Stocks were down for the fifth day in a row, buffeted in part by falling oil prices.Eduardo Munoz Alvarez/Getty Images
As panic rampages through global markets, driving frantic investors to the traditional safe harbour of top-rated government bonds and cheering up depressed gold bugs, the blame game is in full swing.
The spotlight has been turned on everything from the gloomy oil picture, falling inflation and fumbling central bankers to mixed U.S. economic signals, fresh worries about Chinese growth, the health of banks everywhere, scary media reports and even the plunging Baltic dry index, the closely watched indicator of shipping activity.
The latest culprits picked out of the police lineup: The Swedish central bank's bigger bet on negative interest rates; Fed chief Janet Yellen's testimony before largely clueless U.S. legislators; and bearish hedge-fund manager Kyle Bass's assertion that Chinese banks are facing huge losses that dwarf those of the U.S. financial system in the 2008 crash.
All are fanning fears that another U.S. and global recession looms, that central banks have run out of ammunition to fight it the way they did during the previous financial crisis and that more than a few of the world's major banks aren't in good enough shape to withstand the ensuing fallout.
"Frightened people are grasping at excuses," David Ader, head of government bond strategy with CRT Capital Group, said in a note Thursday. "[The market is] off simply because it's got to run its course until the panic is exhausted."
For that to happen, though, we'll need more evidence that the global and U.S. economies are resilient enough to weather coming storms and that central banks can keep propping up financial assets.
Fleeing markets in the midst of a stampede sounds like a terrible idea. But dashed expectations lead investors to expect the worse to come. And waiting out a prolonged slump may take more time and patience than most worried market players are willing to bear.
Ms. Yellen took pains Thursday to deny that the Fed was responsible for the investor angst, even though her warning the previous day about the potential impact of global market turbulence on U.S. prospects triggered more of that very turbulence.
She also waded into the negative-rate debate. "We wouldn't take those off the table, but we have work to do to judge whether they would be workable here."
No wonder investors are so jittery. It's essentially an admission that we are right to assume central banks have used up the tools that inflated so many risk assets. And some analysts argue that negative rates will make things worse.
The International Monetary Fund has lowered its global growth forecast for this year only slightly to 3.4 per cent, but many analysts say this is overoptimistic and counts heavily on a rebound in developed economies that has yet to materialize.
"The next recession will come a lot sooner than people think," long-time permabear Albert Edwards, Société Générale's London-based global strategist, told me last month. He expects the Fed to eventually join the negative-rate club. So, studying such a policy now is more than an academic exercise.
"The key thing is this is an elderly, fragile [business] cycle" that began in June, 2009. "It won't die of old age. But you'd expect margins to be turning down. You'd expect underlying profits to be slowing as productivity growth slows. It's very vulnerable to being blown off course."
Even conservative financial institutions are sounding the alarm.
Last month, Royal Bank of Scotland, which barely survived the meltdown of 2008, bluntly warned clients that the end was nigh. "Sell everything except high-quality bonds," the bank told clients in a note. "This is about return of capital, not return on capital. In a crowded hall, exit doors are small."
It now appears more and more market players, many of whom retain bitter memories of the previous global crisis, are taking that advice.