Sunday, July 11, 2010

A Maddening Headline from the Times

The NYT demonstrates how out of touch the financial community appears to be with the headline of an article today:

Wall St. Hiring in Anticipation of an Economic Recovery


Not to be tendentious, but here's a bit of history review. Wall St. and its media allies led Main Street America astray with the wild overvaluation of stocks in the late 1990s and hypocritical descriptions of a New Era of investing, Dow 36,000 and all that stuff. When a mild recession came, stocks crashed, but at best only to normal valuations at the bottom. A credit bubble succeeded the stock bubble. The current result of the ensuing credit collapse is no greater employment than a decade ago and no greater industrial production than 12 years ago, despite population growth of 1% a year. In that decade, oil and gold prices have both quadrupled, and vast numbers of Americans have been suckered into "buying" houses they could not afford, and now have no equity in their homes.

The large American banks are in far worse financial shape than in the worst of the Great Depression. Even though they are publicly owned, there is no disclosure of the true value of their assets; most Americans have no idea of Level 2 and 3 (mark-to-myth) assets. Short term interest rates are lower than in the Depression, indicating even less demand for credit now than then. Stock market dividend yields are in the aggregate lower now than then, as well.

A growing and aging population needs more medical care, a young population that scores less well on math and reading tests than the generation before it needs better education, and there are few IPOs of American companies.

So why is one of the few growth industries the financial business, which mostly means selling pre-owned stocks and pre-owned or new debt?

And why, about 3 years after the domestic economy started slipping into a downturn, should the cosseted and bailed-out financial industry be hiring in advance of a true sustained economic recovery rather than in response to one?

This is an example of malinvestment. The country needs its real needs met rather than continuing down the road of over-financialization.

Copyright (C) Long Lake LLC 2010

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