smallest rumor and, hence, as seen in the first weeks of 2016, highly volatile.»

To escape from this negative cycle, we need a plan to restore confidence in the economy, rooted in the very structures of the economy. The central banks' policy of increasing money supply to stimulate growth across the globe simply wasn't enough, because the money didn't reach the real economy, the companies.

Awash with cheap money, investors simply don't know what yield they can reasonably expect to achieve.

The Role of the Banks

Banks undoubtedly will have to restore the confidence of their clients in their ability to give sound investment advice with a long-term perspective. The bond of trust between bank and customer, which was broken during the financial crisis when venerable institutes such as UBS had to ask the government to bail them out, needs to be rebuilt, Beat Wittmann, a Swiss financial market expert, told finews.ch.

A noble goal, for sure. But escaping mediocrity surely must be the aim of everybody. The turbulence of recent weeks isn't to the benefit of anybody.

Pereira da Silva concludes: «Is our capacity to reinstate growth now resting only in using financial markets and hyper-inflating some asset class? Or can we think of alternatives?»

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