The New Asset Dependent Economy
financialsense.com
by Mark M. Rostenko
Editor, The Sovereign Strategist
January 31, 2005
I remember a time when the stock market served as a barometer for the overall economy. Generally stocks would rise in anticipation of improving economic conditions and begin to fall before the cracks appeared.
To be sure, in the short-term, we often saw divergences between the economy and the market. The stock market is, after all, the collective opinion of emotional and frequently irrational human beings. It can’t help but get out of line at times. But viewed from a long-term perspective, secular bull markets have gone hand in hand with prosperous times while secular bears have served as an indication of something considerably less pleasant.
Today we remain in the midst of a secular bear. The mainstream financial press will of course take great issue with that statement, but then the mainstream has never met a bear it liked. As far as they’re concerned, stocks are always on course to go eternally higher, even when they’re going lower. Pessimism doesn’t pay the bills on Wall Street nor at CNBC. So let’s keep the whole “bear thang” on the hush hush.
Regardless, it is a secular bear. But shorter-term, it’s a funny thing about today’s stock market: While underlying economic conditions continue to deteriorate, the market continues to climb. One day we’ll look back and realize it was just another cyclical bull within a secular bear, a massive bounce that suckered in the bulls, giving the bear nourishment with which to launch his next attack. But for some time now it has looked quite strong.
Oh yes, I know. The gains are justified. GDP grew at a healthy 4.4% last year. That is, if you believe the GDP figures. Bear in mind that official GDP numbers are calculated with official inflation numbers (among other data, of course). Unless your purchases over the past ten years have been limited to “made in China” toothbrush holders and generic pancake mix, you’re undoubtedly aware that inflation is running at a substantially higher clip than official figures belie. When you understate inflation, you overstate GDP. So take that 4.4% with a very large grain of salt.
But let’s give our fine feathered friends, the feds, the benefit of the doubt. Let’s say the economy isn’t nearly as bad as we crusty bears incessantly insist. Then where are the jobs? There aren’t more of them today than four years ago. And if the economy is growing at such a healthy clip, where are the wage increases?
Wages are up 2.5% over the past year. That’s the lowest increase on record. Meanwhile, official figures put inflation at around 3.3%. Even if this figure were anywhere near reality, you can see that the American worker is growing poorer. The cost of living is rising faster than wages. That’s not a recipe for a healthy consumer-driven economy.
Meanwhile the collective debt of American households stands at a staggering $10 trillion while interest rates are rising. Which means that the cost of servicing that debt is on the rise. Inflation is on the rise. Every cost any consumer can imagine is on the rise. Fuel prices. Health insurance. Debt service. And wages aren’t keeping up.
But corporate profits are doing well. Isn’t that a sign of growth? If you focus exclusively on U.S. business it looks like we are in fact doing well. But obviously those profits aren’t making it back to households. Not going toward increased hiring nor wages. And in an economy where 2/3 of GDP is consumer driven, it’s simply not enough that corporations do well. The consumer must do well too.
I believe that U.S. corporations are getting real hip real fast to the fact that there’s a new player in town. Her name is China and she’s willing to do what we’ve done, produce what we’ve produced, but at a fraction of the cost. U.S. companies need to funnel their profits into the future, into remaining competitive long-term. They simply can’t afford to pay out profits to employees, not when the future of the company is at stake. That’s one big reason why jobs and wages just aren’t keeping up.
The Fed’s “solution”, which is in fact a recipe for long-term disaster, (as are ALL solutions created by the same dingbats who create the problems that eventually need solutions) is to keep propping up assets and imbue the consumer with the illusion of increasing wealth. Stephen Roach of Morgan Stanley calls us “asset-dependent American consumers.”
And that’s precisely what we are. Saving is at an all-time low. Debt is at an all-time high. The only thing keeping this gig afloat is asset inflation. Artificially-induced increases in home values and a liquidity-driven stock market: the inevitable result of artificially low interest rates, not genuine increases in value.
The Fed’s strategy is to engage in “serial bubble blowing”, pushing up asset class after asset class in hopes that the consumer will feel rich enough to BORROW more and thereby spend more. Spend more money he doesn’t have, that is.
Look at the psychology out there, folks. The typical American homeowner truly believes that when his home his appraised at a higher value and he’s able to borrow against it, that he is somehow wealthier! The fact that he has to start paying back those borrowings beginning ONE MONTH LATER, and that he will continue paying them back for 15-30 years, escapes him. It escapes him that by the time he’s paid back his borrowings, he will have spent 2-1/2 to 3 times as much as he borrowed initially.
This is wealth? I don’t think so. If it’s YOUR wealth, how come you’re PAYING interest on it? Duuuuuuuh.
Sure, if you sell your house at the higher price you have in fact increased your wealth. But unless you plan to live on the street, YOU’LL HAVE TO BUY ANOTHER HOUSE, ONE THAT HAS ALSO INFLATED IN PRICE. Newsflash: You don’t get to sell at 2005 prices and buy back at 1995 prices! Where’s your “increased wealth” now? In the hands of your mortgage banker, that’s where.
IT’S NOT WEALTH, FOLKS! IT’S INFLATION. It’s the polar opposite of wealth. It is the very stuff that corrodes, sullies and diminishes wealth but somehow the average American has been led to believe that the two are one and the same. (By a brilliant and obviously effective long-term program of brainwashing by the Fed, the same folks who brought you the idea that unbacked pieces of colored paper are “money”.)
That’s a long way of getting around to my point, and surprisingly enough, I do have one. (Please allow me the luxury of diverging from my purpose in order to slam the Fed. I’m a simple man and I live for this one pleasure.) And here it is: Fundamental economic conditions OBVIOUSLY continue to deteriorate even while the headline numbers continue to look “healthy.” Meanwhile our "wealth" is fleetingly asset-bubble-dependent. And the stock market remains TEMPORARILY decoupled from economic reality as is typical in big bear market rallies.
Don’t be fooled, dear reader. The health of the market is not indicative of economic health anymore so than a 77% advance (low to high) in the S&P 500 between 1970 and 1973 foretold of prosperous economic times. In fact, a year later, the market had given back all its gains and lost another 11%. The economy was in a bigger mess than most of us care to remember and remained so for years.
Beware. These days the market doesn’t grow more bullish with every advance as is typical of a genuine bull market. Instead, the market grows increasingly overpriced and substantially more risky with every advance. How long can stocks continue to rise while economic conditions deteriorate? I don’t know, but I do know the answer is definitely |
