Albert Steck: «The Year the Disasters Were Cancelled»

Albert Steck

Albert Steck

In 2016 markets panicked repeatedly – but it was false alarm on every count. The nervousness is no coincidence though, Albert Steck writes in an essay for finews.first.

finews.first is a forum for renowned authors specialized on economic and financial topics. The texts are published in both German and English. The contributions appear in cooperation with Pictet, the Geneva-based private bank. The publishers of are responsible for the selection.

The year started with a stock market crash: share prices dropped around the globe and the word quickly was of the worst start to a new year ever.

Promptly, analysts popped up warning investors that now they had to be particularly cautious. An utterly useless piece of advice, of course: an increased level of caution would have been required before stocks crashed – when no warnings were to be heard.

The frequently made assertion after a crash – that risks had now risen – is equally cheap and meaningless. In reality, the dangers had been there before. But they were ignored by the market, which is why the risk of a negative surprise hadn't been smaller before the crash, but actually bigger. Once prices already are low, the potential for further losses declines – the size of the fall for investors is smaller. And at the same time, cheaper stock prices mean more attractive valuations of shares.

«The Brexit blues was forgotten two weeks later»

If you withstood the scaremongering, you had no reason to rue your decision: the Swiss market added a remarkable 15 percent from mid-February through to the beginning of June.

Until June 23. With Brexit, the same story began all over again. Markets panicked and easily moved experts estimated in great detail just how much growth the decision would cost us. But the dark predictions didn't last long this time either: the 0.6 percent expansion of the Swiss GDP in the second quarter was pleasing. The economy grew a real 2 percent year-on-year. Which prompted the augurs to revise up their previously lowered forecasts.

The stock market was equally volatile: the Brexit blues was forgotten about two weeks later. Numerous indices reached new records, including in the U.S. and of medium-sized Swiss stocks.

Thus, 2016 will be remembered as the year that disasters were cancelled. You could put this down to the twitching of hyperactive stock brokers – in the sense of «the dogs bark, but the caravan moves on». However, this interpretation falls short.

«Central banks evoke ever new risks»

Why? The development on the financial markets is increasingly dominated by central banks. With ample money supply, their signal to the market is: «Don't worry, we have things under control.» The markets are only too eager to trust this reassurance and activate «risk-on-mode» (meaning: risky investments are being snapped up regardless).

But at the same time, central banks evoke ever new risks – as justification for not (yet) tightening interest rates. In reality, the European Central Bank and the Bank of Japan this year increased their firepower. Take the following historic interest rate graphic, going right back to the year 1517, as a way of illustration: the yield on the Dutch 10-year government bond. For the first time in 499 years, the yield dropped below zero.

«No doubt, the financial crisis of 2008 was an enormous disaster»

But the more the central banks keep firing, the more the markets ask whether the monetary policy arsenal will soon have been used up – which the central banks vehemently deny. Speculation that the safety net of monetary policy is about to give way is making the market rounds in regular intervals. That's when the markets turn into «risk-off» (liquidating risky investments) and a mad rush ensues, as repeatedly was the case this year.

Central banks would be able to stop this fatal dynamic. They should explain the limits of their powers. And renounce the use of even more aggressive instruments such as helicopter money (the financing of public expenditure through an increase of money supply). On the other hand, a little less of the doomsday scenario would also be welcome. That way, central banks would show that they have trust in the power of the economy to recover.

No doubt, the financial crisis of 2008 was an enormous disaster. But eight years on, we shouldn't have to constantly prepare ourselves for the worst disasters to happen – only for them to be called off again.

Albert Steck has worked for Migros Bank since 2007. He is responsible for market- and product analysis. He is also a finance columnist for the «Migros-Magazine» and a blogger. After his studies in Economics, Political Science and Media he worked as a journalist, among other publications also for the bi-monthly Swiss magazine «Bilanz». In 2007 he won the prestigious media prize for finance journalists in Switzerland.

Previous contributions: Rudi Bogni, Adriano B. Lucatelli, Peter Kurer, Oliver Berger, Rolf Banz, Dieter Ruloff, Samuel Gerber, Werner Vogt, Walter Wittmann, Albert Steck, Alfred Mettler, Peter Hody, Robert Holzach, Thorsten Polleit, Craig Murray, David Zollinger, Arthur Bolliger, Beat Kappeler, Chris Rowe, Stefan Gerlach, Marc Lussy, Nuno Fernandes, Thomas Fedier, Claude Baumann, Beat Wittmann, Richard Egger, Maurice Pedergnana, Didier Saint-George, Marco Bargel, Steve Hanke, Andreas Britt, Urs Schoettli, Ursula Finsterwald, Stefan Kreuzkamp, Katharina Bart, Oliver Bussmann , Michael Benz and Peter Hody.


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