Financial Sell-Off Continues

I would love to have more time to analyse and report on current financial and economic events, but pressure of other commitments prevents an in depth analysis at the moment. However, it should not have escaped anyone’s attention that the forecasts I made at the start of the year are bearing out. I will give an end of year assessment in December as usual, together with forecasts for next year.

The global stock markets are experiencing sequential large sell-offs, with no evidence of any appetite for buying the dips which accompanies such sell-offs during secular bull markets. As I have described for the last year or so, the basis of the sell-offs is not just that stock, bond and property markets have been astronomically inflated over the last thirty years, and reflated deliberately by QE at the expense of the real economy, with austerity thrown in to restrain growth, so as to suppress pressure on interest rates, for the same goal, it is that despite the QE, and the austerity, the normal operation of the long wave upswing has forced its way through.

Despite attempts to suppress growth, which was the cause for rising wages and rising interest rates in 2007, which sparked the 2008 crash, global growth has continued to force its way higher. More labour has been employed, which has caused demand for global wage goods to rise. In a global economy where 80% of value and surplus value comes from service industries — for example, huge mobile phone companies, whose product is the service of being able to chat, e-mail, watch cat videos, porn and so on, rather than processing materials, or huge media companies selling us films, videos, and computer games and so on that again process very little in the way of materials — the first consequence of this rise in demand for these wage goods/services is a rise in the demand for labour-power. That means more workers are employed, who, in turn have more wages to spend causing the demand for wage goods to rise again. And, in sector after sector, this also leads to relative shortages of labour, and rises in wages.

In the UK, 70% of companies now say they are unable to recruit the workers they require — which really means they can’t recruit them at the wages they want to pay them, which means a bottle neck builds up of firms that will need to start paying higher wages. There is a shortage of more than 45,000 lorry drivers, for example, expected to rise to 75,000. That is despite wages of over £40,000 a year, illustrating why Labour was right not to target workers on these kinds of wages for paying additional tax. This increase in demand for wage goods, and subsequent rise in demand for labour, causing wages to rise, means that to finance the expansion, firms have to use more of their profits to finance this expansion; it means they then have proportionately less to pay out in dividends, less to put into the money market, for other firms to borrow to finance their expansion. In short, it causes market rates of interest to rise.

Already, a number of large companies, who for years have been able to borrow at very low interest rates, by issuing bonds — often using the proceeds to buy back shares, to boost their share prices — are now facing rising costs of borrowing, and seeing their bonds fall sharply in price. For that large sea of junk bonds out there that financed some of the shakier ventures, a day of reckoning grows closer by the day. The Federal Reserve has been trying to get from being behind this rising interest rate curve, leaving the ECB and Bank of England a long way to catch up, as the rising demand for consumer goods, now also means that liquidity is flowing into the real economy, away from the fictitious, speculative economy, and is thence leading to the inflation that central banks thought was impossible now starting to rise rapidly, which puts even more pressure on wages, and market rates of interest.

As bond prices fall, and interest rates rise, that means the capitalised prices of shares and of property falls, and because those capitalised prices have been so grotesquely inflated, by manipulated official rates of interest, even a modest absolute rise in the rate of interest causes, these capitalised prices of bonds, shares, and property to drop significantly.

The US stock market has now lost all of the gains it made for 2018, and continues to head lower. Bond prices too, continue to head lower, though they exchange places on a daily and weekly basis with stocks, as speculators move from one to the other, in search of marginal gains, which increasingly become marginally smaller losses. But, confirming what I said earlier in the year, and for the last few years, the fall in these asset prices need have no detrimental effect on the real economy. As Marx pointed out it simply amounts to wealth in the hands of one group of speculators being transferred into those of another. because today, a lot of those speculators are amateurs, the people who think because they day traded a few shares in a heavily manipulated market, or who put money into an equity ISA, which they saw rise in value each year, because of the same manipulation, or the buy to let landlords, who’ve listened to all the TV property programmes about get rich quick schemes, by using your life savings to speculate in property, for your pension, that they can continue to make money when conditions change, will also be the ones who suffer most, because the smart money will have got out long before the amateurs are left with worthless assets on their hands. Trump, who stupidly, but typically, tried to claim sole responsibility for the sharp rises in the US stock markets after his election, now, of course, wants to disown any responsibility for the current sharp sell-off in those markets. He is now blaming the Federal Reserve, and its Chairman J. Powell, who Trump himself appointed, for the falls in stock markets, blaming the Fed for raising official interest rates. As the example, of Trump’s erstwhile friend Erdogan, in Turkey showed, such statements by the President do more harm than good. If speculators think that the central bank is not independent, but its policies are dictated by the President, they are likely to be less likely to lend, which then pushes up bond yields further, which then causes stock and property prices to fall further. And, of course, the other real cause for US markets selling off is Trump himself.

As I set out at the start of the year, Trump’s huge tax giveaway to the rich has caused the US deficit to rise, especially at a time when Trump has increased military spending, and when the US needs to spend trillions of dollars just repairing its decayed infrastructure of crumbling roads, collapsing bridges and so on. By inflating the budget deficit, in the same way that Reagan did in the 1980’s, Trump has necessarily pushed up US bond yields. His other main economic policy of entering a global trade war, has also pushed up the costs of US imports, via the imposition of 25% tariffs on a wide range of imports that passes through to US inflation, and thereby to the rising pressure on US wages. At the moment, the US can still borrow easily in global capital markets, but Trump’s other obsession with supposed unfair competition from China also threatens to undermine that. Some pundits have suggested that the conclusion of Trump’s attacks on China for unfair competition, will be for the US to simply write off its debts to China, on the basis that they were the result of these unfair practices. That is unlikely, but even the potential that it might happen, given Trump’s maverick nature, and his decisions to just withdraw from the Paris Climate Treaty, the Iran Nuclear Treaty, his threat to withdraw from NATO and the WTO etc. could be enough not only for China to begin selling its US bonds, but for other speculators to treat the US as a bad credit risk, which night not meet its obligations.

However, as stock and bond and property markets have continued to sell off repeatedly over the last year, it has had no detrimental effect on the real economy. The US economy has continued to grow at around 4%, and the global economy is also forecast to grow at around 4%, despite the limiting effects of Trump’s Trade War, and of Brexit. As the three year cycle comes to an end in this 4th Quarter of 2018, global growth should again begin to rise into 2019, irrespective of the sell-off in financial and property markets. In fact, the sell-off in those markets, will assist further economic growth, for the reasons I’ve set out in the past. Lower property prices means a lower value of labour-power, and so higher rate of surplus value, as well as less money required to finance Housing Benefit for landlords, paid for out of taxes. Lower stock and bond prices, means a lower cost of pension provision, and so on.

As I said at the start of the year, Bitcoin tends to be a bit of the canary in the coal-mine as far as that sell-off is concerned. Bitcoin and the other cryptocurrencies are the epitome of the financial speculation of the last thirty years. Having floated into the stratosphere on nothing more than hot air, Bitcoin is crashing back to Earth. having reached $20,000, its now dropped below $5,000, and as I predicted in January, its on its way to zero. If it could go below zero it would.


Originally published at boffyblog.blogspot.com on November 21, 2018.