Rally Time On Wall Street – OpEd
By Mike Whitney
“Rising stock prices have long since ceased to provide any real barometer of the underlying health of the economy. Over three decades in which financial speculation has increasingly come to dominate the economic activity of the ruling elite, the financial markets have become a mechanism for funneling an ever greater share of the social wealth into the private bank accounts and investment portfolios of the rich and the super-rich.” – Andre Damon and Barry Grey, “Behind the global stock market surge”, World Socialist Web Site
The stock market has been on an tear for over a month.
While China readies itself for a hard landing, Japan struggles with another bout of deflation, and Europe slips deeper into a self-induced Depression, Wall Street has been flying-high buoyed by rising stock prices, steadily improving economic data and an ocean of liquidity provided by the Federal Reserve.
“We’re entering a sweet spot for the economy,” said Allen Sinai, president of Decision Economics Inc. in New York. “We’re in a self-reinforcing cycle,” where faster employment growth leads to higher household income and increased consumer spending.” (Bloomberg)
Not so fast, Allen. While it’s true that the US economy has created more than 200,000 jobs in the last 3 months; it’s also true that the labor participation rate has dropped 2.5 percent since 2008, which means that millions of people have thrown in the towel and stopped looking for work altogether. If these folks showed up in the data, unemployment would be hovering around 11 percent instead of stuck at an improbable 8.3 percent.
Even so, Wall Street’s optimism is not entirely unfounded. Consumer sentiment is up, manufacturing remains a bright spot, (The manufacturing sector has expanded for 32 consecutive months) and personal consumption has rebounded sharply. Here’s a clip from the BEA’s Personal Income and Outlays report for February:
“Personal income increased $28.2 billion, or 0.2 percent … in February, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $86.0 billion, or 0.8 percent.” (Calculated Risk)
Sounds great, doesn’t it; until you sift through the numbers and see that the personal savings rate dropped to 3.7 percent while personal consumption increased by a paltry 0.1 percent less food and energy. So, yes, people are spending more, but not by choice. The sad fact is that it takes gas to get to work, and that fuel costs a heckuva a lot more than it used to thanks to Wall Street speculators.
Also, take a look at personal income, up a lousy 0.2 percent (which barely covers the rate of inflation) while “real disposable income” (The money that’s left after you pay the bills) slipped to 0.1 percent, not enough to take the kids to the local drive-in for a Happy Meal.
The truth is that working people need to trim their personal consumption even more so they can pay off the debts left over from the burst housing bubble. That’s why another round of fiscal stimulus would be the best antidote, because it would help to ease the deleveraging process by increasing activity and boosting employment. It’s a lot easier to get out of the red when things are bustling then it is when the economy is stretched out on a marble slab. Of course, revving up the economy means increasing the budget deficits which will never pass muster with GOP hardliners in congress. So it’s probably a moot point.
Bloomberg: “U.S. households spent $10.7 trillion in 2011, accounting for about 70 percent of GDP, according to the Commerce Department. That’s more than China’s total GDP of $7 trillion last year, based on International Monetary Fund figures.” (“U.S. Economy Enters Sweet Spot as China Slows”, Bloomberg)
Is that it? Does Wall Street really think the US consumer can get up off the canvas and go on another spending spree?
Dream on. The recent uptick in credit card usage has nothing to do with bingeing at the Malls and nights-on-the-town. People are just strapped and need to get to work, so they’re using their plastic to fill the 140 gallon tank of their new Ford Titanica. But let’s see what happens in the next few months when these same maxed-out people have to cut back in other areas of discretionary spending like retail and dinners out. Then we’ll know for sure whether the spending was just a “one off” brought on by soaring gas prices or the first signs of a sustainable recovery.
Still, stocks are less effected by reality than perception, and the perception is that things are getting rosier all the time. Here’s a clip from the Wall Street Journal that underlines that point:
“Stocks rose to multiyear highs on the first session of the new quarter after a solid reading on domestic manufacturing…. The Dow Jones Industrial Average climbed 52.45 points, or 0.4%, to 13264.49, its highest close since December 2007.
The Dow rose 66 points on Friday to close out the best first-quarter point gain—994.48 points—in its history, and the best first-quarter percentage performance—8.1%—since 1998. The Standard & Poor’s 500-stock index gained 10.57 points, or 0.8%, to 1419.04, its highest finish since May 2008. The Nasdaq Composite rose 28.13 points, or 0.9%, to 3119.70, snapping a four-day losing streak.
“After a massive run, what’s better than putting a cherry on top?” said Barry James, president of James Investment Research.” (“Stocks Resume Their Strong Ride”, Wall Street Journal)
Have you ever heard such nonsense in your life? Is Mr. Investment Research aware that the Fed has expanded its balance sheet by more than $2.25 trillion in the last 3 years and that most of that money has gone into shoring up financial assets? Does he know that “the amount of marketable debt outstanding has more than doubled to $10.2 trillion from $4.34 trillion in mid-2007″ as the Obama administration has been forced to widen the deficits to keep the US economy from falling off a cliff? And, yet, here’s James, sounding like stocks are soaring on their own devices. What a joke. The recent gains have less to do with fundamentals than they do with the boatloads free money provided by the industry reps working at the Central Bank. Everyone knows that, which is why stocks plunged on Monday after the FOMC announced that it was (temporarily) taking away the punch bowl. Here’s the story from Bloomberg:
“The Federal Reserve is holding off on increasing monetary accommodation unless the U.S. economic expansion falters or prices rise at a rate slower than its 2 percent target….
“I would have to see some pretty severe circumstances before I endorse for another round of quantitative easing,” Atlanta Fed President Dennis Lockhart said today on Bloomberg Radio…(Bloomberg)
The Fed has never stopped priming the pump ever since Lehman Bros. crashed in 2008. Never. At present, Bernanke is halfway through another $400 billion giveaway called “Operation Twist” that’s set to end sometime in June. Then, it’ll be on to something else. The notion that stocks can continue to climb absent liberal doses of Fed-generated helium is laughable. It ain’t gonna happen. Even with interest rates at zero and a steady flow of liquidity (from maturing mortgage-backed securities) mainlined into the financial markets, stocks still stumble whenever the Fed even whispers that it’s planning to take its foot off the accelerator. Trim Tabs Charles Biderman summed it up like this:
“Why has the stock market risen the first part of each of the past three years? The answer is simple. The Fed has front loaded money printing each year, QE1 in 2010, QE2 in 2011 and Operation Twist this year.” (Trim Tabs)
Amen to that. But, the truth is, stocks are headed for trouble whether Bernanke spikes the Koolaid or not. Aside from a disappointing durable goods report, corporate earnings are looking softer all the time. The easy profits that were made by firing workers and slashing expenses are a thing of the past. Now companies will either have to boost revenues in a slow-growth environment or face smaller and smaller profits. And if profits shrink, then stocks will fall and Bernanke will be forced to intervene once again. And, stocks will fall because the underlying economy is still weak. Here’s a short rundown from Comstock Funds that explains what’s on the horizon:
“The economy is also facing the so-called “fiscal cliff” beginning on January 1, 2013. This includes expiration of the Bush tax cuts, the payroll tax cuts, emergency unemployment benefits and the sequester. Various estimates placed the hit to GDP as being anywhere between 2% and 3.5%, a number that would probably throw the economy into recession, if it isn’t already in one before then.” (“Fixation with QE3 Tells You The Market Sweet Spot Is Ending”, Credit Writedowns)
No matter how you cut it, the federal government’s share of net spending is going to shrink, and when it shrinks, profits will tumble, activity will slow, unemployment will rise and stocks will tank. So, we’re not out of the woods yet, not by a long shot.
The 3 year equities-ramp that’s sent stocks into the stratosphere has done nothing to lower unemployment, raise incomes, expand credit or improve living conditions for ordinary working people. All it’s done is transfer more wealth to the 1% while masking deepening economic stagnation. Of course, that was the objective, right?