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(Blair Gable/© 2009, Blair Gable Photography)
(Blair Gable/© 2009, Blair Gable Photography)

'There will be blood'- Part 2

What Niall Ferguson thinks now Add to ...

There's nothing like a long-running equity rally, a return to something resembling normalcy in the credit world and fresh signs of economic recovery to lift the gloom of a dreary late November day.

Sure, there are still occasional rough waters. Take last week, when weaker than expected U.S. housing stats, a downbeat profit report, downgrades in tech land and yet another warning from an inflation-fearing central banker reminded jittery investors it's not only free-spending governments that need a sound exit strategy. Tomorrow, we'll undoubtedly hear that U.S. consumers are still suffering from a shortage of confidence, which tends to happen when jobless rates keep rising.

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But for all of that, the optimists are looking for firming economic numbers, healthier corporate earnings and continuing evidence that risk will be properly rewarded in the months ahead.

"A strong tape, corporate [bond]yields still falling, sentiment not showing extreme optimism and low inflation are a pretty bullish signal," veteran U.S. strategist Ned Davis told a bunch of investment advisers in Florida recently. "At this point in time we don't have any evidence that the cyclical bull market is over."

Far be it from me to rain on that parade. I'll leave that task to one of the world's best known and least cuddly of doom-and-gloom bears - Harvard University financial historian Niall Ferguson.



The stock market rally has been largely due to near-zero interest rates and a weaker dollar. In foreign currency terms there's been no rally.


"I don't think it's possible to infer from the stock market rally anything resembling a sustained recovery," the peripatetic professor says in an e-mail exchange. He rightly notes that at least half (and probably much more) of the third-quarter U.S. economic growth of 3.5 per cent stemmed from one-off government measures and that the consumer remains tapped out.

"The stock market rally has been largely due to near-zero interest rates and a weaker dollar. In foreign currency terms there's been no rally."

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It was last February, just two weeks before global stock markets began their remarkable eight-month ascent from the depths, when Prof. Ferguson famously told The Globe and Mail: "There will be blood, in the sense that a crisis of this magnitude is bound to increase political as well as economic [conflict] It is bound to destabilize some countries. It will cause civil wars to break out that have been dormant. It will topple governments that were moderate and bring in governments that are extreme."

Has the long market rally and the apparent success of unprecedented government interventions around the world caused him to change his grim prophecy?

"I wasn't saying there would be blood in the streets of Toronto, remember. My first point was that the crisis would likely destabilize about a dozen relatively weak states and that this 'axis of upheaval' would become more violent.

"The other point I had in mind was that, after previous big financial crises, insecure governments have been tempted to rattle sabres for the sake of promoting their own domestic legitimacy. My prime suspect here is Russia, which, of all the big powers, stands to gain the most from geopolitical instability, since (for example) a major attack on Iranian nuclear installations would double the price of oil and greatly enrich the denizens of the Kremlin. The probability of such a war is currently being underestimated by many people."



Over a five-year time frame, the [U.S.]dollar is likely to weaken some more, inflation is likely to pick up after another year or two of pretty low prices and long-term interest rates could move up sooner than that, in anticipation of a revival of inflation. Add, say, 50 to 150 basis points to the ... 10-year treasury yield and the effect could be quite painful for the economy as a whole.


Prof. Ferguson, whose most recent timely best-seller, The Ascent of Money, is now out in paperback, does some hedge-fund advising on these big global themes.

He claims no expertise as a market forecaster. But when coaxed, the historian in him comes out.

"The most we can say, drawing on what we know about past financial crises, is that over a five-year time frame, the [U.S.]dollar is likely to weaken some more, inflation is likely to pick up after another year or two of pretty low prices and long-term interest rates could move up sooner than that, in anticipation of a revival of inflation. Add, say, 50 to 150 basis points to the ... 10-year treasury yield and the effect could be quite painful for the economy as a whole."

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He puts his money where his sentiments lie.

"I am out of U.S. stocks and currently have a modest cash pile," he says. "The commodity and stock market rally since March looks to me to be coming to an end. I am genuinely not sure what happens next.

"Having narrowly avoided a Great Depression by using massive fiscal and monetary stimulus, we are now in uncharted waters."

Follow on Twitter: @bmilnerglobe

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