Opinion and observation on a world gone crazy

Joe Gill, journalist and game inventor from Brighton, UK

Tuesday 18 July 2017

Asset owners are enjoying a bubble - but a 'major loss event' could be coming


Here's a really sound - and pretty much Marxist - explanation for the current stock market boom from Southbank Research:
"We’ve created an environment — for an extended period — where we have a decreased frequency of loss events, an accumulating risk of a major event, and a bias that does not contain the wisdom of navigating any such event. So, market volatility is low. At the same time, this environment is increasing the potential for a major loss event.
A “major loss event” is pretty much just what it sounds like. A correction. Or even a crash. Something you don’t see coming until it’s right between your eyeballs, caving in the bridge of your nose.
Yet it’s been over a year since there was even a 5% pullback in the S&P 500. The S&P is in the middle of its longest such “quiet period” since 1995. No matter how hard you look, you will struggle to spot any sign of trouble on the horizon.
Here it would be tempting to make some analogy about dormant volcanoes. Eventually they erupt. Ka-boom! Pyroclastic flows. Herculaneum. Pompeii. Ash, fire, death.
But geologic time scales are so long compared to our own puny lives that few of us would be genuinely afraid about a volcano erupting and ending the world as we know it. And that’s no way to go through life anyway, waiting around for a volcano to erupt.
Let’s leave off the apocalyptics and suggest there may be something else going on today in financial markets. But what, exactly?
The something else is that the financial markets have become a semi-private means for the wealthy and well-connected to improve their position. There are two worlds now. One for people who can afford to own stocks and bonds and one for everyone else.
The share of profit going to corporations is going up. The share to workers is going down. In this way, corporate earnings are quite bullish looking. That’s great news if you’re a shareholder.
Wall Street and the City have the support of the Federal Reserve and the Bank of England, respectively. Asset owners and asset managers have friends in high places. And those friends have printing presses.
This is why it’s possible for stockmarkets to make higher highs even as most of the middle class in the Western world falls further behind. If you work in or around finance, you have a chance to earn a big wage and buy financial assets, which are bid up and backed up by the central bank.
If you’re out in the real world with a skill and have to compete for your wage with several other billion people who can also make things or provide services, you’ll be lucky to find a job and stay out of debt (unless you want to buy a home, in which case, borrow away and good luck paying). You’ll be lucky to keep the robots off your back.
Granted all this is just a theory about why stocks can go up while wages (for most people) struggle to match rising health, education and housing costs. But it’s not a bad theory. There are two systems. And they are only connected at the margin.
The world isn’t really a less risky place now that it was 20 years ago. It’s just that all the risks are in one system. All the benefits are in the other.
But don’t rule out “a major loss event”, especially when it’s the most unexpected. One trait we all have in common in the modern world is our increasingly short attention span. Our collective memory is failing."

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