Anthony Rowley

Macroscope | Signs are pointing to another Black Monday. Somebody tell the Fed

Changes in monetary policy have a lagged effect. The Federal Reserve’s abrupt switch to tightening last year is now resulting in investor confusion

Today’s bond market jitters and monetary squeeze bring to mind the situation leading up to 1987’s global market crash, but the Fed seems oblivious

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Federal Reserve chair Jerome Powell speaks during a news conference after a Federal Open Market Committee meeting on November 1. Fed officials are fixated on economic indicators such as labour and consumer prices, and overlooking signs of trouble from the money supply. Photo: AFP

Anthony Rowley

Published: 3:30pm, 4 Nov 2023

With two hot wars currently under way – Russia’s against Ukraine and Israel’s against Hamas in Gaza – on top of the US’ cold wars against Russia and China, attention is distracted from current threats to financial markets. But these could create another war zone before long.

Bond and equity markets have been subjected to repeated assaults by central banks in the United States, Europe and Japan for a decade or more and, not surprisingly, they have now gone into spasms that threaten a replay of past crashes.

There is much talk among economists and analysts of a repeat of Black Monday – the worldwide stock market crash on October 19, 1987 when the Dow Jones Average fell 23 per cent in just one day, which remains the largest one-day decline ever.

There had been another Black Monday, October 28, 1929, when the Dow fell by 13 per cent and by the middle of November it had lost almost half of its value. Black Mondays are something markets have good cause to fear.

In a recent commentary, John Greenwood, architect of Hong Kong’s dollar peg, and Steve Hanke, professor of applied economics at Johns Hopkins University, suggested that US Federal Reserve policies are threatening US financial markets and the economy. Such policies, they wrote, risk “a steep recession and … a repeat of 1987’s Black Monday”.

Why would markets crash now when they have survived Covid-19, tectonic shifts in geopolitical relations, interest rate swings, a surge in inflation and now hot wars? It is because the great lake of excess liquidity is fast evaporating, although relatively few seem to have noticed.