‘Footsie pushes above 5,000’ but it will not last

Update: As the Footsie pushes above 5,000, we bring this post forwards and refer readers to Why is the FTSE going up?

Hopes for a flurry of company takeovers and growing belief in the strength of economic recovery on Wednesday propelled the FTSE 100 index through the 5,000 level for the first time in almost a year.

Follows on the heels of FTSE 100: stock market has best month in more than six years – Telegraph:

The stock market has enjoyed its best month in more than six years, boosting the savings of millions of investors and bringing hope that the worst of the recession may be over.

The FTSE 100 index of leading shares climbed 8.5 per cent in July, adding £134 billion to the value of the stock market, its best monthly performance since the fall of Baghdad during the second Gulf war in April, 2003.

The rise in share prices followed a series of strong profit figures from Britain’s biggest companies, with many proving to investors that they are coping well in the recession by cutting costs.

However, according to Austrian-School theorist Jesus Huerta de Soto1:

[U]ninterrupted stock market growth never indicates favorable economic conditions. Quite the contrary: all such growth provides the most unmistakable sign of credit expansion unbacked by real savings, expansion which feeds an artificial boom that will invariably culminate in a severe stock market crisis.

In other words, and most unfortunately, the present stock market conditions are an illusion produced by quantitative easing that will not last. And:

The crash will take place as soon as economic agents begin to doubt the continuance of the expansionary process, observe a slowdown or halt in credit expansion and in short, become convinced that a crisis and recession will appear in the near future. At that point the fate of the stock market is sealed.

  1. De Soto, “Money Bank Credit and Economic Cycles”, p462 []