Global warming has yet to get a firm grip on Europe. This week, the weather in Ireland turned in the direction you might expect.
It is midsummer, but in Baltimore it could pass for a bad day in February.
It was rainy, windy and cold when we left this morning. Even with a sweater and an umbrella, you have to stop in a tearoom to warm up.
Here in Paris, it is about 10 degrees warmer…but still chilly.
Meanwhile, look out below…
Beginning to wobble
The techs are beginning to wobble. It could be nothing. Or it could be the beginning of the end. Sooner or later — we remind readers of the obvious — asset markets will crash and the economy will go into recession.
Janet Yellen says this is unlikely to happen during our lifetimes. That she would say so reveals three startling things:
First, the crisis is probably closer at hand than we thought.
Second, Ms Yellen is not afraid to tempt fate.
Third, the two people most important for the future of the United States of America — the president and the Fed chief — are both morons.
We wrote last week that we never know where a crisis will begin. But with the tech stocks lost in space, it wouldn’t be at all surprising if their owners were to get nervous.
And that’s what seemed to be happening last week.
From The Wall Street Journal:
‘Major U.S. stock indexes slumped Thursday, as technology shares tumbled anew.
‘…Tech shares led declines in the S&P 500, falling 1.8%. Google parent Alphabet fell $23.19, or 2.4%, to $937.82 and chip maker Nvidia shed 5.07, or 3.3%, to 146.68. The S&P 500 tech sector is up 17% this year, but has fallen 2.6% in June as some investors have questioned whether the group’s run-up has been overdone.’
Goosed-up stock prices
An asset market is supposed to be a place where diligent, informed investors ‘discover’ the right prices. These prices change, naturally, as new information arrives.
But the last eight years have distorted prices throughout the economy. Price discovery gave way to price manipulation. That was the whole point of Fed policy — to lower interest rates and drive up equity prices.
It is illegal to manipulate securities prices. Still, nobody objected as the Fed goosed up stock and bond prices, boosting total capitalisation of both assets by as much as $20 trillion.
Providing fake money to the asset markets did not make companies genuinely more profitable or bonds safer. But the money had to go somewhere…
Corporate executives couldn’t think of anything better to do with the money than buy their own shares; capital investments in job-creating new plants and equipment, and new start-ups, actually went down.
Real value seekers were flummoxed, too. These old-fashioned investors sharpened their pencils. They put on their eyeshades…and spread out the reports.
They could find the expenses…clearly and prominently displayed. They looked for EBITDA, but where was the E? Where were the earnings? Alas, for many of the techs, there were none.
The old value guys had to pack up, leaving the ground to younger players. Try as they might, their research could not discover anything to justify higher prices.
Name of the game
Of course, the younger players found no value there, either. But it didn’t matter. They were playing a different game. A mo-mo game. Forget earnings. Forget debt. Forget Graham and Dodd. Momentum was the name of the game.
And momentum appealed especially to the fastest-growing segment of the Wall Street world. It appealed to gamblers without real brains, as well as robos and algos.
They couldn’t meet the CEO, look him in the eye, and draw his measure. But they could add. And when they saw the numbers adding up, they piled in.
And so it was that the cheap money went where all bubble money goes — to the bubbliest part of the market: the techs.
Up and up and up went the techs. They didn’t need earnings; they were bringing revolutionary new technology…or whatever it was…which promised a future so bright, it was practically blinding. Just like the late 90s.
Buying begat more buying. Excitement begat more excitement. One tech breakthrough begat 10 more.
Isn’t Jeff Bezos going to deliver hot meals to our door…by drone? Isn’t that Russian kid completely changing the money system with his blockchain? And isn’t Elon Musk going to the moon?
It is all so thrilling…and exhilarating. But it will be breathtaking when it ends, too. We can’t wait to see the look on Ms Yellen’s face.
For Markets & Money