Overseas Markets Decline

Feb 9, 2018
Originally published on February 9, 2018 5:28 am
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STEVE INSKEEP, HOST:

OK. U.S. stock markets opened higher this morning, gaining back a little bit of the territory that was surrendered during Thursday’s dismal performance on Wall Street. If you were to look up a chart of the Dow Jones Industrial Average as it went through the various hours yesterday, it looks like one of the ski slopes at the Winter Olympics - down, down, down. To talk more about this, we've reached Liam Halligan, who is an economics commentator for The Telegraph and is also an economist himself. Welcome to the program, sir.

LIAM HALLIGAN: Very nice to be on NPR.

INSKEEP: And I don't mean to insult you in any way by calling you an economist. I know that it can be a dirty word in some ways.

HALLIGAN: (Laughter) It's something I have to live with.

INSKEEP: (Laughter) Anyway, it's good to talk with you. How does the U.S. market decline look from where you are in London?

HALLIGAN: Well, I'm speaking from BBC here in London. And this is my take - I've got a cover story on The Spectator magazine this week. It says it's the crash we need. Look, if you're trading these markets and your savings are totally tied up in them or if you recently entered the markets at the start of this year, it is painful. But these - even though these are large points crashes, they're quite small in percentage terms - a 4.6 percent fall on Monday and then a 4.1 percent fall just now as you said. Back in 1987, Black Friday, the Dow lost a quarter of its value. These markets have been pumped up by lots of printed money since the Lehman collapse. Valuations are very stretched. Shares are too expensive. If we can get back to reality with a series of small, downward corrections rather than a huge dive, then that will be much better for America and the rest of the world.

INSKEEP: Oh, so what you believe is happening is we're letting a little bit of air out of a bubble without popping it.

HALLIGAN: That depends. I certainly hope so, and I think every - all observers should hope that that's the case. A lot of this comes down to the world's central bankers. I actually think Janet Yellen has been the best head of the Federal Reserve since Paul Volcker back in the 1980s. She's increased interest rates five times - deftly. She's communicated fairly and squarely with financial markets, and as such, those rate rises haven't led to a crash.

INSKEEP: Oh. Well, now, let me ask you about this because Janet Yellen's last day was Friday just as the market was starting to decline, and our economics correspondent John Ydstie raised the possibility that one thing that may be happening in the market is just a bit of uncertainty about her successor, Jerome Powell - exactly what is he going to do, exactly how much confidence should people put in him.

HALLIGAN: That's right. I think that's exactly right. We don't know much about Jerome Powell. He's a Trump appointee. Ordinarily, a Republican president would leave a Democrat head of the Federal Reserve there - a Democrat-appointed head of the Federal Reserve to serve out her two terms. That didn't happen with Janet Yellen. I think that was a mistake. Will Trump have more power over Powell than he should have given that this is meant to be an independent appointment? Will Powell feel that he can't raise interest rates as much as he wanted to? That will please the markets in the beginning, but it could lead to those valuations getting too juiced up all over again, leading to dangers.

INSKEEP: Oh, no, you're raising a question, not making an accusation but raising a question...

HALLIGAN: Absolutely.

INSKEEP: ...Of whether Powell would feel independent enough to raise interest rates the way that the Fed might want because that's the kind of thing that would slow down the economy in the way that an elected official might not love.

HALLIGAN: That's right. Either he won't raise rates when he should, as Yellen has said they will be raised, which could lead to valuations spiraling upward and out of control. Or he may raise rates too quickly, leading to too much downward pressure on equities. Both things are bad. The market liked what Yellen was saying. She liked the pace at which she was raising rates. The market doesn't want that to change. It would have been much better if the president had kept, in my view, Janet Yellen where she was at this crucial time.

INSKEEP: So let me just ask you. You've mentioned President Trump. We have just finished talking about a bit of chaos, or near chaos, as Congress briefly let the funding authority for the government expire. There was another shutdown. There have been many months of debates. Something seems to be somewhat resolved for the moment. But does the political situation in the United States affect in any fundamental way the global view of the United States as an investment?

HALLIGAN: Oh, absolutely. And it must be said in the president's credit - to the president's credit that at Davos, the gabfest of the world's elite so-called in Switzerland...

INSKEEP: Yeah.

HALLIGAN: ...In January, a lot of central - a lot of investment bankers, the Democrats (ph) who don't like Trump, were toasting him because of his tax cuts. They seemed to be business friendly. On the other hand, it may be if you cut taxes when the economy is really getting going - and the U.S. economy is motoring ahead at about 3 percent now - again that may be a little too rich for the market. It may juice up valuations too much to cut taxes just when the American economy is really getting going. That is a question for future historians.

INSKEEP: Liam Halligan, pleasure talking with you. Thank you very much.

HALLIGAN: And you - thank you for having me.

INSKEEP: He writes for The Telegraph and other publications in London.

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