How do governments see the stock market?
According to EqtasOnline, Peyman Molavi, an economic expert in the world of economics, wrote; At first, everything was beautiful and eye-catching, but only two turns were enough for the results of that illusion of scientific forestry to become apparent. The Germans suffered from forest death and instead of increasing production, they witnessed severe pests, do you know why?
In producing wood and increasing trees and neat forests, they ignored the role of mosses, ferns, bees and fungi, and destroyed the entire ecosystem with their thoughtless simplification. Now it was the turn of forest health, they released bees and tried to objectify the details of the ecosystem. You may ask what this has to do with the stock market in Iran?
You are right; we started from an unexpected place, but it is very relevant. The problem is in the extreme simplification that governments love! It is also prevalent almost all over the world, but in Iran to an extreme extent.
Simplifying everything, and most dangerous of all, simplifying complex ecosystems such as the economy and its subsystem, the capital market with millions of actors and billions of decisions, is what we are witnessing these days.
When in 2019, at the end of the year, there was no one left to be in the queue to invite people to the stock market and everyone was outdoing each other, it was clear that simplification was working and many people at different levels are simplifying the capital market without understanding risk and, of course, risk management. A market that is a complete ecosystem and, unfortunately, many see it as planting a few trees in the forests of Prussia and Saxony.
The stock market cannot be simplified. The stock market is fundamentally complex and, most importantly, systematic risk is an integral part of it; asking for government intervention to support the capital market is a beautiful slogan, but in the author’s opinion, it will be as dangerous as the death of the Saxony forests.
It would be good if governments stopped simplifying and simplifying this ecosystem, for example, eliminating the fluctuation range or the command and circular economy and pricing, which are themselves manifestations of simplifying the economic ecosystem. If the fluctuation range had not existed in August 2020, we would not have witnessed all this war of nerves until today, and of course we could have witnessed a natural recovery of the capital market.
In analyzing the current situation of the stock market, what we should not overlook is that the disproportion in the efficiency of a market is gradually compensated by parallel markets. As long as dangerous simplifications continue in the Iranian economy and we do not have a systemic approach to the ecosystem, we will witness a self-serving economy. The result of this is nothing but that some of these simplifications benefit, and such as the allocation of 4200 foreign exchange, the command pricing of cement, steel, and chicken, relying on protective slogans, will gain benefits for themselves from this aforementioned view of the capital market.
Suppose the capital market were to be supported by the government in such a way that, without making more significant changes such as those mentioned, only the stock market index would increase. In such a case, we should gradually expect this imbalance between the stock market and other markets to compensate for itself. As we saw in 2019, where prices in other markets rose almost immediately after the decline in the overall index, and despite the fact that the stock market recorded significant fluctuations at the end of this year, markets such as gold, currency, and housing were able to almost catch up with the stock market.
The main problem, however, is that by interfering in one market, the normal mechanisms governing the economy are disrupted. This means that other markets must also be supported in order to restore the situation to normal.
This is exactly the same situation as what happened in the Saxon Forest. Simplifying the issue and making decisions based on it ultimately leads to imbalances in the ecosystem and markets. Of course, saying that the market should do its job does not mean that the government has no role in policymaking. Rather, it means that government policymaking should be aimed at economic growth.
The next point that is very important is the issue of risk control for investors. In the field of risk management, we have three cycles; the risk identification cycle, the risk assessment and control cycle, and a repetition cycle. When governments enter the field of market intervention, due to the creation of asymmetric information, they create numerous problems for those who are active in the discussion of risk assessment and management. For example, any change in interest rates can have significant effects on the field of real interest rates. For this reason, whether in Iran or in other countries, if it is supposed to start intervening in the economy to save a market and prevent creative destruction, other markets will inevitably reach the efficiency of that market, and this can create an endless cycle.
