Sunday, August 26, 2012

Will Stock Markets Survive?

There has been much debate about the demise of equities, inspired by PIMCO’s Bill Gross’s comment that equities are in a state of terminal demise. An interesting response came from Grantham’s Ben Inker, who argues that the relationship between GDP and earnings per share for equities is non-existent. And that therefore trying to pick stocks by looking at GDP forecasts is not valid. Pronouncements like Gross’ are the kind of overstatement that certainly attracts attention, without necessarily having much substance. Brand marketing remains as important as ever in financial services. But what I find interesting about the discussion is that does not pay much attention to the meta money world of derivatives or high frequency trading that is coming to dominate the financial markets. Conventional transactions, whether it be bonds, equities, bank debt are being superseded with meta transactions. The collapse of the collateralised debt obligation (CDO) market that led to the GFC is a case in point. The conventional mortgage transaction was compromised by the meta transaction of mortgage securitisation. When it failed, it was no longer possible to work out how the conventional transactions were working. Who owned what, for example.
But analysts are concentrating on the conventional transactions because they are just that. Conventional. And therefore amenable to analysis using well established methods. Since the GFC the greater threat to returns is obviously the systemic threat, but that is extremely hard to analyse, not least because it is a disappearing point: money made out of money made out of money. It is also weirdly symmetrical. Money is made or lost when prices go up, money is made or lost when prices go down. Welcome to meta money.
So what does analysis of the conventional tell us? Inker makes the point that GDP and corporate earnings do not follow each other:

Read more: http://www.macrobusiness.com.au/2012/08/will-stock-markets-survive/

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