How does one reconcile the increasing disconnect between the stock markets and what's happening in the real world? Photo / AP
How does one reconcile the increasing disconnect between the stock markets and what's happening in the real world? Photo / AP
COMMENT
As stock markets soared back to where they were at the start of the year, opinion writers tried to make sense of the nonsensical.
For equity investors "it's like the pandemic never happened", wrote Matt Phillips in the New York Times, noting the S&P 500, a leading stock marketindex, on Tuesday was up nearly 45 per cent since March 23.
This is despite plummeting corporate earnings, tens of millions of people unemployed and industries such as tourism, retail and entertainment completely shattered and facing an uncertain future.
Clearly, factors other than the usual fundamentals have driven the rally – not least the actions of central banks and their relentless money printing policies to inject trillions of dollars into markets in an attempt to hasten the recovery from the Covid-19 crisis.
Through it all, though, an even bigger question is bubbling to the surface.
How does one reconcile the increasing disconnect between the stock markets and what's happening in the real world?
Roger Armstrong, in the Financial Times, put it best when he wrote Covid-19 "has put working and middle-class people under immense strain, while the asset-owning classes have felt relatively little pain". And let's not forget the big equity drops in March came after a decade of historic increases in asset values.
In short, it's the old the rich get richer sort of story and even though everyday workers get to participate to some extent through pension schemes like KiwiSaver, the imbalance or inequality gap grows ever wider.
Armstrong cites research that shows the richest 11 per cent of the world population holds more than 80 per cent of its wealth and in the US, almost 90 per cent of equities are owned by the wealthiest 10 per cent of households.
Those figures may not be new but the picture has been painted a lot brighter by the fallout from Covid. And, how do Governments respond and develop policies to pay back the money borrowed to pay for the recovery?
Rising inequality is something the Government is likley to take into account when setting future policy as the country clocks up higher debt in response to Covid-19.
It's worth repeating some of what former Prime Minister Sir Bill English said in a presentation in late March as Finance Minister Grant Robertson was preparing the start of what would become a $50 billion-plus rescue package for the economy.
If markets shrug off the major threat to the wider economy, English said, the public will realise something is amiss and wealth or capital gains taxes could follow.
"If the equity market falls 30 per cent, coughs and then recovers, the Government would likely have no hesitation in pushing through a capital gains tax (CGT)," he said.
"An equity market that seems to shrug off such an enormous dislocation would attract broad consensus across the political spectrum that something is amiss, and a CGT is needed."
The market has been going up and up since 2008, based on Central banks buying the gains with printed digital money. It's an unstainable yet seemingly unstoppable scenario.
Rising inequality is a symptom of this financial system and little wonder the big institutions are growing even larger and more dominant as a result.
The problem is the obvious solutions of higher taxes on wealth, capital gains and even redistribution run counter to what economies need right now.
But if the current government ever needed a plank for a tax policy, the stock market is offering an increasingly sturdy one.
