Stock Markets Celebrate Whilst Real Economy Mourns

Stock markets celebrate, ending November on record highs as cash poured into equities to deliver an early Christmas to investors. The Nikkei enjoyed its best month since 1990 with a gain of 16.7% only to be bested by Italy’s FTSE MIB which jumped a staggering 26% in just 21 days of trading. Broader indices also barrelled ahead. The MSCI world stock index rose 13% whilst the S&P 500 ended the months 11% higher after successive record-breaking trading sessions. In Europe, the Stoxx 600 climbed 14.8% in November – its largest monthly point gain since December 1986. Analysts now predict two weeks of consolidation before the start of the customary Santa Rally.

The excitement is palpable, bordering on the insane, and culminating – arguably – on the op-ed pages of the Financial Times where senior editor John Plender dared argue that the current monetary environment and the rally it produced vindicates the venerable John Maynard Keynes who announced the ‘euthanasia of the rentier’ in his landmark General Theory of Employment, Interest, and Money. Keynes argued that as rates fall, the privileged few drawing an income from interest would struggle to survive.

Perhaps Plender may want to reopen the tome lest his analysis disturbs Keynes’ peace. If he thinks rentiers heading towards extinction is cause for celebration, then what about their heirs: investors shifting positions on the flimsiest of artificially generated pretexts without having a clue of underlying values and their human dimension apart from a few ‘key performance indicators’ crunched and extrapolated by algorithm-powered bots. The added value to the real economy as expressed in labour, machines, and bricks-and-mortar is nil – or at best marginal. However, the exercise of shuffling vast volumes of data and money for a fictional yet tangible outcome is highly lucrative – much more so than the mundane business of producing actual wealth as opposed to its paper variety.

Data Rules

Just consider the $44 billion S&P Global on Monday plopped down for London-based financial analytics powerhouse IHS Markit. Both companies are in the business of collecting, assessing, distilling, and distributing information to investors. As such they may, perhaps, be likened to a wire service on steroids. It is a most lucrative pursuit too: the London Stock Exchange is in the process of acquiring Refinitiv, founded only in 2018, for a cool $27 billion. In the US, Intercontinental Exchange, owner of the New York Stock Exchange, paid $11 billion for Ellie Mae, a software company that processes mortgage applications – and not to be confused with a pin up model.

Getting rich effortlessly no longer requires peddling miracle knives on late-night television but merely entails pushing data onto a network, adding a whiff of mystique that passes for wisdom, and voilà your wallet magically swells to a great many times its original size. And yet, Plender and other learned pundits insist that Dire Straits pinned the yo-yo’s number – or at least up to the ‘chicks for free’ bit.

Keynes, a forex trader in his day, would not look kindly on that enormous mismatch between markets and the economies they are supposed to mirror. The money-for-nothing crowd, driven to near ecstasy by Panglossian optimism, is doing little for the households and businesses that suffer the nasty effects of the Corona pandemic and its lockdowns.

Entire sectors are being ‘euthanised’, including the hospitality sector, the travel industry, and the arts. Fiscal policy tries as best it can to minimise the damage whilst central banks – never too quick on the uptake – keep pumping untold billions into the stock market, providing an ocean of liquidity where it is needed least and prompting scores of publicly traded companies to resume dividend pay outs even as they offload workers by the thousands.

Enter the Scrooge

Daring to speak truth to monetary power equates to blasphemy and invites name calling of which ‘scrooge’ is possibly the least offensive moniker attached to those slightly less impressed by the bull run. Judiciously studying the entrails, market watchers promise an even better 2021. Vast amounts of money hoarded by corporate zombies and households unaffected by job losses – estimated at anywhere between 7.5% and 10% of GDP – are to be released as soon as large-scale vaccination campaigns get underway and infection rates plummet.

What happens next does not require a crystal sphere to predict: markets reach for new highs whilst governments clamp down on spending in an attempt to rebalance their fiscal accounts, causing considerable social pain and dealing yet another blow to small and medium-sized companies that are unable to tap the financial markets.

Thus, prepare for additional consolidation and greater inequality. The silver lining is that the World Economic Forum’s flagship Davos Summit has been postponed by six months which spares us all the sight of CEOs and assorted billionaires piously engaging in an Alpine ritual of penitence at the altar of sustainability, lamenting and deploring the sorry state of the world whilst suppressing a wicked smirk.

Central banks must, however, receive some praise for taking a more proactive approach to the current crisis than they did to the previous one. Kudos to Lagarde, Powell et al. Now, please back off, or – if you insist on spreading the dough – please resort to helicopters for distribution. Better yet: why not adopt one of the world’s great monotheistic religions all of which feature some form of debt jubilee.

After all, do central bankers really expect all the world’s $277 trillion debt load to be repaid eventually? Of course not, it’s just a bunch of digits on a balance sheet, albeit a rather bloated one. Nobody expects that debt to be paid – not even partially – for it’s not how the monetary system inspired by Keynes works – or is meant to work.

Enter Captain Mainwaring

Whilst Keynes did recognise the need of stimulus spending in ‘uncertain times’, he presumed that such spending would benefit ‘economic actors’ clamouring for liquidity. Those were innocent times indeed when your friendly high street banker – think Captain Mainwaring – knew his customers and their needs without the resorting to spreadsheets, algorithms, or artificial intelligence.

The trouble now is that the world was already awash in liquidity before the Corona pandemic struck. In fact, most advanced economies had become quite addicted to quantitative easing. With markets already saturated, the monetary support measures sparked by the emergency only caused asset price inflation whilst simultaneously driving down bond yields, thus providing most economic actors – save for the ones trying to do the actual work – with a windfall.

Though some funds did trickle down to reach struggling households and entrepreneurs, most of it got stuck along the way, vindicating not Keynes but the likes of Friedrich Hayek and other theorists of the Austrian School who always questioned the use of central banks. One might almost think they were right after all.