What is happening with Wall Street?
United States stock markets are experiencing wild gyrations which are spreading to other markets around the world, and all the while the US economy is doing well.
Four factors – three of them related to President Donald Trump – explain this strange phenomenon:
1. The Federal Reserve Bank
Former Fed chief Janet Yellen guided the US economy through the Great Recession, keeping interest rates very low to ensure recovery. But she had been appointed by Barack Obama, so President Donald Trump fired her and picked as his Fed chief Jerome Powell, who started to raise rates.
Wall Street is now worried that he will raise rates so far that he sabotages the economy and drives it into a recession. Professional stock traders are simply trying to get ahead of the curve.
2. The trade war with China
The ruling Communist Party sorely represses the people of the country, and at the same time refuses to open its markets all the while demanding transfer of high technology secrets by Western firms that want to produce goods there. We do need to support the democratic aspirations of the Chinese people, and we have to stop this trade abuse.
Trump, though (excuse the joke), has been a bull in a China shop. The Chinese respect strength (it was Mao, after all, who said power comes from the barrel of a gun). But strength should be shown behind the scenes, with only infrequent public statements. Unfortunately that style of negotiation leaves no room for Trump’s addiction to bombast and outbursts.
Last month’s market spasm derived from news that Trump had suspended raising tariffs for three months – followed the very next day by a renewed threat to do just that. Markets hate uncertainty and with Trump there is never certainty.
3. The outcome of the Mueller investigation
Traders have been anticipating for months the results of special counsel Robert Mueller’s investigation. They have priced into their models everything up to and including impeachment, and even Trump fighting impeachment by openly calling for the US Armed Forces to back him personally by, for example, attempting a coup.
4. Hedge funds and high-frequency traders
In the 1980s, a new type of investment fund was created, which is now driving market volatility. Hedge funds engage in a wide range of risky strategies and can earn their managers hundreds of millions of dollars, if not a billion or more, in a single year. Because of this, they have huge incentive to risk everything, and also to surreptitiously cross the line into illegality.
An estimated 70 to 80 per cent of daily market trading is now made by hedge funds. Their models track a massive and ever-changing set of factors – economic, market and company-specific – looking for patterns that trigger automatic trading,
Meanwhile if the analysts think a recession is more likely (no matter what the economy is doing right now), because of Fed interest rate increases, or a trade war with China, or the Mueller investigation, or just because of the massive uncertainty generated by the United States having a deranged president, they sell.
Hedge funds that traded in “derivatives” caused the 2008 financial crisis and the Great Recession. Trump, together with the new algorithm-driven hedge funds, could easily cause in 2019 another recession or even potentially an economic depression.
Roland Watson
