The weather might not be what it once was, and the football season might start so quickly it feels like it has hardly been away, but there is one thing everyone can surely agree on about August. Nothing of any importance happens. As we head into the dog days of summer, everyone can sling their feet up on the desk and relax.
All the people who really matter — the ones running the big corporations, the banks or the government — are off sunning themselves by a pool somewhere. As for the office, it’s about as busy as a job centre in downtown Athens. The only people left are the post boy and the interns busy updating their Facebook pages. It’s impossible to imagine anything of significance happening.
The last government thought the month so inconsequential that John Prescott used to be put in charge of the country: the current one goes a step further and leaves Nick Clegg minding the shop. Indeed, we’ve developed clichés for the unimportance of August. In newspaper offices, it’s ‘the silly season’, those few weeks when clueless trainees are allowed to write stuff that wouldn’t be allowed anywhere near the printed page during the rest of the year. In the stock market, the mood is summed up by the old adage ‘Sell in May and go away’.
All this suggests total confidence that we can coast through the month. Nobody will disturb us if we take time off. Brokers can set their email to auto-reply, analysts can put away their spreadsheets, financial columnists can safely dust off earnest but dull thinkfests about how China will grow in importance over the course of the century, secure in the knowledge that the readers, if there are any, will be relieved not to have to interrupt their sun worship with hard thought.
But hold on. In fact, as this magazine’s former editor Frank Johnson famously argued, August is often the most critical month of the year. It is a complete myth that not much happens. As often as not, it is the most turbulent time of the year for the markets. Not convinced? Just look at the evidence. In August 2007, the French bank BNP Paribas had to close two of its investment funds that had invested heavily in subprime mortgage-backed paper, because liquidity in the markets had evaporated. Markets froze, the European Central Bank had to pump emergency liquidity into the system, and the Federal Reserve had to cut interest rates — and that was the start of the credit crunch.
In the previous decade, the Russian financial crisis started in August of 1998 — and within a few weeks Russia was bust. In 1987, the Dow Jones Industrial Average reached its peak on 25 August, and then began the steep decline that culminated in the crash of October that year. Way back in August 1971, President Richard Nixon cut the last link between the dollar and gold, ushering in the era of paper money — the so-called ‘Nixon Shock’.
More recently, the last big plunge in the markets, which saw the FTSE 100 index lose 1,000 points in a month, came in August 2011 as investors became convinced the euro was about to fall apart.
Of course, August is not the only month when important stuff happens. Plenty happens in October as well: the Great Crash of 1929, for example, or Black Monday in 1987. But the idea of August as a quiet month is clearly a myth. And in reality, it is a long time since October was of any great significance: more recently, it has always been August that witnesses the pivotal points.
You can debate the reasons for that. It might because the people running big corporations and powerful investment banks are away from their desks, and take their eye off the ball — although that would presume they have control over what’s going on in the first place. It might be because the summer heat brings issues that have been boiling under the surface to a sudden head — in much the same way as Londoners rioted in 2011. It might be because the optimism of the traditional New Year rally is bound to have faded by then. It might just be a coincidence. But the record is indisputable.
So what might happen this year to bring markets crashing down? Brazil and Turkey have seen mass demonstrations, and while the Istanbul market has already plunged, that turmoil could also trigger a wider flight from the emerging markets that investors have piled into as they sought refuge from miserable growth and near-zero interest rates in the developed economies. Slovenia may turn into the next Cyprus, with bank depositors forced to pay for the bailout of another bankrupt eurozone nation — and while Cyprus didn’t quite precipitate the flight of capital from peripheral European banks that some feared, this one might.
Italian bond yields are spiking upwards again, and the new government of Enrico Letta is only kept in power with the support of the increasingly anti-euro Silvio Berlusconi. If he pulls the plug, the market may be back in a full-scale panic.
The war in Syria is reaching an endgame that could be very bloody, and in which the US and its allies may have no choice but to intervene. A war in the Middle East, no matter how well-intentioned, only ever sends the markets in one direction — and that’s -downwards.
Meanwhile, as Alex Brummer points out in this issue, the new Governor of the Bank of England, Mark Carney, may find the British economy a lot harder to keep on an even keel than the Canadian one.
No one knows what the catalyst will be — but it’s out there waiting to happen. So enjoy the holidays. By all means bag the best sun lounger by the hotel pool. But don’t forget to bring the charger for your iPhone, and make sure you’ve downloaded your broker’s app. The next few weeks will be the most crucial of the whole year.