The Stock Market Rally
Having been chastised for giving what I thought was faint praise to Iggy for moving on EI a couple of days ago , I’m going to really, really stick my head out here and wonder if Alan Greenspan has a point when it comes to potential positive linkages between the stock market and the real economy.
I think that we should be very, very cautious about seeing the recent run-up in share prices as portending a recovery in the real economy – given that, in the US in particular, production and jobs are still sinking fast, households have clearly decided to save rather than spend, the stimulus package falls well, well short of closing the output gap, and many banks are on the edge of insolvency and could still fail.
That said, Greenspan has a point when he suggests that higher equities will increase corporate liquidity and will, in the financial sector, help repair capital ratios and thus support more bank lending. Higher equities can only be good news for corporate sponsors of battered pension plans as well.
That is why it will be bad news when this temporary equity rally stalls and reverses, as I strongly suspect it will given the continuing dismal state of the real economy.
As the days go by, the current stock market boom really, really seems like a textbook bear market rally or, as I prefer, a “bull trap”. It seems completely disconnected from economic reality. I strongly expect a big crash in Autumn.
If this be an L shaped recession then we could see a stall but not a major reversal. After all the DOW not so long ago traded at +/- 14,000 it now trades around 8,500. So even if it were to stabilise around 10,000 it will still be awhile before we hear DOW 14,000. There are still lots of bond holders in line to get hair cuts, more real economy restructuring to be worked through and then the public debt. All this on top of the major demographic adjustments still to be worked through. In a word: “austerity” going forward.
myth does have powers, and maybe behind a restart is some really good fiction. However, as you stated Andrew, with many of the fundamentals still in free fall, I am not so sure a boost in equities can counteract the fall in many of the other indicators.
I still do not see how, without a restored economic base of consumer consumption, i.e. core high wage/ high quality jobs being added into the consumption , a turn around can be accomplished.
However Frankenstein was a myth, yet still when you combine his fiction with genetics its does kind of scare me and considering the desperation on Wall street and Bay street you can be reassured the boys in the lab are quite busy and no fairy tale is safe.
Does the equity growth linkage to general economic health matter, can it raise all boats through easing the credit markets? For sure with pensions it does, but I simply don’t see the connection between more job loss in the manufacturing sector and credit worthiness needed to fuel consumption based on the previous model of credit to feed the required consumption.
It comes into how do we define and create value that can circulate and keep the profits flowing.
But then again, I guess if the monster is big enough and the fairy tales circulate with such resonance throughout the inner cores of the cultural psyche, maybe we can grow out of this through more credit for the consumption, whether it be personal or public. Maybe it is the future, 50 year mortgages, unlimited credit cards at non usury rates, automatic debt annihilation on death, bankruptcies lose their meaning, and a few other handy measures needed to bring about a change in the capitalism of a credit economy. Who needs a good job within such system?
Maybe Andrew you should pick up your pom poms and join the cheer leaders, they seem to be so optimistic with their rah rah rah. lol
There is probably something to the balance sheet effect that could be a necessary condition for recovery but not a sufficient condition.
Households are upping their savings, but only if a hefty share of those savings are going into the stock market could that drive price increases upwards. I don’t think that is happening — most of the increase in savings is repaying debt not purchasing assets, and the latter is certainly not in large enough measure to ramp prices even close to where they were a year ago.
I stuck my neck out on this one before you, Andrew 🙂
A month ago, I argued in a couple of comments on this blog that the stock market is an extremely important indicator of where the real economy is likely headed. After all, the current real recession began with a huge stock-market crash.
It is almost impossible to predict where the stock market will go in the short term, but my instinct is to disagree with Andrew and Rumour that there will be another crash based on weakness in the real economy. It may be that economic fundamentals do not justify the TSXâ€™s jump from 7,567 on March 9 to 10,143 today, but they did not justify its fall to 7,567 in the first place.
I tend to share the perspective of Travis and Marc that stock markets are still far below where they were a year ago.
The current real recession in the US began way before markets tanked…No?
Fair point, but US stock markets peaked nearly a year before the TSX peaked. An appreciable decline in US stock markets at the end of 2007 and beginning of 2008 did kick off the American recession of 2008. Also, the more recent and severe stock-market crash began the far worse contraction of recent months.
FDIC insured savings plans are averaging 1- 2.5 % interest in a 5-6% inflationary environment. Apparently savers are parking their money for safety,certainly not profits. The contrived,controlled U.S. & free world stock mkts., are phoney as hell. Hedge funds,and large corporations buying back their own shares,at assigned intervals in unison with each other,certainly are a large contributor to the contrivity. Large crash due, definitly within the next 90-120 days
When prospective buyers out number sellers, the price rises. Eventually, sellers attracted to the high selling price enter the market and/or buyers leave, achieving equilibrium between buyers and sellers. When sellers outnumber buyers, the price falls. Eventually buyers enter and/or sellers leave, again achieving equilibrium