Stock markets – Wall Street especially – now resemble a huge marquee party where the champagne and fun are running out fast but few wish to leave because it’s raining outside and there’s no place else to go. But the time is up, the party is about over and the last man out is an idiot.
Besides, the marquee needs to be cleared for the next event, which will look very different to the fizzy tech-stock party that has intoxicated so many investors for so long. It’s going to be a new kind of capital markets convention, attended by sobersided bond and fixed-income investors.
It will be a time when markets have to get serious about providing long-term capital to meet dire and imminent threats such as climate change or the need for post-pandemic health and other infrastructure. It will be a time, too, of increasingly state-influenced capital markets (by China and others).
The current bull market in stocks on Wall Street has endured for so long (a dozen years if the temporary correction induced by the Covid-19 pandemic impact early last year is discounted) that it is tempting to believe those who argue it can continue to run indefinitely on the back of easy money.
This is almost certainly wrong. Recent inflation data from the United States and Britain have shown upwards pressure on prices. Even if this is a temporary cost-push, rather than demand-pull, phenomenon, it has investors worried that the best they can hope for is no monetary tightening and not further easing.
Not even euphoric Wall Street investors with their “irrational exuberance”, to quote former US Federal Reserve chairman Alan Greenspan, can ignore this for long. Once stock prices correct they will not do so in an orderly fashion. They may climb a “wall of fear” on the way up but they go off a precipice on the way down.
So, we can expect a severe market correction or crash as more investors sidle towards the door of the big tent in the hope of slipping out before the roof falls in.
What would an implosion of the great stock market “money machine” imply? The total value or market capitalisation of global equity markets passed US$100 trillion by the end of last year, somewhat more than the value of global annual gross domestic product. Stock prices are thus of systemic importance.
It might appear that such colossal wealth cannot simply “disappear” and that it can be transformed into cash in a crash. But the fact is that stock values are “imputed”, meaning they are what the market thinks they are worth. In a sell-off, this imputed value can collapse at a terrifying rate.
Stock valuations also act as collateral for loans and myriad other transactions, so the coming correction in stock markets will reverberate mightily throughout an already debt-burdened global financial system. The resultant shock will force overdue capital market reforms.
After the market crash, the tech sector – already under siege by regulators everywhere from Beijing to Washington, who are alarmed by more than just its sheer financial size – is unlikely to attract anything like the degree of investor adulation that it has in recent years.
There are obvious areas into which private savings – portfolio investment in stocks and bonds as well as direct corporate investment – need to flow, among the most urgent being the fight against climate change, post-pandemic health services and physical and digital infrastructure development.
Tens of trillions of dollars at least are needed in the coming years. But how can such sums be channelled into these vital areas? Climate change and infrastructure do not enjoy the same glamour in terms of “products” and personalities that tech does.
But these are areas of existential importance and if even a looming climate disaster is not sufficient to lure investment into those areas, then maybe a tech sector-led stock market crash will serve by default to bring about a change in investor attitudes.
The trouble is that it is not just investor attitudes that need to change; it is also capital market structures. There are many so-called sustainable investment vehicles available to invest in but as former US vice-president Al Gore warned recently, much of this is just about “greenwashing”.
Whether it is in green bonds, social bonds, impact bonds or in the area of sustainability that most people are familiar with – investment in firms that promise to be virtuous in environmental, social and governance (ESG) areas – there is a need, Gore says, to be “vigilant” about greenwashing.
Put simply, this means that pouring investment into companies that promise in return to do good things or the benefit of the planet and of mankind is not good enough. We need new agencies or special purpose companies to achieve these ends, whether created by markets or by the state.
This is the challenge now for governments and capital markets as we face the prospect of a post-pandemic correction in stock markets, whose impact can only increase hugely the need for remedial socioeconomic actions. Markets are going to have to re-establish their credentials as providers of capital.
Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs