Does a falling FTSE matter? This was yesterday's chart:
At one level the fact that the FTSE has been in steady decline and took a tumble yesterday is inconsequential. Few companies are dependent on stock exchanges to raise funds. Long-term investors sit out such bumps, presuming that cash will flow in their direction, eventually. And for the day traders, downsides provide as much chance to make money as the upside: for them it is volatility that matters. In that case it is possible to say 'so what?' to yesterday's blip that followed the blip of the day before, and which might be reversed today (who knows?).
And yet it does matter. We live in a world where there is a lack of confidence.
People do not have confidence in their jobs, and so their financial security.
People do not have confidence in their politicians.
Or their countries, where some at least see their cultural identities as under threat.
Whilst many more wonder how we can survive climate change, maybe with good reason.
Some lack any confidence they will ever get a secure home.
In the midst of all this on the hour, every hour, news bulletins pump out FTSE 100 data as if it really matters. After all, why report it if it does not? People are told to think it matters.
And some do believe it matters. Trump did. He's in trouble as a result.
Politicians who obsess with growth use it as a proxy for that.
And a rising stock market is used as a proxy for a brighter future because, after all, that's where most people's pension saving goes.
For that precise last reason, for those with conventional savings arrangements (and that is most savers, but they are not by any means the majority of the population) this does matter. The value of the FTSE 100 is a proxy measure of their well being. It does not matter if they know the precise relationships that do that. It does not even matter if that is not really true. Political and social expectation is that we should save, and I stress, save and not invest. And the pressure to do so is continually reinforced, not least by the tax system, which provides considerable encouragement to do so. At the same time the whole financial services industry issues daily warnings that the value of what they inappropriately call investments might go down, whilst acting as if that is entirely untrue. The pressure to believe in the FTSE is high.
And so let's ignore the reality of its limited role in the real economy. And let's just treat it as an indicator of confidence. Put like that the FTSE does what most of us do, in that is it builds confidence slowly. And it also behaves like us, in that faith can be lost very quickly.
I have no idea whether or not real faith is being lost right now. But Trump; trade war; Chinese disputes; destructive protectionism; Brexit and other factors all give very good reason to think faith could be lost. Of those Trump is most especially significant. And the markets are sending a signal, which is that they are not sure what he is doing.
For a man who has based part of his appeal on rising stock markets that should matter. It probably does. If he understands as little as some suggest (and I do not know the truth here, but the reality is that his evidence base for action is usually pretty limited) a decline in US markets, which is also happening, matters to him.
Or does it? What of those without savings? For those who support his alternative vision maybe the USA stock markets are just part of 'the swamp'. And they do not matter. Trump could try to ride this out on that basis. I am not sure he could succeed, but the rise of populist politics that can sometimes (but not always) ride on a sentiment that what is good for the financial elite is not good for the rest (and vice versa). So, a stock market decline on this logic could be a gain. That might still be used by him to sell this as a win.
My point is then? Simply that by itself a fall in the FTSE (and other markets) does not matter much, technically. But actually, because we have given it such inflated status (in every sense) it most certainly does, and the consequences are unpredictable, most especially if someone like Trump over-reacts to it.
The truth is when you think the wrong things are of value then things can go wrong. And we do think things like the FTSE are or value. And the consequence is an obsession with growth because nothing must threaten its rise. And that is wrong.
The FTSE may well need to fall in value, considerably. The world can in theory survive that. But like so much else, it's whether it's confidence can survive such a change when it is already so vulnerable that really matters. And on that I do not know the answer.
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I thought inequality was the most pressing human need of the day, but today it didn’t get a look in when considering a drop in the indices.
Maybe it only deserves comment when it moves in the other direction.
Much to agree with here.
The fall in real incomes and austerity are much more worrisome.
I don’t mind a drop in confidence to be honest. I tend (wrongly or rightly) to associate confidence with greed and speculation.
And I still think that the decline in economic performance as a result of BREXIT has yet to work its way into the reporting systems.
Stocks in both Britain and America are most likely overvalued. This is in part because massive share buybacks have been driving up P/E ratios, by just driving up stock prices while neglecting real investment and innovation that drive future Earnings growth.
But stock prices, like any other market, also respond to supply and demand pressures. For decades a greater share of income has gone to the wealthy, creating a huge surplus of capital sloshing around the World, seeking “safe” investments. This has also been driving up prices on property and financial assets, while diluting long term returns.
If indeed these assets have now become overvalued, then the bursting of this bubble could be very painful to the West. Falling confidence in Britain and America as safe places to invest could drive up the cost of borrowing, further choking off investment, which is where the real cost to people’s lives becomes evident. Already Britain has lost out on £22B in investment over the last 2 years just because of Brexit uncertainties. If we go ahead and leave the EU in 2019 that uncertainty will now persist for another decade.
Innovation and investment always rest on the confidence and competence, of our politicians and business leaders. Yet we seem to have entered an age when mediocrity is the new excellence (KPMG), and personal greed is the new morality (Trump). With the quality and integrity of our leaders at rock bottom, the outlook, not just for share prices but for the whole economy, is bleak.
I have a particular obsession about the FTSE and pensions.
At any one time workers are contributing to personal and company pension schemes. At the same time retirees are receiving pensions.
These two processes should almost cancel out. However, the default position is that you must invest the money now, to pay for the pension you hope to receive in 30 years time.
Your money is given to an investment expert. The expert earns a 6-figure salary for pressurising your company to reduce your salary, reduce your job security and to lower the value of your pension.
The actuary for your pension scheme uses a bizarre calculation to predict that every £1 you put into your pension scheme will eventually give you 80p worth of pension in real terms (a process known as de-risking). They therefore advocate piling more money into the scheme. (As an example, the University Superannuation Scheme is a mature scheme with assets of £60 billion. It receives £2 billion contributions each year, plus likely investment income of £2 billion, and it pays out £2 billion in pensions. Its actuary says that it needs another £15 billion for the £4 billion of income to match the £2 billion of outgoings. Therefore staff must receive less pension to make ends meet.)
For Richard’s point today, the question is what does this mountain of money do to the stock market? Does it serve a useful purpose? Could it serve a useful purpose? What would happen if we decided it was not needed?
You’re even more cynical about this than I am
Stock markets are trying to discount all present and forecast information both economic and geopolitical. They are therefore volatile, always have been and always will be. To base a judgement of general sentiment on there level is mostly nonsense. Indeed most people (including those with Isa & pension investments) probably have no idea as to its level or recent performance.. if they did they were miserable yesterday and happy today. The weather has a bigger impact on people’s feel good factor.
There are still people around claiming to model fundamentals against stock values – e.g. https://arxiv.org/pdf/1607.03205.pdf – dividends, book price and cash flow (all per share). If this worked I’d be quids in. The valuing of shares is a discipline of madness. No one can defend rationality in the stock market and we left that behind in about 1981.
As a civil servant for over forty years I can say that my pension was a so called non contributory pension for thirty of those years .I did not have any deduction from my salary for this pension.So where did the money come from you may ask ?
There was no pension fund or pension fund manager no investments being made , how come ?
Then about 15 yrs ago the govt said we would have to start paying contributions for our pension and gradually the contribution amount has been increased .
There is no sense made of it all because when I did not hav to pay for my pension I received good pay increases each year then about the same time as I had to start contributing to a pension fund I started to receive zero pay rises otherwise known as payfreeze.
Ideology I think is behind it all.