Coronavirus has only hastened the inevitable stock market crash, but expect another bull run on the back of stimulus measures
- It was obvious from the initial Wuhan lockdown that the damage to the Chinese economy would reverberate globally. Wall Street’s reaction is not surprising
- Policymakers keen to avoid a credit crunch are pouring liquidity into the market, which will once again fuel an asset bubble
In their book Animal Spirits, George Akerlof and Robert Shiller note that the US stock market index rose over five times in real terms from 1920 to the 1929 Wall Street crash, then fell a massive 86 per cent, giving it all back by 1932. It doubled between 1954 and January 1973 – then lost half its real value by October 1974.
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It is subject to cyclical disruption as we see a catastrophic destruction of jobs in one part of the economy, while others prosper. Surpluses and deficits of commodities and sought-after components cause booms and busts. The oil crisis of 1973 roiled inflation for a decade.
The fortunes of Wall Street broadly follow the Main Street economic cycle. A strong economy generates a rise in company earnings – from which stock markets are valued.
Rational analysts conclude that the market is “cheap”, when in fact sticky prices, rent increases and low stock-price volatility merely reflect the virtuous cycle of the economic boom. Markets are collapsing today because that self-reinforcing mirror has been smashed.
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Every major country now has a policy of helicoptering liquidity to those most likely to spend it quickly, such as small companies and lower-income recipients, finally recognising that there is no point giving tax breaks to the unemployed.
Many of these guarantees will be called and never paid off – governments are not good at collecting because politicians worry about their future today, and ours tomorrow. Moral hazard is ignored; the indebted become rich again.
Much of that funny money is likely to end up in fake asset prices, so we should expect another bull market encouraged by the protection of the “government put”. The bill will still have to be paid and I have no confidence that it will.
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Richard Harris is chief executive of Port Shelter Investment and is a veteran investment manager, banker, writer and broadcaster, and financial expert witness