authored by

John Kierans
August 2019

In Part One I argued that bond markets have become highly speculative. Investors who traditionally invest in bonds are being out-bid by government departments (e.g. the European Central Bank and the Bank of Japan). This has forced cautious investors away from ‘safe assets’ like bonds or cash deposits and into other markets like stocks and property.

Investments in stock and property are deemed to be more risky than bond or cash deposit markets. The returns promised tend to be higher in order to compensate the investor for the extra risk taken.  However with the fixed returns offered on cash and bond markets trading at negative the bar is lowered for stock and property investments.  

In 2018, 81 percent of US companies were unprofitable in the year leading up to their public offerings, according to data from Jay Ritter, an IPO specialist and finance professor at the University of Florida. That’s a statistical dead heat with the rate in 2000, the year the dot-com bubble burst, plunging the US economy into recession. It’s the only other time unprofitability was this high, according to Ritter’s data, which goes back to 1980.

Share of US IPOs that aren't profitable

It is too hard to say definitely whether the stock market is highly speculative or not.  However, the green line in the chart shows the general trajectory of interest rates in the USA from 20% in 1980 to 2% today.  In our view the high percentage of IPOs that are unprofitable is symptomatic of over exuberance or speculation in the stock market.  This is fuelled by low or negative interest rates.

Negative and excessively low interest rates feed into and fuel speculation in stock markets.  In my view stock markets are highly speculative.

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