Market corrections


There was glee in the Washington establishment when hard on the heels of President Trump’s State of the Union boast about the strong US stock market that market actually took a massive dive. But rather like the President, the market has since bounced back up, though not to the historic highs of a few days ago.

Analysts described the drop in share prices around the world as a long-overdue market correction. Though portfolio values will have been hit by the dramatic fall, the investment industry will welcome the apparent return to the typical volatility where there is more trading. Stockbrokers are interested in market movements not their direction. Every buy and sell order generates a fee which is what makes them rich. Then there are the sophisticated investors, such as the short sellers who borrow stock for a fee, sell it in anticipation that the price will fall and then, before they have to return the stock, buy it back at the lower price. The seemingly endless rise of share prices had caught out many of the short sellers in recent months, but now after some serious losses, they are back in the game.

Though markets are moved by reports that companies are doing well or facing problems, the feverish buying and selling of securities with the consequent impact on their price, arguably has little to do with the underlying performance of these businesses. Some fail, some are bought out but even in a financial recession, most of them continue to produce their goods and services, even though demand may have declined temporarily.

Market operators will point out rightly that stock exchanges are the way that new companies raise initial capital and existing companies can find investors ready to back their expansion. But considering the billions of dollars that are earned by those who simply trade securities, regardless of which way their value is heading, there is a degree to which stock markets are pilot fish riding on the back of productive enterprises. And “pilot fish” is probably a misnomer since investors rarely steer companies in any direction that their executives do not wish to go, including enriching themselves unreasonably at shareholders’ expense, even in the face of losses.

But there is one investment that has clearly not prospered in recent weeks - the cryptocurrency Bitcoin and its emulators. The value of a Bitcoin, which late last year was $20,000 has gone through the floor, trading now at $6,000. For a while it looked as if the financial establishment was coming to accept the complex block chain mechanism that underpins the use of the pseudo-currency as a cheaper and more efficient mode of settlements.

But Bitcoin and its ilk have been undermined by hackers who have stolen the cryptocurrencies to the tune of hundreds of millions of dollars. The recent plunge in the Bitcoin price may also have a lot to do with institutional investors changing their minds about it as well as taking their profit and selling out. Now no less a person than Agustín Carstens, the boss of the Bank for International Settlements - the central banks’ bank, has said Bitcoin is a “Ponzi scheme” and a bubble that threatens financial disaster. While Carstens is obviously eager to defend traditional currencies, the “product” of all central banks, his warning should not be ignored. This is a market that may not correct itself.