One of the apparent oddities of the current crisis is the fact that stock exchanges have not fallen as far as might be expected.
The UK is not alone in facing unemployment rates of up to 30%, which are disguised by furlough arrangements at present. Although so far no major company has gone bust some, especially the travel and tourism sectors, look to be very vulnerable. There is a very real prospect of recession. The likelihood of deglobalisation is real. Oil prices hardly exist any more. Banks face massive loan risks. Future profit expectations have to be reduced. And yet stock markets are only down about 20% or so from their peak now, and look to be slowly covering.
Why is this? I offer three explanations. None is an absolute answer. I should make clear other interpretations are possible.
First, markets are absolutely confident that governments will not let major companies go bust. In 2008 we discovered the concept of ‘too big to fail' when it came to banks. Now we have gone a stage further. This concept is now the norm, and most certainly when the chips are down for the economy as whole.
Governments know that economic chaos is costly for them. I do not just mean in cash terms, although that is obviously true. Instead, it means that those elected politicians who make up governments known that the incumbents in a crisis usually pick up the blame for it, whether that is fair or not. The consequence is that those politicians have every incentive to minimise the risk of the largest employers in an economy failing, even if the minnows can, they think, be lost. It is not by chance that government bailouts have concentrated on the banking, finance and large business sectors in that case. This is not largesse. Nor is it real concern, or even economic rationality, that necessarily drives this. It is just ministers desire for their own survival. Too big to fail means it is just too uncomfortable for some minister, somewhere, to pick up the consequential risk of this in their own constituency.
The result is obvious. What the City realises is that the risk of corporate failure in large businesses no longer lies with the shareholders of a company. It does instead rest with the government. The reality is that, in effect, shareholders are not the providers of capital of last resort to a company now, as economic theory suggests. Instead the government now is. By providing loans, furloughing staff and making it clear that though QE and other programmes (where corporate debt buying is now on the agenda) whatever funding is required by larger companies to stay afloat will be provided. The burden of risk has been removed from most shares. No wonder the market is rising again. The rates of return it might expect might have gone down, but what there is now appears to be largely risk-free. That's ample reason for the markets to celebrate.
Second, stock markets do not, in any event, price market risk because most of the companies operating in them are not market players. They are, instead, monopolists, or at the very least, oligopolists. And monopolists do not work in markets. They do instead exploit them for their own ends. This needs some explanation.
My claim is based on a number of facts. The first is that some major market sectors are massively supported by state licences which create monopolies. Banking and the extractive industries are two of them.
Then there are more sectors that heavily on copyright and patents to generate massive monopoly profits by letting the heavily overcharging for what they do. Tech, pharma and car companies are obvious examples. These monopolies are also state granted.
There are also natural monopolies. Water, and to a large degree other ex-privatised industries fall into this category. They were, after all, nationalised for this reason.
All three of these categories extract rents - which are unearned supernormal profits attributable to their state-granted monopolies - to make their exceptional profits. These monopolies are not threatened right now. As a result, nor, in most cases, are the profit streams coming from them.
And thereafter there are the rentiers: those who simply extract more traditional rents. They may be hit right now, but they will be back. That's because impoverished thinking in the savings market, added to the fact that all UK bankers really want to lend for is land acquisition, means that is inevitable without reforms.
Which brings me to the third reason for this survival of stock market values and that is that same impoverished thinking of the savings market. Whilst UK pension and life assurance funds, who manage much of the savings market, think the only things they can save in for those they supposedly represent are shares, corporate bonds, government bonds and property, then money will keep flowing into these sectors and keep the prices up. This does not mean there is any value in them. It just means the Ponzi scheme has not been broken as yet.
So markets are rising, however illogical that seems.
What to do about it? Several things, where 'several' means this is an open-ended and developing list.
First, end the monopolies. The state has to reconsider all the licences it grants and what it gets back from them.
Second, reform patent and copyright law. Anything much beyond ten years is unnecessary, I think: ideas cannot be owned in perpetuity. And yes, some rock stars will protest. Tough luck: just keep touring.
Third, the future private ownership of natural monopolies has to be in doubt, starting with rail and moving on from there.
Fourth, rent controls have to be considered when it is rent that has, for example, hollowed out our High Streets. This sector enjoys far too many rights, many of which need to be challenged.
Fifth, require that pension funds, ISA funds and other invest the savings they manage, I suggest how, via the Green New Deal, here. Right now almost all savings are dead money that does nothing for anyone but fund managers. That has to be changed, and regulation must do it.
And last? Recognise that we have better options for a post coronavirus economy. We need to take them.
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Interesting ideas, but I think the pressure to get back to ‘business as usual’ will win out in as many activities as it can.
We have, after all a government which believes in the market (in so far as it believes in anything). I know we are not supposed to blame the stupidity of the electorate for the government we have, but who else can we blame ?
Your observations about the UK economy and stock market are broadly correct. However, a few points….
(1) Are you looking at the right index? The FTSE 100 is not really representative of the UK economy as a whole. Just 3 companies (HSBC, BP and Shell) are 25% of the index and the UK is a small part of their businesses (and they earn in dollars). So, the FTSE 100 is probably more linked to GBPUSD FX rate than to the real economy in the UK. Broader UK indices still tell the same story but to a lesser extent (FTSE 350 down 25% from pre-COVID 19 levels).
(2) It is not just (or even mainly) a UK story. The S+P 500 is up 30% from the low and is now just 15% from the recent highs. Some (most?) of what you say applies to the US, too, but not all.
(3) “Markets can remain irrational longer than you can remain solvent” (Keynes)
(4) I was preparing a slide for a presentation and was shocked to see that 60 year ESTR rates are at -0.35% – ie. the market is pricing o/n EUR rates to be, on average, -0.35% for the next 60 (!!!) years. (Rates are low everywhere but the EUR ones are particularly eye-catching). Very hard to get people out of stocks if that is the alternative.
But maybe that rate is real
I accept the point re the FTSE
It is “real” in the sense that it is from the ICAP broker screen….. but it is definitely a “nominal” (not inflation adjusted) rate. Amazing, I agree….. and if governments can’t get out there and borrow at these low (or negative) rates in order to invest in a green future then history will judge them harshly.
Very, very harshly
But my point is – that may be the real rate of return in the real economy now – or at least the one we have had
The delusion is it can be better without reform
Why not just say stock markets are looking beyond 12-24 months of economic disruption and a significant earnings improvement thereafter and repayment of dividends etc..that and low interest rates lowering the opportunity cost of owning stocks
The rest of your piece is a general rant against capitalism, some of which i agree with some of which i don’t. Not sure there is much state involvement in the likes of Astra, Unilever, GlaxoSmithkline, Diageo, Rio Tinto, Reckitt Benckiser, Anglo American, Smith & Nephew..the list goes on..
Because that’s simply not true
Would that be a good explanation?
If they were we would not have the volatility that we have seen, or the belief that this goes very upward, when that is not true
And I ma pro-market
You clearly are not if your think monopoly abuse a good thing
That’s being pro abuse and have nothing to do with markets
Monopoly? in the companies I listed?
What companies
I cannot see your list when I moderate and your comments are very tedious if I can be candid
You give the impression of being an astroturfer
” the likes of , Unilever, Diageo, Rio Tinto, Reckitt Benckiser, Anglo American, Smith & Nephew..the list goes on..”
where is the monopoly?
astroturfer?? i have no clue what you are talking about
Two are extractive
The rest rely wholly intellectual property
If you can’t see that you’re being deliberately blind to what I am saying
“The rest rely wholly intellectual property”
In other words they produce products which people want to buy!! What on earth is wrong with that? ..and where is the monopoly?
Astroturfer- i googled it, i interpret it as some kind of lobbyist?? well actually im working from home home and have more free time than im used to. Nothing more than that. sorry to disappoint!!
There is nothing wrong with making a product
There is problem when that product is protected from competition by law and scope normal profits are earned as a result at cost to the consumer
That is called exploitation
Do you favour that?
Why?
You call it “exploitation” others call it consumer preference..
All down to one’s interpretation..
The consumer is being conned
That’s what advertising does
That’s not interpretation
That’s fact
Great post.
To misquote a Chairman Mao, all businesses swim in “a sea” that its created by the state.
Dean Baker often says that the economy we have has not come about by accident,it has been entirely made this way deliberately,but we can change it if we so wish.
We should entirely ignore stock markets, they are short termist and serve only to further enrich the rich. The concept of stock markets,to provide investment for business, seems to have died long ago,they really are not of any concern to the average person.
Government’s economic response to the coronavirus pandemic is now of course beginning to be subject to the usual Libertarian spin that a sovereign government doesn’t have a Lender of Last Resort monopoly at all and the “mythical omnipotent taxpayer” must ultimately foot the bill for the whole economic stimulus package. These Libertarians need to be relentlessly chased down and asked how exactly are they going to manufacture the currency to do this!
Quite so…and that’s the right question
Do you know how long it takes to get a new drug approved by the FDA and the MHRA? Twelve years in the USA, on average.
So no patent protection for a majority of drugs.
Come on…it is 12 years from sale
And yes, that is long enough
$400 bn of excess profits is extracted by pharma in the US each year from patents
That is a mighty private tax bill, in effect
I’m really appreciative of your analysis – very thought provoking and grounded.
[…] Cross-posted from Tax Research UK […]
Ah Richard, I’m such a huge fan of your blog, but now you mention something (in passing) that I actually know about (because I work in the music industry), and I’m thrown into doubt. “Just keep touring” – there is no touring business right now and whatever touring business there is in the future may look nothing like it did in January. Will people want to be in close proximity with 1000 or 5000 or 10,000 others? Will they be allowed to? We just don’t know.
Hmmm…
You have called me out there
I’m open to longer copyright on creative work
Music and books, maybe…
Yes I think there are good reasons why tech types want a shorter copyright term just as there are good reasons music people want a longer one. We should find a way to reconcile the two.
Patents, and more and more ‘intellectual property’ (which absorbs more and more of the legal profession’s most expensive minds because of the scale of money involved) are becoming more and more powerfully intrusive in the whole economy. Patents (always have been) and intellectual property (as increasingly applied) are not part of “free” market capitalism; they are forms of monopolism or rentierism.
Precisely