The FT has this headline in an email this morning:
You can almost sense the fear pervading the writer who is seeking any excuse to justify further inflows of funds into an over-inflated market.
I'm more honest: this is a major bubble. A crash will follow. And the reason why is obvious: there is no consumer power to sustain it. You can't make money if most of the world is suffering falling living standards. Sometime the wealthy will realise that, but I fear it won't be yet.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
There are links to this blog's glossary in the above post that explain technical terms used in it. Follow them for more explanations.
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
I suggest that the wealthy already know that.
I feel that some consideration should be given towards what benefit another crash gives to the “wealthy”.
In particular, it may be beneficial to look at what reasons lay behind the engineering of an unstable economy?
When FTSE 100 was 5500 you stated on this blog that it was going to 3000, I said based on earnings yield it was cheap, it now stands at 6770 increasing about 24% in addition to dividends.
I was right then and I’ll be right now
It’s overvalued
Overvalued relative to what? negative rates in savings accounts?
Earnings potential
The bubble is just hot money without a home waiting to be lost
Alan Greenspan has stated recently that the “equity risk premium” is very high and that puts an upward bias in stock prices.
there is a twitter feed, https://twitter.com/equity_research, it does a précis of company reports, companies are reporting very strong earnings growth and outlook.
Argos owner HOME has doubled in price during 12mths while pawn broker Albermarle and bond has fallen 80%
Car Dealer Pendragon has gone from 7p start of 2012 to current 38p.
Ho ho – “globalisation and technology advances.” One thinks of three historical precedents:
1) the economist Irving Fisher saying in summer 1929 that stock prices had reached “a permanently high plateau” thanks to new industries like washing machines and air travel
2) Glassman and Hasset publishing “Dow 36,000” in 1999 (arguing that 36,000 was a realistic target for the Dow in the 2000s because of the new wave of technological innovation unleashed by the internet)
3) Gordon Brown saying in the Mansion House speech of summer 2007 that bankers had ushered in a new “golden age” for the UK economy…
Within months of each assessment being made, subsequent economic events rendered them a sick joke… it doesn’t seem to me that this time is any different.
But Richard, this time it’s different.
Just like the last one was.
Richard is right that there will be at some time a market crash. The big question is how much harm will it do?
The crashes of 1987 and 2000 did little harm. A lot of funny money was simply worth less. It makes no difference to the economy whether a Picasso painting is worth £5,000 or £50,000,000 and not that much difference whether a share trades at 5p or £5.
On the other hand, the 2008 crash was different in kind and did a lot of harm.
The question for Richard is will the next crash be a 1987 or a 2008 crash and why? Because I would also argue that taking a 1987 crash seriously can do a lot of harm.
The second question is whether corporate profits can continue to rise as a proportion of GDP or will they revert to the mean? If profits remain historically high, then the market is not yet in bubble territory. But if we ever get a fairer society, will profits drop dramatically? So that a buoyant stock market is incompatible with a just society?
Fair questions
Perceptions matter is one answer
And profits cannot keep rise as a proportion of GDP without serious backlash happening
thats a very good measure of the stock market, profits/gdp. sadly labours power to claim an increasing share of the countries product has been destroyed.
Eh?
“You can’t make money if most of the world is suffering falling living standards.”
Global GDP growth was 4% in 2010, 2.8% in 2011 and 2.2 % in 2012. Even when you adjust to per capita those are positive figures.
The world as a whole, the average of the people in it, is indeed gaining rising living standards.
What that means for FTSE is something else of course. But given that some vast portion of it is now not about the UK economy this certainly has some effect.
Most of that was China
Do you think a) much of that is FTSE linked and b) it is sustainable?
From the Economist:
““The world is dangerously dependent on China… Since the beginning of 2010 it alone has contributed over one-third of global GDP growth, with another 40% coming from the rest of the emerging world. Weighed down by debt since the financial crisis, the rich world’s growth has been sclerotic. Excluding America, it has provided just 10% of global growth since 2010; America has contributed another 12.5%.””
That one sixth of humanity has provided one third of the growth doesn’t surprise me very much. But one third is not most either.
Sustainable? I see no reason why not. Might be bumps along the way but there’s nothing inherently impossible in the poorer parts of the world becoming as rich as we are today for example. Indeed, we’re all being told that it will happen.
The IPCC economic estimates, those that underpin all of the work on climate change, assume that the global economy will be $250 trillion to $550 trillion in 2100 in inflation adjusted 1992 dollars. That’s up from about $60 trillion in 1992.
An awful lot of poor people can get rich in those numbers: which would be pretty good for business.
I love your naivete Tim
Growth without limits as the planet burns is what you believe to be possible
Some of us base our outlook on what’s really going on and on the constraints that really exist and when 80% or more of all carbon has to stay in the ground if there is to be any chance of the world surviving with humans on it your growth assumptions are simply absurd
Richard,
We’ve had this conversation before, a few years back.
Here are the economic estimates that underpin the IPCC.
http://www.ipcc.ch/ipccreports/sres/emission/index.php?idp=0
The next set is due early next year.
They really do state economic growth of that magnitude. There are several emissions paths within those families which are entirely consistent with climate change not being a problem.
That’s not good enough of course. Stern took one of those economic families (where global GDP grows to “only” $350 trillion) and then looked at what we would have to do in order to be sure of dodging the really bad parts of climate change. That’s what the Stern Review is all about. His answer was that we need a carbon tax (at $80 per tonne CO2) and a bit more R&D spending.
Which is why I support a carbon tax at $80 per tonne and a bit more R&D spending. And why I also note that we all expect the world to get very much richer in the coming century. Because, quite simply, this is the scientific consensus.
The consensus amongst mainstream economists is not evidence of fact
Not long ago they thought the problem of depression had been solved
“Not long ago they thought the problem of depression had been solved”
You’re a Keynesian. You do believe the problem of depression has been solved.
And if you want to start insisting that the economic analysis behind the IPCC is wrong then doesn’t that mean that we have to question everything that the IPCC is telling us? For don’t forget, all of that work really is based upon those economic models. That’s how we find out what emissions are likely to be that we can then feed into the climate models.
We know how to tackle depression
That is not the same as solving the problem of depression
And since I have not read all the IPCC have written and it is not core to debate here I will let you claim what you wish with regard to it and will not take the time to challenge you
Depression:Insoluable.
Another side of the coin:
http://www.testosteronepit.com/home/2013/10/30/politicians-are-all-jabbering-about-creating-jobs-doing-what.html
“In this paper, we examine one of the possible determinants of unrest and violent protests – ï¬scal policy. How do budget measures affect the level of social instability? The extent to which societies fracture and become unstable in response to drastic retrench-ment in the government budget is a major concern for policymakers tackling large budget deï¬cits: From Argentina in 2001 to Greece in 2010-11, austerity measures have often created waves of protest and civil unrest”
http://www.scribd.com/doc/77140328/Austerity-And-Anarchy
Business investment is down 4 percent but spending is supposedly up. It is up because people are dipping into their savings or borrowing (at seriously high interest levels) on credit cards. No doubt the great rise in house prices will be helping to fuel this borrowing.
But it is the same old story; real wealth can only be created on the buying of real goods and services. Creating wealth from useless assets is only eventually, if left unchecked, going to lead to one thing.
Once a society allows jobs to migrate from a high wage to a low wage economy and only ever really replaces those jobs with low skilled, low paid “McJobs” in the service sector, then allows the real economy to shrink and let the financial sector grow ever bigger is storing up huge problems for itself.
I firmly believe the only real way to rectify this is to reject absolutely the junk economics of neoliberalism.
Bring back fixed currency rates, capital and exchange controls. The “free” market is only there to mainly benefit corporations and speculators anyway! Let’s explore again the ideas of Keynes when he proposed the ‘bancor’ system, designed to eradicate the distortions and imbalances of importing and exporting.
What to fix currencies against? gold didn’t work. Some suggest a basket of commodities.
Whatever path is taken, the express train of meoliberal economics must be derailed. If that means going back in some fashion (though adapted for the modern world) to the Keynesian economics of post World War II, then so be it!