Why markets keep going up in the face of “real world” economic turmoil

With the economy being shuttered for months and a very fragile reopening, many people and industries have had a miserable year. But not the stockmarkets. Why? Dominic Frisby explains the difference between the real world and the financial world.

Lockdown posters
Most people and businesses have had a miserable lockdown
(Image credit: © Getty Images)

A friend of mine works in the entertainment industry. He manages comedians and TV personalities, and puts on tours both here in the UK and in the States. He represents some quite big names.

One of the reasons he has such a good reputation in the business, and why he is so well liked by the acts he manages, is his foresight. He can see when something is about to go wrong, often long before anyone else can, and is able either to avoid whatever is coming or get some damage limitation in place.

But like everyone else in the live entertainment industry, he has had a miserable year.

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My canny showbiz friend is missing one thing

It’s been a tough year for lots of businesses, but entertainment has to be among the hardest hit of all.

Earnings for my friend have gone from “very nice, thank you very much” to “zero”. Turnover has stopped.

My friend will be fine; he’s made a lot of money over the years. But it is still amazing watching an industry not even grind to a halt – just halt, almost overnight.

There have been grants to help him out, but I think the most difficult thing to deal with has been the false dawns. Every time it looked as though there was finally a chance to get back to normal and things were opening up, plans have been scuppered.

All the effort that goes into putting on a show – booking the dates, securing the staff and crew, sorting the publicity, the technicals, meeting the new, ever-changing and often inconsistent regulatory requirements, let alone writing and rehearsing the material – is suddenly torpedoed.

He now lives in a state of paranoia every time Boris Johnson or the health secretary makes an announcement, because he knows the goalposts are about to be shifted.

But when Covid came along last year, my friend was, I think, the quickest of anyone I knew to see the long-term dangers. I had one friend in New Zealand – a bitcoin gazillionaire – who had been warning me for weeks, and had holed up in his mansion with a year’s worth of supplies.

But him aside, entertainment manager Howard was ahead of the pack.

“I could see what was coming,” Howard said to me on Monday. “Most of my money is in property. But what I had in the stockmarket, I sold. The stockmarket is now up quite a bit up on where I sold, but it’s down 2% today. It’s not looking good at all. Finally, people seem to be waking up to the havoc this has caused in the real economy.”

Howard is right. Stockmarkets do not reflect what is going on in the real economy. And for the sake of clarity, we are talking about the US indices especially, as well as those in the UK. If stockmarkets did reflect what is going on, they would be much lower.

Howard’s logic is reasonable. The real economy is struggling, especially in the industry he works in. What he is immersed in and seeing every day is not being reflected in prices. The chances of going back to normal look slim. The virus is ongoing. The ongoing reality is that the goalposts could be shifted at any moment, and any recovery derailed.

The money keeps flowing in the financial world, even if it’s stopped in the real world

But there is one huge assumption that Howard is making, without even realising it, perhaps. He is assuming that money is sound; he is ignoring the fact that new money is being created every day, whether by the issuance of debt or by digital printing. Most of that money goes straight into financial markets.

Some have access to the capital. Most, especially in the daily grind of the entertainment industry, don’t. Money supply may be tight in the foothills of laughter, but it isn’t at the corporate or government level.

It is a two-tiered economy. He is on one tier and mistakenly assuming all tiers are the same. They aren’t.

In the 1980s when interest rates were in the 5%-10% range, people saved their money in a bank or a building society and they were paid a reasonable level of interest. Now, with rates suppressed, no such vehicle exists.

The model of saving your money in a bank or building society is dead. What is the point of a savings account? Most of us only have one out of legacy. Banking may be a great vehicle for payments – but not for savings.

And so the stockmarket, especially the S&P, has become a savings vehicle. When you buy the S&P 500, in part you are placing a bet that the American economy is going to grow and prosper, but you are also gaining exposure to America’s savings.

While interest rates stay low and money creation is plentiful (and think of the money creation that happens simply by leverage and gearing), money will make its way into the stockmarket.

Every time anybody earns anything, and saves, that money will make its way into the stockmarket. That is not supposed to be what investing in a market is about; it should be about understanding a company and its chances.

But with tracker funds, ETFs, low interest rates, QE and all the rest of it, that is what stockmarkets have become: a savings vehicle. Such is the economic distortion of today’s markets. One day it will all go belly up, of course, but that day is not today (famous last words).

You just need to see the spring with which the S&P 500 bounced back from Monday’s correction. It was a straightforward bounce off the 50-day moving average in effect.

So Howard, my canny entertainment-manager friend is right. Markets do not reflect what is happening in the real world. But what is happening in the financial world is rather different. And stockmarkets do reflect that.

As long as there is money being saved, the S&P 500 will have buyers. As long as there are buyers, there will be leverage, and leverage means more buying. It will carry on – until it doesn’t.

Daylight Robbery – How Tax Shaped The Past And Will Change The Future is now out in paperback at Amazon and all good bookstores with the audiobook, read by Dominic, on Audible and elsewhere.

Dominic Frisby

Dominic Frisby (“mercurially witty” – the Spectator) is the world’s only financial writer and comedian. He is MoneyWeek’s main commentator on gold, commodities, currencies and cryptocurrencies. He is the author of the books Bitcoin: the Future of Money? and Life After The State. He also co-wrote the documentary Four Horsemen, and presents the chat show, Stuff That Interests Me.

His show 2016 Let’s Talk About Tax was a huge hit at the Edinburgh Festival and Penguin Random House have since commissioned him to write a book on the subject – Daylight Robbery – the past, present and future of tax will be published later this year. His 2018 Edinburgh Festival show, Dominic Frisby's Financial Gameshow, won rave reviews. Dominic was educated at St Paul's School, Manchester University and the Webber-Douglas Academy Of Dramatic Art.

You can follow him on Twitter @dominicfrisby