By Mike Whitney
Despite the dire “fiscal cliff” predictions, stocks ended the year on a high-note led by the Dow Jones crossing the 13K mark with an impressive 166 point gain on the day. The NASDAQ and S&P 500 followed closely behind posting 59 point and 23 point gains respectively. The S&P ended the year up 13.4 percent, while blue chips saw an uptick of 7.3 percent. Since the recession ended in March 2009, all three indices have more than doubled in value due to the Fed’s unconventional monetary policies. The Central Bank has added more than $2 trillion to its balance sheet in the last 36 months. Its bond buying program, dubbed Quantitative Easing, has reduced the supply of risk-free assets (USTs), thus, pushing up the price of equities.
Fed chairman Ben Bernanke is committed to keeping stock prices high hoping that the “wealth effect” will spur more spending and stronger growth. That, in turn, will lower unemployment and strengthen the recovery. Surprisingly, retail investors are still liquidating their stock holdings even though Bernanke appears to be ready to stop any correction before it gets started.
So why are smalltime investors so reluctant to get back into the market when the so-called “Bernanke Put” basically guarantees that the Fed will keep stock prices bubbly for the foreseeable future?
The main reason is lack of confidence. People have lost faith in the stock market, the Fed, and the government. So they are doing what people do when they are afraid; they’re pooling their resources, hunkering down, saving more of their weekly paycheck, and ignoring the cheery business-channel propaganda. Experience has taught them that the basic institutions they used to trust are no longer reliable, and that the data is skewed to boost the profits of insiders who have gamed the system. The belief that the system is rigged is no longer limited to conspiracy nuts and perma-bears. It’s the prevailing view among reasonable people who simply acknowledge that the Fed’s thumb is firmly planted on the free market scales. Everyone knows that the deck is stacked against them and that the Bernanke’s interventionist policies are merely a means of diverting more loot to his primary constituents, the big banks and brokerage firms. But there is a price for all the Fed’s hanky panky, and that price is the steady erosion of confidence and the withdrawal of Mom and Pop investors from the equities markets. Here’s more on the topic from AP News in an article titled ”Ordinary folks losing faith in stocks”:
“Defying decades of investment history, ordinary Americans are selling stocks for a fifth year in a row. The selling has not let up despite unprecedented measures by the Federal Reserve to persuade people to buy and the come-hither allure of a levitating market. Stock prices have doubled from March 2009, their low point during the Great Recession.
It’s the first time ordinary folks have sold during a sustained bull market since relevant records were first kept during World War II, an examination by The Associated Press has found. The AP analyzed money flowing into and out of stock funds of all kinds, including relatively new exchange-traded funds, which investors like because of their low fees.
“People don’t trust the market anymore,” says financial historian Charles Geisst of Manhattan College. He says a “crisis of confidence” similar to one after the Crash of 1929 will keep people away from stocks for a generation or more.”….
Since they started selling in April 2007, eight months before the start of the Great Recession, individual investors have pulled at least $380 billion from U.S. stock funds, a category that includes both mutual funds and exchange-traded funds, according to estimates by the AP. That is the equivalent of all the money they put into the market in the previous five years.” (“AP IMPACT: Ordinary folks losing faith in stocks”, AP News)
There’s been a seismic shift in the average “Joes” perception of the market and that shift is going to have a dramatic effect on everything from business investment to retirement nesteggs. It may even be effecting consumer spending which represents 70 percent of GDP. Take a look at this article titled “Dismal holiday sales belie talk of US recovery”:
“US retail sales over the holiday shopping period grew at the slowest pace since the depths of the 2008 recession, according to a report released Tuesday by MasterCard Inc.’s SpendingPulse unit.
SpendingPulse tracks all retail sales in the form of credit card payments, cash and checks, excluding only restaurants and sales of autos, groceries and gasoline. It reported that over the eight-week period from October 28 through December 24, retail sales rose only 0.7 percent from the year before.
…. most retail analysts had predicted holiday sales would rise 3 to 4 percent. The general presentation was that a steadily improving economy would encourage consumers to spend more freely this season than in the past. But according to the MasterCard unit, sales grew by less than half the 2 percent rise in 2011.
Another firm that tracks retail sales, Customer Growth Partners, said 2012 looked to be the worst holiday shopping season since 2009.” (“Dismal holiday sales belie talk of US “recovery”, World Socialist Web Site)
Consumers are spending less because they are worried about the future. Will they have a job? Will their benefits be cut? Will austerity measures raise their taxes? Will their house be worth less than what they paid for it? All of these things are constraining spending and thus, crimping growth. The fact that so many smalltime investors have exited the stock market and did not benefit from the surge in prices, only adds to their troubles and to those of the broader economy which is ailing from weak demand. Here’s more on the condition of the hobbled US consumer by economist Steven Roach at Project Syndicate:
“US consumers have pulled back as never before. In the 19 quarters since the start of 2008, annualized growth of inflation-adjusted consumer spending has averaged just 0.7% – almost three percentage points below the 3.6% trend increases recorded in the 11 years ending in 2006.”
Consumer spending hasn’t rebounded at all, not really. And, how could it? Unemployment is still high, wage growth is tepid to nonexistent, and the prospects for the future (gov cutbacks to spending due to fiscal cliff settlement) look grimmer than ever. So, who is going to do all the spending that’s needed to propel growth? That’s the question. The last big consumption binge was made possible by draining the equity out of homes and using it as disposable income. That’s not going to work now, because prices have collapsed and people have to live within their means, knowing full-well that gov belt tightening could leave them worse off then before. (Fiscal cliff negotiations eliminated the payroll tax holiday, which will increase taxes across the board while reducing growth.) That sort of insecurity does not strengthen the impulse to run up the credit card at the shopping malls or expensive restaurants. No. It persuades overstretched consumers that they need to live more modestly and get out of the red pronto or face the consequences.
Did you know that consumer sentiment hit its lowest level since July in the latest survey? It’s true, and the pessimism isn’t limited to just consumers either. If we look at who’s is ditching their stocks, we see that the big boys are feeling pretty bleak, too. Here’s more from the article in the AP News:
“Even foreigners, big purchasers in recent years, are selling now – $16 billion in the 12 months through September.
As these groups have sold, much of the stock buying has fallen to companies. They’ve bought $656 billion more than they have sold since April 2007. Companies are mostly buying back their own stock.” (“AP IMPACT: Ordinary folks losing faith in stocks”, AP News)
How do you like that, eh? So the market is being driven higher by companies buying back their own shares with money they borrowed at record low rates? (Check: “US credit expansion driven by corporate lending”, Sober look) What a racket! And defenders of the system still argue that “financial institutions provide capital for productive activity”. Yeah, right. In your dreams.
When a company buys back its own stock, it’s like taking a dollar out of one pocket and sticking it in the other. Does that make you richer? These companies are just inflating asset prices to fatten the bottom line. There’s nothing more to it than that. Take a look at this from Naked Capitalism:
“In the name of shareholder value over the decade 2001-2010, the 500 corporations in the S&P 500 Index (representing about 75 percent of US stock-market capitalization) expended not only 40 percent of their profits on cash dividends – the normal mode of rewarding shareholders – but also another 54 percent on stock buybacks, the purpose of which is to give a manipulative boost to a company’s own stock price. Large established companies did hardly any buybacks in the early 1980s. Over the past decade, buybacks by S&P 500 companies totaled about $3 trillion, which has left scant corporate resources for investment in innovation and high-value-added job creation.
When companies do massive buybacks to boost their own stock prices, the big winners are the very same top executives who make these resource-allocation decisions. Why? Because the largest single component of top executive pay is the income from exercising stock options – which become more lucrative when the stock price goes up, even if for just a short period of time during which the options can be exercised and the acquired stock sold.” (“Robots Don’t Destroy Jobs; Rapacious Corporate Executives Do”, Naked Capitalism)
So on the one hand, you have corporate execs goosing prices with massive stock buybacks, and on the other, you have Inkjet Bennie depleting the supply of risk-free financial assets to keep equities soaring. So, tell me, which part of this even vaguely resembles a “free market”?
It’s all manipulation, every bit of it, and yet, the stewards of this crooked casino expect honest hard-working people and fixed-income retirees to plunk down their life’s savings in the vain hope that they’ll beat the odds and come up winners? No thanks. The little guy would be better off going to Vegas, at least the drinks are free.
Here’s more from the same article:
“People who think the market will snap back to normal are underestimating how much the Great Recession scared investors, says Ulrike Malmendier, an economist who has studied the effect of the Great Depression on attitudes toward stocks.
She says people are ignoring something called the “experience effect,” or the tendency to place great weight on what you most recently went through in deciding how much financial risk to take, even if it runs counter to logic. Extrapolating from her research on “Depression Babies,” the title of a 2010 paper she co-wrote, she says many young investors won’t fully embrace stocks again for another two decades.
“The Great Recession will have a lasting impact beyond what a standard economic model would predict,” says Malmendier, who teaches at the University of California, Berkeley.
She could be wrong, of course. But it’s a measure of the psychological blow from the Great Recession that, more than three years since it ended, big institutions, not just amateur investors, are still trimming stocks.” (“AP IMPACT: Ordinary folks losing faith in stocks”, AP News)
This is pure psycho-babble baloney. The “experience effect”?!? Give me a break. You mean, the fact that people understand when they’re getting fleeced, that’s Malmendier’s groundbreaking observation? And, besides, she’s totally wrong about the Great Recession turning people off to stocks. That’s not what turned them off. What turned them off is corruption. Everyone thinks the market is rigged, and they’re right! It is rigged.
Let’s do a simple thought experiment to prove that point:
Let’s say, the Fed suddenly announced that it planned to sell just $500 billion of the $2 trillion worth of financial assets currently on its balance sheet? What do you think would happen?
I’ll tell you what would happen; the market would tumble 1,000 points or more in a matter of hours, followed by another 2 or 3 thousand-point bloodbath on Day 2.
Find me one market analyst who doesn’t agree with this view? They all agree, because they know that stocks are artificially high due to the Fed’s helium-pumping operations. (QE) But doesn’t that prove that stocks are massively overpriced due to Fed manipulation, which is the same as saying “cheating”?
You bet it does. I mean, Bernanke doesn’t even try to hide it anymore. He just dumps the money in on one end, and then watches as stocks float higher on the other. It’s more like a physics lesson than a free market.
Now ask yourself this: How can Bernanke add $2 trillion to the market and talk about “strong fundamentals” with a straight face? Huh? It boggles the mind.
What fundamentals? Printing press “fundamentals”? Is that what he’s yapping about? What does that have to do with efficient, well-managed companies with strong earnings potential? Nothing, that’s what. It’s just more gas in the old stock Zepplin so his lotta-bucks buddies can skim bigger profits and keep the larder in the Hamptons stuffed with Beluga and Dover Sole.
None of this inspires confidence. Quite the contrary. That’s why retail investors are voting with their feet and fleeing in droves. They’ve seen enough of Dr. Bernanke’s 3-Ring Circus to last them a lifetime. They’re getting out while the getting is good. They’re putting their money in CDs, Treasuries, FDIC-insured accounts and gold. They’d rather take on beating on interest rates and get their money back, then plunk it into some dodgy equities fund that will implode in the next big crash. No thanks. That’s a mug’s game that fewer people are willing to play. And that’s why–according to Bloomberg: “The gap between U.S. bank deposits and loans is growing at the fastest pace in two years… As deposits increased 3.3 percent to $8.88 trillion in the two months ended July 31, business lending rose 0.7 percent to $7.11 trillion, Federal Reserve data show. The record gap of $1.77 trillion has expanded 15 percent since May, the biggest similar-period gain since July, 2010.” (Blooberg)
You read that right. Deposits now exceed loans by nearly $2 trillion. How’s that for a ringing endorsement of a shitty, ripoff system run by crooks and charlatans?
You’re doing a heckuva job, Bennie!
About the author: Mike Whitney
Mike Whitney writes on politics and finances and lives in Washington state. He can be reached at firstname.lastname@example.org