Skip to comments.A Record Stock Market with Record Federal Debt: Does This Make Sense?
Posted on 04/04/2013 11:14:09 AM PDT by SeekAndFind
The stock market has hit record highs, causing surprise among many people. My friend Arthur noted two reasons why he could hardly believe the stock market is up. Here are comparisons between now and when the stock market was at its previous peak in October 2007:
* the federal deficit is over one trillion dollars, six times higher than in 2007
* federal debt is twice as high
How, he asked, can the stock market be reaching new highs in this environment?
Begin, I told him, with a simple model in which future cash flows are discounted to a present value. The analyst is concerned with the growth rate of cash flow (the numerator) and the interest rate by which those cash flows are discounted (the denominator).
What about cash flow? For a simple approximation, lets look at after-tax corporate earnings. They are 49 percent higher than at the previous stock market peak. What about the discount rate?
One popular benchmark is the yield on 10-year Treasury bonds, which is 2.7 percentage points lower now than when the stock market was at its peak. A larger numerator, a smaller denominator, its a wonder that the stock market hasnt been soaring for several years. Corporations as a group regained their peak profits back at end of 2009; at that time the 10-year bond was about one percentage point below its level from the stock market peak. That might have justified the stock market getting back to its peak three years ago.
What about all of that bad news? First lets talk about the deficit and debt and ask if that might influence future dividends and interest rates. Before beginning that discussion, note that the stock market is not a referendum on whether Congress and the President are doing a good job.
(Excerpt) Read more at forbes.com ...
It does if the record stock market is because of the record debt...
ie, borrowing & printing money to prop up the market to give the illusion of prosperity.
Makes as much sense as Corzine walking around a free man.
It only makes sense when you figure the Fed is priming the pump to the tune of 85 billions/mo, Bloomberg and CNBC are little more than cheerleaders for the stock market (except for Santelli), and who’s going to buy bonds at these levels?
Even holding your money in a time deposit at a bank carries with it the ‘Cyprus’ risk. Nowhere else to go.
And the idiots on Fox Business are celebrating and haven't the intelligence to realize that this boon will bust and destroy our economy.
It’s intended to get “the rubes” to put their money in the market, right before they all short it down to 5000.
Where the heck do I park my 401k. Just cash out and buy ammo?
If you print money the equivalent of California’s current deficit every two days, it does.
Documentation File on the negative impact of the Obamanation Counterculture on America.
These are being held artificially low (near zero). We have a whole generation of borrower who thinks you can get
1) money with nothing down and
2) at zero interest rate.
As soon as they have to "pay" to borrow (even at the historical 4% level), all hell will break loose in the economy
Is this a 401k that you’re currently contributing to, or one that is from a former employer?
If it’s current, go to the cash option if available, drop your contributions to barely maximize your company’s match if any.
If it’s not current, convert to a self-directed IRA that invests in metals.
The Federal Reserve is handing over $85 Billion a month to Wallstreet with bond purchases. The Market is being fed sugar. This is not going on the US Debt ledger, so it’s above and beyond the $16 Trillion in US debt. Your Kid’s future Taxes ultimately will have to pay the ALL the debt off.
I’ll jump in if I may.
“If its current, go to the cash option if available...”
Could you explain this to a “late to the show 401k” guy like me?
Quite simple actually. Everyone expects to be the first out the door when the SHTF. That never works of course, but people in this country have memories and attention spans about as long as a housefly’s.
“How, he asked, can the stock market be reaching new highs in this environment?”
The reason why the stock market keeps going up to record high levels while the Federal debt increases to astronomical levels is a very simple and easy to understand example of economics.
The federal Government has been printing fiat money like crazy, which vastly increases the money supply. When you start with 100 dollars of money supply to represent 100 units of assets in the economy and then increase the money supply to 200 dollars for the same 100 units of assets, a single unit of the assets which previously cost 1 dollar will now cost 2 dollars due to the inflation caused by the increase in the money supply. So, as the money supply is increased without a corresponding increase in the units of assets in the economy, it will require more and more of the devaluing dollars to buy the same share of stock in a company and its assets.
Conversely, when the inflation and hyperinflation reaches the limits to which it can expand, the stock values will suddenly and catastrophically plunge as the deflation of the economy collapses the artificail bubble created by the inflation of the money supply without the comensurate incerase in the assets needed to sustain the larger money supply.
The corporations so far have been using every trick in the book to try and keep their profits coming in on their financial statements. They’ve reduced their market presencce to limit losses due to marketing and sales expeenses that cannot be justified with lower customer sales. They have stopped expanding sales operations and concentrated upon improving efficiencies to makeup for the lost sales and sales grrowth. They havee used mergers and acquisitions to capture larger markets while lowering the cost of sales. Finally, they have resorted to buying back their own shares to increase the remaining share values and dividends. However they have used up just about all of the slack these various tricks can wring out of the economy. The time is near when the corporations will be increasingly forced to post declining eearnings and increasing losses. When this downturn in corporate business occurs, the banking system will be put into jeapordy again, as the corporate accounts heavily impact bank liquidity.
Until then the party goes on and the stock market achieves record highs that should frighten rather than rejoice investors.
When people refer to their “401k”, they could be referring to the one they have with their present employer, which I referred to as “current”.
If you have a current 401k, unless you want to roll the dice as to how long this runup is going to last, adjust your holdings into whatever is your cash equivalent option. That will at least keep it from crashing when the market blows up.
They could also be referring to a “401k” that they haven’t rolled out of a former employer. If you have one of these, at least get it rolled into Vanguard ASAP.
If you have an IRA sitting out there somewhere, it’s probably invested in mutual funds, ie, the stock market. I’d suggest, if your IRA doesn’t allow metals holdings, that you move it to another custodian that has a metals option.
And, if you think that even THAT isn’t safe, because you aren’t holding the metal yourself, there is a way to do that as well, but it’s tricky, and though not illegal, the IRS of course does not like it.
It makes perfect sense.
The elephant in the room that concerns me greatly ate interest rates
When we bought our first home in 1986 our interest rate was 13% and 20% down. Unthinkable in this day and age
Yet... those rates will be coming back. They are being held artificially low.
We’re going to have high interest rates, high inflation, and negative economic growth when our creditors say “enough”.
“The Federal Reserve is handing over $85 Billion a month to Wallstreet with bond purchases. The Market is being fed sugar. This is not going on the US Debt ledger, so its above and beyond the $16 Trillion in US debt. “
“More Americans than ever in prison, yet the crime continues to decline.”
Same people making the same error in logic.
A roof over your head is tangible goods, as long as the bank does not own the last 1% of it. Because they will be glad to repossess it if there is an economic collapse.
The Banks got a good gig set up, if it all goes down, all their worthless cash becomes land at cents on the dollar, and if it does not collapse they rake in the interest.
Run away, run away!
But what earnings justify these sky high stock prices? Glen Beck is even musing that one day America will be China’s bitch; yet the stock market is telling us all is roses and honey in the world.
Buying stocks on margin has increased at a pretty clip since QE Eternity was announced. It was $366B at the end of February..
If it is a result of inflationary monetary policy over the last 9 months, why is it gold is lower than it was 9 months ago?
Much of the inflationary pressure on the gold market was due to sovereign nation stockpiling gold as a hedge against the deposing the U.S. Dollar as the international trade currency. Note how Germany called home its gold deposits in the New York depository. some of this sovereign nation purchasing as abated somewhat for the moment, allowing market valuations of gold to fall to more affordable levels for any future tranches of bulk purchases of gold for their depositories.
Don’t forget there was a mass exit from stocks into bonds and other securities in the last few years, so it is to be expected that margin volumes should increase as investors and traders return to stocks, stock options, and short premiums.
20% down? What were those draconian banks thinking? My God! Didn't they know that every one has a right to own a house? /s
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