“Billions were burned on the stock market” is one of the ugliest and most mistaken things to say. Yet, we have often heard in the opening of the news in recent weeks. Certainly, in the general opinion, hearing that a certain title has declined impresses, and hearing that the lists of the main indices in the world maintain a downward trend that, for now, seems to be endless impresses even more.
In the past years, many people boasted about their investments in shares and about how much they had gained over time; those who were not well versed in the matter, that is to say, most people, might have easily believed that the markets could multiply money, almost as if they were the tree of sequins from Pinocchio. Like in Pinocchio’s case, the way people see investments are often merely an illusion.
Why? The reason is simple, financial markets do not create wealth nor destroy it, but simply reallocate it where there is demand. To put it brutally, if someone earned money, someone else must have lost it, that is it.
This image is simplistic, it is true, because it does not take into account the companies’ remuneration of dividends to the shareholders (but they are outside the stock exchange). The same is true for quotations and coupons of the purchased bonds, which are paid by the emitter to remunerate the received loan, but in general, this is how a stock exchange list works, be it a matter of ordinary financial tools or a matter of derivatives.
It does not take much to go from here to the contestation of the relative expression of the “burned” billions, because those billions have not disappeared, but someone has cashed them at the expense of those who have maintained their position.
This being said, it is interesting to understand what is going to happen to the markets in the months to come; If the bear, that is, the downward trend will continue or if it will leave room again to the bull, that is, the bullish trend, which represents the “secular” state of the financial market.
The current situation is caused mainly by the uncertainties that have reappeared on a global level: from the situation in the Middle East to the decline in Chinese growth (which will probably be much heavier than we know so far) and the collapse of commodity prices in the “emerging countries” precisely as a result of the latter phenomenon. What in the jargon is knownas sell-off has generated, however, a huge amounts of liquidity that increases the one introduced in the markets over the recent years by the Central Banks, which is kept unused in warehouses and which will have to produce income sooner or later.
With the “crash” of the interest rates in a good part of the world, excluding the countries that are characterized by a rather high internal systemic risk, they must use the weapon of the high rates to call capital, the ability to invest in low-risk assets such as debt securities with high ratings or titles, the presence of negative, or at least nullified, real interest rates that are worth less than the investment risk (even if the latter is temporary).
Moreover, if the ECB, following the Swiss National Bank and the Bank of Japan, brings deposit rates broadly in negative territory, the maintenance of liquidity would become excessively expensive for all the operators. In this case, equity market would be the only one where to look for profit.
Credibly, in the next few months we will see the main lists from around the world begin to grow again, maybe even rapidly, to reinsert the funds that, today, have been transformed into liquidity and have been deposited, waiting for improvement in future expectations or, perhaps, for a strategy game designed to make more desirable high-level assets (such as many companies listed on the Italian list, just to give an example), and be able to acquire a greater share in view of substantial future revenues.