Home' Trinidad and Tobago Guardian : October 4th 2015 Contents OCTOBER 4 • 2015 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
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That year India s current-account deficit, for
instance, was USUS$16 billion, but the gross capital
flows washing into the country were 28 times
bigger, partly offset by outflows. Since the 2007-
2008 crisis, low interest rates have encouraged
large-scale speculation, with capital flooding into
emerging countries. This year s chaos in the currency
markets has reflected the unwinding of these posi-
The third problem is the dollar and America s
role in the system. The greenback reigns supreme
by every yardstick for an international currency:
as a medium of exchange, a unit of account, a store
of value and a reserve asset held by central banks.
The euro has lost ground, the yen has flopped and
the yuan is still in diapers.
By one estimate the de-facto dollar zone accounts
for perhaps 60 per cent of the world s population
of America, the countries whose currencies float
in sympathy with the dollar and countries with
dollar pegs, such as China.
By law the Fed sets its policy to suit America
alone, but a great archipelago of offshore dollar
deposits and securities exists outside America.
Dollar payments pass through banks that directly
or indirectly deal with New York. Countries trade
flows and some of their debts are in dollars, so this
is the currency they need.
There is no guaranteed lender of last resort,
however. The Fed lends dollars to foreigners on
ad-hoc terms. The International Monetary Fund
has insufficient money and legitimacy to play this
role. Instead, many countries have built up enor-
mous safety buffers of dollar reserves in the form
of Treasury bonds.
Those vast global capital flows tend to move to
America s financial rhythm. Countries with currency
pegs have to mimic Fed policy or risk excessive
capital inflows if they keep rates too high, or out-
flows if they keep them too low.
Global banks are financed in dollars, and expand
and contract to mirror conditions in America. Com-
panies with dollar debts or deposits have no control
over changes in their interest costs or income.
Giant global investment funds, usually headquar-
tered in America, often borrow in dollars, and their
mood swings to the beat of Wall Street.
Like Tolstoy s unhappy families, every country
in the dollar system is unhappy in its own way.
The three problems listed above are mixed into a
giant omelet that is near-impossible to unscram-
ble.America could find sneaky ways to create safe
assets, such as offering blanket guarantees of bank
deposits and corporate bonds to make them as safe
as government bonds. It could issue far more bonds
that it needs and invest the surplus abroad, acting
like a sovereign-wealth fund.
After the bailouts of 2008, however, Congress
wants to limit the scope of the Fed s safety net.
Some believe that the IMF could meet the demand
for safe assets by creating more Special Drawing
Rights, a form of quasi-money based on a basket
of major currencies. If countries wanted to diversify
their reserves, however, they could easily do this
directly, without a need for SDRs. They want dol-
The global monetary system is unreformed,
unstable and possibly unsustainable. What it needs
is an engineer to design smart ways to tame capital
flows, a policeman to stop beggar-thy-neighbor
policies, a nurse to provide a safety net if things
go wrong and a judge to run the global payments
If America s political system makes it hard to fill
those vacancies, can China do any better?
Have the recent stock mar-
ket declines made you
queasy? Over the past six
weeks, stocks have lurched
lower---down 12 per cent
from their May high---
bounced back, then dipped again. The roller-
coaster ride is enough to make even seasoned
thrill-seekers a bit jittery.
The stock market is a leading indicator
for the economy; in fact, it is one of 10
components of the Conference Board Lead-
ing Economic Index. So should investors be
worried about the economy slipping into a
"The stock market is the best economic
barometer out there," says Jeffrey A. Hirsch,
editor at Stock Trader s Almanac & Almanac
Investor. "In conjunction with the bond
market, it is where all the biggest money
managers lay their bets on the economic
Pullbacks, corrections and bear markets.
How low is low? Market analysts generally
define a zero to 10 per cent decline in the
stock market as a pullback, a retreat of 10
per cent to 20 per cent as a correction, and
a drop of 20 percent or more as a bear mar-
In August, the Standard & Poor s 500
index dropped 12 per cent, which counts as
a correction. But sometimes a market just
needs to let off a little steam, which can
actually be a good thing. "On average, once
a year, you will see a 10 percent or more
correction. The last one we had was 2011,"
says John Canally, economist at LPL Finan-
cial in Boston. "Now that we ve had a cor-
rection, it s like the first snowstorm you get
for the year in New England; people forget
how to drive in the snow."
In other words, the market was overdue,
and since it s been awhile since we ve seen
a correction, investors may be a little
unnerved. While history shows that the
stock market is a good predictor of reces-
sions, not all corrections signal that a reces-
sion is ahead.
"Does a 10 per cent-plus decline in the
S&P 500 predict that a US recession will
soon be at hand? Not according to history,
which shows that while all recessions were
preceded by corrections or bear markets,
there were nearly three times the number
of 10 per cent-plus declines than there were
recessions since 1948," says Sam Stovall,
managing director at S&P Capital IQ in New
Canally says that generally, "you get a
recession once about every 10 years, but
you get a 10 per cent correction about once
a year." Investors can take some comfort
that the recent volatility and stock market
weakness doesn t necessarily spell economic
What s behind the recent stock market
nervousness? Pick your poison. Uncertainty
about the Federal Reserve and upcoming
rate hikes is one factor, but there are plenty
of other triggers. "The correction was due
to a decrease in investor confidence, lowering
valuation levels, caused principally by events
in China and emerging markets rather than
by a decline in the US economy," says Brad
McMillan, chief investment officer for Com-
monwealth Financial Network in Boston.
But looking ahead, stock market bulls
remain optimistic. Canally points to a year-
end target on the S&P 500 at 2,050. McMil-
lian also expects a rebound by year s end in
the S&P 500, which is down about 8 percent
year to date.
"Right now, 2,000 is the most probable
level," he says. "This is the upper end of
the current range. I do not expect confidence
to rise enough to justify breaking this level,
but I also expect market improvement
toward the end of the year as the US econ-
omy continues to grow."
Moving ahead. The stock market may be
taking your pension plan for a roller-coaster
ride, but the chance of a recession is remote.
"We see the odds of a recession in the next
12 to 18 months as pretty low. History shows
the odds of recession are about 10 per cent,"
If you are a long-term investor with a
time horizon of five or more years, sit tight,
McMillan says. "You can do more damage
to your portfolio than the market can over
the long term. For money you need in the
short term, reduce your risk exposure to
something you feel comfortable with in the
event of a market downturn."
The price retreat also means there could
be bargains to be found. "A number of high-
quality stocks have fallen more than 20 per
cent from their 52-week highs, meaning
they themselves have undergone a bear mar-
ket and represent a buying opportunity,"
Stovall says. He points to the energy sector,
where earnings are expected to be off nearly
66 per cent in the third quarter. "But that
will likely be the trough quarter for that
sector, and things will gradually improve
from here," he says.
Continue to stay the investment course
if you are fully invested, Stovall says, adding:
"Don t let your emotions become your port-
folio s worst enemy." US News
Is the stock market
signaling a recession?
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