Over the past decade, central bankers have been at the helm of an unprecedented economic experiment. The mountain of cheap money inserted into the global economy has been instrumental in keeping things going and propping up international financial markets. As the Federal Reserve is now tightening its policy and raising rates and the European Central Bank prepares to follow suit, why is everyone so surprised at sluggish stock markets?

Yes, fundamental indicators actually look quite good. Thus, at this point, the choppiness of the markets is commonly attributed to fears of an escalating trade war between China and America. It is also often blamed on emerging markets, where stocks have been falling in 2018, after logging a great year in 2017 with over 30% gains. Instead of joining these discussions, we like the dry and straight-forward assessment recently offered by Deutsche Bank macro strategist, Alan Ruskin:

“Whenever the Federal Reserve embarks on a round of rate increases, it’s a lot like shaking an overripe fruit tree.”

That’s the analogy he offered and urged investors not to “overcomplicate” the macro picture. According to Mr. Ruskin, the starting point should be that the Federal Reserve’s tightening cycle creates “a meaningful crisis” somewhere, often outside of the US but with some domestic (US) fallout.

To illustrate his point, Mr. Ruskin offered the following history lesson:

“Going back in history, the 2004-6 Fed tightening looked benign, but the US housing collapse set off contagion and a near collapse of the global financial system dwarfing all post-war crises. The late 1990s Fed stop/start tightening included the Asia crisis, LTCM and Russia collapse, and when tightening resumed, the pop of the equity bubble.

“The early 1993-4 tightening phase included bond market turmoil and the Mexican crisis. The late 1980s tightening ushered along the S&L crisis. Greenspan’s first fumbled tightening in 1987 helped trigger Black Monday, before the Fed eased and ‘the Greenspan put’ took off in earnest. The early 80s included the LDC/Latam debt crisis and Conti Illinois collapse. The 1970s stagflation tightening was when the Fed was behind ‘the curve’ and where inflation masked a prolonged decline in real asset prices.”

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