Until you got to this tax and spending deal a year ago, it was one of the most hated bull markets. The markets steadily climbed one wall of worry after another, and the problem was that the economic data did not confirm it.
Bloomberg
That’s right. The market was not rising for the past ten years due to a healthy underlying economy. On the contrary, the market was rising due to the Federal Reserve pumping out stratospheric amounts of thin-air money, all of which needed somewhere to land.
It was targeted by the Fed to land in stocks and bonds. Their goal, stated long after the fact, was to create a strong economy by what I would consider a reverse strategy of inflating money supply in order to pump up stocks in order to create a wealth effect that would cause companies to expand and people to buy more, etc.. The plan was that wealth would spill backward into the economy, rather than wealth emerging out of a strong economy.
The plan was nuts.
One of the beautiful ironies of this whole situation is that in 2018 you finally feel like the economy is normalizing to what we knew before the crisis.
By 2018 the wealth effect appeared to be finally working, but mostly what was working in 2018 was the new tax gift to the rich. The corporate tax cuts in particular made companies look much more profitable by improving the bottom line because “earnings” are calculated after taxes. So, it appeared profits were soaring because of corporate economic vitality. In addition, stock buybacks made earnings-per-share look better still because the increased buybacks reduced the number of shares over which the earnings were distributed.
It all looked great on the surface. Employment was historically low, and we started the year with housing prices in many areas well above housing’s pre-crash peak. This created the illusion that the economy was percolating along splendidly … just as the Fed had planned.
And then it wasn’t … because it never was.
Why was the market so hated?
Hated it was, and for many the rally represented a moral quandary, particularly in the early years, when stocks served as a kind of daily referendum on actions by the Fed to end the financial crisis. In that role, buoyant markets became a target for those who saw a charity program for the very people who laid the economy low. At the other end of the spectrum, critics accused the Fed’s Ben Bernanke of engineering gains to hide economic wounds that never healed. Profits rose, fueling the bull, but wages stayed stagnant. Most of the time since 2009, gains in the S&P 500 have surpassed gains in GDP and worker pay by gaping margins.
Exactly. Stocks were not going up because the flaws in the economy were being corrected so that the economy was standing on an increasingly stronger foundation. Stocks were only going up because the Fed’s new money was targeted to go into stocks. The rich banksters who created economic catastrophe were being Fed with wads of new money and had to put it someplace, so they put it in stocks. The market rose, and everyone knew it would continue to rise so long as the friendly Fed kept giving new money to the crooks who broke the market in the first place.
Almost every point where I said the market would hit trouble was a point where the Fed had announced it would change its plans — stop creating new money, then start raising interest rates, then start actually sucking the new money out of the economy, then increase the rate at which it sucked money out of the economy. At each point the market faltered in a big way. That’s what made those scheduled changes in Fed policy and the market’s corresponding moves so predictable — the knowledge that the whole recovery was an illusion built on nothing but huge financial liquidity being concocted by the Fed and then mainlined by banks into stocks.
That is why the bull market was hated by so many (like me) who didn’t want to buy in when they knew the whole thing was an illusion of success, built over a deeply flawed economic foundation, who knew the whole illusion of life would fail when the Fed pulled the plug. The average Joe like me wasn’t being given the new money to play with virtually risk free, so we couldn’t afford to go on that ride. The people who broke the economy were.
That is why the wealth effect created a widening gap between the 1% who were receiving the money directly and the 99% who were not. Now there were actually about 10% of the people at the top who benefited because those who rub shoulders with the 1% got a fair amount of rub-off benefit. But those who depend on the money trickling down in the form of better wages got … nothing!
If that wasn’t all just an illusion, why did the market fall in January as soon as the new tax breaks kicked in?
The market fell hard in January for the reason I said it would: The Federal Reserve doubled the rate at which it was unwinding its balance sheet in January, and its reduction happens mostly at the end of each month. The removal of life support that had supported the illusion of a fundamentally strong economy suddenly caused the otherwise lifeless patient to convulse. With the withdrawal of life support getting more seriously underway, the largest tax breaks in history were not enough to even keep the economy stable, much less cause it to return to health.
That looked like this:
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http://www.investmentwatchblog.com/fed-med-is-dead-how-we-went-from-fake-recovery-to-freefall/
Realist - Everybody in America is soft, and hates conflict. The cure for this, both in politics and social life, is the same -- hardihood. Give them raw truth.
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