Peter Jones: Disturbing signs of bubble culture
MORE horrors unfolded on the stock markets yesterday. Red figures, indicating value and wealth evaporating, dominated traders’ screens world-wide. Investors are said to be panicking. Is the financial world going to hell in a handcart, again? No, I don’t think that it is, but that doesn’t mean that there won’t be some short-term fall-out hurting some. It may also signal that markets are becoming more unstable, not less, and that these violent swings may become more frequent.
The proximate cause of yesterday’s upheavals was yet another slide in Chinese equity values. The Shanghai index fell 8.5 per cent yesterday, sparking a global rout. The values recorded in Europe’s stock markets fell by around 5 per cent, the worst day since Lehman went bust and turned a financial problem into a global disaster. Reuters reported that nearly £300 billion had been wiped off the value of Europe’s 300 biggest companies.
Since that last number is about twice the value of Scotland’s entire annual economic output, including the North Sea, this was clearly a massive financial event. But how real is it?
At the individual level, since most pension funds have about a third of their value in stock markets, pension pots have reduced in value, perhaps by about 2 per cent. In today’s environment of meagre investment returns, that is a big hit. For people with their own money invested directly in markets, the hit will be bigger.
Well, as investment advisers say, stock markets rise as well as fall, although recoveries are always much, much slower than crashes. The troubling feature of yesterday’s London market falls was that there were next to no gains made apart from a couple of online retailers and an insurance company becoming a target of takeover speculation.
It’s a little odd, because Britain’s economic fundamentals, which ought to have big effects on the likely profitability of the companies listed on the stock market, are actually quite good. Unemployment is continuing to fall and productivity, or output values per worker, are starting to rise, while retail trade volumes are sharply up. It indicates, certainly compared to the last five years, that the economy is in relatively good shape.
The UK government’s spending deficit, a big drag on the economy, is also reducing – July saw tax revenues outweigh public spending by £1.3bn, indicating a faster than expected reduction in the deficit and the probability that overall national debt totals will stabilise at about 80 per cent of GDP sooner than expected.
So why the market rout? Investors don’t like uncertainty, and big falls in the Chinese stock market (massively down by nearly a third since a June peak) spell uncertainty even though relatively little non-Chinese wealth is invested there and Chinese investors seem to behave more like speculators than seekers of dividend and profits-based capital growth.
So there was also a rush towards traditional safe havens – the price of gold rose sharply yesterday and there was heavy demand for German government debt.
Another concern is that the trend towards relatively slow Chinese economic growth has become entrenched. China has been a big buyer of commodities to fuel its growth – steel and oil, for example – so the prices of these commodities fell sharply. Brent crude prices, having apparently stabilised at between $50-60 per barrel earlier this summer, are now down to less than $45.
That was reflected in the stock market value of mining and oil-producing companies which were the biggest tumblers as their profits and dividends will be clobbered by low prices. This logically obvious consequence underlines the less obvious sense of the rest of the share value falls. Low oil and other commodity prices should benefit companies which are big buyers of these things, such as bus firms, and also retailers as consumers will have more money to spend on other things especially as their real incomes are also beginning to rise.
But in the markets, the only solace for companies which are the beneficiaries of commodity price falls was that their share prices dropped less than others.
Another part of the explanation for the markets’ behaviour lies in the nature of the investors who were shifting their money around frantically. They are hedge and investment fund managers, many of whom use computerised trading – if x falls in value by y per cent then the computer is programmed to sell p, q, r, and s. And having sold p, q, r, and s, if they carry on falling by a further y per cent, they may be programmed to buy them back.
That’s why the Dow Jones Industrial Average plunged more than 6 per cent when Wall Street opened and then promptly regained about 4 per cent, swings representing billions of dollars of value, all within the first hour of trading.
What this says to me is that by far the bulk of the money which is available for investment in markets has come to resemble an unimaginably vast sea of cash constantly sloshing around, not aimlessly, but semi-intelligently looking not simply for where it can gain the best return but also seeking to avoid the worst losses.
I say semi-intelligently because it does not seem to me, despite all the gains in technology and analytical expertise which should make market behaviour infinitely more intelligent than in the days of the Wall Street Crash nearly a century ago, that the markets are more intelligent.
Quite a few analysts have decided that yesterday’s events were a “correction”, meaning that the values which were wiped out were in fact artificial and did not represent the true value of the affected equities.
If that is right, it follows that the values recorded in the markets were wrong when they closed before the weekend. How did that come about? And why should we believe that the markets have now got it right?
Moreover, the “correction” explanation also means that last week’s market values were a bubble which has now burst.
This poses the question of why this bubble should have occurred, especially as there were voices saying it was a bubble. Why were they ignored?
And even more troublingly, it also suggests that the increasing mobility of the money which drives market rises and falls is liable to create more bubbles and bursts, not fewer.