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Money & Markets: Tech companies’ share prices racing ahead in market uncertainty

New technology companies are putting in a tremendous performance on the stock market, while the rest languish with lacklustre results. The market is dysfunctional, thanks to governments pumping money into the financial system.

If you invest in Apple, Amazon, Google, Facebook, Tesla and a host of other tech companies, you must believe something fundamental has changed in the world.

While all around us is in disarray, these and many other tech companies are being valued as if Utopia is not only here, but about to go to the next level. In the UK, many companies are trading in price ranges higher than a year ago.

While you might think it’s fine for companies like those in healthcare, it is hard to understand how that can be possible for Ryanair. Normally, if the UK stock market is disappointed by a company’s results, it can quite easily slice 30 per cent overnight from the company’s value and thereafter grind it down 75 per cent in a slow, permanent death spiral. That type of outcome is impossible to square with the stock market performance of companies that have had sales sliced in half and consequently racked up losses so large, they would be judged to be on the edge of extinction. That reality is not in the price. If it is, then some future miracle is also priced in.

Companies are being punished. However, corporations like Rolls-Royce, whose business is bound to fleets of grounded airliners, are not being crushed underfoot like listed engineers of the past that merely showed a lack of sparkling growth.

The UK market has long been a bargain bin of companies that didn’t fit the tastes of the City of London. Instead, these businesses found themselves on the block at fire-sale prices. Recently, even fabulous companies like ARM plc – which would be valued at hundreds of billions if they were US Silicon Valley-based companies – have been hoovered up by overseas companies from their insouciant UK institutional holders, who find nothing so welcome as an offer of a 40 per cent premium to sell out.

That tale of negligent woe is now secondary to dislocations in the market itself, with increasingly dysfunctional pricing and liquidity drying up for many companies.

Meanwhile in the US, the Federal Reserve’s liquidity measures have created mammoth amounts of money. The bulk of this has got stuck in the financial system where it has frothed and bubbled into the Nasdaq-listed tech darlings of the FAANGS, or whatever acronymic selection is used to conflate magically valued companies like Apple and Tesla.

There is little doubt that US markets have been in a bubble, but few dare say it. A bubble is always such a lovely thing to be part of and few people dare take the blame, curse it.

By the time you read this, it may well have imploded. There is only one possible explanation as to why giant US stocks are not in a bubble and the UK market isn’t half the level it is: inflation. Soon to explode in the US and Europe.

It makes sense, but the current direction of travel is that we will suffer deflation for at least a time before inflation gets a chance to spring back to life as many fear. With that being the case, high stock prices would be unlikely, until (at least) the early signs of a bounce in broad market inflation arrives. However, stock prices are utterly detached from the economies they are meant to reflect.

Markets are high because money has been injected into the banking system and the corporate finance machinery. It has not been able to escape to the broad economy as bankers are not going to put themselves on the hook for massive bad loans, and therefore liquidity goes to parties with collateral to cover their borrowings. Those are institutions that gamble on financial markets.

With a free turn of the wheel and with the world’s governments backstopping them, these players are buyers of financial instruments that they can get in and out of quickly to reap profits from this free money. These highly liquid goliath stocks are almost completely responsible for the stock market bubble and if the magic ends, the markets will collapse. This financial feedback loop has created a bubble in technology stocks. When it bursts, it will create yet another crisis.

It does make sense to prop up stock prices and credit of huge listed companies. Companies are core to any economy and an engine of tax revenue. If they fail and create a negative feedback loop, then the economy they maintain will slump drastically. Trying to nurse companies to recovery is sensible, but distortions caused by interventions are unlikely to pan out smoothly.

It seems highly likely we are in for a series of future financial crises – market, fiscal, economic and political – and it would be a miracle if tech darlings of the market and their 12-digit values remain untouched.

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