Terry McCrann: Stock market correction we had to have

TRADING — across all markets and across all categories: shares, bonds and currencies — is going to have a volatile year; much more volatile than the one-way bet that 2017 was, writes Terry McCrann.

SO, is that it then? Are we all done with the “Great Crash of 2018”?

Has it come and gone barely in the space of a fortnight?

A few trillion dollars of share values wiped out around the world one week — and then much of that value regained the next?

The answer is “yes”— and “no”.

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As I argued two weeks ago, as we were hovering over the weekend between Wall St’s “wobble” on the Friday and what would prove to be the biggest point fall ever in the Dow Jones index on the Monday, we were not facing a replay of the (truly) Great Crash of 1987.

Back 30 years ago, the Dow “wobbled” down 4 per cent on the Friday and then plunged — really plunged — 22.6 per cent on the Monday.

Reserve Bank governor Philip Lowe. Picture: AAP

This time round the Friday wobble was only 2 per cent and the Monday plunge, although the biggest point fall ever, in percentage terms was just 4 per cent.

Further, almost as the share prices were tumbling on our Tuesday back in 1987, almost all the great 1980s entrepreneurs started toppling.

Our big banks — and even more, the big foreign banks that had rushed into Australia after Paul Keating removed the bans on them; and then poured money into the hands of the entrepreneurs — started counting their losses.

And the same happened in New York and London.

There hasn’t even been the faintest hint of any of that this time — and no, we are not living in a fool’s paradise with all the toppling and huge bank losses still to come.

Also, at the more granular level of market dynamics and investment exposures, there’s no sense of “fools’ optimism” about last week’s upbeat trading. We haven’t been in a desperate attempt to paper over ever-widening underlying cracks.

So it is in those two big senses — with the market and especially Wall St specifically coming back and no signs of corporate implosions — that the answer is “yes”. The Great Crash, such as it was, of 2018, is done and dusted.

I would importantly add, again as I argued two weeks ago, we were also not facing a replay of 2008 and the global financial crisis either.

The GFC led on to the worst recession in the global real economy (excluding, almost alone, China and Australia).

Indeed, as Reserve Bank governor Philip Lowe explained on Friday, the world economy was heading in exactly the opposite direction: we were embarked on our first real synchronised global upturn — China, the US, Europe and the rest of Asia — since before the GFC.

So, what about my opening “no”? What is not over is both the likely market volatility that is the inevitability both of what happened two weeks ago and the more fundamental dynamics, which caused it.

Once you get that sort of big movement in share prices and bond prices as well, there’s both a shock to the investor psyche and to investor behaviour. Even if the broad mood remains bullish or at least not bearish.

In terms of fundamentals, the global share market was unquestionably overvalued. Or priced for an unrealistic perfection.

That the plus side of the Trump agenda — the tax cuts, the coming infrastructure spend — would overcome or neutralise the negatives — the Fed putting up short interest rates and demand-supply pushing up long bond rates.

Broadly put the two together and trading — across all markets and across all categories: shares, bonds and currencies — is going to have a volatile year; much more volatile than the virtually uninterrupted one-way bet that 2017 was.

This leads on to the second part of my “no”.

Traders at the Australian Stock Exchange in Sydney after the 1987 crash.

Through that volatility Wall St is likely to trend sideways or somewhat down (my worst case is perhaps 10-15 per cent down) then.

We had the “correction we had to have”— at least on Wall St and in Asia and Europe — of a 10 per cent fall — and then came back a little over half. We are still going to have it, spread over the year.

But we didn’t see the same big moves in Australia over the two weeks, in either direction. We “only” fell 5 per cent. But we are still down nearly 4 per cent.

And we started from a much lower level.

The Dow was not only up 45 per cent from Trump’s election, it was up over 80 per cent from its pre-GFC high.

We were up only 12 per cent post-Trump and we’ve never ever got back to our pre-GFC high and our market struggles to hold at the 6000pt level, more than 10 per cent below that pre-GFC high.

You might say our asset boom has been more egalitarian than the US’s — it’s been in property. But that’s another story, involving our population Ponzi and China.

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