Summer markets are over. Autumn winds blow chilly and cold.
by George Hatjoullis
The autumn markets begin with western economies in good health. So much so, that the Federal Reserve of the USA is almost inevitably going to start withdrawing the recuperative medicine on September 18. This is widely understood and has been discounted a couple of times already. However, it is not a simple matter of buying developed equity markets now and maybe taking a cruise (if you like that sort of thing).
The period between September 1 and October 31 is invariably treacherous for equity markets. Definite trends usually begin at the start of November, carry on into January and often extend to May. Of course, any one year may deviate from the average but this is the pattern. Moreover, there is still the matter of the dogs of war having slipped their leash.
There is no popular support for punitive action in Syria. It is not because the populations of the west do not care, or that they support the use of chemical weapons. It is largely because they do not trust the motives of their own governments or what they are told by them. The fact that there has been a gas attack is not disputed. There is however a clear unwillingness to accept the assertion that it was the Assad regime that perpetrated the attack. There is also some concern that, given the nature of some of the rebel forces, an attack on Assad is aiding enemies of the west in the ‘war on terror’. Finally, there is general war weariness and a lack of will to attack as policemen of the world. It is expensive and no one seems to appreciate the effort. Perhaps the strangest development, but most welcome, is that leaders of western democracies are asking the elected representatives for support in this venture. They do not need to do so.
In the UK, the elected representatives gave a clear NO to the principle of military intervention in Syria. To everyone’s surprise President Obama has also decided to ask the House of Representatives in the USA. The commander-in-chief asking for permission to go to war! We await the answer and Obama’s response. Meanwhile, the Assad regime have plenty of time to prepare for an attack. The good news is that with all this scrutiny further gas attacks are unlikely. An attack on Syria cannot be ruled out and the unintended consequences are quite difficult to predict.
The role of military adventures is not always appreciated by electorates. It is usually easy to sell such adventures by appealing to base jingoism ( no longer it seems). However, the true role is economic. Unlike investment, which boosts the economy but has the (un)fortunate characteristic of also boosting supply, war creates demand and typically reduces supply. It is a very effective way of boosting an economy, albeit ethically reprehensible. Ethics however are not the strong point of the global industrial complex.
In the sphere of the middle east the matter has the added complexity of crude oil (Texas tea). The industrial complex has done good business providing Sunni medieval monarchies with weapons and other high-tech goods in exchange for oil (money just intermediates). One suspects that there is great pressure from the industrial complex, which has huge funds available to it for lobbying, to aid the Sunni rebels, whatever the rebels’ ultimate aims. There is no doubt that Saudi Arabia and the Gulf States are using their influence with the Industrial complex to lobby the west to intervene in Syria.
One might ask why Saudi Arabia and Turkey, two Sunni states, do not act against the Assad regime? They have the firepower. We sold it to them! No doubt logical reasons can be constructed. Containing the conflict comes to mind. Such action by Turkey and Saudi Arabia might suck in Iran and if it becomes a religious conflict who knows where it may end. Then again, action by the west may bring it into conflict with Russia. An even more dangerous prospect. The west has weapons and standing armies and they need to use up some weaponry so it can be replaced and thus create jobs. Perhaps the outbreak of democracy and pacifism in the west reflects the view that such a boost is not necessary at this point. The economies of the west are doing just fine without a further demand boost. The lack of compelling economic imperatives and the risk of escalation may yet keep the west out of the Syria conflict.
Moving on from such cynicism (well the blog is about looking at things from many angles), what is the market outlook? The outbreak of pacifism may lead to a new trend in international politics; diplomacy. This is bad news for the industrial complex but no doubt other non-investment outlets will be found. Maybe space exploration will get a boost, though this too can have military implications. The most likely immediate trend is a sharp rise in public and private investment. An expensive high-speed rail link will do the job just as well as a war in the short-term.
The investment-accelerator will boost economic activity further for a while. However, eventually the investment will start to produce output and this will need to be sold. Unfortunately, Says Law does not apply and supply does not create its own demand, so it will become necessary to find ways of boosting demand again at some point to avoid or recover from recession. The good news is that with a global economy and plenty of populations not yet satiated with material possessions ( or even food and water) this may take a while. Perhaps by the time the problem comes around again economics will have found a solution that does not involve a destructive war. My money is on space exploration.
The immediate implications for markets is that, once the autumn winds have blown themselves out, equity markets will start to trend up again. Use the next two months to buy dips but don’t rush. There will be plenty of dips.