Record boom makes no noise

On Monday, US economist Richard Thaler was awarded the Nobel Prize in Economic Sciences for his work on incorporating insights from psychology into economic theory and policy making.

Thaler’s work encouraged the development of the new field of behavioural economics and inspired others to investigate ideas about the “animal spirits” John Maynard Keynes mentioned long ago.

It’s an auspicious moment for Thaler to win the prize because this week stock markets around the world, including the JSE, hit records. Have investors’ “animal spirits” run wild? The Economist magazine points out that the cyclically adjusted price:earnings ratio — a useful measure of how expensive stocks have become — has been higher only twice before in history. Both ended in calamity. The first was the crash of 1929, then the dotcom bubble of 2000.

Yet if you had to measure the level of nervousness in stock markets around the world, or the level of excitement for that matter, you would probably be disappointed. This has been the calmest boom in history, yet look at the rise in international stock markets and the numbers are eye-popping. Markets that were in recovery mode have exploded. Argentina’s Merv index is up 42% year to date in dollar terms, Greece 30%, Turkey 31%. The entire eurozone is at last showing some prowess, with the German DAX up 26% in dollar terms and 13% in euro. How can this be?

The first reason for the comparative calm is that the rises and records have come after a long period in which shares were becalmed. The JSE has risen 13.6% in rand and 12.8% in dollar terms and hit a new record, but this is after two years of hovering. As The Economist points out, the main reason is the extended period of extraordinarily loose monetary policy. Central banks have globally depressed interest rates by buying almost $11-trillion in government bonds since 2008. That build-up is only now beginning to be unwound. The surprise has been how low inflation has been over the period, which has meant the unwinding process will probably take longer that anyone expected.

Behind that lies a strong demographic shift. Aggregate age increases in developed countries have helped stimulate a greater desire to save as populations edge closer to retirement. The global population growth has dropped from 2.1% a year in 1980, to 1.2% today, and almost all of it is happening in the developing world. That has helped keep inflation under control since, as The Economist points out, just as the supply of savings increased the demand for it has fallen.

The second reason for relative calm is that the boom is not only happening on the stock market. Property values around the world are now generally above where they were before the 2008 recession. In a perverse way, that’s calming because it suggests a broader rise in asset prices.

And third, the asset-price increase is underpinned by the real economy. Global growth is rising and fairly evenly spread, corporate profitability is high and developing countries have emerged from the downturn in pretty good shape.

For South Africans, the domestic stock market record may seem perverse. SA is in the midst of a political crisis. Corruption is rampant and government policy is in tatters.

But as we have heard many times before, the level of foreign investment in the main JSE stocks is so high that the exchange has ceased to be a fully accurate indication of the state of the domestic economy.

In some ways, the 12% rise in the JSE in 2017 is disappointing, even though the record level has been breached. After two years of stagnation, you might hope for more. SA once again seems to be missing out on the party.

FOR SOUTH AFRICANS, THE DOMESTIC STOCK MARKET RECORD MAY SEEM PERVERSE