Tuesday, March 05, 2013 - Milk and Cookies

Milk and Cookies

by Sinclair Noe

DOW + 125 = 14,253.77
SPX + 14 = 1539
NAS + 42 = 3224

10 YR YLD + .02 = 1.89%
OIL + . 50 = 90.62
GOLD + .80 = 1576.40
SILV + .16 = 28.80

The Dow has recovered all of its losses from the financial crisis and the small”d”depression, gaining 119 percent from its low in March 2009, making this the third-strongest bull market for the Dow since World War II.

Though the Dow has erased its memories of the crisis, many households aren't so lucky: Neither jobs nor wages have regained their pre-crisis highs. Home prices are still nearly 26 percent below their level when the Dow last peaked, and about 14 million homeowners are still underwater on their mortgages.

The job market has recovered only 5.5 million of the 8.7 million jobs lost during the downturn.

With the job market weak, worker wages have stagnated. Inflation-adjusted average income is 8 percent lower than in 2007, when the Dow was at its previous high. A chart of the stock market points to the upper right hand corner, while a chart of hourly earnings is just a flat line.

Higher stock prices do tend to benefit the more affluent. This might eventually provide a lift for the broader economy, or it might just be enough to sucker Mom and Pop investors into the market again; you remember those folks who were clobbered, twice in the past 13 years; those folks who were steamrolled by the flash crash; some of them will follow their lizard brain and jump in at record highs. Maybe it will work. I hope so.

These are boom times for Wall Street traders and Corporate America but Main Street America hasn't fully recovered from the Great Recession or the small “d” depression or whatever you want to call it; and just a reminder – it was kind of caused by Wall Street.

Unemployment is still around 7.9%. Median income dropped more than 8%. Wages as a percent of the economy are at an all-time low (at least for the time we've been keeping records). The number of people on food stamps is also at a record – 46 million. If we didn't have food stamps, there would be long lines outs outside of soup kitchens. More Americans are now a doctor's bill away from the poor house; more than 48 million have no health insurance. Student loan debt has gone from just over 23K in 2007 to $26,500 for the Class of 2011; someday they'll get a job and start paying down the debt. Home-ownership is down to 65.4%, the lowest level in 15 years; and if you still own your home there's a good chance you're underwater. Surprisingly, homelessness is on the decline. And foreclosures are on the decline, though still high, the numbers peaked out.

So, nothing to worry about. Jump into the market. What could go wrong? The excesses have been washed out. The banksters that crashed the market have all begged forgiveness and changed their evil ways. Washington has punished the wrong doers so severely that they'll never consider shenanigans again. Plus, the regulators are on top of everything. If it seems like Denzel Washington is flying the plane and everything is upside down – well, it is.

In this crazy mixed up world, why is the stock market doing so well? Corporations are enjoying sky high profits; they are doing more with fewer workers. Payrolls were cut, and the remaining workers were required to pick up the slack. American workers are incredibly productive, and right now they have no bargaining power to push for higher wages. Also, the tax code favors investments in technology and capital goods expenditures, but not for human labor. Tax and trade policies also encourage US corporations to expand and hire overseas. And then the Federal Reserve has been throwing money at Wall Street and that translates to lower borrowing rates for corporations. Corporate profits are claiming a larger share of national income than at any time in 60 years. It was the best of times, it was the worst of times.

After taking inflation into account, both the Dow and the S&P are down from their earlier highs in 2000. And, on an inflation-adjusted basis, the S&P 500 is down even after factoring in returns from dividend payments.

Still, American stocks are far ahead of their foreign counterparts. The Euro Stoxx 50, a barometer of euro zone blue chips, trades at 2,683 points, off its record high of 5,464 reached in March 2000, while the FTSE 100 in London was at 6,431, compared to a record of 6,930 in December 1999.

In Asia, the Nikkei 225-share index in Tokyo closed Tuesday at 11,683.45; it reached its high of 38,916 points in December 1989. And the Hang Seng index in Hong Kong finished at 22,560, versus a high of 31,638 points in October 2007.

The Dow is a price weighted index, so they almost couldn't include Apple or Google at current prices. They swapped a few companies over the past five years. Still, it's been an impressive rebound. After the crash of 1929, it took 25 years for the Dow to get back to the nominal level it plunged from.

The biggest factor in the recent rebound: the Federal Reserve has added more than $3 trillion of monetary stimulus to the economy and more than $1 trillion of bailout loans to financial firms since the 2008 financial crisis. This was done to prevent a widespread banking crash and help the wider economy. The banks have enjoyed a windfall, the broader economy, not so much. Federal Reserve Vice Chairman Janet Yellen said Monday that the Fed should press on with $85 billion in monthly bond- buying while tracking possible costs and risks from the unprecedented program.

"Turning to the potential costs of the Federal Reserve's asset purchases, there are some that definitely need to be monitored over time," Yellen said in a speech in Washington. "At this stage, I do not see any that would cause me to advocate a curtailment of our purchase program."

Yellen, the central bank's No. 2 official, echoed Chairman Ben Bernanke's comment last week that the benefits of the Fed's historically low interest rates and near-record $3.09 trillion balance sheet outweigh any risk of financial instability.

The big question is whether the stock market can keep going up from here. 

 One determinant is whether stocks are seen by traders as relatively expensive, and therefore vulnerable to a sell-off. Robert Shiller, a professor of economics at Yale University, has built a model for gauging whether stocks are cheap or pricey. Right now, stock valuations are above historical averages, but well below the stratospheric highs they’ve reached in bubbles. According to his model, stocks are signaling that they can return about 3 to 4 percent a year. Of course, that's not guaranteed.

I repeat – not guaranteed.

But for today at least, Wall Street looked like the past 5 1/2 years never happened. What happens next depends on the Federal Reserve continuing to prop up Wall Street even as Main Street struggles; it is a dichotomy that can't go on forever. This bifurcation and the growing inequality is the dark lining behind this silvery cloud. Bernanke is a student of the Great Depression. One lesson he could still learn from the small “d” depression is that there is a difference between markets and the economy.