Saturday, January 04, 2014

The Dow Paradox

How is it, despite the utterly counter productive and business bashing moves of this Obama Administration, is the stock market reaching new highs?

First, we must understand that these highs are *nominal* highs, and they are achieved with "Quantitatively Eased" dollars. In real terms, a 16,469 Dow closing today simply *does not* mean what a 12,000 Dow meant in 2006, let alone what an "irrationally exuberant" Dow of 14,000 meant in 2007.

And what of the irrational exuberance of today? What is truly underpinning this economy? And more importantly, what isn't?

For all the Leftist Rhetoric about the "99 percent", it is the politically connected 1%, like big time Obama donors at General Electric for example, who are making out big in this easy credit driven market boom.

Rahm Emanuel famously said that a crisis should not be wasted. Well, the Obama administration has made a very good use of this one. By relatively shielding the wealthy and the educated, the Obama bureaucracy loving elite has used the crisis to make the less prosperous and less educated poorer and more dependent on government largess. How? By using tax payer money to employ the grad school educated in more and more government administrative jobs and by pumping money into the stock markets through near zero percent bank lending.
The result? Two Americas. (1) A mostly employed graduate degree America increasingly drawn to secure, well paid, prestigious if unproductive government jobs, and (2) the increasingly underemployed rest.

How come? The promise of continued low interest rates emboldens those who have gobs and gobs of money to afford risking losing it, i, e., hedge funds and other professionals.
Meanwhile, other individuals with just a little bit of savings are too worried by the dire economy (high unemployment, poor housing markets and record national debt) to risk what remains of their funds. So, they missed the bull market.

What do they do with their money? They put it in the bank for very little return. For as Charles Schwab poignantly notes, Low Interest Rates Punish the Savers and the Prudent.  To make matters worse, American saw their personal income decline by by 3.2% during the Obama presidency. Not to mention that “At the end of last year, debt averaged $43,874 per American, or about 122% of annual disposable income,” though economist debt should exceed 100%.

Ironically, to jump start the economy, Americans, and not merely wealthy ones, are encouraged to spend more, not less of money many do not have. Some fear their money is going to be worth less and less not to mention the probability that an increasing percentage of it will be lost to regressive taxes. They are getting more and more dependent on food stamps, unemployment checks and soon to come government health care.
The big question, of course, is when all these quantitatively eased chickens come home to an inflationary roost.