When you look at the below chart you can see why even the U.K. government is starting to be scared the U.K. London Stock Exchange is going to dwindle into nothingness. A current advertising campaign by the LSEG (London Stock Exchange Group) is even foreshadowing this by saying it is so much more than just a stock exchange. It doesn’t help that the CEO of the “London Stock Exchange” is not the CEO of the group and doesn’t even report directly to him and isn’t on the board of the LSEG. (That is so wild I had to double check that.)
The London Stock Exchange, the bit that is the exchange and has been for centuries, is the very beating heart of the city of London, and while the captain doesn’t sit in the engine room, his screws are not going to turn if the engine dies. Make no mistake, even the media confounded government has noticed and is giving notice it might swing into what passes for action.
Here is the chart of the FTSE 100, the U.K.’s equivalent of the S&P 500 over a lost market generation:
The FTSE 100 is up 11% plus dividends in the time it has taken for investors to go from ‘just married’ to ‘grandparents.’ No wonder the writing is on the wall.
But wait! It is easy to pour scorn on failure, particularly abject failure. What is the solution?
Firstly a basic problem is this. A stock market is a pool of money, which is meant to grow through economic activity. Players play a “positive sum” game where they can extract a return from that growth in the pool and that pool likely grows because it makes sense to leave your money in the pool to grow.
If the pool is drained by some mechanism it goes ‘negative sum’ – it shrinks and most players stop playing, leaving a rump to wade around in the muddy shallows.
It is the draining of the London Stock Market that is becoming its undoing.
So here are some fixes.
1) Let institutions get back into stocks.
The problems with the U.K. stock exchange are long standing. The rot sets in when government around the time of the Dotcom told funds to get out of stocks and into bonds “because.” The “because” was said to be “to match assets to liabilities” by picking “less risky” bonds over dodgy equities as a way to more safely provide for future liabilities, especially for pensions. I was aghast at the time but no one else seemed to be that bothered. The alternative reason was “of course” to push pension funds into buying government debt and in turn drop the cost of borrowing so that government could grow the public sector and produce fake growth with juicing GDP with its fake public sector GDP component. For that matter you could say the reason was simply to get its hands on more money and there is no reason to say more.
Twenyy-plus years pass and now government wishes institutions to stop following this order and segue way back into stocks because most institutions are now out of stocks altogether, but wait, government needs more bond buyers than ever and interest rates have risen so selling them now or not buying them with such a nice coupon seems rather rash, especially as interest rates are fated to fall heavily once inflation has finished rebasing debts. Let’s call the idea “counter intuitive.”
The idea is sound though and if this can come about there is definitely hope for a strategic recovery.
2) There is a U.K. transaction tax. Stamp duty as it is called is 0.5% but if stocks turnover their market cap in trading every year, and some do more than that, that 0.5% of their market cap has gone to the government not the investor or your pension. It comes out of the price too because market liquidity is part of the price algo that sets prices because an illiquid share is worth less than a liquid one. The easiest way to see this is in the spread when illiquid shares have wide spreads and liquid ones have tight spreads. It’s not just this cost of doing business caused by low liquidity, it’s also embedded in the price. So stamp duty hurts three ways via increased costs and a share price haircut. Doing away with it would increase share prices and likely be more than compensated through taking the resulting increase in capital gains taxes. Obviously you tax the fruit not the root, but…
3) Outlaw retail share derivative trading, called spread betting. The regulator tried its best to slow down these casinos masquerading as stockbrokers by killing leverage and making them show the fact 70%-80% of their customers lose money. That didn’t work as boys will be boys but this need goes straight back to “draining the market.” Spread betters drain the market and they are the reason there is no “equity culture” in the U.K. and old fashioned stock brokers are slowly but surely going to the wall. Anyone trying out the stock market for the first time is likely to stumble into a spread betting site first, then have their face ripped off within weeks, to stumble off in financial agony, never to return. Bucket shops have been a bane for centuries and remain so. Predators might make for a healthy population, but they do not make for a large one. Don’t worry, all my old buddies that ‘Remora’ around that industry, it’s never going to happen.
Even one out of three of these actions could change the trajectory, and there is a good change we will get one. If the LSE continues its decent into the black hole of irrelevance it will throw off a lot of investing profits as it approaches and crossed the event horizon.
Right now it could go either way, even as the world economy turns the corner.
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