There is a thirteen year
cycle for Stock Market crashes. In the last fifty years, they have
occurred in 2000, 1987, 1974 and 1962, but the sequence can be traced
back at least to 1929, provided a six year allowance is made for
WWII. This year, 2013, is the next year in this sequence, and all the
conditions appear in place for a huge Stock Market crash as well as
crashes in other financial assets such as Bond and Property Markets.
The difference with this crash will be in the conditions under which
it occurs. It will be a bust occurring under conditions not only of
no previous economic boom, but of extremely low interest rates, and
lax monetary policy as an attempt to deal with the lack of economic
growth in developed western economies.
An economic boom and a
financial bubble are not the same thing. On the contrary, the latter
frequently arises in the absence of the former, or as it ends. For
example, the 2000 bubble blew up during the 1990's, prior to the new
economic boom that started in 1999. The 1987 bubble blew up in the
conjuncture between the ending of the Autumn Phase of the 1949-99
Long Wave, and the start of the Winter Phase. The 1974 bubble burst
as the 1949-99 Long Wave exited the Summer Phase, and entered the
Autumn Phase, and during a period of stagnation. The 1962 Bubble,
however, burst under conditions of robust growth, as the 1949-99 Long
Wave transitioned from its vigorous Spring Phase into the Summer
Phase of the cycle.
 |
| George Hudson, The Railway King, presided over the Railway Mania of the 19th Century, that was pretty identical in nature to the Technology Boom of the 1990's. Most railway companies went bust, share prices bubbled then collapsed, but masses of capital in the form of railway lines, stations, hotels, and rolling stock was created. A few large profitable companies emerged from it. |
US growth started to pick up
in the 1990's. A lot of it was based on the Technology Boom. A lot
of that boom was fictitious, but no more so than the Railway Boom of
the 19th century. A lot of firms went bust, but a lot of
capital was also formed in the process. Like the railways before, it
now forms an important element of infrastructure.
Likewise, the growth of the
US and other developed economies, rose after 1999, partly due to the
onset of the new global boom, partly as a result of monetary policy
by Central Banks. Between 2000 and 2007, US growth rose from $11226
billion to $13206 billion (2005 $'s). That compares with an increase
from $4890 billion in 1974 to $10780 billion in 1999 - i.e. the
period of the Long Wave Downturn.
The Financial Meltdown of
2008 brought that boom in the US, UK, and Europe to a halt.
Particularly after 2010, with pressure from the Tea Party in the US,
the Liberal-Tories in the UK, and their co-thinkers in Europe, the
recovery was held back. In the absence of fiscal stimulus, monetary
stimulus could only create inflation. It did as it it had done in
the previous thirty years, create asset inflation – bubbles in
shares, bonds and property.
In 2000, the crash of Stock
Markets took the DOW back below 10,000 and NASDAQ down by 75%. At
the time, the Sunday Times suggested share prices would not recover
their 2000 levels for 20 years. But, money printing had taken the
DOW back not just above 10,000, but above 14,000 by 2008. The S&P
500 too was now at at an all-time high. But, at least, there had
been an economic boom between 2000 and 2008, even if not enough to
justify those rises.
Between 2008 and today there
has been no such growth. That is particularly true of the UK, and
parts of Europe like Spain. Yet, in those countries, stock markets
are near record highs, and the property markets are still well into
bubble territory. That is despite the UK being in a triple dip
recession and Spain being in a 1930's style Depression with
unemployment at 26% and youth unemployment at a staggering 60%. Both
Spain and the UK have more than a million empty homes. In the UK,
the bond market is also in severe bubble territory, despite the
country's deteriorating debt, and persistently high inflation.
There is, however, a sharp
disjunction between this high consumer price inflation, and the
astronomical inflation of asset prices. Inflation is caused by a
reduction in the value of money, or in a paper money economy, too
much paper money/credit being printed. But, how the excess manifests
itself depends on many other factors.
The basic exchange relation
between commodities – or their relative prices – was explained by
Marx. At root, it depends on the relative amounts of Abstract Labour required for their production. In a capitalist economy this is
modified to the Price of Production of each. If the Price of
Production of A rises while that of B remains constant, more of B
will exchange for A than before, and vice versa. Changes in
inflation do not alter this relation. If inflation doubles then, all
other things being equal, the price of everything doubles so that
their exchange relations to each other remain the same.
The only time this relation
should change then is if the Price of Production changes. For
example, if the Price of Production of houses rises, then you get
less house for a given amount of Labour Power. If a house was equal
to say 2 years wages – 2 years of Labour Power – and its price
doubles, it will now equal 4 years wages.
But, in reality, things are
not that simple. In practice, the Price of Production of all
commodities should be falling over time because productivity is
constantly rising, reducing the abstract labour-time required for
their production. But, it changes faster for some than others, so
their relative prices constantly change. They should all fall, but
some more than others.
But, modern capitalism does
not like falling prices. It encourages people to hoard money,
whereas capitalism needs them to spend. It also leads to big firms
competing on price which leads to cuts in profits. So, it prevents
falling prices – deflation – by printing money tokens to devalue
them, thereby keeping nominal money price changes positive.
But, the money when printed
can go anywhere. With rapidly falling prices in consumer goods from
China keeping consumer price inflation at moderate levels, it went
into buying shares, bonds and property that had a peculiar quality.
When the price of bread say
goes up, people tend to buy less of it, and vice versa. They switch
to potatoes or some other substitute whose price may have fallen.
With shares and bonds, and now even property, the opposite can and
has happened. They have behaved more like bread, when people think
it is running out. It is like a panic that causes them to buy more.
There are two ways you can
make money from any of these assets. Firstly, you can make money in
yield, and secondly you can make money from Capital Gain. The yield
is how much income it can produce as a percentage of its price. If I
buy a share for £1,000 that pays a dividend of £100, or a Bond that
pays a coupon of £100, or a house from which I get a rent of £100,
the yield in each case is 10%. In the past, investors tended to
invest in order to obtain income in this way.
However, at certain times,
the prices of these assets – in the past only shares – could rise
very quickly. People could get rich quick not from the yield they
could obtain from investing in some productive activity, but simply
from the rapid rise in the price of the shares they had bought i.e.
from Capital Gain.
The more these periods
occurred, the more this became seen as the motive for investment
rather than income. The more money was printed, the more such
periods of rapid price increases occurred. But, just as the only
basis of a relative increase in the price of a commodity is an
increase in its value i.e. the labour-time required for its
production, so too there are only two real bases for the price of a
share to rise. That is because the capital of the company, which
these shares represent has increased. Either, the company expands
and produces more, or the value of its production increases.
In reality, shares do not
get priced on that basis. Instead they are priced either according
to the amount of profit they are expected to earn, which gives the
Price/Earnings ratio, or else they are priced according to how much
traders believe the price might be pushed up to given the amount of
momentum behind the demand for them. The former can be to some
extent calculated, but the latter is in reality pure guesswork. It
is based on the observed phenomena that with such assets, people will
buy them for no other reason than that they are going up, and so
although this makes it now more difficult to obtain a yield from
them, the hope is instead to make a Capital Gain.
But, of course, in the end,
such Ponzi Schemes have to end in tears, when there are no bigger
fools left to buy the over-priced assets, and when the ability of the
share, bond or property to provide an adequate income is found to be
missing. A company that year after year fails to make a profit, will
year after year see its capital fail to expand, and so there will be
no basis for a change in its share price. If, despite that, its
share price rises by 10% a year, ultimately it will have to come back
down. The shareholders who sold their shares on the way up, will
have individually pocketed Capital Gains, but those who bought these
over priced shares from them, will make an equal Capital Loss, when
the shares collapse to their true level.
But, that is true also of
bonds and property. More so for the latter. A bond should be so
priced as to cover against inflation, plus an average rate of
interest. Yet, many bonds today, for example those of the UK,
Germany, US and Japan do not even provide a sufficient yield to cover
inflation. Their buyers are actually paying to lend money to these
Governments! What is more, when the holders of these bonds begin to
sell, the price will fall precipitously so that those left with them
will suffer huge capital losses. I've already pointed out in past
posts that some big Pension Funds are already beginning to sell their
bonds for that reason. The yield on US and UK 10 Year Bonds has
risen by more than 30% in the last couple of months. Now other big
investors are making the same bet - Jim Rogers - Short US Bonds and Bill Gross – Beware the Credit Supernova.
But the case with property
is even clearer. The price of houses, as with other commodities
should have been falling, as productivity rises, reducing their price
of production. Even allowing for the monetary inflation referred to
earlier, the price should only have been rising modestly. As UK
Housing Minister, Nick Bowles, put it recently, if chickens had risen
in price as much as houses since the 1970's, they would today cost
£47, and a jar of coffee would cost £20! Nor is it due to any
housing shortage as is frequently claimed. There is 50% more housing
per head of population today than there was in the 1970's, and there
are more than 1 million empty homes. The real reason for high house
prices is speculation, just as with share prices and bond prices. It
has caused people to bid up the price of houses and building land for
no other reason than a belief that the price will continue to rise.
In other words, a Ponzi Scheme. It has also caused people, on that
basis to modify their behaviour. For example, far more people today
seek to buy houses than to rent – though astronomical prices mean
very few first time buyers can, and also mean existing owners cannot
afford to buy a more expensive house. It means more affluent people
have bought more than one house, and it also means that many single
people seek to acquire houses, whereas they would previously have
lived with parents etc.
That change is provided in
the data supplied by the Halifax in relation to the change in
household composition.
In 1971, 70% of households
in the UK were composed of married couples, and a further 9% was made
up of co-habiting couples or other multi-occupancy homes. Only 2%
comprised lone parents, and a further 19% were one person households.
By 2011 those figures had changed dramatically. They were 40%, 19%,
8%, and 33% respectively. Even since 1991 the figure for married
couple households has fallen from 55% to 40%, whilst one person
households has risen from 27 to 33%.
The real reason for rising
house prices is not shortage of housing or land, or rising costs of
production, but speculation – hence all the TV programmes that feed
off it – causing a massive bubble. As with share prices, each time
that bubble has burst, over the last thirty years, it has been
reflated. But, with share prices bubbled to all-time highs, with UK
and Spanish property prices still near all-time bubble highs (and now
speculators are once more driving US property prices back into a
bubble - CNBC)
with bond prices also in a bubble not seen for maybe 300 years, and
yet with interest rates at near zero, in an attempt to raise the
economy from its near zero growth, when these bubbles burst, as they
appear soon to do, there is no way of reflating them this time, apart
from Ben Bernanke's previous suggestion to print money and simply
throw it from helicopters!!
I'll look at the
consequences of that dilemma, and of the looming financial supernova
in Part 2.
Forward To Part 2
Forward To Part 2
No comments:
Post a Comment