American Consequences - February 2019

world economy slowed in 2018, instead of accelerating, as most economists (including me) expected. But many of the forces that caused last year’s slowdown are now reversing. Oil prices have fallen, U.S. bond yields are back to almost where they started in 2018, trade conflicts appear to be subsiding, and China is easing macroeconomic policy at least to some extent (and will probably move to outright stimulus if its economy weakens much further). The policy changes and political events just described were clearly the main drivers of last year’s market shocks. For example, January’s stock-market correction and volatility surge were clearly caused by fears of U.S. overheating and rising bond yields. Once the overheating concerns subsided, bond repricing turned out to be very limited, equities everywhere rebounded, and the dollar remained very weak. Dollar weakness and global equity strength reversed abruptly in May, when markets were hit by a perfect storm of the three political shocks that I had considered most likely: soaring oil prices in anticipation of Iran sanctions, the U.S.-China tariff war, and the formation of a left-right populist government in Italy. In October, with political risks receding, emerging markets started to outperform, stock markets stabilized elsewhere (even in Europe), the oil price returned to what looked like a stable pre-sanctions range of $60-65, and the strengthening of the dollar ended. In short, markets seemed to move broadly in line with the changing political and macroeconomic fundamentals – until everything suddenly went haywire in early

December. For the next three weeks, until December 24, the S&P 500 collapsed by 16% for no apparent reason, Brent oil plunged from $61 to $50, the dollar again strengthened, and yields on ten-year U.S. bonds fell from 3% to 2.7%. If all of the main fundamentals suggest that economic growth in 2019 could end up as strong or even stronger than in 2018, why did equity prices and bond yields suddenly collapse last month? Could it be that investors are so confused by political chaos that they have given up trying to anticipate what could happen next? If so, then markets, instead of being predictive, become increasingly reactive, simply extrapolating recent events. In a world where “nobody knows anything,” investors may be no better than Hollywood moguls at predicting the future. © Project Syndicate Anatole Kaletsky is Chief Economist and Co-Chairman of Gavekal Dragonomics. A former columnist at The Times of London , The International New York Times , and the Financial Times , he is the author of Capitalism 4.0 : The Birth of a New Economy , which anticipated many of the post-crisis transformations of the global economy. His 1985 book, C osts of Default , FIGEQIERMRǼYIRXMEPTVMQIVJSV1EXMR American and Asian governments negotiating debt defaults and restructurings with banks and the IMF.

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