We look at our portfolios on our iPads and think ”Yes, this’ll do me nicely. I’m a frigging stock market genius I am”. It's only when the inevitable drop off the face of a cliff comes, that we run round the kitchen like a chicken with its head chopped off screaming for our mothers.
We’ve all known the current bull market has been a deceptive façade. The markets should be (emphasis on should be) connected to the real economy, but they haven’t been. There has been little real economic growth in the past few years, the vast majority of the global population has in fact been getting poorer. Without a widespread, robust base of economic growth amongst the poor and the middle income demographic we are disconnected from real economic progress.
There’s only so many Louis Vouitton punching bags and Foie gras dinners the 1% will buy. At some point the vast masses have to get in on the act of contributing to growth or things will cease to progress. This isn’t rocket science.
So what’s been happening in the past few years? Banks have had access to cheap money from the central banks, which the banks, in their infinite wisdom, have “invested” into higher yielding bonds and equities. What the banks haven't been doing is lending that cheap money to small and medium-sized businesses to build their businesses.
You know why? Well us bankers may be dumb, but we weren’t that dumb. It was plainly obvious that there was no growth potential in the real economy, combined with our cowardice and inability to take risk, we did the easy thing and started pushing the cheap money we had access to in to the secondary markets, bonds and equities in particular: Borrow at 0.01% get a return at 3% and higher. That’s free money right there all day long… until the sun goes down. But the problem is that the markets are not Lapland in the summer where the sun never sets.
Our greatest problem has been that instead of the real economy being the underlying driver of secondary market asset prices (as it should be) the secondary market has been the driver of… well the secondary market. The tail has been wagging the dog since 2008.