There is something wrong with the stock market. The housing market too. I see no evidence that the economy is picking up. To the contrary, all the numbers are horrible. Yet, the stock market and the housing market seem to disagree. Why? Well, there are reasons.● The Stock Market: Ug. The stock market. The stock market is my nemesis in rational times, but forget times like this. Since 2009, the stock market has been on one long, uninterrupted ride straight up. We’re up 117% from the lows of 2009 with no signs of stopping. Does that make sense? Well, consider this:
● Unemployment grew from 6% to 10% during that period and still remains around 7.5%. Is that good news?So if things are this bad, then what justifies this long, steady rise? One thing: the Fed. The Fed is pumping money into the market each month. Right now it’s buying $85 billion in bonds each month to prop up the world’s biggest companies. Even a hint that the Fed might cut the heroin is enough to make the market lose 2% until someone at the Fed says, “Just kidding!”
● Corporate profits are weak. 80% of S&P 500 companies have issued negative guidance on corporate earnings growth, and 56% missed their revenue targets. As the market increased 5% in the first two months of this quarter, earnings actually dropped 3.4%. Should stocks really go up?
● Economic growth in the US has been anemic.
● The US government is paralyzed by debt and infighting.
● There have been repeated near-collapses of the Eurozone, which still has virtually no growth and no jobs.
● China’s economy has slowed to a crawl and is well below the level where the Chinese government fears a revolution.
In fact, we’ve reached a point where market watchers say that the worst thing that could happen to the market would be good economic news because it would mean the Fed might end its buying. Think about how sick that is that our stock market, which supposedly represents the value of American companies, wants bad news to maintain its drug habit. This is basically subsidy behavior. Buyer and sellers and profits no longer matter... government money matters.
● Jobs: And what has that government money gotten us? No jobs, that’s for sure. May’s jobs report showed that 175,000 jobs were added as compared to 149,000 in April. Sounds good, right? After all, it is higher than in April. Well, no. For one thing, this number of jobs is the average for the last 12 months. So this isn’t exactly a break out... it’s just more of the same. Moreover, 26,000 of those were temp jobs, meaning they aren’t real. Some number will also be summer jobs, which will end in August. So we’re looking at something less than 149,000 real jobs were created. Unfortunately, the economy needs to create around 180,000 jobs a month just to keep up with population growth. So all we did last month was increase the number of unemployed people.
Moreover, while the official unemployment rate fell to 7.6% the real number remains double that. And this is after five years of the Fed pumping 2-3 trillion dollars “into the economy.” So why didn’t this stimulus work? Well, the problem is that they didn’t put it “into the economy.” They gave it to rich banks, who sat on it. And as I point out in my book, just giving money to someone does nothing to make working more profitable nor does it make the cost of labor cheaper. In other words, it will never spur hiring.
● Housing: So what about housing? Strangely, over the past couple years, the housing market has started rising again. This makes little sense unless the economy is doing better and people have more confidence, right? Well, no, because it turns out that “people” aren’t buying the houses. According to a company that tracks mortgage financing, “first-time home buyers” are buying only 16% of homes at the moment. That is a surprisingly low number. So who is buying the rest? Well, it turns out that 69% of purchases are being made by “investors,” and these aren’t people who flip homes.
According to Fitch, “The housing price growth is being propelled by institutional money.” Companies like Blackstone are buying homes. (There are other companies too.) In the past couple years, Blackstone has spent nearly $4 billion to buy 24,000 homes with plans to rent them out. And they’re doing it in pockets, which is why the housing market has taken off in some cities but not others. For example, according to Bloomberg, Blackstone bought 1,400 properties in Atlanta in 2012 for a total value of $100 million. The result was that home prices increased 12.4% in Atlanta compared to 10% nationally.
But who cares, right? A buyer is a buyer, right? Well, no. For one thing, these companies are jacking up the price of homes in markets where the natural economy can’t support the price. That always happens when you get an influx of outside money. Basically, you get a price spike that is unrelated to the natural market value of a thing which distorts the market and makes it harder for the locals to buy homes. Moreover, when the outside money stops, the prices will crash. In fact, warned Fitch: “The question is how much the change in prices really reflects the market demand, rather than one-off market shifts that may not be around in a couple of years.”
Do I ultimately care that investors are doing this? No. But what bothers me about all of this, is that our economy is off-kilter because it no longer seems to be focused on helping average people. To the contrary, our government has decided that “the economy” means “Big Business” and it has set out to take care of them on the theory that this will make everyone’s lives better. This is called “socialism” and it doesn’t work any better when it’s done using a handful of big companies as agents than it does when it’s done directly by bureaucrats. We genuinely need to rethink our economy and open it up to the free market. The government needs to stop trying to prop up big companies and their stocks, it needs to stop giving tax breaks to investors to buy homes rather than home owners, and it needs to focus on eliminating the barriers to the creation of jobs. America is a country of people and their government should recognize that... it is time to think about the people and not the balance sheets of the incorporated. We are the United States of America, not America, Inc.
Free the free market!
BTW, Today was a perfect example. The market fell more than 1% just because the Bank of Japan slowed its stimulus program. Socialism is like a drug addiction for corporations.
ReplyDeleteVery good overview. I was being asked about this very thing a few weeks ago. I put it pithily, saying that basically the government has mistaken the stock market for the economy. As far as I can tell, they've been under that delusion to one degree or another since the crash of 1929.
ReplyDeletetryanmax, I think that is how the government thinks -- it's certainly how the media thinks. I think that they believe that stock price is based on the health of companies and the health of companies translates into hiring and salary. Ergo, a rising market means the public is well off.
ReplyDeleteThe problem is that while this may have been true in the age of manufacturing, it certainly isn't true in the age of law and finance. All this does not is line the pockets of people who don't create jobs. And if you look at the stats over the last 40 years, you'll see that the market soared as middle class incomes fell.
What's even worse now is that the market has decoupled from fundamentals entirely and now runs on direct stimulus. Basically, the market is no longer any kind of signal for the economy, it's a signal of the free flow of government money.
Andrew....one of the benefits of a rising stock market could be the retirement portfolios of the boomers. As the stocks they have their 401k's and IRA's invested in rise, then so would their portfolio, right?
ReplyDelete>>We are the United States of America, not America, Inc.
ReplyDeleteFree the free market!>>
Awesome summary throughout, but way to save the best for last, Andrew!
P.S. Without a Hitch and How Conservatism Can Rise From The Ashes both on their way to Chez Porvaznik via Amazon.
Is anyone else getting tired the lack of honesty in all of this. Oh, not in what you wrote, but that fact that our government officials won't tell the truth because it might be embarrassing (I can only assume). And because of that, we can't really fix the problems. I am so very tired when they are asked direct questions and what we get back is the "least untruthful" answers - as described by the James Clapper, Intelligence Czar (how fitting).
ReplyDelete//End rant
I agree that housing and stock prices act on a lot of things other than our overall economic health. Very subjective and emotional. Plus you are absolutely correct that the Fed is propping it up and giving a false picture. Unfortunately, in my view, every time government tries to manipulate things to "soften" the pain, it tends to prolong (and usually worsen) the pain and the length of time to recovery. Government rules and regs keep the laws of free enterprise out of balance. The stock market is an amazing mechanism to raise capital from new ventures, but like big government, it tends to concentrate wealth in too few hands, AND foster abuse of power.
ReplyDeleteSo yes, our policies should focus on promoting new private sector business by setting up a favorable environment to do so, and second, using the regulatory powers to enforce the anti-trust oligopoly aspects of commerce, and punish abuses such as insider trading. Perhaps a return to some of the medieval punishments favored in England might help.
ReplyDeletePatriot, That is true, but at the same time those same boomers have lost the value in their homes (which is where most Americans keep their value) and they've lost value in their individual stocks, and they've become less secure in their jobs.
ReplyDeleteSo to me, it's kind of a small bone to be thrown that my managed 401k is doing ok when everything else is doing poorly.
Eric, Excellent! I hope you enjoy both! Please let me know your thoughts! :)
ReplyDeleteGlad you liked my final thoughts. This is something that bothers me so much. It strikes me that our government is doing so much to stifle the free market to help their friends and the result has been a jobless decade and an asset-less generation.
I don't believe in redistribution at all, but that means I also don't think the government should be working to create inequality in the first place by skewing everything toward a handful of people.
P.S. Make your money fairly, more power to you. Make your money by government fiat, then I have a real problem. Too many are making it by government fiat today.
ReplyDeleteBev, I totally agree. I'm very sick of it. These days so much that we hear from the feds, from Congress, from corporate spokesmen is a flat out lie. Nothing is true. Statistics are skewed. Obvious motives are denied. And through it all, our "elite" keep raking in the money and the power at the expense of the rest of us and our economy. It is infuriating.
ReplyDeleteJed, I totally agree. Something like the stock market is an awesome tool for raising money and for letting people participate in the economy. But things have gone off kilter because of the connection between BIG government and BIG business. The fed hands out money (debt we must repay in one form or another) to big banks. Uncle Sam hands vast amounts of money to big companies. It uses regulations to smash competitors and ensure monopolies.
ReplyDeleteAnd the end result is that average people are being left behind. Not only is the jobs market lousy (and has been for a long time), but we've been whacked by periodic bubbles created by speculators hedge funds and banks, the fed is destroyed things like interest, business power has been increasingly concentrated.
It's time that our government focus on the public again, not only a certain part of it. Handing over the treasury and the regulatory power to a handful of rich businesses and kicking some money to the poor is not acceptable anymore. Our government needs to start working for main stream. That means stopping it's aid to those who don't need it, wiping out anti-competitive regulations, and using the anti-trust laws to ensure that competition reigns.
BTW, I need to run to Denver for a couple hours. Yes, Bev.... Denver. :P
ReplyDeleteI'll be baaack.
P.S. In an unrelated aside, my city is on fire AGAIN. Ug. Different part of town this time.
I stopped trusting the stock market when....actually, I don't remember when I stopped trusting the stock market. The more stuff I read about the economy, the more it became obvious to me that Wall Street was full of idiots.
ReplyDeleteFact is, stock market numbers aren't an indicator of the economy overall. Never have been. They're all about what a small group of investors think is going to happen with this business or that, nothing more.
Thanks for connecting the dots Andrew.
ReplyDeleteI would add that the low interest rates have cratered retirement income for seniors who keep their life savings in CDs. Their only alternative is the stock market which also inflates that bubble. When, not if, the stock market crashes again there's going to be even more misery than last time.
I asked a financial analysis friend what happens when interest rates get raised to slow the increasing inflation - she said thinking about that prospect keeps her up at night.
I would disagree about only one thing in your article. I would call this fascism rather than socialism.
ReplyDeleteI went to a recent talk by an expert on generational differences. It was a great talk about how different generations think about the world differently. How much of what shapes your outlook accures at around age 11-12. She has identified a next generation who was about that age when the markets crashed in 2008. She states that very few of these kids ever expect to own their own home during their lifetime. A long term investment might be looking into owning rentals and perhaps these companies are doing the same.
Another reason the US is doing better is give me another country where your money would be safer? Much of China's growth has been due to government spending and they are starting to pay for the growing middle class. Europe is a mess. Nobody trusts Russia or South America yet.
As for a conspiracy theory, pumping the money to prop up the market does temporarily help multiple state pension fund numbers. Essentially is a bailout for states such as Illinois and California, but it is all false.
T-Rav, You're a wise man.
ReplyDeleteK, You're welcome. Very true. What Bernanke is trying to do is force people to spend their money by eliminating interest at the moment. The British actually are talking about taxing savers to force people to get their money out into the economy. That's a horrible idea to try to force people to stop saving because it leaves them very unprepared for any future shock -- and there will be many at this rate.
ReplyDeleteIt's honestly despicable.
Koshcat, You are correct. This form of corporate socialism is very similar to Mussolini's fascism... and it doesn't work any better.
ReplyDeleteLet me add to your conspiracy theory: pouring money into the market now inflates government budgets and helps our rich friends. One of the things you will hear all over the financial networks is "get out once the retail investors start to get back in." In other words, once the public puts that money in, get out because a crash is coming. Then, after the "correction", interest rates skyrocket which means the government will pay back all this debt it is taking out with very cheap money. Essentially, current bondholders will be paying the government for the right to loan the government money.
Who wins? Governments and hedgefunds. Who loses? The public and foreign bondholders.
You just spun my head in circles. Let me read your statement a few hundred times but if I still don't get it I may need a diagram.
ReplyDeleteKoshcat, Think of it this way.
ReplyDelete1. Insiders run up market value based on fantasy and government money ($85 billion a month right now). That money is borrowed by Uncle Sam from risk-averse people like old people who buy bonds and foreigners like China. Current rates are close to 0-1%.
2. Insiders keep running up the market until "retail" investors start to jump in. (Retail is us... the rubes in the public.) They sell to the retail investors who they are simultaneously telling on places like CNBC "don't miss this incredible market... it will run forever." This is a form of "shilling."
3. Once the insiders are out of the market, it crashes significantly because the insider money coming out is larger than the retail money coming in.
4. The retail investors freak out and yank their money out, causing the completion of the crash.
5. The insiders then buy back the shares they sold a lot cheaper, plus they enriched themselves by selling essentially overvalued stock to the dupes... ie. the public.
6. Once the dust settles, it's time to pay back the 1% bonds. But by this point, inflation is say 10%. So instead of paying back $101, they actually payback what is really $90.90 in real terms. Essentially, the bond holders "paid" $10.10 to loan the government money.
7. Rinse and repeat.
My understanding was that many of these large banks were actually borrowing money for next to nothing from the FED at 0% interest and actually buying government bonds. Even at 1% they are making a lot of money. I figured it was this activity that was driving the treasury price down which is forcing people to put their money into stocks. Treasuries may be safe but if inflation hits at the current rate you're toast.
ReplyDeleteThis just goes to show that people in Amerika make far too much money while you let the poor suffer. Let us take care of you and you will never have to worry about evil capitalist markets. More potatoes, comrade?
ReplyDeleteYep, the fed "discount window." They can basically borrow at 0% and use it for whatever they want. I don't know if they were buying bonds with it, but it makes sense to do that -- guaranteed return.
ReplyDeleteBut keep in mind too that these companies don't necessarily buy bonds to get the interest. Instead, they trade in the bonds just like stocks.
Oh Karl... you idiot. It's too bad you never got the honor of being purged by Stalin.
ReplyDeleteIn Soviet Russia, honor purge YOU!
ReplyDeleteCan you believe that someone once got rich and famous using that line over and over and over and over and over and over...
ReplyDelete