Superwealth: Understanding The Decoupling Of Stock Values From Real Economic Value

Lisbeth Latham

Global wealth inequality is reaching historic highs. Inequalities have been both highlighted and exacerbated by the current crisis. However, while the world’s super-rich are obscenely wealthy, most discourse around this issue fundamentally misunderstands and misrepresents the nature of much of this wealth – which, in turn, can distort our view of what addressing this inequality should look like.

Deindusrialisation and financialisation
As the global, post-war long boom came to an end in the late 1960s and early 1970s, capital began to intensify a range of processes that had been at play in the economies of the advanced capitalist countries. Most notable of these was the process of deindustrialisation, as capital shifted manufacturing from high-wage, heavily organised factories in the metropolitan centres of the Global North to the periphery – initially of the imperialist countries themselves, and then to former colonies and neo-colonies of the Global South.

This shift temporarily boosted profits and provided spaces for these profits to be reinvested, but this was possible only up to a point (though repeatedly, capital shifted from one low-wage country to the next in response to worker organisation and resistance). Capital still faced the problem of what to do with the new profits being generated, and to maintain profit growth the capitalist class sought desperately to find new areas to invest in.

While new technologies have developed and state-owned industries have been pried open through privatisation, the main source for investment and reinvestment of profits was in the financial markets, where new and more bespoke products, with ever more rapid exchanges and turnovers, were developed as mechanisms through which to make money. This process of shifting investment and money out of the real economy and into financial markets is known as financialisation.

The 60 stock exchanges around the world currently have a total capital value of $69 trillion. The growth in financial markets over the 45 years can be seen in the S&P 500 index, which tracks the value of the top 500 stocks and equities on the US New York Stock Exchange, NASDAQ and Cboe BZX Exchange.

The S&P 500 had an average closing price of 21.0 points in 1930. This rose to 86.18 in 1975, and to 3,050.00 in 2020. Similarly, the Irish Overall Index, which has measured the value of stocks on the Irish Stock Exchange since 1989, has grown from a closing price of 1,586 in 1989 to 6,464 on 3 August 2020.

The S&P 500 Index, Historical Chart 1928-2020.

Stock market detached from economic performance
This growth in the value of capitalisation on a stock exchange, while significant, does not necessarily reflect the same level of growth in the real-world performance of the underlying companies and equities. These two factors can be significantly out of step with each other, resulting in financial assets being either significantly over or undervalued.

When they are overvalued, which can occur for a range of reasons, a bubble can form. When the two values come back together, considerable losses, both notional and real, can occur (up until an individual sells their assets all gains and losses are purely notional).

So what does this mean for the wealth of people like Jeff Bezos, Bill Gates and Mark Zuckerberg? These individuals are undoubtedly obscenely wealthy, and they have significant political power based on their wealth and control of large companies that play a central role in the global economy.

However, as impressive as it can sound to say that Bezos is worth $190.6 billion, or that his wealth has increased by $74bn this year, much of this wealth is simply not real. These statements are supposed to sound impressive to build on the myth of these great capitalists ‘creating wealth’.

If we were to seize all of Bezos’s wealth and turn it over to the public good we would not gain $190.6bn. Instead, we would have a – not insubstantial, but far smaller – amount of money, and have a percentage share of a company with an annual revenue of $280.52bn and net profits of $11.588bn, profits that would be sharply reduced as we dismantled Amazon’s super-exploitative employment practices and its parasitic relationship to other businesses.

The reality is that the bulk of the growth in the “value” of Amazon – which has seen its share price increase to a high this year of $3,312.49 compared to an average price of $1,789.19 in 2019 – has not been driven by a significant increase in the performance of the company, but rather by a perception of Amazon and other similar companies as a safe bet by some investors, and by hedge funds looking to make money from speculation based on this perception.

The Financial Times reported on 20 August that we have entered a new renaissance for hedge funds using a macro investment strategy (strategies based on assessment of shifts in geopolitical and macroeconomic trends in countries), saying: “The main fund at Brevan Howard, the firm headed by billionaire Alan Howard, was up over 21 per cent in the first half of 2020; Paul Tudor Jones’s flagship fund at Tudor Investment Corporation has gained 8 per cent through July; and Chris Rokos’s Rokos Capital Management has climbed 24 per cent through to the end of July, according to investor documents and people familiar with the matter.”

It continued: “Caxton Associates has returned 31 per cent this year, according to investors, while a fund run by the firm’s chief executive Andrew Law is up 42 per cent. Meanwhile, Louis Bacon’s Moore Capital, which last year decided to eject the remaining external investors from its flagship funds after a long barren stretch, notched up a 25 per cent gain in seven months through July.”

None of this is to say that we should not aim to nationalise large companies, and put them to the use of meeting the needs of people. But we need to be aware that the amount of real value locked up in these companies is overstated, and has much more to do with stroking the egos of the rich and reinforcing ruling-class myths than it does with the actual potential social good these companies could perform.

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Originally published by the Irish Broad Left.

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Top image: Jeff Bezos. Photo by Michael Prince/Forbes.