Let’s not waste time. What gives with the stock market not rallying off the best GDP report in six years? For one thing, it was a total sell on the news play; the whispers for some time had GDP coming with a “5″ handle.
But for another thing, even that hot, blistering number can’t obscure the fact that the economy remains stagnant, and the administration, rather than spending its first year stoically addressing this nation’s problems, wasted it propping up connected banks and dithering over its pet project.
When this crisis began, more than two years ago, I opined that the only true solutions were time and open markets. I still believe that. But we are wasting time, and we’re shielding connected players from the vagaries of open markets. That is making our open markets, the deepest and most liquid anywhere, and the envy of the free world, less open and more rigged. And only a fool doesn’t see it.
It’s not just the 10% unemployment rate, as bad as that is. It’s not just that wages for everybody else that aren’t keeping pace with even slight inflation. It’s that as those two situations persist, as the overall state of the consumer continues to stagnate and decompose, it drains demand, which keeps the lid on corporate profits, so companies are reluctant to ramp up new operations. It keeps state and federal tax revenue dropping, straining already strained budgets, especially on the state level. Something eventually will burst.
I thought this note from fund manager Marshall Auerback, via naked capitalism, was very interesting. Frank Veneroso, who runs Veneroso Associates and is somebody we’ve cited in this space before, notes that the huge 1933 stock rally was driven by “extraordinary fundamentals.” Auerback’s words:
Even if you use the government’s own massaged data, it suggests that we’ve had barely any growth at all and curiously, a massive rally in the stock market. I was chatting to Frank Veneroso about this yesterday. He pointed out that the giant gains in the stock market (after an 86% fall from 1929-1932) were accompanied by the most explosive fundamentals ever.
The stock market’s biggest surge came off that early 1933 low. It was coincident with a 62% rise in industrial production in a mere four months. That outsized gain in the stock market and the one that followed it were obviously driven by extraordinary fundamentals.
By contrast, the almost 70% rise in the S&P since last March has occurred amidst a modest five percentage point rise in manufacturing production off its cycle low. And, in fact, there has been only a 2.6% increase in industrial production so far relative to March when the stock market rally began.
The stock market today is due for a correction. The only question is how big it will be. The Fed bought up more than a trillion worth of mortgage-backed securities last year and slashed interest rates, leaving a lot of institutional-type players with a lot of newfound money and relatively attractive yields in the risky assets like stocks and commodities. A weak dollar made for an attractive carry trade. All that easy money allowed the stock market to rally despite the fact that the economy still has some very deep and raw scars and even still some open wounds.
Corporate America has gotten smaller, and is no position right now to rehire the seven million some-odd people who have lost their jobs in this recession, forget about absorbing the people every month coming into the work force. No tax gimmicks from Washington are going to change that. The Obama administration might as well propose a new WPA as another $100 billion jobs bill.
At least we’d get some new roads from the WPA plan.
And our open markets are far less open, or fair, when the biggest, most well-connected know they’ve got Uncle Sam in their back pocket. TARP watchdow Neil Barofsky ripped the government plan in a report out today. Not only hasn’t the TARP achieved its main goals, but the nation is still driving on the same perilous road, only in a “faster car.”
“It is hard to see how any of the fundamental problems in the system have been addressed to date,” he says.
So-called too big to fail institutions are now “even larger” than before, the market is “more convinced than ever” that the government will bail out failing firms, Wall Street bonuses this year reveal “little fundamental change” in pay plans compared to past years, and federal efforts to support the housing market “risk reinflating that bubble,” says Barofsky.
Tom Friedman, at the Davos forum, notes he’s hearing a phrase applied to America he’s never heard before: political instability.
“Our two-party political system is broken just when everything needs major repair, not minor repair,” said K.R. Sridhar, the founder of Bloom Energy, a fuel cell company in Silicon Valley, who is attending the forum. “I am talking about health care, infrastructure, education, energy. We are the ones who need a Marshall Plan now.”