Ups and downs

Markets come in all shapes and sizes. Most concern goods and services that will not change hands again in their original form and value, though some are exchanged again, either transformed or as second hand. Commodities that can be stored, minerals, cereal, fossil fuels, often change hands several times before they are used. Debts are constantly being bought and sold preceding to their terms, with a natural preference for those contracted by state treasuries. Then there are jewels, gold and art works that may return to the market innumerable times as they are almost eternal. This repeated buying and selling of the same things at varying prices also occurs on the stock market, with a far greater frequency and on a much grander scale.

Stocks, or shares, have the same lifetime as the companies whose ownership they represent, and that can be secular. The amount of stock on a particular market – New York, Frankfurt, Shanghai, Tokyo, etc. – tends to grow because more new companies join the market than old ones leave it, and because companies may increase the shares they have on the market. However over a short period, say a year, the stock on the market is fairly constant. In this case prices will rise if more money is put into the market than is taken out, and they will fall if more money is taken out than is put in. Either money is chasing shares or shares are chasing money.

Fresh money on the stock market pushes up share prices, and it seems that its main source has been for quite a while the companies themselves. They have borrowed to buy back their shares and scrap them. This is a reversal of usual practice where shares are sold to reduce debt. But these are unusual, even exceptional times. Interest is nil and money is for free. Quantitative easing by central banks created cash and exchanged it for Treasury and company bonds held by banks. This cash was supposed to be lent out for productive investments. But most companies have excess productive capacity already, so some of them have borrowed to buy back shares, reduce their numbers on the market and mechanically increase each dividend. The same company profit will pay a larger dividend per share because there are fewer shares around. The increased dividend attracts buyers and the share price rises. This mechanism brings new money and has a buoyant effect on the whole market, encouraging punters and general bullishness. When production growth is flat it gives the illusion of more, a fantasy that is already crumbling.