Economy Sinks, Market Rises
It would be wrong the say that the stock market’s hefty jump in recent months is the result of an outright conspiracy. No secret cabal of Templars, Freemasons, Elders of Zion or Club of Romers is behind this curious upturn. Rather, a simple confluence of interest between government agencies and the market’s own major players is what’s kicking up stock prices while the real U.S. economy sinks.
There’s no question that the U.S. economy is, in fact, sagging badly. Consumer sentiment is at its lowest point in 28 years. There have been three consecutive months of nasty job losses. There’s terrible food and energy inflation. The U.S. dollar is spiraling downward. The overall profits of publicly traded companies fell more than 7 percent in the first quarter of 2008. Banks, meanwhile, continue to tighten their lending standards dramatically, making any economic recovery in the near future unlikely.
What, then, is causing the stock market to soar in this sour market environment? The apparent willingness of the Fed and the Treasury to pump endless amount of public money into some of the weakest market sectors is part of the answer. It’s the internal mechanics of Wall Street itself, however, that’s the real driver here.
There are, of course, market bears and short-sellers who make money when stocks fall. To an overwhelming degree, however, Wall Street players benefit far, far more when markets rise. That’s when money floods into their coffers, That’s when the commissions are rich. That’s when huge bonuses proliferate, and when employment on The Street is secure.
This preference being what it is, there’s been a natural inclination after a panic like the one that swept markets at the end of 2007 to over-react since then to the smallest scrap of positive economic news. And a rather bizarre mechanism now compliments this tendency mightily. A mechanism that turns even the most negative news into a reason for the market to rise— something called “analyst expectations.” In recent months, no mater how bad official numbers have come in, they almost always seem to “beat analyst expectations,” sending the stock market climbing in response.
Stop for a second and consider how very odd this is, How beating analyst expectations about economic numbers move the market, rather than what is actually being revealed about the economy by these numbers.
Consider also that the analysts whose expectations are exceeded are employees of the same Wall Street firms whose brokerages and other institutional departments are investing huge pools of OPM (other people’s money). If the expectations of these analysts somehow are exceeded by official numbers, no matter how bad these numbers are, then the firm’s investing cadre, sitting a few desks away from where the analysts are working, has a rationale for pushing up stock prices.
Thus the consequences of beating analyst expectations: Happy investors pour more money into the coffers of Wall Street firms; there are higher salaries and bigger bonuses for investing professionals and analysts; and there’s more job security for both. All of which suggests that whatever official numbers appear in coming weeks and months, they will continue to beat analyst expectations.
A conspiracy? Perhaps not. A most curious way to set stock prices and push market upwards? Most certainly.
The folks at the Fed, at the Treasury, and at major Wall Street firms may seem to have constructed almost perfect mechanisms for detaching stock prices from what’s really going on the real U.S. economy, and ensuring that no matter what happens in the economy, it won’t have unpleasant carryovers for the market.
I write “almost” because reality has an ugly way of reasserting itself no matter how cunningly its perception is temporarily finessed. This is something to keep in mind in coming days as the economy continues to sink and the market continues to rise.