The Market’s New Perpetual Motion Machine
May 26th, 2009 | 4 responses
I think present optimism about an improving economy is far, far too optimistic. But that’s me. Let’s look at what the experts have to say, the ones in Washington and on Wall Street. Experts who seem strangely in tune about a lot of things these days when it comes to prospects for better times.
None of these experts is saying things are actually improving in the overall economy, merely that the “fall off the cliff” episode has ended and “things are stabilizing.” Looking ahead, these worthies also predict a long spell of 8 percent unemployment even when a recovery begins, and much less copious buying by the consumers who account for some 70 percent of total U.S. spending.
So even on the off-chance these oft’ wrong experts prove right this time around, what is the seemingly appropriate stock market response? Well, if things really are stabilizing, so should stock prices. And even if a recovery really does begin at the end of this year or early 2010, since the experts acknowledge it will be weak, any stock market rise now should also be very modest.
Of course that’s not the case. The Dow is up more than a third since March.
Seeking an explanation of such a surge, one merely has to look at what’s happening this very day in the U.S. stock market (at least through the morning hours when this piece was written). The bad news continued unabated. A closely followed index of home prices plunged. There was more frightening reports about the effects of California’s government revenue crisis, and similar, if smaller, crises being experienced by almost every state in the union. While North Korea’s latest gambit is positively spooky. Yet the Dow this morning was up another 160 points because consumer confidence was reported to have soared last month by the third greatest amount in history.
Good news? I mean, really good news? The prime reason for this surge in consumer confidence is because the stock market has gone up so much of late. And one key reason the stock market has been going up so much is because of soaring consumer confidence.
Think about this. If I give you money, and you give me money, and we keep repeating this process, does that mean we are both getting richer in consequence? I don’t believe that’s the case.
What we thus have here is the latest example of a Wall Street perpetual motion machine. The last one of these contraptions was based in this logic: home prices keep going up so investors have more money to invest, which in turn allows them to put more into the market, whose higher prices allows people to feel richer and pay more for homes whose prices then go up even more.
That real estate-based perpetual motion machine didn’t last all that long, and when it got de-perpetualized caused a lot of problems. But that was then. And maybe there’s something different about this latest burst of exuberance.
Or maybe not.
4 Responses to “The Market’s New Perpetual Motion Machine”
Looks like the perpetual tax paying machine is breaking down:
http://online.wsj.com/article/SB124329282377252…
I'd have to go back and look at the exact timing of events, but to me it looks like the market is returning to the range set last fall. The market had already fallen considerably before that so while we have indeed seen a huge gain in the last couple of months, it nowhere offsets the losses since last summer.
I don't see a big reason for continued optimism in the next couple of years though.
Well, all the money that the government is printing has to go somewhere doesn't it? And what better way to recapitalize the banks?
The economy in the US is going to be a real shit show after the 2010 elections.
DaGoat, seems to me the “rebound” so far has less to do with anything Silverstein has to say and more just reaching back to the point where it should have stopped before… if you were just looking at fundamentals…..from that point on it was pretty much panic (emotional) selling and now that cash has to go back somewhere………..and neither cash nor bonds are very enticing, so it is dribbling back into the equities market as the only choice. Look for a bumpy but steady climb as the doomsday predictions lose more credibility each day.