The quantitative easing programme might be considered a short term success, but as we note, the benefit has been captured almost entirely by the financial services sector whilst further asset boom and bust cycles are, at least potentially being recreated with resultant risk to the economy. These are undesirable long run outcomes when the real aim is to get the UK economy working again.
Sometimes the long-term takes a while to arrive, but it always does. Yesterday saw the biggest fall in tech shares in the USA since February 2009. Overnight the Far East markets moved into bear territory for the year, with 20% falls in value being recorded this year in some cases.
In the short term the primary reason for such moves is fear. That fear is well founded. Look at the risks:
- Trade war;
- Populism;
- The end of international cooperation;
- Brexit;
- Rising dollar interest rates tipping many countries into debt crisis;
- Excessive personal debt in far too many countries;
- Trump's wholly artificial tax boost to the US market losing its impact;
- The impact of quantitative easing on asset prices unwinding;
- Strained middle east relations;
- Rising oil prices that almost always signal the onset of a downturn;
- Falling consumer confidence.
It would be easy to expand that list. Each of these factors creates a risk. They are all happening simultaneously.
Of course, there is no reason why markets should collapse now. But there is rarely a specific reason why markets should collapse ever, barring one thing, and that is the coincidence of sentiment that provokes fear, and mass selling. Whether that is what is happening at present is hard to say. But the possibility is real. So far markets have fought back against a collapse: each downturn has seen a recovery, almost certainly as short sellers have taken profit. Whether that remains possible is open to doubt.
There is good reason for saying that. The fundamentals of the excessive market valuations for shares to which I have drawn attention for a long time all relied on reality being ignored. One of those realities that was ignored was QE: the money it delivered into markets papered over the cracks of 2008. 2008 was the second reality that was ignored: it revealed that the prevailing economic logic in use was time expired, but this fact has been ignored and the system has been maintained on borrowed time. Third, institutionally money has been programmed to arrive month in and month out to prop up failing stock markets, because that is what pension and life assurance contracts do, even when it is against the interests of those paying the premiums for that to happen.
The difficulty always comes when the realisation dawns, collectively and often in unison, that markets have not reflected the underlying facts that were apparent to all who wished to see them in the market, but which were collectively ignored. The reality is that:
- Markets are failing to meet the needs of many: relative poverty is growing even if absolute poverty is declining;
- Markets are not answering the big questions about our future, such as how to tackle climate change;
- Markets are being rigged for the benefit of a few, and this is now obvious;
- Markets are opaque and have collectively deceived society;
- Banking is not delivering appropriate credit for the creation of new, real economic activity;
- The belief that the government has had to stand back and let these failing markets function has been incorrect;
- There is no popular political narrative to support an alternative to failed markets meaning that when the realisation finally dawns the chaos is more worrying;
- A period of adjustment is, then, inevitable.
If that period of adjustment is not starting now it will be soon. What we have cannot be sustained any longer. We are in for a deeply uncomfortable ride.
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even if absolute poverty is declining
Unless you are suggesting that more data is needed and it’s not unreasonable to criticise the World Bank and the other data providers who won’t hire the right progressive leftists, then I think ‘if’ should be replaced by ‘though’ in that part of the sentence.
My meaning is clear
You are being pedantic, and reveal your own lack of objectivity in the process
How exactly are markets rigged?
Read this blog from the beginning
The summary is:
– opacity
– poorbaccounting (by choice)
– failure to pay tax
– cowardly government, and
– unquestioning greed
Have resulted in failed markets where exploitation is normal
Your piece is long but has no specific examples of how markets are rigged. Of course Carillion’s accounts were poor and many hedge funds were short sellers, but all of that was disclosed and public. The setting of Libor was flawed and prosecutions have resulted.. it’s a bit much thereafter to say markets are rigged. Also we take our living standards for granted, look at other nations. Capital markets have helped in that prosperity. Research what is happening in South Africa and how the country is desperate for capital to develop its infrastructure and exploit its natural resources and replace inefficient and corrupt state entities.
Jamie
My piece is long?
I think you need to do a lot more reading
But I am not going to write a specific catalogue for you
Richard
Well, what can you say?
Except ‘Regulation’.
Richard, you make two claims about investments into markets:
1) that monthly investment is against the interests of those paying the premiums
2) it is designed to ‘prop up’ the stock market
1) It seems to me that ‘pound cost averaging’ is a recognised benefit of investing over time, particularly in a volatile asset class
2) generally, people are investing from earned income, which tends to be paid monthly, so aligning this income and outgo makes perfect sense to the investor.
Please explain why you are against the risk mitigating effects of pound cost averaging and how you expect investors to invest if they only have spare money in a monthly basis?
Sarah
This appears to be about your tenth identity on this blog, all making remarkably similar comments in defence of the finance industry and all seeking to waste my time.
I really can’t be bothered with trolls
Richard
I only have one identity.
I’ve not defended anyone, I’ve just asked you to provide a credible answer to support your claims, which (to my mind at least) do not align with the real world.
With respect, I do not believe you
The coincidences in posting are too great
So you can’t or won’t answer the basic questions? I wonder why.
I have explained why
And also because I have addressed these issues countless times before – as you well know
Richard,
You haven’t explained why and you don’t seem to have adressed these issues countless times before. Why don’t you just answer Sarah’s question?
It doesn’t matter who she is, the question is stil a good one.
Most people get paid monthly, so that seems like the right time to invest the money that goes towards their pensions. It doesn’t cost them any more to do it that way as the fees they pay to their pension managers are annual.
It also seems sensible to do it monthly as if you did it annually you would have a huge spike in peniosn money invested at a few times a year, and markets would know its coming so would pre-empt it. Which would be bad for pensioners. As well as the point Sarah makes that doing it monthly averages out when you invest, so averages out some of the risk. As well as that if you don’t invest monthly, what happens to the money people would otherwise be investing from their monthly pay? DOes it just sit there not earning anything?
I’m not sure how investing monthly constitutes being “against the interests of the paying the premiums”. As far as I can tell it is totally in their interests.
If it isn’t, I would be grateful if you could explain exactly how it isn’t in their interest, and what you think should be done instead.
The question is not how often money is invested: clearly, that is not the issue. The issue is that mindless fund managers keep funnelling the money that they are presented with, month in month out, into the same general destinations, be it the FTSE 100 or property, with small parts reserved for cash and gilts. For this mindlessness, which eventually leads to inevitable over the valuation of both equities and property, they are well rewarded those who trust them lose badly. That is the point I was making.
And at a more theoretical level, this outcome is inevitable because buying second-hand shares in second-hand property is not investment at all: it is saving. Therefore no extra return is generated in the economy as a consequence of these actions, and as such no real income generating capacity is created, meaning that any return to pensioners arises largely from speculation, and not from the creation of wealth. This is the fundamental flaw in our pension arrangements.
We need pension funds that actually invest in job creation, and in the facilities that people need to undertake their lives and achieve their goals.
I’m not sure I agree with what you are saying.
Firstly, most pensions these days have hundreds if not thousands of destinations for your investment. So you get a great deal of choice in what you want to invest in. Certainly it doesn’t just go to a fund manager to invest blindly.
Then secondly, I think most fund managers would take great offense for you to call them mindless. I’m not sure you underatand the work and effort that goes into the decisions they make. I don’t think you have any experience of the industry to make the claims you do.
THirdly, your claim about second hand shares is pure nonsense. Especially the bit about no extra return. I don’t think you have thought what you have through at all.
If people didn’t buy “second hand” shares, how would people sell the shares they own when they need or want to?
More importantly, when someone buys a share someone else sells it. Which means that someone else now has cash to spend, back in the rest of the economy. Which is what generates the return in the economy. You are making it sound like the money a pensioner invest just disappears and can’t be used for anything else, when all that really happens is that one person swaps cash for shares with someone else. Basic logic.
You say that pension funds should invest in job creation (which they do already through investing in companies) and the “facilities that people need to undertake their lives and achieve their goals”.
What do you mean by that exactly, and how would it work?
Actually, I have tho0ught all this through
That’s why I can say those who have not are mindless
I am not suggesting there should not be secondary markets
I am saying they are vastly too significant
And that speculation is a zero sum game, with costs attached
But you clearly do not agree, without offering any good reason why bar standard, poorly thought out rhetoric. And I am going to leave it at that.
Try reading this http://www.financeforthefuture.com/MakingPensionsWork.pdf
It doesn’t look like you have. Not from where I’m sitting.
It’s pretty arrogant of you to claim that you know what you are talking about yet none of the thousands of experienced, intellignet proffessionals in the pension industry do. A lot of people would look at your blog and say you haven’t got a clue, and are just making stuff up as you go along.
For example, you just say secondary markets are too significant. As as statement.
But then you don’t clarify that at all with what you’d do about it. NOt withstanding the fact that secondary markets HAVE to be much bigger than primary, because companies don’t issue new shares every day. IPOs are very infrequent.
I’ve also read the piece you link to. In the section titled “The reforms that are needed” you are basically arguing the same meaningless things, and display the same basic lack of understanding about “second hand shares”. What does new economic activity mean, exactly? How do you define it? Most of the paper is pure waffle.
Then you say that pension funds should be invested in local authority bonds, green bonds or hypothecated bonds for PFI – saying they are somehow less risky. I doubled over laughing – these types of bonds are some of the most risky assets out there.
Then you say companies should fill their pension fund deficits by issuing them new shares in the company. Apart from this being illegal – anyone with a basic knowledge of the pension industry would know this – it’s also really stupid. Those pensioners would have double the exposure to the company – and it would make the pension fund basically a cash reservoir for the company to use if needed. If the company went bust what would happen to that pension fund, now holding lots of the compnay stock?
Instead (after you make a basic accounting mistake) you seem to think that it would make both the company and the pension fund better off. I quote ” so the company’s worth should have gone up by the value of the shares issued”. You seem to have invented the incredible corporate money printing machine. Why not just underfund your employee pension scheme, then hand them shares to fill the shortfall – which makes your company worth more.
If I rinse and repeat this process a few times my company could be bigger than amazon!
So it looks to me like you don’t really know what you are talking about. If you had actually thought about any of this properly before typing you’d quickly realise the mistakes you’ve made.
Upi have been told fir years that I don’t know what I am taking about.
For example, country by country reporting was pure nonsense.
Now it is the law in 60 countries.
I am used to supposed experts telling me I am wrong. Trouble is, I very rarely am. And I am not on this.
Richard – That’s means something entirely different from what you claimed above!
However, in a pension or other investment, it is the investor that chooses the asset class into which the money is invested, not the fund manager.
Oh come on. This is getting silly. The fund manager decides what to offer. I really do not have time for nonsense.
Fund managers typically offers tens or even hundreds of different options.
All of which look remarkable similar
And I note you are a troll: you clearly know how to work round blocks
https://www.hl.co.uk/funds/fund-discounts,-prices–and–factsheets/search-results?investment=&category_list=CEHGINOPW&companyid=2075§orid=
Here is a link from HL which lists the 123 different unit trusts Black Rock offers retail investors and obviously there are many many more companies offering retail funds. There are also hundreds of closed ended funds which by their structure are more suitible for less liquid assets I.e private equity, infrastructure and commercial property. So no one is forced into the same FTSE companies as you suggested.
But all of the same broad type
As I said
Is there one that only invests in job creation? If so please highlight it
I understand your point about job creation..but share holders capital was removed from businesses the imagine the employment destruction. Direct job creation is really via venture capital and as theses companies grow they will eventually grow into large listed companies. Look at the growth in many biotech and technology companies. By the same token many private equity backed ventures fail and investors lose everything. This is the function of capital markets, to let the succcessfull companies have access to capital and grow and create employment. There really isn’t a modern example of a country which hasn’t prospered without a capital markets function. To get more savings into start up’s (which I think is your point) then tax breaks would need to be offered (like EIS and VCTs),.
I really think you need to read The Ebtrepreneurial State by Marianna Mazzucato and stop spouting dogmatic nonsense
I have read the book and agree with much of what it says. However it doesn’t justify your rhetoric and you can’t hang your hat on one publication. It covers only the USA which has mantra in Government which is miles apart from the state intervention you advocate.
Marianna would not agree
I think I kniw her well enough to say that
As a member of the biggest private sector pension funds – USS – I am not at all convinced that pension managers are good at making decisions, or at all trustworthy. ‘University pension fund accused of exaggerating shortfall’
https://www.ft.com/content/3778c62c-d142-11e8-a9f2-7574db66bcd5
Precisely
I am also a member of that scheme
What that… markets are rigged & people just put money into FTSE100 companies & fund management companies offer no choice etc etc… I don’t think so
Then you do not live in the real world
I do
Well please back up your statement about markets being rigged..or just consign it to a worthless throwaway comment .
I think I have written about 15,000 blog posts justifying my claim
And several books
Please feel free to read them and only return when you have