October Surprise: Market Apocalypse?

Volatility!

That’s the word that Wall Street uses when investors are getting nervous. And Wall Street and the financial pundits should and are getting nervous now.

The major US equity markets-- the Dow Jones, S&P, and NASDAQ-- have enjoyed a strong, and, to many, a paradoxical recovery since the pandemic shuttered much of the productive economy. While unemployment has soared and is only slowly reversing, while growth has collapsed, and while earnings are challenged, stock markets are marching forward, restoring nearly all of their previous losses by the end of August.

To many of us, it is not unusual to see stock performance far outpace the general economic welfare of the people. That is a commonplace of the capitalist economy.

Nor is it unusual for investors to expect that the stock market will outperform the economy in general. After all, that was the point of Piketty’s celebrated, thorough historical study of capital which showed that, all things being equal, the rate of return on investment will grow faster than the rate of economic growth. As a result, capitalism necessarily generates what we Marxists insist is exploitation.

But equity markets are not free floating, independent systems; they must intersect at some point or some time with the real economy. Stock performance must reflect the underlying ability of its associated corporation or enterprise to produce something of worth to the investor: profit. 

So if stock values in the five or six months of the 2020 pandemic seem dissociated from the economy, what is going on?

The Wall Street Journal offers a useful, if incomplete, explanation of the anomaly. How Stocks Defied The Pandemic (September 15, 2020) suggests five factors: 1. Stimulus from the Fed and Congress, 2. Expectations of a strong recovery, 3. The dominance of the tech giants, 4. The return of individual investors, and 5. Momentum trading.

Certainly the Federal Reserve and the two parties’ elected officials acted swiftly in the wake of the pandemic shut-down. Absorbing the lessons of the 2007-2009 crisis, they cranked out trillions of dollars’ worth of stimulus, they sanctioned easy loans, and they collapsed interest rates swiftly. 

But it is telling that equity markets appear to have been bolstered more significantly than other aspects of the economy, including those aspects protecting or promoting the fate of those most vulnerable to the catastrophe. In short, the investor class seemed to reap the greater benefit of their actions.

Though maybe unintended, the bailout encouraged hungry investors to devour stock market opportunities, with bond yields decimated and other interest-generating instruments foreclosed by the Federal Reserve’s actions. Capitalists must land their capital somewhere in order to preserve the accumulation process-- the system’s blood flow; the impact of institutional intervention by the Fed left them few promising alternatives outside of the equity markets. And that is where they put their money.

As for “expectations” of a quick recovery, any notion that such expectations could be built on anything more solid than hope and faith must be discarded. This singular event-- a crisis of public health, economics, politics, and racial conflict-- generated profound fear more than expectations.

The WSJ correctly located the outsized influence of Tech stocks-- principally, Apple, Amazon, Microsoft, Alphabet (Google), and Facebook-- in the stock boom. Without the investment flowing into tech stocks, mainly the big five, there would be no notable market rally. Apple, alone, has gained 57% in 2020 and now has a valuation greater than the FTSE 100, an index of the top companies on the London Stock Exchange. At the same time, the frenzy for tech stocks frightens pundits and advisors. Apart from Amazon, tech stocks play in a virtual universe that challenges real-world valuation. Moreover, they have been notoriously volatile. And the gains have been concentrated in the Big Five, with other companies far less successful. 

Past stock market collapses have been preceded by a dramatic increase in individual investors bent on taking advantage of an overheated market. The return of the “rubes” has always been a signature benchmark of an impending decline. From the casual dabbler before the Great Depression to the day trader and dilettante of today, the engagement of “amateurs” is always a harbinger of market disaster. 

Some would be surprised to learn that in the modern era, individual investors-- day traders and the like-- only account for roughly one in ten trades. The rest are made up by institutional investors, funds, etc. But, in 2020, the number of trades by individual investors has doubled, accounting for about 20% of equity market action. 

With social media tipsters and discussion boards, the born-again investors have accounted for many stock valuations that puzzle and concern wiser investors. Tesla, for example, has gained 438% this year, establishing the maverick car company as the highest valued auto company in the world and the eighth largest corporation in the US by market value.

Fed by social media gossip, investors jacked up share prices of Eastman Kodak by as much as 614% before losing most of the gains! This kind of euphoria-driven investment has mature investors and advisors shaking in their boots.

Creating momentum through bets on overheated valuations only generates greater momentum. Easy money and the fear of missing a surge amplifies the momentum. Add the attraction of derivatives and the likelihood of a market bubble increases dramatically. 

Stock options-- the purchase of a contract to buy a stock at a price fixed before the actual purchase of the stock-- have exploded in 2020. They are attractive to investors who want to risk their capital on a bet of future gains and increase the potential return on the bet by spreading the capital over more, less costly options. Goldman Sachs reports that the volume of option trades exceeded the volume of stock trades for the first time this year. Three years ago, option-trading volume was only 40% of stock volume. In August, option trading topped 120% of stock trading. Small investors bought half of a trillion dollars’ worth of options in August alone, five times the amount bought in any previous month, as reported in the WSJ.

Much of this market craze is occurring against a backdrop of over three weeks of net decline in the US stock market indexes. Moreover, the employment recovery is stagnating, with new unemployment claims remaining at an historic high, and the pace of retail-spending growth slowing. Earnings-- the crucial factor in capitalist behavior-- is expected by some to fall by as much as 22% in the third quarter. 

Conditions are ripening for another market crisis not unlike that brought on by the 2000-2001 dot.com collapse. Billions, if not trillions, of nominal value stand to disappear.

Likely such an October Surprise would be fatal to Donald Trump’s reelection prospects, since most polls show that respondents see the economy is his greatest strength against Biden.

But whether Biden or Trump wins, the depth of the emerging crisis will make it almost impossible for either to rule effectively. Neither offers a way out. Only a profound, radical political realignment will blaze a path forward.

Greg Godels

zzsblogml@gmail.com

More on Energy Imperialism

Literally days after my last post on the changes in US energy policy and its influence on the trajectory of US imperialism, President Donald Trump and his energy secretary proclaimed those changes in their customary blunt and bombastic way. On June 29, Trump declared a US policy of “energy dominance” at a meeting at the Department of Energy. Reuters‘s headline on their coverage perfectly captured the meaning of this policy: “Trump Seeks to Project Global Power through Energy Exports.” Bloomberg News’s Gennifer Dlouhy quotes Trump: “We are a top producer of petroleum and the No. 1 producer of natural gas. We have so much more than we ever thought possible. We are really in the driver’s seat.”

Clearly, Russia is a target of the emerging policy. The Administration’s Secretary of Energy, Rick Perry said that “... the entirety of the EU totally get it that if we can lay in American LNG [liquefied natural gas] ... we can be able to have an alternative to Russia…” “The US will be able to clearly create a hell of a lot more friends by being able to deliver them energy and not being held hostage by some countries, Russia in particular.” (Reuters)

Lest anyone fail to get the message, Trump told cheering Polish people in Warsaw on July 6: "We are committed to securing your access to alternate sources of energy, so Poland and its neighbors are never again held hostage to a single supplier of energy.” (CNBC) Instead, they will be held hostage to the US.

Bloomberg’s Dlouhy notes that negotiations have begun to sell more LNG to the Republic of Korea. And Reuters’s Timothy Gardner comments that the US exports more petroleum products to Mexico than does any other country. In fact, according to Gardner, the US is already the world’s largest exporter of refined petroleum products.

Despite the near total neglect of the foreign policy implications of this emerging policy by US commentators and, especially, the left, they have not gone unnoticed in important circles internationally. Writing in the largest circulation UK paper, The Sunday Times, Irwin Stelzer stated on July 2: “LNG has created a new Great Game, with America’s ‘yuge’ reserves of natural gas giving Trump a weapon with which to offset Russia’s early lead.” Talk of “Great Games,” of course, invokes memories of the imperialist rivalries and clashes of the late 19th and early 20th century. While the “Russia-gate” controversies uncritically consume many US observers, even conservative Europeans are identifying the material interests, the imperialist interests standing behind the hysterical anti-Russia campaign.

Further, Stelzer sees the recent Gulf States’ aggression against Qatar for what it is: “... the Saudi royal family believe now is the time to wring a total surrender from Qatar… The implication for the global LNG market of a potential isolation of Qatar [the world’s largest exporter] could not be more consequential.” And it could not be more beneficial to the emerging US LNG shippers.

The recent Trump European trip was a sales trip for US LNG as much as it was participation in the G20 summit.

OPEC ‘Monopoly’ versus US Hegemony

It appears more and more likely that the era of OPEC dominance of energy markets is dwindling, broken by US energy production. Saudi Arabia attempted to reverse the expansion of US production by over producing and driving the price of oil below a level that would allow US shale producers to be profitable. Consequently, US operators lost $130 billion since 2015. But Wall Street has subsidized the shale industry by ploughing $57 billion back into the industry over the last 18 months, a move that shows both no fear of a price war and a determination to dominate the markets. The Wall Street Journal (7-8-2017) likened the investments to the tech boom of the past.

At the same time, the US is using political sanctions to hinder competitors. The recent Senate vote on Russian sanctions is one obvious example. But Iran is another competitor that the US hopes to discourage. The European sanctions are now lifted, but EXXON MOBIL and CHEVRON, as US companies, are still deterred from investing in Iran because of remaining US sanctions. BP is afraid of those sanctions and only French TOTAL has dared to invest, along with CHINA NPC. Where Iran is seeking $92 billion in energy investments, it has only secured $1 billion.

Worldwide, most energy investments have channeled to US shale oil.

The monopoly price-manipulation model enforced by OPEC discipline is eroding. Since competition is intensifying, pricing has become extremely volatile. With Chinese imports of crude oil up 13% this year, the Saudis have sharply cut the price of super light crude to Asia to garner a greater share of this burgeoning market.

The Future

Of course, it is impossible to spell out all of the foreign policy implications of the new energy imperialism. But it appears certain that the US drive toward energy dominance will reshape US imperialist designs and generate a strong international response.

The House of Representatives companion bill on sanctions passed 419-3, demonstrating again the ruling-class consensus on punishing oil and gas producers-- Russia and Iran. The European Union wisely interprets this and its Senate companion as a challenge to existing energy relations. As The New York Times reported (July 25) immediately after the vote: “...the new sanctions have important implications for Europe because they target any company that contributes to the development, maintenance or modernization of Russia’s energy export pipelines.” It notes that: “Jean-Claude Juncker, the president of the European Commission, the bloc’s bureaucratic arm, has called for an urgent review of how the European Union should respond.”

Speaking to the “principles” behind the House bill, Russian “Alexey Pushkov, a legislator and frequent commentator on international relations, wrote on Twitter: ‘The exceptional nation wants to block Russian gas supplies to Europe and to sell expensive shale gas from the U.S. to its European servants. That’s the entire ‘morality’ of Congress,’” as reported by The New York Times (7-25-17)

And the price war between the US and OPEC along with its friends has left OPEC unity in danger and its policies in shambles. At the most recent meeting in St. Petersburg, disputes over production and exports have combined with frustration over the effectiveness of agreements. States are conflicted over protecting prices and earnings or fighting for market share.

Where unbridled competition arises, conflict is soon to follow. With economic interests joining with political maneuvering, as the US-contrived hysteria over Russia and Iran instantiates, the danger of aggression and war grows exponentially.

The new US imperialist “Game” is played to dominate energy markets, an even more perilous project that threatens friend and foe alike.

Zoltan Zigedy

zoltanzigedy@gmail.com