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.