As Donald Trump careens from one crisis to another, one thing buttressing his presidency has been the surging stock market. Investors have been pushing up share prices since he was elected last November.
The initial public sales of shares in Snap, parent company of the messaging app Snapchat, last Thursday valued it at £27 billion. This is reminiscent of the dotcom boom of the late 1990s, when a craze for “new economy” IT sectors turned nerds into millionaires overnight.
Trump is keen to claim the credit for this. The euphoria is partly driven by the expectation that he will slash taxes and government regulation, and stimulate the economy by financing investment in the infrastructure.
Despite running against Wall Street, Trump has stuffed his administration with bankers—and bank shares have led the stock market surge.
But some market-watchers, such as John Authers of the Financial Times newspaper, are more sceptical. He argues that the markets had a big fright at the beginning of 2016, particularly because the Chinese economy seemed to be in trouble.
The whole world economy appeared close to a vicious deflationary spiral in which falling prices would push down output.
But these fears have been receding. The Federal Reserve, the US central bank, is more optimistic about the health of the US economy. It has started hinting loudly that it’s going to start raising interest rates from the very low levels they were cut to after the 2008 crash.
Nearly three quarters of economists questioned for one survey predict that the Fed will raise interest rates three times this year.
According to Authers, “supply managers’ surveys … showed growth accelerating, with optimism for the future. US inflation, according to the Fed’s favoured metric, rose almost to the target of 2 percent. Europe continued to show signs of recovering from a very low base.
“The week also brought news of resurgent house prices in the US, and of inflation in Japan after two years of deflation. Crucially, China—the focus of concern a year ago due to its big overhang of debt—continued to rebound. Twelve months ago, Chinese producer prices were falling at about 6 percent a year, now they are rising at 7 percent.”
But are the markets any more rational in placing their hope in economic growth rather than in Donald Trump?
The dotcom boom of the late 1990s proved to be a financial bubble. Share prices soared out of line with the profitability of industrial and commercial firms.
The bubble burst in early 2000, in what was in many ways a dress-rehearsal for the 2008 crash.
But Michael Lebowitz of the investment consultants 720Global argues that US share prices and the “real” economy are even more out of line now than they were then.
National income rose by 4.08 percent a year in 1995-99 and 1.9 percent in 2012-16. Annual productivity growth was 1.84 percent 1995-99 and only 0.49 percent in 2012-16.
Then US government debt was £2.9 trillion, rising to £13.9 trillion by the mid-2010s. The earnings of the top
500 S&P companies rose over three years by 7.53 percent in the dotcom era, and actually fell 3.84 percent in 2012-16.
Nor is the US economy alone in resting on fragile foundations. Chinese growth recovered last year because the government encouraged banks to lend more to companies.
As a result Chinese banks now have more loans than anywhere else. Some £27 trillion compared to £25 trillion in the eurozone and £13 trillion in the US.
“The massive size of China’s banking system is less a cause for celebration than a sign of an economy overly dependent on bank-financed investment, beset by inefficient resource allocation, and subject to enormous credit risks,” said one economist.
But it’s not just China that depends on what the revolutionary Karl Marx called the credit system. Despite the Fed’s plans long-term interest rates remain either low, or negative in many countries once inflation is taken into account. Borrowing, in other words, is still very cheap.
It’s this easy money that is fuelling the market froth.