It was reported on Tuesday that shares in London had soared to another five year high, with the blue chip index (banks and financial institutions) climbing as high as 6,563.35 in the middle of the afternoon.
The official explanation was that better than expected job creation figures (or creative job accounting?) from the US suggested that unemployment fell to 7.5 per cent. That, together, with better than expected financial results from HSBC and Commerzbank, was what drove the FTSE to new highs – apparently.
Experts have pointed out that the FTSE was last above 6550 in the first week of December 2007, a year and a half before the crash of 2009.
Nor were stock market surges confined to London – Japan’s Nikkei 225 index surged past 14,000 to a five year high and, in New York, the Dow Jones Industrial Average surpassed 15,000 to hit – yes you’ve guessed it – another new all time high. Similarly in Europe, where the German DAX also set a new record.
So what’s going on?
Has the British dead-in-the-water economy suddenly resurrected itself? Has there been a remarkable increase in manufacturing production or a staggering demand for British manufactured goods or services from overseas? Perhaps there has been a massive fall in unemployment or a discovery of a gigantic new oil/gas field off the Scottish coast that will, at a stroke, wipe out this country’s lamentable dependence on borrowing arising from endless annual budget deficits?
The answer in every case is a resounding NO – so once again we ask – what’s going on?
In less extraordinary times a buoyant stock market would reflect a healthy economy, arising from sound investment, increased productivity, growing prosperity and lowering unemployment – but none of these factors are in play.
Could it be that the stock market is just the latest financial bubble, a bloated entity increasingly adrift from its real underlying asset values, inflated out of all recognition by cheap money “printed” by the bank of England and invested by the recipient banks? And if it is then how long before the bubble is pricked and an awful lot of people lose, directly or indirectly, an awful lot of money?
This is clearly a concern shared by at least some market traders who warn that the rally is unsustainable and that “an aggressive sell off” is sure to follow.
One market strategist is on record as stating: “It’s not a question of if we see a sell off but when. The Cyprus crisis seems to be under control at the moment but we could well see another market shock this quarter.
“A lot of people are waiting to see which of the central banks back out first as well. The Federal Reserve is very divided at the moment over the prospect of more money printing so there’s a question over whether it will continue to provide liquidity to the markets or start to tighten the flow. As soon as one of the central banks talks about reducing or controlling quantitative easing there will be a sell off.”
Meanwhile a professor of Finance has added: “My overall impression is that the market is too overvalued and there is no fundamental reason for the recent increase in share prices given the gloomy economic conditions.”
Precisely!
So is the stock market just one big bubble waiting to be popped? If so, who are the preordained winners and who will be the preordained losers = apart, that is, from the small investors and pension funds?
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The trick is knowing when to buy & when to sell. The big players, like Soros & Buffett are very experienced at this game, so presumably they are the ones to watch. Someone I know had shares in 2007 which climbed from £5,000 to £25,000’s worth. He was advised to sell, ‘Why’? he asked. Because Warren Buffett says sell, ‘Oh, he said, he’s old’. A week later the whole thing crashed & his shares were reduced to his original capital, but at least he got out with his shirt!
Shares, banks, hmm….mattresses are beginning to look good!
The key fact to remember about the stock exchange is that it is a casino. Unfortunately whereas all good casinos are properly regulated the stock market is not. Any fool can see that the stock market is priced well above its real value and that a crash is certain. Some people are going to lose their shirts but you can bet your bottom dollar that it won’t be the bankster fraternity.
Quantative easing (printing money) is also having an effect on stock prices. With gold, oil and other assets fully priced and interest rates at zero, traders are looking for returns on their money. Some stocks still yield 4 & 5% dividends which is a decent return at the moment.
Of course the market is driven by the big merchant banks such as Goldman Sachs etc., and when it suits them they will sell the market after they have made a tidy profit, pension funds and smaller investors end up nursing most of the losses something that happened during the dot.com boom and bust.
One thing’s for certain it’s not the vibrancy of the western economies that’s driving the surge in stock prices.
With the below inflation returns now offered on bank deposits it’s scarcely surprising people are looking for yield elsewhere – and that is going to be a self-fulfilling affair.