Covid-19 puts workers under immense strain, while asset owners feel much less pain
Robert Armstrong
It is wrong to dismiss worries about the disconnect between the stock price gains and political unrest © Samuel Corum/Getty
Was the market right all along?
Until last Friday, it looked as if stock markets had lost all track of reality. In the world, we saw spiralling unemployment and political disarray.
In the markets, especially the huge American market, exuberance.
Within finance, the consensus on this disconnect was that the market was pricing in a lot of good news about a fast recovery from the Covid-19 crisis. This is a bit worrisome, but not too bad, because the market is never a simple barometer of the economy. And as for the political issues, the market is amoral, focusing solely on profits. No need for concern there, either.
Then came a much better than expected US jobs report, showing a gain of 2.5m jobs in May.
The consensus was reframed.
The market had not assumed the good news, it knew it was coming, and it has proved itself, once again, to be an amazing economic barometer. It still doesn’t care about justice, of course, so China’s latest crackdown in Hong Kong, a US president threatening to set the military on his citizens and the Brexit shambles remain irrelevant to future market rises.
The new consensus is wrong.
The jobs report was unexpectedly terrific, but the unemployment rate, at 13.3 per cent, remains well above the worst part of the 2008 financial crisis and there are concerns that the numbers were affected by classification errors. Consumer spending has plummeted.
The course of the virus is unknown. We need to see more swallows before we declare it summer.
The market, however, is already acting like it is the fourth of July.
The S&P 500 has risen to within 5 per cent of its all-time high.
Most importantly, it is wrong to dismiss worries about the disconnect between the stock and political unrest. Observers are shocked by the market’s insouciance not because they misunderstand how markets work but because they see it as a symptom of how society works.
Covid-19 has put working- and middle-class people under immense strain, while the asset-owning classes have felt relatively little pain: the big equity drops in March came after a decade of historic increases in asset values. Although the middle-class participates in markets through pensions, this does not offset the imbalance.
In the US, almost 90 per cent of equities are owned by the wealthiest 10 per cent of households, according to the Federal Reserve. Not only do market gains flow overwhelmingly to the wealthiest, but the link also runs in the other direction: inequality contributes to the gravity-defying rise in markets, in a self-reinforcing cycle.
The richest 11 per cent of the world population holding more than 80 per cent of its wealth, Credit Suisse estimates.
This means the rich have a lot of excess savings. There is, after all, only so much anyone can consume. This “savings glut of the rich” (as Atif Mian, Ludwig Straub, and Amir Sufi call it) is a pile of capital that has to go somewhere. The cash flows towards open capital markets, especially America’s.
Ideally, it would then be channelled to productive investment.
But US investment is stagnant, for reasons that are debated. (It could be that slowing innovation means there are fewer good investment opportunities, or that oligopolistic industries have grown lazy, or that management incentives encourage dividends and buybacks over capital spending).
Whatever the reason, instead of spurring investment, the savings are lent to governments, companies and households.
The surge in debt issuance drives long-term interest rates down. The lower rates make future corporate profits more valuable, driving stock prices up. The rich end up with more wealth still, and the cycle repeats.This hurts economic growth, too.
When the rich receive incremental wealth, they generally save rather than spend, which saps demand. Ordinary households and taxpayers meanwhile are stuck paying interest on mounting consumer and government debt.
Even at today’s low rates, that represents another drip-drip transfer of capital from the lower classes to the upper.
If this picture is correct, and if inequality helps fuel the political strains we see across the world today, then those strains are hardly irrelevant to the rise of the stock market. The two grow from the same root.
An unequal and unbalanced global economy should ensure that, for a few years yet, US stocks will remain a good bet. But it should also make investors wonder if, in the long run, political change could reveal their gains to be fool’s gold.
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