Gavyn Davies

Exactly four years ago, amid almost universal pessimism, global equities embarked on a massive bull market which remains intact to this day. US equities have been flirting with all-time highs and many other global markets are near to their 2000 and 2007 peaks. Investors are naturally very focused on whether equities, having failed twice before to break above current levels, can finally overcome vertigo and sustain a bull run into unprecedented territory. After all, it is now 13 years since US equities first touched these levels, and US corporate profits have approximately doubled since then.

The market mood is optimistic. For example, Andrew Parlin of Kotell Advisors, a man who exactly called the bottom four years ago, remains bullish in this recent article. But sceptics argue that the rise in equities is just another example of the successive financial market bubbles which have been created in the past two decades. As each bubble has burst, the central banks have set about creating another, larger bubble, the latest of which, sceptics claim, is based entirely on quantitative easing, and not on the fundamental soundness of the underlying economy.

If this proves to be the case, then equities could be tracing out a massive triple top formation, which will ultimately be followed by a major crash. Which is it to be: a move into uncharted territory, or a triple top? Read more

The legal enactment of fiscal sequestration in the US last Friday brings to an end a series of haphazard measures to tighten budgetary policy since the Obama fiscal stimulus was reversed in 2010. The overall result has been to raise $3,500 billion over the next decade, around 2 per cent of GDP.

Taken together with other measures which were already in the baseline for policy, the cumulative fiscal tightening will amount to 4.8 per cent of GDP from 2010-14, of which 1.5 percentage points will occur this year, and 0.6 percentage points will come from the sequestration order itself.

This tightening has set in stone the fiscal stance for President Obama’s second term and it will ensure that the US budgetary position is “sustainable” over that period. It is not yet clear, however, whether the economy can grow robustly while the measures take effect. Read more

The major event in the global financial markets in the coming week is likely to be the nomination of a new Governor for the Bank of Japan. Very rarely does the identity of a specific individual matter so much for future central bank policy as it does in Japan right now.

The incoming government of Prime Minister Shinzo Abe has succeeded in weakening the yen by 20 per cent, and raising the Nikkei by 28 per cent, since last October. For the first time in two decades, Japan seems to have a chance of escaping from the liquidity trap. Read more

The FT recently called for a serious debate on the idea that budget deficits should be permanently monetised by the central banks. So far the most prominent response from an active policy maker has come from Lord Adair Turner, the outgoing Chairman of the UK Financial Services Authority, and a former candidate to become Governor of the Bank of England [1].

Lord Turner is under no illusion that his discussion of this policy option will open him to ridicule or worse in some quarters. He expects to be called a “dangerous man”, which is a strange description for this typically cerebral product of McKinsey. Yet he considers this risk worthwhile because he believes there should be a rational comparison between OMF or overt monetary finance (a less inflammatory term than the usual “helicopter money”) and the quantitative easing favoured by today’s central bankers.

In public, central bankers like Ben Bernanke, Mark Carney and of course the entire ECB remain firmly opposed to this idea. But it is probably being implemented in Japan, and I have been surprised (and worried) at the willingness of mainstream central bankers in the US and the UK to contemplate the option in private. This blog serves as a reminder of the serious dangers involved. Read more

Mario Draghi, ECB chief. Getty Images

Following today’s glut of monetary policy news, markets seem to have temporarily re-assessed their recent bullishness about the euro. However, investors should not lose sight of the fundamental gap that still exists between the ECB’s preference for relatively traditional monetary policy and the aggressively unconventional approach of the other major central banks. That has not gone away.

For example, the Bank of England remains in unorthodox monetary territory, as shown by its willingness to accept, for the first time, that inflation will remain above 2 per cent well beyond the two-year policy horizon. Mark Carney’s Select Committee evidence may have dashed expectations of a nominal GDP target, and he may have sounded lukewarm about more quantitative easing, but overall he remained extremely dovish, especially with regard to Fed-style forward policy guidance. Read more

Worries about global currency wars have resurfaced in recent weeks, mainly because of Japanese action on the yen. This is only the latest of several such flare-ups since the 2008 financial crash. It is hard to avoid the suspicion that the unconventional monetary policies of the US, UK and others are designed to drive down their exchange rates in order to indulge in “beggar thy neighbour” policies of the type which Samuel Brittan has condemned.

Currency wars strike dread into the hearts of most economists because they contributed greatly to the severity of the Great Depression in the 1930s, especially in the worst phase from 1931-33. The damage done to global trade in that period took several decades to repair, and a repeat of this nightmare cannot be entirely ruled out. However, there are very large differences between the policies pursued in the 1930s and what is happening now, and the results may also be very different. Read more