August Angst or Apathy
It seems as though whatever is going to happen in Syria, if it’s going to happen, when it happens, will not happen in August. Earlier this week, the opposite had seemed to be the case: the looming American/ allied attack was expected to take place within days. This delay may be a source of relief, or of additional concern – that the dithering and blithering Obama administration, with its pathetic and largely impotent British and French allies, cannot bring itself to do what it has all but said it will do because, so it believes or would have us believe, it must do.
The passing of August into September may not affect how this crisis plays out, but it might help lay to rest some ghosts from the past. The First World War, about which we can expect to hear a great deal as its centenary nears, actually broke out in early August, after a six-week slow-burn diplomatic crisis – that began with the assassination of Austrian Archduke Ferdinand in Sarajevo on June 28 – ran out of the control of the politicians supposedly managing it. A mere twenty-five years later, the Second World War broke out in early September, after a crisis over Poland dragged on through August and, having spawned the incredible in the shape of the Nazi-Soviet alliance, delivered the awful in the shape of the invasion of Poland and the ensuing declarations of war between Britain and France, against Germany.
There is considerable evidence to suggest, if not conclusively prove, that the statesmen involved did not want, nor did they expect, war to break out at those points in time – neither in August 1914, nor in September 1939. Libraries have been written on this topic, so there is n need to pursue it further here. But a fascinating and little-known aspect of the run-up to the First World War is that the financial markets failed totally in understanding what was happening and assessing where it was leading.
Many scholars believe that this is, in fact, the default mode for financial markets: they have zero ability to understand geo-political developments or predict their outcome. Indeed, as markets have become increasingly dominated by computerised models, which are based on the assumptions that human activity is a) rational and b) develops in a linear manner, the chances of financial players that rely on these models to reach any useful conclusions move toward zero.
One of the most striking analyses of market failures in this context is that of Professor Niall Ferguson with regard to the events of that dramatic summer, 99 years ago. Anyone following world events in July 1914 through the prism of the financial markets – equity, bonds and currencies – would have been unaware that anything untoward was underway. The first inkling that things were not as they should be, Ferguson found, came around the 21-22 of July, by when the diplomatic crisis was well advanced. From that point, the markets became increasingly alarmed, as might be imagined with mass mobilizations taking place across the European continent. In August they collapsed, but that was not the really bad news for investors. Rather, it was the fact that exchanges closed down completely in the course of August, trapping everyone invested in them, and did not re-open until December of that year.
Of course, it is unthinkable that markets would behave that way today, when we and they are so much more sophisticated. Or is it? Not a day passes without a market somewhere in the world closing for an hour, or three, or more, because of ‘computer glitches’. Recent examples include Shanghai, the mighty Nasdaq and humble Tel Aviv, so it cannot be said to be a localized problem.
The unpalatable truth is that the financial markets are, from a technical point of view, very vulnerable to crashing, in the sense of becoming dysfunctional under pressure. That is in addition to the now uncontested fact that, from a fundamental point of view, they have been subverted and their price mechanisms distorted by the massive and prolonged use of expansionary monetary policy. As Ferguson showed, they have never been capable of understanding or predicting geo-political or military crises. But they have never been more central, both to the macro-economy and to households’ financial wellbeing.
With that background, we enter September-October — historically and statistically the worst months for markets and the best for crises