These last few weeks have seen stocks markets around the world begin to wobble. Risks to the global economy have started to worry investors and stockbrokers. Once a driver of the global economy, China’s growth rate has slowed significantly” in the last couple of years. And the Chinese leadership predicts that growth will remain relatively low both this year and next.
China has been marred by an investment bubble in real estate and infrastructure that looks like it is about to burst. Thanks to years of artificially depreciating its currency, savings in the country have spiralled. All that extra money has been funnelled into building roads to nowhere, apartments with no tenant. China even has whole cities lying empty.
Clearly, there are significant risks to the global economy on the horizon. And what is worrying is that many of the fundamentals are not improved from the last great crisis that hit the world economy in 2008. In fact, by most indicators, the situation is even worse. The absolute level of public debt held by governments around the world is higher. The economy is growing more sluggishly. The savings rate in the West has plummeted, meaning that we are sabotaging our ability to grow in the future. And many banks are still not solvent, nor do they appear to be robust enough to withstand another recession.
So what do the currently high stock prices mean? While trading has gone digital and everybody is looking out for the best binary options robots, stock prices have risen. One theory is that automated trading has made share prices appear more volatile than they are. But this theory does not adequately explain the level of the stock price.
The other theory about why stocks are so out of whack with earnings is that traders expect companies to take advantage of next-gen technology. In other words, today’s high stock prices are a reflection of the fact that investors think that earnings in the future will be much greater. New technology will drive innovation in business. And these innovations will make them far more profitable than they are today.
It’s an optimistic view and one that isn’t without support in trading circles. But a lot of the news about new technology like AI coming to fruition has only emerged in the last 24 months. But stock prices have remained high ever since we emerged from the depths of the recession in 2010.
The other explanation is far less bullish. It’s that we’re in a global stock price bubble, driven by low-interest rates across the globe. Stock prices don’t have any basis in economic reality. They’re just a reflection of the fact that people have nowhere else to get a return on their investment. In which case, they’re probably in a bubble waiting to burst.
Founder Dinis Guarda
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