Yesterday the World Health Organization declared that an influenza pandemic was “imminent.” The U.S government reported that in the first quarter of this year the Gross Domestic Product fell 6.1 percent. The number of unemployed continues to rise, and foreclosures continue to increase. Six of the country’s 19 largest banks failed the government’s stress test and will need more capital to survive a continued financial crisis. Chrysler is about to declare bankruptcy and GM still hovers. On the international front, President Obama said in a news conference that he is “gravely concerned” about the situation in Pakistan. North Korea announced it plans to go forward with a nuclear missile program. A very nasty series of bomb blasts in Baghdad threatened that country’s fragile political recovery.
And yesterday the stock market soared again.
This wasn’t just a technical bounce either. This market boom has been going on for months. It’s the biggest such surge since 1933. The market’s performance in April is on course to be the best since 1991.
So what’s going here? What’s this disconnect all about? The stock market, of course, never tracks the actual economy really closely because there’s always some market-specific stuff affecting stock prices. But the apparent total detachment of market performance and real world happenings over a sustained period appears utterly incomprehensible. Unless some very curious metrics, some very curious ways of judging stock value, are in play.
In that regard, there’s the ongoing spiel from officials like Chairman Bernanke that the economy is finally “stabilizing” after a period of economic “free fall,” and that such stabilization is cause for great optimism. And true, from a certain standpoint, it is better to have landed at the bottom of a well than to still be falling toward the bottom. But if you’re still at the bottom, what’s the cause for optimism?
Officialdom, the frightened government variety, the predatory and greedy Wall Street variety, and the historically other worldly economist variety, also claim to see glimmer upon glimmer of hope that things are improving. And yes, there are such glimmers. Even deep space isn’t totally empty, however, there’s the occasional hydrogen molecule floating around, so how could there not be some glimmers of economic hope in an economy as large as our own? A few glimmers, however, don’t equal a sunrise. Nor should they generate market euphoria.
Another major reason for market happy faces these days involves the fact that corporate earnings are “beating expectations”. This notion is actually rather fascinating—in a kinky sort of way. That’s because such “expectations” are actually just averages of one or two dozen economist guesses, economists mostly working for Wall Street firms, virtually all of whom have appalling predicting records. Nonetheless, by collectively coming in with “expectations” so low that even a recession-ridden marketplace can top them, the market soars.
Is the present surge in stock markets just the latest burst of irrational exuberance? Of couse it is. Here’s reality. A decades-long phony boom based on excessive private borrowing requires a very long period of austerity to make things right. And excessive government borrowing to cure excessive private borrowing is akin to a methadone addiction substitute for addiction to opiates. .
Tragic as this is for so many people, that’s the way it has to be. The gamesters, both well meaning ones and those just looking for another shot at undeserved riches, aren’t going to change that reality by temporarily warping the markets and jollying us up a bit with happy talk and number fudging.