The Unreal Economy

One of the biggest stories of the day is the record set by the DJIA yesterday:

The Dow Jones Industrial Average surged to its highest closing level ever, finally overcoming the losses tied to the financial crisis on the back of a tenacious stock rally that began in March 2009. And the blue chips did it with an exclamation point–a 125.95-point blast that left the old record in the dust.

The previous record had been set in October of 2007. All is not skittles and beer, however. From a New York Daily News editorial:

It’s a fabulous irony that Obama, who has dined out politically by vilifying big business, finds himself the master of a rich-get-richer universe. All the more astounding: No one invited Obama’s ardently championed “hardworking Americans” to the feast — except if they were lucky enough to have the remains of a 401(k) retirement savings plan and the stomach to play stocks.

With unemployment stuck around 8%, and with millions of people forced into part-time or low-paying jobs, corporate earnings have climbed 20% a year since 2008 while disposable incomes edged up 1.4% annually, according to Dean Maki, chief U.S. economist for Barclays.

Oh, how the Democrats would flay a Republican who presided over such a have-and-have-not economy. They spare their man because, well, he’s their man. They’re sure Obama’s heart is in the right place, and they blame the GOP for preventing him from lifting the fortunes of the working and middle classes.

and from Thomas Pascoe in The Telegraph:

Strong stocks and strong bonds are an unusual mix. Theoretically and historically, money has washed from one to the other causing rises and falls along the way. What is unusual about the present climate is that so much money has been created by central banks that there is sufficient available to create a bubble in, well, everything.

This has a lot to do with how QE operates. Unlike straight money printing, it is designed to transfer money to banks, not to the consumer or to the government. The banks swap their existing government bonds for newly printed money. In theory, the banks now lend this cash on the high street to consumers and businesses. In reality, that has been a problem. Burnt by the financial crisis, banks have imposed tougher lending criteria at a time when creditworthiness is impaired. As such, they cannot lend. Instead the money ends up in the trading account. It gets spent on financial instruments in proportion to the greed (equities) or fear (bonds) of the institution in question. The main reason that QE has not been catastrophically inflationary is that so little of it has filtered down to the high street. For the most part, it has simply pushed up values across the board in the financial markets.

There’s more than one way to look at this. In one view the Powers-That-Be are desperate to improve the state of economy but don’t know how. Poor, powerless Powers-That-Be. In another view the enormous explosion of asset inflation is exactly what the Powers-That-Be want to happen.

I don’t think that I hold either one of those views. I’m more with Josh Billings who said “It ain’t what you don’t know that will hurt you but what you do know that just ain’t so.” The Powers-That-Be know too much that just ain’t so and it’s hurting the rest of us.

While I’m on the subject doesn’t the new record lend a certain amount of support to a point I’ve made before: that the DJIA is increasingly disconnected from the real economy, you know, the one in which you and I work and buy and sell goods and services? I might add that it’s quite possible to construct an index of stocks that always goes up, always setting new records. The trick is changing which stocks go into the index while retaining credibility at the same time.

24 comments… add one

  • Icepick

    There’s commerce, and then there’s finance. Finance is golden right now – commerce not so much. Helps to have all the largest governments in the world, even the ones run by alleged lefties, in your pocket.

    Really, I don’t know how you can believe that the bastards don’t know exactly what they’re doing. What they’re doing and what they say they want are at cross-purposes on almost every policy.

  • I went to orientation yesterday and picked up my shirt and visor to work at McDonald’s. I still need some pants and shoes.

    I am not being facetious. Unless you’re in a family business around here or mechanics you won’t make a living.

  • jan

    I found Pascoe’s analysis of how the QE functions interesting and fruitful in giving some kind of explanation for where the funny money goes and who it favors. However, most people keep their eyes glued to the DOW as a measurement of the economy’s vibrance, whether they are invested in it or not. It kind of reminds me of ‘fool’s gold.’

    Janis, wondered where you went. Good luck with the job.

  • corporate earnings have climbed 20% a year since 2008

    Really, the growth of corporate earnings from 2008 to now has been 107%? More than double?

  • And if it holds for 2 more years, corporate earnings will have tripled since 2008?

    Color me skeptical of the claim.

  • Icepick

    I don’t know, Steve V., it might be credible. 107% of not much is still not much. How good were corporate profits in 2008?

  • FRED says they were $1,050 billion in 2008, and $1,475 in 2011 or about 40.3% higher, or not quite 12% growth/year. Most of that growth is in 2010, with 2012 showing a meager 2.2%.

    And corporate profits were down considerably in 2008 from 2007, a bit over 18.7%.

  • steve

    Kaminska suggests that equity is the new safe asset, largely due to govt intervention.

    http://ftalphaville.ft.com/2013/03/06/1412822/the-age-of-infinite-equity/

    Steve

  • Icepick
  • Drew

    FRED sounds more like it, Steve V. Getting it right down to the penny is a fools errand in my opinion because……..

    The policy is clear, chase people into risky assets to create a wealth effect (but on a risk adjusted basis a bizarre “musical chairs” bet – Kaminsky be damned), make borrowing both for consumers and government cheap: read: time financed assets like homes, cars and washing machines………….and government borrowing. And worry about inflation and bubble collapses later. Politicians are like that, you know.

    We have paid cash for our last three homes. We are considering buying what amounts to a mansion right now. Big dollars. I’m hesitant – not my style. But my wife has a quote from B of A for 2.12 %. No points, and credits for closing costs. People, that’s free money. From a financial perspective, if you can buy a stable asset, perhaps even a modestly appreciating one, you do it at those rates.

    This is wrong. My financial situation means I can capitalize on this grotesque government policy, but the guy eating at the local pizza joint can’t. This is just flat damned wrong. Hope and change my ass….

  • Drew

    PS –

    This is absolutely true, because of QE:
    “While I’m on the subject doesn’t the new record lend a certain amount of support to a point I’ve made before: that the DJIA is increasingly disconnected from the real economy, you know, the one in which you and I work and buy and sell goods and services?”

    This, I believe was snark:

    “I might add that it’s quite possible to construct an index of stocks that always goes up, always setting new records. The trick is changing which stocks go into the index while retaining credibility at the same time.”

    Academically true, but not really.

  • PD Shaw

    @icepick, early withdrawals sound like the federal government has found its revenue raisers.

  • This is wrong. My financial situation means I can capitalize on this grotesque government policy, but the guy eating at the local pizza joint can’t. This is just flat damned wrong. Hope and change my ass….

    Can we call Obama a sell out now?

  • Icepick

    @icepick, early withdrawals sound like the federal government has found its revenue raisers.

    That’s one thought about it, yes. They won’t have to confiscate 401(k)s at this rate because in a few years they’ll be as rare as pension plans.

    Can we call Obama a sell out now?

    That was so obvious from the start that I can only assume you are joking.

  • Icepick

    I see that Rand Paul is starting to look as haggard as I feel when thinking about the economy. I wonder how long he’ll keep it up.

  • TastyBits

    @Steve Verdon

    Can we call Obama a sell out now?

    This implies he had different intentions. If one intended to work for the 99% at the expense of the 1%, would one appoint Wall Street’s toadie as Secretary of Commerce?

  • jan

    Ice

    Rand Paul is on his 10th hour. I have to hand it to the guy, for hanging in there. It’s getting to the point where I am supporting those who have the guts to question the government. Most are just whimps or morons in lockstep with their own party.

  • jan

    We have paid cash for our last three homes.

    There are very few people these days who instead of leveraging their purchases, pay for them in cash. It’s similar to those who prefer automatic transmissions, rather than those who like manual shifts in order to be more interactive with the road. The latter two are where I’m at….

    My husband and I are remarkably in sync with Drew and his wife, in that we save and pay cash for most items, recently becoming mortgage free as well.

    Moreover, I am simply distrusting the fiscal path of the current U.S. government, as well as the devaluation of our dollar. I’m not sure there is any one way to circumvent what is going on. However, to be as debt-free as possible seems like one option in surviving the unpleasantries that the government seems to be exposing us all to, in the near future.

  • Drew

    jan

    I think the Fed’s policy is a disgrace. I understand the intent, but its a disgrace. And Obama (and others) could speak out against it, but for political reasons won’t. It benefits them.

    However, there comes a point when recognizing they are going to continue to punish savers and subsidize borrowers becomes the smart financial move you must act upon. If my after tax savings rate is less than inflation, but I can borrow and my after tax cost – with an underlying asset keeping up with inflation – (the long term historical record for residential real estate) is the game then , well, that’s the financial play.

    That is not an option that should be offered to people like me as a proactive policy. But it is squarely current public policy. Think about renters. Think about small dollar housing asset buyers. Current policy benefits me disproportionately. All for the political gain of the incumbents in Washington.

    Shameful.

  • This implies he had different intentions. If one intended to work for the 99% at the expense of the 1%, would one appoint Wall Street’s toadie as Secretary of Commerce?

    Liar then. But a liar who gets a B+ from some.

  • jan

    However, there comes a point when recognizing they are going to continue to punish savers and subsidize borrowers becomes the smart financial move you must act upon.

    I agree that there is an intrinsic advantage these days to not being a saver, and simply borrowing what is considered to be ‘cheap’ money. However, we have usually not taken the popular, financially ‘smart’ roads to prosperity, and have mainly gone on the less used gravel ones, more in sync with our monetary principles, personal values and comfort zones.

    We are what would be considered ‘unconventionally successful,’ in the choices made, as well as being unconventional as to the simplicity of what supplies contentment and pleasure in our lives.

  • Drew

    “Liar then. But a liar who gets a B+ from some.”

    Juicy (and valid). Let the fun begin………

  • Drew

    jan

    I think that is a very laudable stance. We are getting to the age where we are asking are we actually going to enjoy this filthy lucre, or give it all to the daughter. She will get a handsome share, and it is quite apparent she is a good, solid values kid. So she will get a leg up.

    But we are starting the charitable giving in a major way process. They obviously share info, because the phone rings off the hook now – schools, churches, institutes…..

  • jan

    Drew,

    I definitely know what you mean. Requests for good will multiply exponentially once you start signing on to the ‘giving’ process.

    My husband and I are divided in our interests on this one. He supports environmental preservation, while I lean into small medical outposts in helping them sustain their services. So, we simply do a 50/50 to these causes, supporting both at the same time. Plus, I might add, a myriad of other smaller contributions to projects helping needy children, L.A. Skid row, and the wounded warrior project.

    Like you, our son will get a share to hopefully use wisely. But, a good portion will be divided between different individual and public good needs.

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