February 15, 2016
The markets are collapsing. “Oh my God, what are we going to do?” should be a perfectly reasonable reaction.
But why not take the view that the collapsing markets are a good thing for you and me?
The link between overvalued financial assets, the pampered traders this casino enriches, and the rest of the economy has become at best tangential.
In the old days, the share price of a company reflected the underlying performance of the company. The price of a government bond reflected the underlying creditworthiness of the country. This is no longer the case, so let the markets have their hysterical fit, and ignore them!
Their travails should be welcomed with the contempt that most of the casino reserves for the rest of us.
I am going to list the various reasons the stock markets are worried and see whether we should be worried too. If not, who cares?
First, the markets are falling because they are worried about the collapse in the price of oil.
But that’s good news for us, the consumers who benefit from cheaper oil, so bring it on. The second reason, which is related to the first, seems to be the knock-on effect of the oil slump on the activities of funds from the rich oil countries.
They are selling good assets – stocks in the US and Europe – to pay for their falling oil revenue. Well if this is a problem, it’s their problem. Why should we worry if a few sheikhs see a few zeroes disappear off the end of their bank accounts? Sure, if you own upscale property in London, you might worry, but most people need not.
Another reason bandied about is China, and what is likely to happen next over there. Here again, the frenzy has been a little worked up.
The Chinese economy is slowing down, as it should, but even if it goes into a tailspin, the impact on the rest of the world from a Chinese slump should be even cheaper Chinese imports.
From the perspective of the average westerner, this is an issue, but no reason to panic. The next problem for the markets is the notion that the Chinese will have to devalue their currency and this might prompt tit-for-tat devaluations in Asia.
So what? Currencies go up and down all the time. What is the big deal now?
If you are in the US, many market traders are pointing their finger at the Federal Reserve, saying that the Fed inflated a massive stock market bubble by cutting rates to zero and then kept them at zero too long.
The traders say this caused a bubble, and that the Fed then raised rates and caused asset prices to fall. This is essentially true, but can a central bank subsidise the avarice of the already wealthy again and again?
The Fed told the markets over a long period it would eventually raise rates; is it the Fed’s fault that some held on until the last minute, trying to squeeze every last dollar out of the increase in stocks and were caught holding the bag when they fell down? Aren’t they supposed to be the experts?
Yet another reason identified by some traders and speculators is that all this was the result of negative interest rates, which the central banks of Europe and Japan have deployed recently.
At negative interest rates, banks can’t make money because they can’t charge enough interest margin for loans they lend to punters – and the central bank doesn’t pay them for depositing money.
Some investors are saying this is why bank shares are plummeting. But if the problem on the banks’ balance sheets is that there is too much debt and they can’t make enough profit now to generate the capital to set aside against these debts, then they surely they should sort out the debts?
Furthermore, the problem for the banks is that the regulators reacted to the 2008 collapse by saying that the banks had to raise enough capital to make sure they had buffers in the case of another slump in the economy.
However, what we call bank capital is no more than an accounting trick: liabilities minus assets. But if the banks overstate their assets and understate their liabilities, the bank can look like it has buckets of capital. We know well what happens if the assets fall in value and a few more loans go bad.
Suddenly the “capital” disappears and bank shares fall. Normally, however, the banks’ shares fall when financial investors “suspect” that capital may be insufficient rather than after the event – and this is what is happening now.
But for the average European, the banks haven’t been lending in the past few years even when their share prices stabilised, so what difference does this all make to you?
Another reason being bandied about by the financial markets is that the emergence of Bernie Sanders, Donald Trump, Marine Le Pen and the imminence of Brexit in Britain have all created political uncertainty and this uncertainty is unnerving speculators.
Well, the phenomenon that is described by speculators as “uncertainty” is actually described by most of us as “democracy”. Deal with it.
In truth, the main reason the markets are falling is that – at the margin – financial markets have become a series of highly leveraged bets by very wealthy hedge funds.
Because they are taking bets with borrowed money, the whole system is very unstable.
Once one panics they all do because they have to report their profits/losses every month and they are endemically short-term.
In the years ahead, politicians have to cut these guys astray. We simply can’t run a world economy that is hostage to the balance statements of hedge funds.
Let them panic, let prices fall, and let them pick up the pieces.
Ultimately, hedge funds have absolutely no economic value to society, and if they all went bust, the global economy would be none the weaker. Indeed, it might be stronger.
These people and funds display what I would term “financial ADHD” – a form of capitalism that is constantly distracted and looking for attention. What we need is patient capital, and patient investing. The only way we will get it is to ignore the children when they throw their toys out of the pram!