InvestNow News – 19th June – Nikko AM – What purpose do financial markets serve?
2nd June – Andrew Hunt International Economist
In many countries around the World, workers are now being at least partially paid by the state and government guaranteed loans are being provided to companies that the credit markets would otherwise not lend to, given the credit risks involved and low yields on offer. Admittedly, the system is working better in some countries than others – China’s banks are clearly doing immense national service quite effectively at present, while the US banks are perhaps struggling to overcome capital adequacy and bureaucratic constraints on their ability to act.
In such a system, the capital markets are no longer being tasked with allocating capital, and they themselves have in any case become somewhat illiquid as market makers have been obliged to remove capital from these particular divisions of their businesses. In fact, we would argue that, in what is now a non-market wider economic system, it is not clear just what role the financial markets fulfil at this time, which in turn rather begs the question what exactly are the financial markets doing at this juncture aside from the minor roles of providing a gauge of (investor) confidence, employment for those that work in the oligopoly of financial market related companies, a speculative arena, a modest source of income for savers, and a useful diversion for those stuck at home with no sport to watch?
Of course many people rely on activity in the equity and debt markets for their daily livelihood, many savers require high and rising asset prices after perhaps saving too little of their incomes during the late 1990s and 2000s, and, as Employee Stock Options have grown to become a key part of the overall remuneration of many Corporate Executives, many company managers also need to see higher stock prices whenever possible. Meanwhile, governments around the World that are facing large budget deficits and high existing debt burdens need-ultra low yields simply so that they can appear to be solvent. Finally, public sector pension schemes the world over are under-funded and dependent on high & rising equity prices – be they in US Municipal Government, European State Pensions, or the Australian super schemes.
Superficially at least, the world and of course most governments themselves all now appear to have a vested interest in maintaining asset prices and we suspect that this has been the driver in a number of – we believe – crucial developments in markets over the last decade or so.