While America is in the midst of the weakest economic recovery since the Great Depression, the stock market is soaring towards record levels. Dow Jones just hit 14,000 for the first time since October 2007.
Huffington Post reported on the disconnect between Dow Jones’ and the rest of the economy’s performance:
The best-known stock-market average in the world is at an all-time high. Unfortunately, that matters less than it ever has.
A new high for the Dow Jones Industrial Average is an important milestone on the road to recovery, no doubt. The stock index has more than doubled from its low in March 2009, making this one of the strongest bull markets in history. At the same time, regular people have hardly benefited.
A snapshot of economic indicators from today’s headlines comparing the last time the Dow was over 14,000 [in October 2007] can be found at ZeroHedge (select):
- Dow Jones Industrial Average: Then 14164.5; Now 14164.5
- Regular Gas Price: Then $2.75; Now $3.73
- GDP Growth: Then +2.5%; Now +1.6%
- Americans Unemployed (in Labor Force): Then 6.7 million; Now 13.2 million
- Americans On Food Stamps: Then 26.9 million; Now 47.69 million
- Size of Fed’s Balance Sheet: Then $0.89 trillion; Now $3.01 trillion
- US Deficit (LTM): Then $97 billion; Now $975.6 billion
- Total US Debt Outstanding: Then $9.008 trillion; Now $16.43 trillion
- Labor Force Participation Rate: Then 65.8%; Now 63.6%
- 10 Year Treasury Yield: Then 4.64%; Now 1.89%
- Gold: Then $748; Now $1583
While the news isn’t all bad, since corporations have been hoarding money due in part to an uncertain business environment, and thus could potentially employ that money if the economy settled down, there are some serious challenges ahead of the country, namely:
- GDP growth below expectations (including 0.1% contraction in 4Q 2012).
- Troubling financial news in Europe.
- Potential unwinding of Federal Reserve balance sheets.
- The dissolution of stimulus spending.
In other words, the market is being propped up by The Fed’s liquidity along with debt-spending by the U.S. government (46 cents of every dollar spent by the government is borrowed). And news reported by Business Insider has it that The Fed is preparing for the public relations “nightmare” when it halts “payments to the Treasury from the interest income it receives on its bond portfolio.”
As a Deutschebank strategist cited in the BI article points out, the suspension of remittances and carrying unrealized losses “would leave a private company technically insolvent. It is unclear how Washington and the public might react to these circumstances and whether the Fed’s independence might be challenged.”
In plain English, what is going on in the economy, and what role does The Fed have in it?
Imagine you have a bowl of stew that has been simmering all day on low at a cheap all-you-can-eat buffet (gross, right?). Every once in a while Chef Producero throws in some new meat, while Chef Bernanko adds some broth. Over the course of the day, Chef Producero is putting in less meat, while Chef Bernanko keeps watering down his broth. Meanwhile, the soup stock is filling up nearly to the top. What is happening to the stew?
What is happening to the stew is what’s happening to the economy: a record stock market with a sluggish productive sector, that’s what. Not very appetizing, is it?