Stock market 'volatility', a worrying sign about the health of the global economy
Milan (AsiaNews) - The world's stock markets marked in an odd way 'Black Monday', the historic stock market crash of 19 October 1987. On that day, the Dow Jones lost 22.61 per cent, the worst drop in its history. Now, 27 years later, they exhibited high 'volatility'.
For the uninitiated, 'volatility' is an obscure term. In fact, all it is are the deep and rapid downward and upward swings in share prices. This is has been the case in recent days, with shares losing more than 4 per cent one day (in Greece the drop topped 10 per cent), only to move back the next. Such high volatility is a strong sign of basic nervousness that many experts are unable to explain convincingly.
Indeed, there are reasons for some basic optimism as well as elemental pessimism. One reason for optimism comes from the United States. Since the end of the Second World War, the US has been real driving force of the economy all over the world, not only for the West but also for countries that once were - and some still are - its political adversaries.
Recently, the United States appears to have become once more an oasis of prosperity, to which the world can look as a paragon for a speedy return to «normal» time, like before Lehman and the 2008 crisis. Many people, perhaps almost everyone, are hoping that the storm is over and that we can look forward with confidence to going back to the model of steady development, temporary ups and downs aside, that defined the last sixty years.
Compared to early 2009, when they tanked and hit the bottom, equity indices have now made a strong comeback, reaching new heights after recouping all the losses. The official unemployment rate also dropped to its lowest level in six years, whilst US businesses and households have cut their traditionally heavy debt load.
At the same time, energy costs are expected to remain low. The same goes for the rates of return on bonds, which will lower the cost of borrowing for large companies. All this should set a solid foundation, enough to provide the necessary confidence to believe that the bad nightmare of six years ago is finally over.
However, some signals point in another direction. Almost every day, Japan and the euro zone show new signs or fresh signals of chronic weaknesses. No encouraging signs for global growth are coming from emerging markets.
China, which had initially fuelled much of global demand thanks to massive infrastructure spending to counter the declining phase of the global economic cycle, now is a major drag on it because the original artificial drive of public (unproductive) spending has petered out.
Brazil, which also seemed to have been less affected during the height of the crisis of 2008-2009, is now struggling to extricate itself from the recession in which it has officially fallen at the start of the year. The same can be said for South Africa, the largest economy on the African continent, and, for other reasons, India. Russia is also showing the effect of sanctions and low energy prices.
Other major social and political events are playing a role, such as the war in the Mesopotamian region, the precarious stalemate in Ukraine, the Ebola outbreak that is spreading outside of Africa, but especially the tensions between two major nuclear powers like the United States and Russia.
All these signals are said to explain the aforementioned volatility. But do they? Is economics some form of divination, like an ancient pagan rite, one that, despite is ambiguities, claims in hindsight to have predicted everything correctly? Like Pythia, the oracle, who said, 'Ibis Redibis not morieris in bello' so that, depending on where the comma is placed in the Latin text, it can mean "You will go, you will return, not in the war shall you die" or "You will go, you will return not, in the war shall you die".
Despite the efforts of many pseudo economic experts, it is not so because economics is not just history, political and social doctrines, political and power relations or, last but not least, the imagination of the philosophers of economics. Economics are about the math of facts, and to know facts one must first have a desire for the truth, which is always one, unambiguous.
The performance of the S&500 listed on the NYSE or NASDAQ is another sign that market volatility is not due only to anxiety caused by mixed signals. One can see a striking similarity by comparing stock market trends over the past six years starting in early 2009 to the same period before the market crash of 1987. The great difference of course is that this time there was no crash and this, for a specific reason: this time, central banks intervened to prop up shares. The same goes for the recovery of stock market prices beginning in 2009. Central banks, with the Fed leading the way, avoided a crash by using a set of tools to pump liquidity into financial markets and commodity exchanges.
Should we thank them for that? First, let us note that central banks are not a public tool but private entities, consortia of banks to be more exact. They do not operate in the public interest but rather in the interest of the banking system of which they are an expression.
Since the Lehman moment, central banks (first the Fed, the Bank of England and China's central bank, followed by the European and the Japanese central banks, and eventually the rest of the world) have injected liquidity by buying toxic assets from banks. In so doing, they saved the banking system as well as the financial sector, i.e. the bond and equity markets.
For the real economy, the world of actual businesses and families, the above provided an optical illusion, the illusion of financial wealth based on the recovery in prices without any real effect. For example, notwithstanding the aforementioned improved official unemployment figures, the reality of recent years is one of no improvement. If anything, things have worsened, as an economist of the old school, John Williams, has shown. All one had to do was to tinker with the definition of unemployment to "improve" the data outlook. The same is true for the price index and the official inflation index, by removing or adding one product or another. This ways, it is possible to get better data of economic and GDP growth. Once the touched-up parts are removed, it becomes clear that the world's main economies have had no growth or had negative growth. This means that they have been in a recession if not an increasingly protracted depression. The same goes for share and commodity prices.
The game of supply and demand, the market system, has been completely distorted by such tinkering. For instance, the volume of daily buying and selling of certain raw materials exceeds their annual world production. Starting with raw materials, everything has been distorted in a way that almost no one can account for. In light of the central banks' interventionist capitalism and of the government dirigisme that expresses it, talk about liberalism and free market is almost laughable, although crying would probably be better. Hence, we live in a capitalist-communist world, not only in China but also in almost the whole world, one that even George Orwell would find hard to fathom.
We can thus understand market anxiety, the so-called volatility. Markets are addicted. Without central banks pumping massive liquidity into the system, it would crash.
Can this last much longer? This writer is convinced that the collapse of the system is mathematically certain, because it is stems from more than 60 years of Keynesian illusion and a history of more than three centuries during which central banks have been in control of the economy, under all circumstances, including war. Why a crash? Because the total assets of central banks have ballooned, a classic telltale sign that a bank is close to implosion.
However, how this will occur remains an open question. For this writer, the coming collapse will be via hyperinflation, not deflation like in the 1930s. As soon as stock markets tank, central banks will use their preferred tool, pump money into the system, but this time a hurricane will follow. Giving more dope to an already doped economy has become a must, but today's phoney development will result in real hyperinflation because the existing economic system has lost touch with reality.
As the Gospel says, "But of that day and hour no one knows", so no one knows when the next economic crash will occur, but for this writer, it is possible to assume unpretentiously that when, in the next year or two, listed companies release their financial statements with data from the real economy, things will snowball into an avalanche.
Vedi http://www.shadowstats.com/
Economic growth is calculated at current prices, year-on-year. An increase in the nominal GDP, a country's "income", must therefore be subtracted from the effect of inflation. By underestimating inflation, the GDP will obviously appear higher.
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15/06/2021 16:11
12/11/2008
