The harder they come…

The world’s stock markets are extremely jittery and ready to run. For example, the short scramble on October 19^th was just because of the date. But, notwithstanding this general nervousness, indexes have continued to move incrementally upwards. This means that more money is constantly being pumped into stocks, money that is not being spent elsewhere. So where is it coming from? Some of it comes from incomes, the one to five per cent who do not spend all they “earn”. But a large, if not a major part is borrowed. After all, when dividends pay more than the cost of borrowing, and when the value of stocks is increasing steadily, who can resist such an offer of easy gains? The trouble is that the fractional value of dividends is reduced by rising share prices, and dividends in general depend on fluctuating corporate profits. And then there is the looming subject of interest rates that are artificially low due to central banks discounting at around zero per cent and buying vast quantities of bonds. Will it go on indefinitely and negate the whole idea of usury and the retribution of lent money, or will interest rates rise and upset the present fragile equilibrium?

Borrowing to buy shares whose rising value allows more borrowing. On a more modest scale, a similar process led to the housing bubble that popped in 2007. That event will be dwarfed by the deflation of the stock market balloon. It seemed likely this would happen in October, which is historically propitious, but it could occur any time in the coming months, because the structure is creaking loudly and will not hold up much longer. If Powell, the new Fed chairman, tinkers with the rates, it could be the last straw, so Yellen must be relieved to have exited in time. It brings to memory when Greenspan handed over to Bernanke in 2006. Except that Powell has inherited a bag of bonds valued at over four trillion dollars, which is a heavy handicap.