As the markets celebrate something or other without the benefit of real economic improvement, the traditional relationship between dividends, corporate bond yields and Treasury bond yields moves more and more askew toward the speculative. Here are some takes on matters. First, from John Hussman:
But if you look carefully at the economic data that shows improvement, and correct for the impact of government outlays, it is difficult to find anything but continued deterioration in private demand and investment. What we do see is a government that has run what is now a trillion dollar deficit year-to-date, representing some 7% of GDP. That sort of tab will undoubtedly buy some amount of Cool-Aid, but it has been something of a disappointment to watch how eagerly investors have guzzled it down. It is not at all clear that short-term, deficit-financed improvement necessarily implies sustained growth in the context of a deleveraging cycle. This is like somebody borrowing money from their Uncle and then celebrating that their income has gone up.
Amen. As this blog has said many times, there is no special reason for economic disaster in this country. The weather is good, peace reigns, there is no plague, etc. There are, however, distortions, most notably in the monomaniacal propping up of the housing market. The stock market, which by itself creates no wealth, only the illusion of such, exists for the benefit of the insiders. Rising stock prices far ahead of the pace of economic growth help no one except sellers. Evidence from "the trenches" of what's happening in the real world comes from self-reported daily spending by individuals. As reported by Gallup.com, average daily spending is now $61, down from over $100 one year ago. No small decline!
Small business is probably bemused by the S&P back at 1000, as well. The July NFIB poll of small businesses revealed very poor readings on essentially all business fronts. One may respond that such is seen at economic troughs. Economies cycle. Etcetera, so on, ad infinitum. If you're giddy over all the good news from the housing market firming, stock prices rising, rapid rises in the ECRI's Weekly Leading Index, please click on the NFIB link to see what small business thinks.
The current decade is simply different from the prior one, when fundamentals went hand in hand with optimism on multiple fronts. The 1990s began with major victories both over Communism and Saddam Hussein. The global dominance of the U. S. was shown by the fact that Japan, the Arabs and others paid us for our trouble in kicking Iraq out of Kuwait. Quelle difference between then and now! Then we went on to both have some exciting technologic changes that in fact have changed how we live and communicate, and we balanced the current portion of the Federal budget. Multiple big wins. Sales, dividends, profits rose. Welfare receded. And private debt uptake exceeded diminution of Federal debt issuance, so the debt bubble grew (ignoring the growing unfunded Federal liabilities for Social Security and Medicare).
Unfortunately, the 1990s ended with the victory of the bank holding companies with the 1999 effective repeal of Glass-Steagall, the first of FDR's reforms of the financial system that served the country so well for so long.
Since then, the ongoing bubble in stocks and game-playing with financial reporting ("beat the estimates" rather than make real sustainable business progress became the game) gave way to more and more ridiculous lending. That bubble popped 2 years ago and sadly the Bushbama and Bernanke approach has been to reconstitute the ancien regime rather than to promote thrift and hard work on all levels.
As Dr. Hussman put it, of course the intangible "thing" called the "economy" is moving up. Such happens when a Government borrows at low interest rates, bringing forward consumption from the future to now. But so what? To what end? From Mother Earth's standpoint, less consumption rather than more is the goal. The continuity is to enrich Big Finance by giving it a constant supply of debt to issue and trade. Whether the debt is securitized mortgages or Federal debt is of little importance to it. The looting is all that matters. Thus it is reported that Switzerland has largely run out of storage capacity for physical gold.
The higher the stock market goes on the backs of momentum, massive Federal and Fed intervention, and slanted news coverage, the more I look askance. The doubling of the NASDAQ in 1999, while completely lunatic, followed a pattern of about 16 prior years of generally rising stock prices, sales and earnings. Investors should have learned by now that the only thing that remains of ownership of a security is the income it throws off, plus sale at a price that is unknown until sale.
The sharply restrained spending reported by Gallup and the weak current readings and future expectations from NFIB may help explain the declining volume on the stock exchange. In my optimistic moments, I hope that not only will the public reject the blandishments of the Merchants of Debt even when the economy turns up, but that it will also reject the extreaties of the financial community to this time strike it rich for real by buying used stocks from owners who no longer want to own the shares they currently own, and instead will demand a fair return for safely invested funds.
And then in my fantasies, the Obama administration will take action against the obesity epidemic.
Dream on . . .