Is the fall in share prices serious and what is really causing it?

Contributed by Joe Montero

Don’t read too much into the present wave of falls in the major share markets, at least, in the sense that an immediate collapse is at the doorstep. Nevertheless, it should not be dismissed lightly either.

The scale and nature of the fall brings to light the rumbling in the foundations of the national and global economies. Something is going on.

Wall Street fell by almost 8 percent overnight, and Europe was not far behind. This is the biggest drop since the Global Financial Crisis of 2008. In Wall Street, it was big enough to force a pause in trading. Like many other countries Australia followed, showing a fall of 7.33 percent.

The fall of the Dow Jones index in New York

The major cause is said to be a fall in the price of oil by 25 percent, brought about by a price war between Saudi Arabia and Russia. It has the markings of a political stoush rather than an economic one. If this was all there is to it, the effect on other countries would be transitory and unlikely to create the severe reaction we have seen.

On one level it says a lot about the level of economic dependency on this black carbon liquid. This is not secret. This is not all there is to it though.

Stock market earnings are much less dependent on providing goods and services and have been increasingly reliant on profiteering from speculation, to the extent that this is now a major driver at the stock exchange.

The oil market works this way. Oil producers sell to trading centres in New York and London. There is a crude oil futures market. It is bought up by investors, who sit on it and resell for a higher price down the track. This is the main factor that has kept the price of oil so high in recent years.

Crude oil being bought and sold at the NYMEX exchange in new York

When there is a sudden and major drop in the price of oil, speculative earnings take a dive. This is what has just happened and it explains the extent of the reaction.

The following graph form the International Monetary Fund (IMF), shows the longer trend rise in the price for crude. It has been going up steeply and now suddenly gone south.

The Covid-19 (Corona) virus is also being blamed. How can this affect share prices? The way in which it is being dealt with contributes to the general atmosphere of uncertainty. The tendency to panic is on the rise, and it can’t be contained to perceptions over the risk of infection.

It is becoming clearer that the possibility of enterprises having to close for a period is real, international travel has been severely disrupted and the slowdown in Chinese manufacturing will cost the bottom line of some. But this impact should not be over exaggerated as the major cause of the current meltdown. But it does add to the bigger problem.

It all boils down to one thing. These economies share in the rise of speculation within their economies, and this is made even more problematic by the scale of dependency on debt. It is unsustainable and they are increasingly vulnerable to external shocks.

The global nature of the share price fall shows, that national economies are now highly integrated and driven by investors in the major financial centres. They are at the core of the speculative industry. We are talking here about the major banks and financial institutions, the hidden nominee companies, the brokers and big law firms, thoroughly immersed in this type of economic activity.

Australia is also experiencing a simultaneous fall fall in the exchange rate of the dollar with its Us counterpart. The downward trend has been in since 2012 (as you can see form the graph below). It is now worth only 63.98 US cents. It has just about reached the Global Financial Crisis low. The difference is that then it was a reaction to a sudden shock. Now it is an ongoing decline, due to the weakening economy.

The reasons are more complex than can be described here. Suffice to say, that speculation, together with the nature of internal economy and international trade are at the base. Put simply, foreign investors are getting rid of Australian dollars.

Economic growth is shrinking overall, and we are now marching into an ongoing official recession, according to the forecasters and ratings agencies. Moodys, for example, has slashed its projected growth rate for Australia by more than a quarter.

The government is so spooked that it is talking about doing what was unthinkable for it only a week or two ago. It is putting together a $20 billion stimulus package to support business cash flows threatened by Covid-19.

But Australia is also suffering from the impact of devastating drought and bushfires, overall dependency on the export of fossil fuels and other mineral resources that are declining in value, plus an economy that is itself highly locked into speculative economic activity.

The shift to government stimulus can be can easily be shifted to other applications. Not that stimulus is necessarily a bad thing. It all depends on how it’s done. Whether it is used to reward the speculators or defend those who are being pushed to pay the price, and through this, assist the economy.

We are not at the point of immediate economic collapse. This is true. At the same time, who can deny that we have moved a step closer to the precipice?

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