Since the 2007 real estate crash and subsequent banking and derivative scandals, people have lulled themselves in the notion that the battered economies of the world were somehow slowly healing.
The problem is not the healing: the problem is the bandaid applied to the wound.
Banks have been trying to stimulate economies on both sides of the Atlantic, but in so doing they might be creating the next bubble, which according to some money brokers, will burst again, and soon.
This great banking stimulus plan however, has done two things: it has made borrowing cheaper, and saving useless. Just ask anyone what the interest rates are on saving accounts and the picture will be instantly clear.
This type of economic stimulus, while it does stall freefall, creates simultaneously a climate where those people who could rely on savings dont do so any more, and those who are working cannot save or don't save because there are no incentives to do so.
The result is that prices are still climbing, and the price of stock is soaring, sending alrealy rampant speculation to new heights. And people are chasing investment on the hope of a big payday, while ignoring their savings account.
The United States stock indeces are at incredible heights even as the economy still hobbles along in some sectors and unemployment is high. So the massive rise in stock value is not driven by a healed economy but by speculators who could drive the US market right into the pithole of depression.
Although the economy has recovered some, and there are new businesses entering the stock market every day, some of the more sanguine stock brokers on the floor of the Wall STreet exchange will have to face the fact that a constantly upward moving price curve for stocks is about as natural as man living in the sea.
The problem is that many of the companies that are now driving the stock market are companies that have not yet realized their economic potential, i.e. a stream of solid return. Take Twitter for example, great IPO, great surge.....but is the value of the stock tied to actual income? No it ins't. It's tied to the promise of what its income will be when all the tech and internet sites cash in. And that is where the problem lies.
Stock used to be valued according to a company's financial worth, and projected growth. That notion now, is almost quaint. All that drives the price of stock today, is consumer's confidence and the belief that a company will become hugely profitable in the near future.
However, international investors are becoming weary of stock whose value is not pegged to a real, material product or income. That is why many of those investors are turning to traditional stock, as in stock that is issued by a manufacturing company, with a traditional balance sheet on which the stock can be valued.
Germany is one of the countries that is benefiting from this trend. Their generations old enterprises and small businesses are highly in demand for their quality tools. And their stock is being mopped up by international entities jittery about US stock or stock that is not tied to traditional enterprises. The DAX, the German stock exchange has swollen from 11,400 to 16,300 in less than a year. Together with the stock, foreign investors are also buying real estate In Germany and other countries, because they want to protect themselves against inflation.
But what does this do to the rest of the world financial markets? It drives up the price of real estate, among other things.
In the US, the problem is that the new monetary policy has not generated jobs and businesses, not has it raised consumption levels. That is also due to the fact that corporations are playing a sickening game of not hiring full time and not paying adequate salaries, so that even with all the money in circulation pumped in from the federal bank, the people who are working are seeing their purchasing power shrink. Wages in the United States have contracted almost 11% since the 1980, while corporate worth and corporate salaries have multiplied.
But hedge fund manager Spitznagel for example, explains that when a company's market value is multiples of what its true assets are, or balance sheet shows, there are real risks of a market crisis.
This kind of uncertainty also breeds strange creatures. In 2008 gold futures and similar investment took off like wildfire; today it's Bitcoins. But the problem is that Bitcoins, just like certain derivatives, have no value in the official currency market, and are driven purely by demand, although some are questioning China's eager adoption of the virtual currency, even if a way to undermine the sovereignty of classic currencies.
So for now, it's caveat emptor, but not too far in the future, there could be more earth shaking in the stock markets, in the US and beyond.
Op-Ed
Partial Source : Spiegel Int'l / 12.4.13
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