My stock market calls have been very bad in recent months. And for this I apologize. I made the classic mistake in this realm — assuming that the obvious and inevitable would morph into stock market results in the short term.
Clearly, that hasn’t happened. With all the happy talk about recovery, there hasn’t been one for the vast majority of Americans in the same 12 months, a period when major stock market indices have risen 60 – 70 percent.
So what’s the cause of this unchecked market surge, this inherently absurd ascent? Of course there are the gimmicks, like ‘beating analyst expectations,’ that are endlessly used to justify a big jump when a minor piece of good news is announced and poo-poo the importance of any horrid number. Just the other day the worst new home building numbers since WW II were reported and the market rose anyway because this number ‘beat analyst expectations.’ Most of these analysts are Wall Street hirelings, and the biggest investors nowadays who benefit from exceeded expectations are their employers. Duh…
Its more than just gimmicks that are inflating this bubble, however. Its actions by the Fed. After it started lending at zero or near-zero rates to companies that became banks with government insured deposits, these companies could get money from a Fed window for nothing or near nothing to play with in the stock market, and not have to worry about loses because they were now not only too big to fail, but too intertwined with financial instruments that could never be allowed to fail.
This deal is akin to you or I being able to borrow from a casino to fund our gambling knowing that if we win we keep the money and if we lose someone else makes good the loses. Why bother not gambling in these circumstances?
A recent report suggested Goldman Sachs has had the same thought, that it derived 76 percent of it profits from trading activity and only 11 percent from the kind of investment banking activities that actually benefited the economy as a whole. And such profit mix is unlikely to change for any company with a commercial bank affiliation even if the Fed window closes. This is because an implicit guarantee of a federal bailout in the event of a market crash still allows such companies to borrow at at rates so low it might as well be free money.
Historically low Fed rates boost the market in another very important way. They discourage risk-free savings and drive people to jump into stocks instead.
Even the official, absurdly tweaked inflation rate in this country is much greater than risk-free investments today. You save risk-free for the future, in other words, you lose money in real terms. So you have to take a flyer in stocks or aptly named junk bonds in hopes of staying ahead.
Personally, none of this threatens me. Like so many other people, I’m part of the great Post-Asset American Generation. A lifetime of work didn’t allow me to put aside much, and the markets took most of the little I had and converted it into bonuses for investment bankers.
Stocks are thus a spectator sport for me. And one so scary of late that it makes sky diving with a bed sheet parachute look like a safe and prudent bet.