On August 18th of 2020, both the Dow and the S&P 500 finished at their highest closing levels on record. The wonder is not that the market is trending upward - the sheer volume of automatic pension saving and monthly mutual fund contributions, ensures that markets are constantly refreshed with new investment resources.
What is surprising is that market momentum has not slowed a wit as the world heads into the historic ‘red zone’ of September/October.
Autumn is a rough time of year for stock markets historically. Consider that the Panic of 1907 also known as the Knickerbocker Crisis started in mid-October of 1906, the subsequent market panic lasted many months and prompted J.P. Morgan’s timely intervention which saved the market from complete collapse.
The Wall Street Crash of 1929, which triggered the Great Depression of the ‘30s, also started in September; lest we forget this Crash was the most devastating stock market collapse in history. Market indices did not recover their pre-1929 Crash levels for nearly 30 years.
Both Black Monday, the stock market crash of 1987, and the Financial Crisis of 2007/8 faced similar crash profiles; both teetered on the brink for months before finally collapsing in the mid-September to mid-October ‘red-zone’.
There is something about that time of the year that breed’s spur-of-the-moment reaction. Perhaps it is the cold reality of summer’s end combined with Q3 corporate financial results and the weary eye financial managers have on ‘end of year’ numbers that creates a sense of precipitous action. Nevertheless, whatever the psychological and/or financial factors at play, this time of the season - particularly in the white heat of a global pandemic - is certainly not for the faint of heart.
In the approaching Autumn of 2020, the possibility of a perfect storm of pandemic induced back-to-school bedlam, a resurgent COVID 19 and the end of government financial supports could bring a final collapse of hope for a short term fix to the COVID crisis, investor panic and another seasonal panic in financial markets.
Remarkably, a stock market correction of 30 percent would only align stock markets values to the present economic reality. Millions of people remain unemployed around the world, and although consumer spending has recovered over the course of the last few months, just how long can governments continue to subsidise unemployed or furloughed workers?
With business failures already at an all time high the Autumn will likely see the end of business subsidies as well; and with no end in sight to the pandemic, the present ‘phoney war’ could end, and with it the somewhat baffling stock market euphoria.
Is there an easy way to implement a set of policy initiatives and accounting practices that could unlock trillions of dollars of undocumented asset value, stabilize the financial system, perhaps reverse many corporate bankruptcies while salvaging market sentiment?
The short answer is ‘yes’. The value of hidden intangible assets in companies large and small around the world is conservatively estimated to be in the hundreds of trillions of dollars. Formally recognising intangibles like internally developed software, artificial intelligence algorithms, social media networks and data on corporate balance sheets would dramatically impact financial metrics and market sentiment.
Imagine the impact if the capitalist system were to expand its intangible asset foundations even further from these ‘easier-to-recognise’ intangibles to include the vast stores of human capital assets as well as the much more vital social and relational capital assets, like corporate reputations.
Capitalising these new assets would, by the very nature of double entry bookkeeping, deliver greater corporate profitability and stronger financial metrics across the board, unlocking hidden asset wealth while greatly strengthening investor equity.
But there is an even greater incentive; legitimising intangible assets while accounting for contingent environmental and social liabilities could unleash a new era of corporate responsibility. This new capitalism would have the internal resources to both save our economy from collapse and the accounting means to convert environmental and social liability expenditures into enhanced investor equity.
Perhaps now is the time to consider just how profound a shift in economic fundamentals we are facing and take some steps to secure our future.
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The economy has clearly changed. Intangibles dominate the global economy but accounting practice hasn’t kept up. As a result financial statements don’t show what is actually creating value (intangible assets) or those things that could lose value (intangible liabilities, such as climate risk).
Ultimately the fact that there is a gender pay gap is the result of decisions made, no doubt by men, based on a belief that motherhood isn’t as valuable as earnings for the company. And balancing gender pay (over time) is similarly a decision, able to be made, by men, who are choosing not to make it. Call it a conscious decision not to make a decision. Now that the gender gap has been exposed, how can the decision to balance it be enabled?