Daily Times

Money begets money, so it is said, and the financial market is proof of the fact that skill, luck, serendipity, and piles of cash will make you ever bigger piles of cash. The mercurial Bazaar of Barter trades in various financial instruments, and even at its most somnolent, is volatile and reactive to the tiniest stimulus. For years now, the Market has been championed as a totem to the economic health of a country and a barometer of that nation’s prosperity. Economics has been twinned with the Market in a symbiotic relationship that has at its heart a perceived causal linkage between the two, but recent events have reinforced the idea of correlation rather than causation. Economic growth isn’t synonymous with Market growth, just as a tanking economy doesn’t always cause the Market to crash and burn. When countries started locking down their people in the face of the threat created by the fast-spreading Coronavirus, they were inevitably locking down their economies at the same time. The resulting global recession we have been plunged into is one caused by countries walking a tightrope to maintain equilibrium between health and economics. Surprisingly perhaps, many chose to gamble with their economics rather than their citizens’ health. And so, the economies crashed.

In the 6 months since the lockdowns started the world has been battered with economic news that is stunning in the sheer scale of what we have lost. World GDP is projected to fall by 4.8% in 2020, with the US and Eurozone economies experiencing sharp contractions, along with emerging economies that have had to follow the lockdown path with far fewer resources at hand to offset or mitigate the inevitable damage. Global unemployment figures herald the virtual demise of industries and sectors that might never recover, and are projected to rise as firms scramble to minimize and consolidate their outgoings and cut their capital expenditures. We’re breaking records in all the worst possible places. And yet, financial markets continue to dance on shifting sands, unheeding of the red alert klaxons being sounded by the economic data.

While the stock market is an incredibly efficient wealth building mechanism, the disconnect from the realities of the economic devastation and suffering of the middle-class and the poor, has highlighted the grotesque inequality of wealth distribution across communities and countries, raising the specter of future social unrest

The global financial market system resembles an asterism, a collection of diverse entities that are connected, highly inter-dependent, and have the ability to operate partially invisibly. While global trade and economics find themselves bound by international law, arbitration, and Courts, the financial market has been deft in skirting oversight and accountability. Countries release economic and trade figures on a quarterly basis, but the Market and its tickers are iconic, highly visible, and real-time. And the associations in people’s minds demand that the reactivity of the Market be of prime concern to governments hell-bent on presenting the gleaming grin of prosperity to the world. Nevermind that today’s grin is more like a Death’s-head rictus of agony at the economic indicators.

Markets are not the economy, they are not a gauge of a country’s economic health. Historically they did mirror the underlying economy but for decades now, they have been detaching themselves from the drag of economics, and the lockdowns have accelerated that separation spectacularly. Mohamed El-Erian, Chief Economic Advisor at Allianz, said in a recent interview, “I continue to emphasize that there is a limit to how much the financial markets are separated from the underlying economy. And we’ve separated them a lot this year.” Operating in a global gray zone as far as international law goes, the Markets have evolved and engineered themselves away from the cause-and-effect relationship between themselves and economic reality.

Investor speculation trumps consumer preferences, and that sets a very dangerous precedent for monetary policy as, post-2008, more and more of the Market’s expectations are being shifted onto the shoulders of Central Banks. The psychology of the speculator’s mind is unique, as it often chooses to dismiss past disasters and crashes as the workings of inefficient or unknowledgeable ‘others’, and looks ahead constantly to the next new variant or innovation the market has to offer. Bubbles start out with some tie to reality but the singular euphoria that is a defining, behavioural feature of today’s Market, drives prices upwards at an exponential rate that far outstrips the economic ground reality. And that is what we are seeing now. Speculators are betting on a V-shaped recovery that envisages a sharp, short-term economic downturn that recovers and rebounds very quickly. Unemployment figures, trade losses, personal consumption numbers are thus of limited value to an asymmetric Market that is stoically, perhaps maniacally, looking ahead.

This disconnect can also be explained by looking at the makeup of the main stock markets and the changes in asset ownership over the past few decades. We live in the age of the colossus – trillion dollar corporations that are practically nations in and of themselves. Global, highly profitable, cash-rich companies with favoured access to public bond markets have not just held their own, but have increased their value as the world relied on technology to maintain connectivity through the lockdowns. The S&P500 had 495 companies losing double digit value this year while Microsoft, Apple, Amazon, Alphabet and Facebook made gains that have led to these 5 companies now making up one-fifth of the value of the entire index. Apple has become the first US company to hit the $2 trillion mark,during a global recession. The S&P500 has rebounded over 50% since its March plunge – the fastest rebound in history, while the NASDAQ is hitting all-time highs. Asian and Latin American markets are also displaying the disconnect with Taiwan, South Korea, Argentina, Brazil, Chile showing solid rebounds in spite of devastating GDP cuts, dismal employment and economic growth prospects, and unsustainable debt burdens for some countries. The incredible gains we are seeing though, are limited to the top few percent of people and households who collectively own nearly 80% of assets. While the stock market is an incredibly efficient wealth building mechanism, the disconnect from the realities of the economic devastationand suffering of the middle-class and the poor, has highlighted the grotesque inequality of wealth distribution across communities and countries, raising the specter of future social unrest.

A market correction is almost inevitable, with bond traders maintaining fairly pessimistic views even though the Citi ESI, which measures the gap between economic projections and real-time numbers,is hitting historic highs, showing that economic recovery is better than was being projected a few months back, giving truth to John Galbraith’s comparison of the accuracy of economic forecasting versus astrology.

The writer is an investment analyst at raanas@gmail.com