I KNOW economics is not everyone’s cup of tea.
But The National likes to delve a bit deeper than the London rags, so bear with me while I explain a few things about the present global economy.
If you lift your eyes above Brexit and the Tory leadership pantomime, it’s apparent the world is starting do some funny things. Of course, economies are just bunches of people trying to earn a crust or make a profit. Which means economic developments are never absolutely predictable because folk aren’t absolutely predictable. Nevertheless, the odds are that the economic weather is about to get stormy – very stormy.
Start with a company called Slack, a new internet messaging app tailored to the needs of business communications rather than personal chat. Slack was started five years ago in Silicon Valley by a bunch of classic software nerds with a Canadian background. It is part of the latest wave of computer gizmos where everything is stored in the nebulous “cloud”, aka big (and eminently hackable) electronic storage farms somewhere in America.
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Last week shares in Slack were sold publicly for the first time. They came on the market priced $26 and soon zoomed to $41, making a tidy profit for early traders. The price has now settled down to circa $36 per share but that still values Slack as a company at around $20 billion. The “so what?” is that Slack has never made a profit. In fact, it burns cash like a house on fire. Last year it lost $144 million. The question is: why are people forking out good cash for a firm that loses money? And remember: this cash is usually – at a few removes – your pension pot.
Slack is not the only high-tech newbie that makes a whopping loss yet manages to persuade investors to hand over more money to burn. In April, Lyft – a ride-sharing app – was put on the stock market for an initial valuation of circa $25bn.
Yet the firm lost a cool $1bn last year and will go on haemorrhaging cash. Shares in Uber went on sale last month, despite the iconic taxi company spilling $1bn of red ink in only the first quarter of 2019. Tesla, the infamous electric car company, has never made a profit yet its share valuation is larger than Ford’s, which made a $4bn profit in 2018. (NB: A big chunk of Tesla is owned by the Edinburgh-based Baillie-Gifford asset management firm).
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Here’s the skinny: most companies being launched on US (and ultimately UK and European) stock exchanges are loss makers. The last time this happened was in 2000, the year the dotcom bubble burst. Back at the start of the millennium, in the first internet frenzy, some 81% of all US companies launched on the stock market had lost money in the previous year.
Last year, that figure was nearer 83%. It will be even higher in 2019. In other words, global stock markets are in the grip of a mad gambling frenzy worse than normal. Footloose cash is being poured into loss-making start-ups in the frail hope that one or two of them might be the next Google or Apple.
But you can’t defy economic gravity forever. We are witnessing the longest period of rising share values in history – longer than the run-up to the 1929 Wall Street Crash. Yet common sense says shares can’t rise forever. To stave off the inevitable, central banks are continuing to pump cheap money (aka “quantitative easing”) into Western economies in a bid to keep stock prices defying gravity.
Donald Trump has just brow-beaten the head of the US central bank into reversing a planned rise in interest rates, in the hope of maintaining the fiction that all is well in the American economy. Sometime in the next few years, the balloon will burst.
I’m not done. This year something has also gone spectacularly wrong in global bond markets. Bonds are different from shares in companies. Bonds are a loan. Mostly, governments sell bonds to cover annual deficits and build things. Buying a government bond (ie lending to a state) is normally considered the safest place to invest, because governments have the power to tax and can therefore always meet their debts. When you take out an annuity or a pension, the fund managing your savings normally salts it away mostly in safe government bonds. Oops, sorry, that plan has just gone belly up.
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When the global economy looks shaky, funds start buying more government bonds as a hedge. What with a dodgy stock market, Brexit, a nutcase in the White House, and looming trade wars, the economic outlook is distinctly bleak. Result: everyone is suddenly buying supposedly “safe government bonds, especially those of the US and Germany. This has an odd
side-effect: with everyone buying, the price of bonds rises on the open market. Bond holders seem to own an even more valuable asset – but this is an optical illusion.
For when the bond matures, the face value – the original loan amount a government is contracted to pay back – will be far less than what the fund or trust paid to buy the bond on the open market. In other words, much of the capital underlying the world’s pension, investment and trust funds is a crock of manure.
In the past year, the global value of bonds with so-called “negative yield” – worth less on maturity than they were bought for – has suddenly doubled to circa $12.5 trillion. That’s about 15% of total global GDP. It could double again. That’s a lot of your savings that could go up in a puff of smoke.
How do we get out of this mess? For starters, we need to stop investing in fictional companies and put cash into real things, such as converting the world to zero carbon by 2030-ish. The financial returns might be more modest – in line with productivity growth – but they would be real rather than imaginary. We also need to put the banking and investment system into public hands, rather than have it operating as a casino for private profit.
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But those are an obvious a set of “to dos”. The real question is how do we remove the political and institutional barriers to dismantling the insane economic system under which we live? That’s the crux of the matter. The problem is that we need dramatic change at a global, or at least continental level. Yet it is also possible to be a standard bearer at a more modest level – say in an independent Scotland. Change globally will come if someone further down the chain can demonstrate change is possible – can break the political logjam first.
My model is not Scotland replicating some mythical Nordic nirvana that’s long gone, if it ever existed. Swedish government bonds went into negative yield territory last week, for the very first time. An independent Scotland is small enough, communitarian enough, social democratic enough to take the really bold steps that a post-Brexit UK run by Boris will only run from. Independence is not about promising the status quo, it’s about recognising the planet has gone mad and we must do something about it.
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Callum Baird, Editor of The National
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