Geopolitical concerns to the fore
September 22, 2017:
Led by institutionalised money, the economic growth model being followed by everyone encourages GDP growth in order to provide more jobs for the people and more returns for the money managers. To give a perspective, the pool of money controlled by institutions and invested in financial assets (not physical assets such as land or commodities) is over $250 trillion. This is more than three times global GDP. Funds such as BlackRock control more money than the GDPs of most countries. The clout they wield in directing corporate behaviour is thus, enormous.
This growth is extractive growth because, in order to achieve it, we extract ever increasing amounts of depleting natural resources. This leads to environmental issues, such as global warming. The ever frequent typhoons (Texas and Florida), earthquakes (Mexico), incessant rains (Mumbai) and breakaway icebergs which raise the level of oceans and cause further typhoons, are testimony to the power of Mother Nature to hit back at man for abusing it. This strike back is the result of what Neil Young said in his song ‘After the Gold Rush’ — we got mother nature on the run in the 1970s.
The traditional 9-5 jobs are scarce, and getting scarcer. This is the truth. The manufacturing sector cannot provide the 1 million + jobs India needs to meet the aspirations of those graduating every month. Nor can the services sector. The agro sector is already overburdened, supporting, as it does, some 54 per cent of India’s population.
The government would do well to focus on imparting skills, and tell citizens to be prepared to learn new skills to meet demands for short-term assignments rather than lifetime jobs. If the people are unprepared for a technologically rapidly changing world, they will be disappointed and turn to other means to express angst.
It is this angst that is manifesting itself, for example, in the growing amount of global terrorism. The world thus grapples with increasing amounts of terrorist activities, escalating to nuclear threats, along with environmental crises due to extractive model of GDP growth, and rising intolerance of opposing views. Not exactly a recipe for rising stock markets.
Yet they are.
Global stock markets are driven by excess liquidity rather than by strong fundamentals. One of the biggest dangers to stock markets is if that liquidity tap is turned off or reduced. The biggest tap is the one on which Janet Yellen has her hands firmly on. On Wednesday last week she did not turn it, but hinted that she may do so in October. The tightening of the liquidity tap becomes a geopolitical risk for stock markets.
The surplus liquidity injected by Central Banks into the system, in an effort to stimulate consumption and investment, has largely gone into creating asset bubbles. Thanks to the liquidity, interest rates have fallen to near zero and this is hurting pension funds who cannot generate enough returns to keep their promises. Pension funds in all States are at varying degrees of insolvency and when (not if) they renege on promises, it will be another global risk.
Bankers also have learnt nothing from the 2008 sub-prime crisis, as sub-prime auto loans are at play now.
Even without the rising levels of insane rhetoric between Trump and Kim over nuclear Armageddon, there are enough external factors that can disrupt a liquidity-driven stock market.
(The writer is India Head — Finance, Asia/Haymarket. The views are personal.)