Why are stocks going up when everything is going awry?

2 July, 2020

From the USA to China through Brazil and Spain, the (un)employment figures are shocking. And with the market shrinking on a weekly basis, capital inflows and foreign direct investment is falling in China, Russia, Britain, the Netherlands…. Geopolitical uncertainty has reached its peak, to top it all. In addition to the trade war between the United States and China, there is also the war between India and China, and the one between Japan and South Korea. And more will come. And yet… the stock markets are rising and the share prices of big companies -especially technology companies- keep climbing until they become divorced from any relation with future profits. Why?

From capital to fictitious capital

In May 1893, at the dawn of imperialism, the Madrid Stock Exchange was inaugurated in the Plaza de la Lealtad.

Capitalism is so called because social organization as a whole is subordinated and oriented towards the accumulation of capital. We have to see capital in reality as invested money that becomes a right of exploitation, as an accumulative title that grows in each cycle and rewards proportionally more those who have exploited the labor power at their disposal in a more effective way. The need to boost accumulation leads each capital to increase physical productivity, the amount of commodities produced with each hour of work. But it does so indirectly, through the productivity of invested capital itself, that is, through profits. Profits whose objective is… to merge into and increase the accumulated capital after each productive cycle.

If capital is so concerned with consumers it is because, in the end, there is no profit if production cannot be sold. But there is a catch: the demand that is created by capital with through the wages it pays is by definition insufficient. The market value of what workers produce is always greater than the sum of their wages. So, capitalism needs to sell abroad. Abroad, for a national capital means exports. And for global capitalism as a whole, it means all the social strata in the world market that do not employ wage labor: independent farmers without day laborers, artisans, labor cooperatives that are not only a veil of precarized labor… basically an insufficient market that for at least a century has been chronically unable to absorb the volume of global capital.

It is clear: exports – both of goods and services and of capital in the form of foreign investment – which is what each individual national capital seeks in order to make its own accumulation viable, are a dangerous game. At the end of all exchanges some parties lose – they suffer sustained deficit trade balances – and pay for the accumulation of the others… This explains imperialism and its developments, among the most recent being globalization and now the trade war.

Now let’s put ourselves in the place of capital itself. The point is… what should be done with the new capital that is created when – among the available options – it is not possible to find enough productive applications to cover the amount of capital that has been accumulated? In other words, what to do when there is no profitable place in which to invest bulk capital? And here we have to think on the scale of big capital. Of course, there will be small businesses with great returns, but … What happens when that return is reduced by the management and supervision costs of way too many managers?

Faced with such a situation, chronic in capitalism over the last century, a growing proportion of capital is devoted to speculation. That means that instead of using the rights of exploitation in order to produce… they gamble in the casino. It stops being capital proper, and becomes fictitious capital: capital that bets its reproduction on the results of other capitals. At first it was the stock markets, large masses of capital were dedicated from relatively early on to betting on the capacity of this or that business to improve the profits it obtained beyond what was expected. Then came the futures market, betting on the value at some moment of the future of products, companies or even debts. At a certain point, the weight of the accumulated fictitious capital came to distort the entire productive apparatus, instrumenting it to be useful to the big casino, this is what was called financialization.

And that’s our world, one more aspect of capitalism in its decadent phase.

The crisis and the stock exchanges

Madrid Stock Exchange

The permanent tendency to crisis during decadence expresses the contradictions between the creditworthy markets that capitalism is capable of creating and the productive capacity that it develops by exploiting labor power. This is important because it makes the crisis itself the obvious display the contradiction between bourgeoisie and proletariat, between the logic of accumulation and universal human needs. But also because it points out to us where we have to look when the great crises come and the bourgeoisie tells us that the causes were financial problems that would be solved by better regulation or by better management of bank, company or government accounting.

No, it has nothing to do with that, the system cannot avoid going into crisis. In the end, crises are nothing more than gigantic devaluations of capital that occur because the capital invested in the production of goods and services does not find demand and is proven to be unprofitable. When that becomes evident, all the bets placed on its profitability fall with it. The expectations of all the fictitious capital bets break down, crashing down; the funds that articulate them lose value spectacularly; the stock markets fall suddenly, the futures collapse, credits are classified as uncollectible. And everything happens very quickly, like an avalanche. One day… the stock markets fall, banks go bankrupt, bankruptcies fall amidst a domino of bad debts. And the media, owned by the same capital, hypocritically asks how could this happen?.

And why isn’t it happening now?

Christine Lagarde presents the ECB’s package of measures in the face of the fall in economic activity due to the coronavirus epidemic.

Many companies are making losses. Others, like the banks themselves, are coming out of a long period of falling yields. And yet fictitious capital rains down on the stock markets and are purchasing like crazy. It is true that many of these loss-making companies will soon return to profit. But it is also true that the global expectations given by the central banks themselves point to a decade of adjustment and impoverishment, i.e., of depressed demand. And the world markets, as we are seeing, far from being thriving and accessible, are going to be more and more strongholds guarded by tariff armies… and increasingy real armies. And no, it’s not that the speculators are aware of anything that the rest of us aren’t.

The question is rather the opposite. To cushion the crisis, central banks – which have long been lending money to banks without interest, i.e. for free – are injecting massive amounts of liquidity into companies and banks. The ECB is already buying from the states those guarantees that were granted by the states for loans requested by companies. And the ECB is merely increasing this purchase and accepting weaker guarantees as collateral for the loans it gives to banks. In other words, the ECB will in many cases pay for loans that cannot be repaid and the banks will not suffer. A bookkeeping entry and a loss result in Frankfurt is just one more accounting illusion. This is the whole secret of the banks’ optimism’ spoken of today by stock market commentators in the media.

Seen from fictitious capital there could not be better news. The players know they’re broke, they think they can write off a good part of their investments. But the dealer appears and offers them, without interest, to lend them all the chips they want and ensures that whatever comes out the chips bet on red will return to their owners. Are they going to quit the game, convert the chips they are offered and set up new businesses? Given what is happening in the world? Not a chance. They will double the bet and concentrate on what has the best chance of surviving when it all goes bust. Netflix? Right. The Internet? Of course. Banks? It’s almost guaranteed they won’t go bankrupt, and everything points to they’ll have to merge soon to make some profit , which means they might go up… Let’s finally add all those fictitious capitals that float around desperately in search of a profitable destination… Netflix stock no longer correlates with expected returns. Will it go down? Of course. Was it crazy to double the bet? The speculator’s hope is that it will not go down too far. His capital will have dwindled, yes, but he will have survived. And hopefully with a little bit of luck…

What we’re seeing is not the optimism of finance capital, it’s the hysterical laughter of the desperate gambler.


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