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Saturday, 19 July 2014

Do share prices matter to you? Only if you want a States Pension.

You may not think that the price of shares matters to you, especially if you do not invest in the stock market, however this is not necessarily true.

Your government does invest in the stock market, if you have a pension then the money you pay in is likely invested at least in part in the stock market.

The £1.6 billion social security fund is entrusted to an investment manager and they decide which investments to make or not to make.

Share prices are doing pretty well at the moment, with anew highs almost daily, but all is not as rosy as it might be.

Stocks do go down as well as up, and what if they go down?

First, three weeks ago, it was the BIS. Then, last week, it was Janet Yellen, who during last week did what no Fed Chairman had done before: commented on stock prices, and what's worse she had her "irrational exuberance" moment when the Chairmanwoman of the Fed explicitly stated that biotech and social-network stocks are in a bubble.

That she finally admitted that the market is approaching its upper limit should have been enough to launch a major market correction. Instead the market barely budged and subsequently recovered virtually all its losses, even as the war in Ukraine and Gaza reached new highs, in the process confirming that other recurring Fed concern: that the market has hit record complacency.

It appears that the Fed has created a terrifying "central-planning" Frankenstein monster with its monetary policy, one which will keep going higher and higher until it crashes so epically, it will complete the finacial system wipe out that was started with the collapse of Lehman and merely delayed with the $4 trillion Fed balance sheet expansion. And the Fed is finally realizing just this, with a 5+ year delay.

Then, yesterday, it was none other that the IMF's Christine Lagarde, who joined the chorus of warnings that the market is overvalued and due for a correction. From Reuters and BBC:
"The head of the International Monetary Fund warned on Friday that financial markets were "perhaps too upbeat" because high unemployment and high debt in Europe could drag down investment and hurt future growth prospects... She also warned that continuing low inflation could undermine growth prospects in the region. 
"There is the danger of a vicious cycle: persistently high unemployment and high debt-to-GDP ratios jeopardize investment and lower future growth," Lagarde said on Friday, according to the prepared text of her speech
So to summarize: first the BIS, then the Fed and now the IMF are not only warning there is either a broad market bubble or a localized one.

And how do the High Frequency Trading algorythms (computer programs which respond to internet news stories to push the market up or down) react? They promptly ramp the S&P 500 to essentially its all time high. Why? Because at this point it is far too late for even the Fed to pretend it has any control over the "centrally-planned" market. Or rather, centrally-unplanned. And because it is now also too late for the Fed to even conduct a controlled crash.

When the epic crash that all international agencies are expecting comes, someone is going to have to take the loss. Some of that loss will be taken by your pension and by the Social Security Fund.

The Jersey Social Security Fund and Health Fund are already in financial difficulty, the States Pension fund is already short of the funds it requires to pay future pensions and those projections rely on certain levels of growth of around 8%.

So what happens if the 'epic crash' comes? Well everyone loses out. The rich may lose the same percentage of their wealth as you, but when you have £100 million you can lose £63 million and barely even notice, especially when those around you who have just £100 thousand lose £63 thousand. That £37 million suddenly buys a whole lot more than the £100 million would buy you before the crash when everyone had plenty of money to spare.