When you have watched the economy for as long as I have, you have seen a stock market crisis or two along the way.
I vividly recall the stock market collapse in 1987, and of course again in 2008, but there have been other bumps as well.
As is also very clear from my opinion expressed here over the years, I have long thought that stock markets are substantially overpriced because they are little better than Ponzi schemes, with financial markets having been engineered so that a steady inward flow of funds from pension contributions, in particular, will ensure that the price of a limited supply shares tends to move ever upwards until a fundamental market correction happens.
Such a fundamental market correction should have taken place last November when Trump was elected. It was glaringly obvious then that he was going to launch an assault on world trading systems through the imposition of tariffs and that this would have major consequences for the way in which world trade would take place. However, although the proponents of efficient financial markets like to claim that they are clairvoyant and take into account all future possible and foreseeable courses of action, their reaction to Trump‘s election was, in fact, to seriously inflate markets. It was as if they did not think that the events of the last few days might happen. So much for their clairvoyance.
Now we have markets tumbling. Panic mode has set in because no one has the slightest idea how extended global supply chains that either have a destination in the USA or involve the supply of goods through that country, are going to function.
Everyone, from some of the world's biggest tech companies onwards, seems not to have noticed that Trump has had a 30-year or more dedication to tariffs, which he is now putting into action. It's not as if he hid his intentions: the mayhem that he is now unleashing was entirely predictable as a consequence. It is the markets that failed to notice their likelihood.
There are three things to note.
The first is that we should not believe that the rigged financial markets that we have are rational, or useful, or in any way the place in which to save, let alone that they are necessarily an appropriate basis for the provision of a pension at some point in the future. Ponzi schemes are wholly inappropriate for use in such activities.
Secondly, we should, as a consequence, ignore all those who claim the markets are efficient. That is the last thing that they are.
Thirdly, we have to presume that markets when panicked, as they now very obviously are, will be irrational in response to a crisis, and the panic of this sort will create reactions that might be deeply detrimental to well-being.
What will the reactions be?
Firstly, there will be big losses reported by many companies because their pension funds will have fallen in value, and some at least will have to make good those deficits. This will distract them from real investment. The net consequence is that the massive investment programme that the Office for Budget Responsibility forecast was going to happen for Rachel Reeves is not going to be seen. She will not be able to meet her forecasts.
Secondly, anyone who finances their own pension will have noticed the hit to its value today. That is going to hit consumer sentiment. That is not going to help Rachel Reeves hit her targets.
Third, there will be less tax paid by the financial services sector. Again, Reeves is not going to hit her targets.
Fourth, because of tariffs, world inflation rates might rise. This could spillover into the UK. Things that start in the States tend to to do so. That could then, inappropriately, but nonetheless probably, lead to interest rises. Reeves would miss her targets again.
In summary, this could be the most almighty economic mess. It may not be, but you would have to be a mighty optimist to think so.
What should Reeves do? Frankly, she needs to reset all her plans. I mean, everything. But you would have to be a might optimist to think she will.
It looks like a great deal of the proverbial might be hitting the fan soon, most especially if Reeves has it on high, as seems likely.
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There’s lots of people who are mightily optimistic. They write books about the power of mission-oriented States operating under strict conditionalities delivering, or about embracing the power of the State but not any of the last 5 here or abroad. My message to them is to calm down dears and have a cup of tea.
I don’t think she will change course, she lacks the ability to do so. It would be better if she stepped down and moved to a job more suitable for her talents – in an office under supervision would be a good move!
Making the Tea!
Nothing like a good stock market dump to make a government bond trader (me) feel smug.
You are right, Reeves must change tack on the economy, Starmer must change tack on our relationship with our friends (ie. favour solidarity with the EU and Canada over begging a less bad set of tariffs from Trump).
For pension funds, it is a “double whammy”; the market value of their equity portfolio has fallen AND the Present Value of their future pension liabilities has risen (as gilt yields have fallen). Of course, they hold lots of gilts for this very reason – they go up in value (roughly) in line with the value of their liabilities.
On the surface, this is bad news for making the case that pension funds should invest in equity or “UK plc” … but let’s look a little closer.
The FTSE index is down sharply over the week but some stocks are up. National Grid, water companies, power companies are higher on the week. Why? Because the represent stable future income so look “a bit like gilts”, indeed, perhaps even a bit like index linked gilts. (I ignore the issues of nationalisation, over indebtedness etc. of these companies but you have blogged and I have commented at length – this is a different discussion).
My point is that “equity investment” by pension funds is appropriate – as long as they invest in the right sort of things. Luckily, they are the things we need (National Grid infrastructure, reservoirs etc..). The issue is that the “Market” is hindering, not helping, the process of getting the money from where it is (Pension Funds) to where it is needed (infrastructure projects). This is what government is for….. but will they? Sadly, no.
Thanks
This is where a major issue lies:
‘The first is that we should not believe that the rigged financial markets that we have are rational, or useful, or in any way the place in which to save, let alone that they are necessarily an appropriate basis for the provision of a pension at some point in the future. Ponzi schemes are wholly inappropriate for use in such activities.’
Not only because I am thinking of retirement now, but really when I was looking at how much was wiped off the market value worldwide yesterday my first thought was how much of that value was simply inflated by the bullshit nature of the market? How much of it was not really there in the first place?
And this where things get interesting because we know the current markets do not really work and could do with a good shake up and perversely it looks as though Trump is doing that.
I heard one commentator say yesterday that essentially stock markets are owned by the rich. Is this Trump’s personal plan to make sure he is the richest of them all by doing stuff like this? Can you rule anything like that out anymore? I don’t think so.
You are right in that Reeves has to respond in some way even just to protect the British people from the inter-dependencies of the stock markets and their personal financial viability.
It technically means that she should abandon austerity because the British people cannot surely be left to cope with that AND a drop in market value which they have increasingly had to rely on. I am note hopeful at all about what she will do.
PSR
‘Not only because I am thinking of retirement now, but really when I was looking at how much was wiped off the market value worldwide yesterday my first thought was how much of that value was simply inflated by the bullshit nature of the market?’
All of it is bullshit. Stock markets are glorified betting shops. They have no value except to indicate to those who own shares roughly how much they may make when they sell the shares. But hat pre-supposes that someone will want to buy them at the price they want to sell.
From reading this blog, and the tea leaves, in January I moved my pension into a very low risk fund. It was a worrying thing to do as it potentially hit long term growth and it’s my biggest, only, investment. I’m extremely glad I did this now.
I guess the tricky decision will be to decide when I have some “risk appetite” again probably not fit some time
My wife and I wrote to our local MP,explaining why we could no longer support Labour.
I suggested that she should look at your ideas on tax.
Her sympathetic,lengthy reply included,in response to a 2 tier rate on government debt owned by our banks,”reforming banking regulations requires careful balance”
Reeves is fulliy captured by the banking sector and the City.This was further highlighted when googling ” Cash Isa”,as a Savings Fund has matured.Up came the warning of Reeves planning to reduce Cash Isa limits to 4k.Her intention being to increase the investment in Stocks & Shares Isas.
We would be delighted to have Isas/bonds,as you suggest,that invest in UK infrastructure etc.
Thanks on many fronts
Careful!
Knockety knock. Ah Mr Murphy (evnin’ all) it has been brought to our attention that some people using your ideas have written letters to their MPs.
The MPs are very very upset because their loyalty to the dear leader (salutes) & his brilliant finance minister (salutes again) have been undermined. They are in tears and it is clear to us that you might have a case to answer – wer’e not sure quite what case right now – but we would like to take you in for questioning under the (oy Bert! which one is it?) “Don’t upset MPs – the prevention of unhappiness legilsation – Clause 4, section B subsection B1.
1st the laugh at you
Then you are a threat
Then….
Does leave the open question – how many of the LINO chimps read the blog.
I know some do…..
“The markets” used to have a pretty simple basic purpose – companies needing a cash injection for their activities issued shares.
Nowadays the majority of “stocks” traded are derived products gambling on the upward or downward movement of stocks, indices or bundled debt. Market makers and global funds are given
privileged access and as we’ve constantly seen by way of criminal prisecutuons and fines, corruption and secret deals are rife.
However, the rubicon was crossed a long time ago. What can we possibly do to prevent this?
I, for one, am all for more prison sentences and fines that actually hit them in the bottom line.
UK defined benefit pension funds are relatively well-funded in the current high yield environment and their exposure to equities has been shrinking for quite some time, particularly for larger companies / schemes, so I don’t expect lots of deficits to suddenly emerge or significant extra cash demands to materialise. In any case, the FTSE All-Share TRI is, e.g. 3% up on a year ago and 12% up on two years ago, so it’s still got plenty to fall given the (as you suggest) inflated returns in recent years.
Maybe, but some actuaries will find a reason to think otherwise.
Do you mean that there will be diversity of thought, or are you suggesting that they would seek extra funding for the scheme regardless of the facts and circumstances? There will be some schemes that have not invested well, or have not been funded well, where the position is not so rosy and the trustees of the scheme might be (justifiably) nervous about the strength of the business supporting the pension scheme given their primary responsibility is the security of the members’ benefits. These situations will occur – I just don’t think they are numerous enough to have a significant impact on the economy.
The current direction of travel is for companies to be able to access surplus in the scheme for the purposes of investment. The latest market turmoil is likely to make trustees more nervous about agreeing to the release of any surplus, although I would expect schemes in such a situation to be considerably de-risked (from equities, for example) before it is even a consideration.
My suggestion – let’s see what happens. I think I have suggested a possibility.