Are stock markets and your pension fund in a bubble?

Our financial columnist Jill Kerby looks at how stock markets and pension funds are behaving and asks, should you be concerned?

My pension fund has gone up in value quite considerably over the last couple of months. I’m not complaining… but I am worried.

The only reason I can see that it has increased in value – 12 months into a pandemic that has caused the greatest surge in global unemployment, business failures, loss of earnings and sovereign debt – has been the pumping by central banks of (digital) cash created out of thin air and exuberant, unhinged trading.

A body of opinion also appears to be gathering, supported by big jumps in the 10-year and 30-year US bond yields, that equity markets are not just overheated, but could be a giant bubble drifting towards its pin.

Long-time readers of this column know the story (as I presented it) of how the US and Irish property markets were in dangerous bubble territory in the early to mid-2000s, set in motion by events that mostly began in the summer of 1971 by the then US president, Richard Nixon.

Worried about the cost of the Vietnam war and other ‘Great Society’ spending commitments made by the previous administration, America was running too many trade deficits with other countries. These were the only creditors, who under the 1944 Bretton Woods agreement, could exchange US dollars for physical US gold reserves.

Once Nixon declared the end of gold as the reserve currency in August 1971 – the US dollar was now "good as gold" – all spending restraints were off: the ending of the ‘gold reserve’ system heralded the start of deficit spending, asset and wage inflation, and the expansion of credit and debt, the funding of wars, social welfare spending like Medicare, Medicaid, Social Security, higher education loans.

However, real wages in the US never kept up with asset price inflation from the 1980s, especially once millions of manufacturing jobs were exported to low cost economies like China. Americans kept buying (just like we did in the noughties) but just not with their moribund earnings and savings; instead they started spending the credit that was laid before them, especially the high-interest, collateral-free credit card loans.

The middle classes, who had been able to grow their wealth (by buying assets like homes with affordable mortgages and to also save into occupational pension funds where risks were shared with their employers) were now consuming their future wealth, before it was even earned.

With so much printed-from-thin-air money pouring into the financial markets after the Wall Street crash of 1987 by the Federal Reserve, nervous investors and Wall Street blew up the property bubble.

This boom and bust scenario has played out repeatedly – after the 1999 the Nasdaq crash, the first and second Iraq wars, the 2008 crash and Great Recession and now the global pandemic of 2020-21.

The economic ‘stimulus’ measures of lower interest rates, cheap loans, zero interest loans and mass ‘quantitative easing’ by the central bankers and treasuries even buying up corporate junk bonds or their own sovereign bonds, has done little for the ordinary ‘middle class’ man or woman on the street.

High student debts haven’t translated into high paid employment for everyone; and even those with good jobs and salaries can’t pay off these loans and save for a home or a pension while paying inflated city rents. The cheap finance and QE money has gone to the financial insiders and investors who are building to-rent apartments and housing tracts and to pump up the share price of their own stock market holdings.

The United States has always had the biggest, busiest printing presses, the biggest bond and stock markets to save, so the price inflation consequences there have been the most severe, but we have been all caught up in the debt undertow.

What started in 1971 with an attempt to remove the spending constraints imposed by the gold standard has evolved in 2021 into a global economic system where the wealth gap in western countries has widened to levels last experienced 100 years ago.

The middle classes – or at least those who thought they were or aspired to be so because of their higher level of education and skills – are being hollowed out and left behind.

Those with the so-called financial security of home ownership, 30 or 40 years of pension fund growth and little or no personal debt cannot be certain about the security of their wealth (or their children’s need for it as an inheritance) given the economic impact of the pandemic.

I know there is something (still) very wrong about the price of my 125-year-old, high maintenance terraced house, which despite devastating economic downturns, is supposedly worth seven times what I paid for it 26 years ago.

My pension fund is worth over 10% more than it was at the end of 2020. How can that be?

Something is so very wrong, I need to call my financial adviser. You should be doing the same.

Letters to jill@jillkerby.ie The TAB Guide to Money Pensions and Tax 2021 is in all good bookstores. See www.tab.ie for ebook edition.