It seems mysterious why the current US stock market is so high. Paul Krugman things it is because people expect a quick recovery. I have a different view.
People have been predicting massive inflation since 2009 as a result of government bailouts, tax cuts, and recent pandemic expenditures. But it hasn’t happened, has it. Or maybe it has just not to the consumer price index.
Inflation results from too much money chasing too few goods. There may be too much money but the people who buy most of the consumer goods don’t have it. It has mostly gone to the top 1% and they don’t need any more food, housing, etc. than they ever did, even if they spend more on those things than ordinary people do. So what do they do with all their excess cash. As far as I can see, they buy land and securities. They are not making any more land, so real estate inflates. And they are not issuing any more securities, in fact, companies are using their surpluses to buy their own shares.
So my take on the start market is that it is simple classic inflation.
“There is no alternative,” often abbreviated to “TINA,” is a phrase that originated with the Victorian philosopher Herbert Spencer and became a slogan of British Prime Minister Margaret Thatcher in the 1980s. Today, it is often used by investors to explain a less-than-ideal portfolio allocation, usually of stocks, because other asset classes offer even worse returns. This situation and the subsequent decisions of investors can lead to the “Tina Effect” whereby stocks rise only because investors have no viable alternative.
Gold is still high despite some significant swings this week. Still it’s as high as it’s ever been I believe. Bitcoin isn’t doing too bad either. Both are signs of investors looking to put there money somewhere.
I also wonder why the stock market is not anticipating low returns in the future, but the prices aren’t actually that high compared to their profits. Large firms, the type that would be more likely to issue stock, have been hit less hard than small businesses. Their own profits have been shielded by bailout moneys and online business - for now. The small businesses and employees who have borne the brunt of this recession are bound to stop patronizing the large businesses as much as before eventually.
I’m a strong believer in TINA. Where else should I put my money?
Nor does Krugman think it’s because people expect a quick recovery. Just the opposite, per today’s column.
For the recent rise in the market has been largely driven by a small number of technology giants. And the market values of these companies have very little to do with their current profits, let alone the state of the economy in general. Instead, they’re all about investor perceptions of the fairly distant future. …
As long as they expect Apple to be profitable years from now, they barely care what will happen to the U.S. economy over the next few quarters.
That doesn’t appear to be true either. According to Krugman:
Apple has a price-earnings ratio — the ratio of its market valuation to its profits — of about 33. One way to look at that number is that only around 3 percent of the value investors place on the company reflects the money they expect it to make over the course of the next year. …
And Apple’s valuation is actually less extreme than the valuations of other tech giants, like Amazon or Netflix.
Here’s a very interesting take on the situation by Yanis Varoufakis.
Video and transcript:
Before 2008, the money markets also behaved in a manner that defied humanism. News of mass firings of workers would be routinely followed by sharp rises in the share price of the companies …
That was then, prior to 2008. Today, this link between profit forecasts and share prices has disappeared and, as a consequence, the share market’s misanthropy has entered a new, post-capitalist phase. This is not as controversial a claim as it may sound at first. In the midst of our current pandemic not one person in their right mind imagines that there are speculators out there who believe that there are enough speculators out there who may believe that company profits in the UK or in the US will rise any time soon. And yet they buy shares with enthusiasm. The pandemic’s effect on our post-2008 world is now creating forces hitherto unfathomable.
In today’s world, it would be a mistake to try to find any correlation between what is going on in the real world (of wages, profits, output and sales) and in the money markets. Today, there is no need for a correlation between ‘news’ (e.g. a newsflash that some large multinational fired tens of thousands) and share price hikes. As we watch stock exchanges rise at a time of tanking economies, it would be a mistake to think that speculators hear that the UK economy, or the US economy, have tanked and think to themselves: Great, let’s buy shares. No, the situation is far, far worse!
In the post-2008 world, speculators – for the first time in history – don’t actually give a damn about the economy.
It is said that the Chinese stock market has always been that way. It’s simply a continuous horse race and folks are betting for or against various horses that the bettor believes will advance or decline relative to the others.
With that relative motion simply an Ouija effect of other bettor sentiment with substantially zero connection to the underlying economy or the specific businesses being bet on.
In a sense the market has always been all about sentiment in the short term and fundamentals in the long term. Where both “short-” & “long-” are pretty elastic ideas. Said another way, it’s a social phenomenon with economic underpinnings.
Armed with enough free money flowing to the people who earn their living by speculating, it’s unsurprising they’ve now got the bit in their teeth and are headed towards the horizon at full gallop.
I have been buying shares because while my income has remained steady, my expenditure has reduced (no holiday and no meals out for a start), interest on savings is pathetic so stocks and shares are the only way to go.
The indexes are high because big-cap tech is in most of them and as more and more money piles into them as opposed to other sectors, their weighting within the index also goes up.
25% of the value of the S&P index now consists of 5 companies. 5. Out of 500. MSFT, APPL, AMZN, GOOG, and FB.
If you look at the chart of almost any company, there are basically 3 patterns out there right now:
Companies thought not to be dependent on an economic recovery, fast-growing anyway, or otherwise benefitting from the Covid economy: new highs, higher than before Covid.
Companies less dependent on economic recovery (like big pharma), but not fast-growers : prices have recovered around 75% - 100% or more of the pre-Covid highs.
Companies dependent on real economic recovery (ie banks and other financials, energy): 50% or less of the old highs.
There’s days here or there where tech sells off and they ploy the money into the financials because long-term, they’re bargains.
When the market anticipates a real recovery is getting closer, tech will sell off some more and there will be a rotation into the worst sectors, and new money will go in there.
But raising the prices of a few stocks don’t raise the costs of everyday living for the rest of the population. Classic inflation makes each unit of money go less far. Apple stock can triple without affecting the price of apples at all.
Is nobody else here seeing that the whole financial system, not only the stock market, is seriously unstable and likely to collapse sooner rather than later?
The crash that is coming will make 2008 look like child’s play.
Unemployment is a bit high. Spending hasn’t decreased as much as it could have, with the stimulus that has been going out up until this month, but it will be dropping precipitously if no further stimulus is coming.
Right now the market is up because people have no other place to put their money. As other countries get their economies rolling, and we are left behind, those investments will go overseas. We will then see what the real worth of US companies are.
P/E ratios are not the only way to see the health of a market, but when they start going up quickly, a correction is almost sure to follow.
It’s perhaps too much of a tangent to go into on this thread, but in a nutshell:
Massive growth in the shadow banking system from about $30 trillion in 2008 to $114 trillion in 2018 (according to Bloomberg), the latest year for which figures are available. All indications are that it’s growing even more rapidly now.
– The shadow banking system was at the center of the 2008 crisis, and has not been reined in.
– It was also at the center of the problems in March this year.
Corporate debt - highly leveraged loans that are in danger of not being rolled over because of the steep decline in the real economy due to the coronavirus.
The uncoupling of the stock market from the real economy.
The real economy is crashing and the financial system is increasingly out of touch. No lessons were learned in 2008. This is not sustainable.
True. And the market can remain irrational longer than you can remain solvent.
Large fortunes can be missed out upon by not investing in strong price appreciation that later proves to be a bubble. Large fortunes can be lost by being fully invested when the bubble is revealed to be a bubble & duly collapses.
I agree that shadow banking requires more regulation than it’s being given now. I’m less sure that we’re going off a cliff because of it. Ironically, for this thread, the lack of inflation is creating an odd playing field in that none of the normal alternatives like bonds are worth the bother. Whether corporate debt is a danger is also questionable: corporations started the year with trillions of dollars in cash that they refused to invest and wasted on stock buybacks. Despite the huge losses from the shutdown, only certain segments are in real danger of collapse.
What happens next is cloudy, says my crystal ball. We don’t know how long the global economy will be shut down. We don’t know how badly China and India, who have worse problems with shadow banks than we do, will be affected. We don’t know what new patterns of living will emerge. We don’t know whether a Democratic administration will start spending serious money regardless of the deficit. We don’t know whether waking up and investing trillions into climate change will even out the distribution of wealth by putting wages into pockets.
I do think there’s enough money sloshing around the world to potentially solve many of today’s problems. I could also make a case for a global economic collapse. The great question is whether the pandemic became a big enough wake-up call to change behaviors and whether those changes, which will take some sacrifice, can be sold to the public.
It’s not the public that needs to be convinced of anything, but the major financial institutions. More austerity will only make the rich richer and the poor poorer.
Do you see any evidence of a wake-up call or changed behaviors?
The links between the banks, hedge funds, etc. and governments are so strong, and the incentives to make as much short-term profit as possible are so high, that there’s not going to be any significant change unless the system breaks down.
If 2008 wasn’t enough to reform the system, the pandemic won’t be.