The US stock market, as reflected by the S&P500 index, reached an all-time high yesterday.
But it is curious that in the same email that delivered this news there were other headlines that cast doubt on the relevance of this
A difference of views? In a market? But, but, how could this be?
It’s no secret to long time readers of this blog that I have long felt that the connection between stock markets and reality disappeared many years ago. It’s good to note that many, if not most, serious investors might now agree, even if the market algorithms that now drive so much investment still drive the herd along despite the obvious failure within the logic that results in this illogical behaviour.
Algos do tend to be countercyclical but leave that to rest for one moment.
The first of these is the reality that such markets fund business, because they do not now. Stock markets raise very little new capital for business and all serious business investment is now funded by debt.
Idiot. Much to most new businesses are funded by privately allocated capital. Which cashes out in a stock market if successful. Public markets are more an exit system than an entry one and no, debt is not the normal new business funding mechanism.
But if we want to talk about debt then what about those CCC bonds being looked at? That’s QE working exactly as it is supposed to, people going out along the risk curve in search of yield.
The second follows on, and is the claim that stock markets appropriately allocate capital to markets. If they did the current disconnect could not happen
So, explain electric cars then. Tesla has this massive stock market valuation. So, where’s that private capital being allocated? To Nikola, Rivian, Nio, Fisker. The prices in the stock market are indicating where the capital should be allocated. Toward those lovely green cars that Richard Murphy insists should be getting capital. Why? Because investors can see that the stock market values electric car companies highly so therefore the money follows.
The third is that stock markets reflect underlying value, which is very obviously untrue: when the world is heading for the most severe recession for more than a lifetime this cannot be the case.
Well, there’s that difference of view again. The markets currently seem to think that we’ve just had the most severe recession for a lifetime and that we’re coming out of it. And given that unemployment – we’re talking the US here – is falling by some million people a week, GDP bounced 8% last month or whatever it was, retail sales are back to February levels and all that the markets might be right too.
Of course they might not be but differences in views. That Murphy believes the recession is still to come is interesting but it’s not – necessarily – reality.
The fourth is that markets are efficient, which is only now true if you accept that they efficiently reflect the massive amount of financial support that they enjoy from governments, which is the sole reason why they have recovered as they have.
This ignorance has been going on for a decade an a half now. You’d think that someone who actually taught economics at a UK university would know what the efficient markets hypothesis is. Which is only – and it is only – that markets are efficient at processing information. There is that QE support, markets reflect this, now even Murphy agrees with the EMH even as he attempts to deny it. Sheesh.
And fifth, the reality that says that these markets are important (as maybe once they were) should also be consigned to history.
Slightly harsh innit? Abolish stock markets because Richard Murphy doesn’t understand them?
Astonishing what the man dunno.