Posted on 11/10/2009 6:34:05 AM PST by blam
Why is the Stock Market Rising When The Economic Recovery is Weak?
Stock-Markets / US Interest Rates
Nov 10, 2009 - 04:35 AM
By: John_Mauldin
"Why" many ask, "is the stock market going up when the bond market is telling us the recovery will be tepid? Isn't there a disconnect?" And the answer is that there is, and this week good friend and fishing buddy Paul McCulley of PIMCO fame discusses that very topic with his usual insight and wit. He poses the conundrum that those expecting a "V" shaped recovery have pushed risk assets up quite high, and that the real risk to their position is that they in fact get a "V" shaped recovery. And yet, they could go higher and into bubble territory.
For the policy wonks among you, I offer a link to a recent paper by the Cleveland Fed, which suggests that the Fed could hold rates lower for far longer than we would think normal. Which makes What Paul writes even more important to understand.
I think you will find this a very interesting read. Meanwhile, I am off to Philadelphia where a team from Dallas was treated very well last night. I hope I get the same warm reception. And then to Orlando and back to Dallas. Have a great week.
[snip]
Because the dollar is tanking. When the dollar is worth 1/100th it’s current value, stock prices will be fifty times what they are now. But a loaf of bread will cost $65.00.
TARP has been a wonderful gift and because the market is inflated by just-hot-off-the-printing-press money.
If you can find a loaf of bread.
There is no “weak recovery”. There is a continuing recession, probably a depression. Until people start working again, there is no recovery. Of course my liberal boss who railed against Bush for 7% unemployment is strangely silent right now. Our business is down 10% and in our industry that is good. He still makes enough to live in a $1.6 million home, but it must suck for him to know that his guy is hurting his pocketbook.
Stock-Markets / Market Manipulation
Nov 10, 2009 - 12:54 AM
By: Washingtons_Blog
Daniel Gross points out that part of the reason that the American stock markets are going up even though unemployment is rising and the real economy suffering is because multinational corporations headquartered in the U.S. are experiencing strong sales abroad:
Here's a puzzle: The stock markets are doing very well, yet the performance of the underlying economy doesn't seem to justify optimism.
The buoyant S&P 500 has risen 53 percent since the March bottom. And while the economy expanded at a 3.5 percent rate in the third quarter, unemployment is high, incomes are stagnant, and consumers are shaky...
It could be that the notion the stock market is an accurate gauge of the domestic economy's temperature is outdated.
The Dow, the S&P 500, and the NASDAQ are primarily indices of large U.S.-based companies, not main street businesses: more Davos than Chamber of Commerce.
These increasingly cosmopolitan firms have been busy globalizing and expanding their operations overseas. In 2006, according to Standard & Poor's, 238 members of the S&P 500 broke out revenues between U.S. and non-U.S. sales.
These companies notched about 43.6 percent of sales outside the United States. For large companies that had already saturated the U.S. market, the home market was something of an afterthought.
In the second quarter of 2007, 66 percent of Coca-Cola's beverage business came from outside North America.
And thanks to the long recession, demand for products and services of all types in the United States has shrunk even since 2006.
Yes, the global economy in 2008 experienced its first year of shrinkage since World War II. But growth has resumed, and in some places—Peru, China, India—it never stopped.
As a result, the globe's economic geography has continued to change, with the United States accounting for a smaller chunk of global output and demand each year. For much of the past two years, virtually all growth in economic activity has taken place outside America's borders.
As a result, U.S.-based companies are becoming even more reliant on non-U.S. customers and operations for sales... in two years, big companies' proportion of sales coming from outside the United States rose 9.8 percent. It's likely the 2009 figure will be something very close to 50 percent.
[snip]
More like levitating through the magic of government manipulation.
Money to burn, and many of the wall street skunks now have unlimited ability to get fresh printed money at no interest. Goldman can even borrow from the fed. Carl Marx was correct.
>> Because the value of the dollar is plummeting.
If that simple answer explains the rise in equity prices,
then
why has the price of automobiles, flat panel teevees, kid’s toys, clothing, food, restaurant meals, hotel rooms, tractors, computers, LAND, HOUSES, etc. etc. etc. remained the same, or decreased?
Some of this is betting on the economic recovery outside the US. With the burden of Baraqqi policies, the US will be one of the world’s laggards in this cycle.
Because the market is not the economy nor are the two connected in a direct mathematical relationship.
The economy's health is difficult enough to define, but the "market" is usually the term used when referring to a specific index or group of indices. The traded price of equities or other instrument in such indices reflects anticipated future returns discounted back to the present.
The transfer mechanism between monetary inflation and price inflation has been broken or severely diminished. The transfer mechanism is typically bank lending to consumers and businesses which has not really recovered. Most of the new money is simply going to bid up asset prices by the larger institutions which can get favorable terms from banks.
It’s waiting for me to get back in, then it’s going to wing-over into a nose dive.
Because so many people are unemployed that demand for consumer goods has dropped.
Well spotted.
It’s not strictly the value of the dollar. It’s the MASSIVE, HEAVILY LEVERAGED dollar carry trade. Institutions are able to borrow dollars not just cheaply, but at effectively negative interest from the Feds, and then put that money into stocks.
THAT is the reason for 95% of the SP 500 rise since March.
If - or rather when - the dollar strengthens for any sustained period, the dollar carry will unwind, or rather ‘snap’, and the stock market will crash like Icarus on the Hindenburg. It will plummet back to the March lows.
LOL, oh I know that feeling.
Why?
Because industrial production is up at an 11.7% annual rate over the past thre months, productivity is up at a 9.5% rate, GDP is up at a 3.5% rate, unit labor costs are falling, and consumer prices are down year-over-year for the first time in about 55 years. That all spells a strong recovery in corporate profits (production up, labor costs down), which is what drives stock prices.
Unemployment has nothing to do with stock prices. If it did, we would never have had the great rally of 1982-1984 when unemployment was averaging around 9%. That was the beginning of the 26 year long Reagan bull market.
The unemployment problem will solve itself via retirements as the stock market recovers. With equity prices back up, the front edge of the baby-boomer wave will continue its retirement spree that has been going on since 2001 (and which is the reason for slow employment growth under Bush), as the first baby-boomers reached the government worker retirement age of 55 (remember government workers are almost 20% of all employed persons). 2008 saw the arrival of the age 62 early retirement age for those born in 1946. These early retirees will begin the real tsunami of retirements over the next 5-10 years as those born between 1945 and 1955 leave the labor market. These retirements will clear out all of the unemployed and then some, as the US is forced to rely on ever higher productivity from technological advances.
If people would take their heads out of their ass and stop crying about how we are DOOMED and all going to DIE because of “bubbles” and “too much” debt and the like, they’d see what is really going on.
You should rub in the fact that using the U6 stats, which I believe were used for GWB, the real unemployment rate is 17+%!
Yesterday was the start of hyperinflation. The only thing missing on this historic occasion is ZerO proclaiming he has turned the economy around.
Unemployment numbers make it politically difficult to restrict money supply. So there will be more and more “easy money” eg, low interest rates. This in turn inflates the bubble. Market makers know that another bubble is coming.
Second, the devaluation of the dollar is driving money out of cash accounts in the hopes that the stock market will provide a greater return. This is fear investing. Fear of missing the incoming wave, fear of loosing value.
It will create another stock bubble that will deflate because it is not sustainable. There just needs to be enough suckers to come in late so that the market movers can unwind their positions.
The simple question is, are you concerned with:
the return ON your principle?
the return OF your principle?
The end purpose of all production is consumption.
Given that “official” unemployment is 10.2%, and (let’s be generous here) unemployed who have stopped looking for work is 3%, and that underemployment doubtless runs from 8 - 10%, where is the impetus for increased consumption going to come from?
Inventories are exceedingly lean these days, and are so for a good reason - businesses see no demand increases to justify incurring the overhead costs associated with stagnant (or expanding) inventories.
At some point in time, yes, those inventories will be depleted, and new orders will have to be made - assuming the business in question can afford the orders.
Banks are not lending. They’re holding their positions in an effort to better strengthen their already-weak balance sheets, but are having problems doing so as costs continue to outpace profit, which would appear to be a classic Catch-22 situation.
Because the banks must have a source of revenue to achieve desired profit goals, they are being more or less forced into acquiring market positions. In an environment of rising stock/commodity prices, it works, if imperfectly.
Thus, we have the makings of a bubble.
However, when something comes along (like commercial real estate, for example) that has the power to collapse the incipient bubble, real problems will arise.
There will be no bailout for those banks because (1) the government can’t afford it. It’s acknowledged it has already spent well beyond it’s means; and (2) it (the commercial banks) does not have the requisite political clout to demand it and successfully pull it off.
Because we have a government that is inching (inching?) ever closer to running and controlling a Fascist economy, it’s going to be a long time before we right the free market ship of state that is (supposed to be) the American economy.
There have been other threads demonstrating the fiction of the GDP figure, but I’ll give you the productivity number. People who still have jobs are afraid to lose them (of course), so they work that much harder (and more productively) because of that.
Not that there’s anything wrong with that!
That unemployment has nothing to do with stock prices is a tenuous argument at best. Stock prices (not the Dow) are a leading indicator; uneployment (or more precisely, average duration of unemployment, inverted) is a lagging indicator.
Put another way, if unemployment continues to rise (or even remains the same!), the future outlook for sales and rising inventories will not be good, and this will be relected in depressed stock prices.
Leading and lagging indicators, it can be argued, are vehicles of convenience, designed so by economists. Think not? The prime rate, influenced by the Fed, is a lagging indicator. Do interest rates affect stocks?
We’ve all seen this administration indulge in it’s almost daily foray into economic folly. They blantantly mis-state and exaggerate the influence and success of the Stimulus; why wouldn’t they engage in numerical shenanigans with the economic data they release?
Demographically, the retirement argument you offer has some merit, but once they do retire, who is going to replace them? Illegal immigrants? We’re looking at a labor shortage a little ways down the road, and compounding that problem is the fact that an abysmally high percentage of these illegals are no where near being trained enough to replace the majority of those jobs. (”They’re just here to do the jobs Americans won’t!)
Then there’s the other side to that retirement coin. Because of the dour state of the economy, and the reckless effect Hank Paulsen’s financial coup d’etat had on wide swarths of the financial market, an awful lot of those people who might like to retire will unfortunately look at themselves, look at their dwindling asset structure, and look at the market and it's future prospects, and conclude they simply can’t retire, at least not at this time.
So if that’s the case, how does your retirement scenario play out against that backdrop?
All this points to the fact that at some point in the future, there will be more than sufficient pent-up demand waiting to find an outlet, but unless and until the financial sector finishes the flushing out process, and liquidity AND velocity return to normal, historic levels, that outlet will not be realized.
Then that “recovery”, too, will depend on other exigent factors...like inflation and structural debt who’s future viability will for ages be viewed with trepedation.
No, while we’re all hoping for recovery and revival, a quick look at the landscape indicates it’s not here, and it’s not going to arrive for quite some time to come.
I could be wrong, and I certainly hope that I am, but given current realities, where is the good news going to come from? Point it out to me!
CA....
We are recovering off a low of a drop of 10-12% in industrial production. Of course things don’t look rosy while we remain near the bottom.
The important thing is the trend, which is positive the past quarter.
The numbers I watch to follow the basic economy (rail traffic, rail cars in storage, steel production, vehicle production) all are pointing towards a positive future.
Note bene: The Muslim in Chief has just about nothing to do with this other than causing panic and uncertainty via his policies.
As to unemployment, because of the effects of unemployment insurance, side-jobs under the table, living off your savings, involuntary early retirements, etc., unemployment figures are less helpful to parse. Demand can remain even as people lose jobs due to government borrowing Chinese money and handing it out to the shiftless.
Additionally, you need to look at the numbers in aggregate. There were 235 million people in the non-institutional population over age 16 when the crisis broke, and now there is 237 million. There were 145 million employed people and 75 million people who weren’t employed but also didn’t want a job, so 15 million people wanted a job but didn’t have one in 9/08. Now there are 138 million with a job and 77 million happily non-employed people, leaving 22 million to be unemployed.
So we’ve gone from 93.6% of the population being a satisfactory working or non-working condition to 90.7% of the population. In other words, there is an aggregate shift to a bad employment condition of 3% points. That simply is not enough of a loss to drop demand for industrial goods by 12% on a permanent basis, which is where we were as the summer began, nor to cause a 6% annualized drop in production and consumption of all goods and services.
In other words, most of the economic crisis is an overreaction of people out of fear and fear-mongering by the media (its a new depression! we’re all going to die!). The flip side of it will be an outburst of pent-up demand once the fear is overcome. People can’t drive falling apart cars, use broken down appliances, wear clothes that are becoming like rags, and live in too little of houses forever. Even if unemployment very high were to remain (which it won’t), the return of normal demand among the non-unemployed population will force the economy and employment upwards in a virtuous cycle.
Lastly, is credit tight? It could very well be for those who were never able to manage it right. But speaking from personal experience, I’ve never had so many people selling things who are eager to extend me all manner of credit as I have in the past year.
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