Every day, the BBC – in fact the whole media circus – faithfully report the progress of the FTSE100 share index, as though it were a portent of our economic future. Every day so called “experts” explain in detail the reasons for FTSE100 movements seemingly on the assumption that it still relates to the UK economy. But recently some mystification has been expressed over how, when the UK economy is doing so badly – resolutely refusing to respond to the inspirational George Osborne, even losing its triple A rating – yet the FTSE100 is doing so well, already up 8% this year following 5.8% rise last year, threatening to follow the Dow to hit an all-time high. There is a definite disconnect between FTSE100 share values and the real economy. Bank of England governor Sir Mervyn King’s enthusiasm for quantitative easing only further emphasises that disconnect, boosting share values but having no effect at all on the real economy and jobs.
The FTSE index no longer reflects expectations about the UK economy. So what does it reflect? There must presumably be some connection between share prices and expectations of future gains. But those future profits no longer relate to what’s going on in the UK. The FTSE has become a global index, comprising companies like the dreaded Glencore, Anglo American, Serco, Xstrata, and like global companies. Oil and gas and pharmaceuticals account for nearly 30% of the FTSE’s value. Basic resources (mining), banks and financial services make up another 30+%. And an increasing number of foreign companies find a London quotation beneficial, such as the recent Russian additions, steelmaker Evraz and gold and silver producer Polymetal International. Around two thirds of FTSE100 companies have limited relevance to the real UK economy.
One might therefore anticipate that though the FTSE’s relationship with the UK is becoming tenuous, it is related to future expectations re the global economy. But even that doesn’t appear to hold. Expectations of the global economy are not that it is about to hit an all-time high. Part of the explanation is no doubt the simple fact that these companies have been allowed to become so powerful that they are able to fix prices in their own markets and thus more or less decide their own profitability, just as they are able to decide the level of taxation they pay. Those decisions are taken in the interests of the corporate shareholders and mostly against the interests of other corporate stakeholders such as customers, employees and the general good.
So who are these shareholders? Well, some like Glencore’s Ivan Glasenberg are the top executives whose shareholding has been accrued through various stock options and bonuses. Of the rest the majority are now very short term holders who for the most part have no idea where their money is invested, but have delegated control to various kinds of fund managers and financial intermediaries whose focus is on short term performance, short being for a substantial proportion measurable in nanoseconds.
An earlier post on this site (http://www.gordonpearson.co.uk/19/what-good-are-stock-markets/#more-1158) suggested stock markets no longer served their traditional purpose of raising funds for investment in the real economy creating jobs. Quite the contrary, today they serve exactly the opposite purpose. An article in Harvard Business Review referred to a ‘multi-trillion dollar transfer of cash from US corporations to their shareholders over the past 10 years’. And similar disinvestment has been achieved by the City of London. And whjat happens to that extracted value? It’s invested by the fund managers and computer algorithms in all the dodgey, opaque speculations that got us in this mess in the first place.
Thus the FTSE100 index has become more a measure of the profitability of anticipated disinvestment. Sir Mervyn King’s enthusiasm for another bout of quantitative easing is not simply a demonstration of insanity, though the previous bouts having totally failed to prod the real economy into life. QE always was what J K Galbraith referred to as an attempt to push the economy into life with a piece of string. Though desperate, it looks like an understandable attempt by Sir Mervyn to retire with at least one success story to his name. The FTSE100 at an all-time high might be the only one that is achievable and QE might just do the trick, pouring funds via all those financial intermediaries into the speculative swaps and derivatives which might just show a quick enough return. Wow! Well done Sir Mervyn!