Wednesday, March 6, 2013

A Record With An Asterisk

     Well, it has taken almost five and a half years, but the Dow Jones Industrial Average has finally risen above its October 2007 high. And while a rising stock market has historically been one of the signs of a healthy economy, it has been completely divorced from economic fundamentals for the last 4 four years. As the bulls on Wall Street and the political Left celebrated the Dow's climb over its previous record high, real unemployment has remained over 14%, Gross Domestic Product grew in the most recently completed quarter at an almost recessionary rate of one tenth of one percent, the federal debt is rapidly approaching seventeen trillion dollars and the housing market is still in shambles. Charge on Bulls!
     The way that the stock market has historically worked is that participating companies report earnings. If both revenue and earnings are growing and expanding, the company is rewarded with investor interest in theirs shares, which in turn drives them higher. Macro-economic conditions also have a hand in moving the stock market higher, but if companies are growing their revenues and earnings, presumably the economy is also growing. Generally the expectations for earnings are based on the companies predictions for the current reporting period which are made as part of the previous reporting period, this is called guidance. Earnings expectations are also based on analysts estimates for the company.
     The complete market fiction of the last four years has seen earnings expectations lowered to almost nothing, and approximately half the companies are still not meeting them. But like the lemmings they are, the market movers bust a gut over companies meeting pathetically low earnings thresholds. They have become like a parent whose child constantly brings home Fs and finally receives a D- and they buy the kid a new car. It truly is fascinating to watch supposedly smart people lower their standards of success to a level that a few years ago they would have considered abject failure.
     The other synthesis driving the stock market higher is the Federal Reserve's easy money policy. Ben Bernanke, the Pope of paper money, has been printing 85 billion dollars a month and buying government bonds in an effort to keep bond rates so low that money flows into the stock market to be invested in equities. In 2008 when the financial markets exploded, the Democrats said one of the main causes was an over active Federal Reserve artificially keeping interest rates low and causing to much monetary easing. It is interesting how the Left changes its economic positions as easily as their social and political ones to suit their agenda of the moment.
     At some point in the near future Mr. Bernanke is going to have to begin to pull out of the economy all the money he has been pumping into it. I have heard this described as trying to pull a pin out of a balloon without letting the air out.  God help anyone who is now entering the market based on the new record high. The market movers will have long since pulled out and only the suckers who invest based on headlines will remain to reap the economic carnage created by unsound fiscal policy imposed on a free market by a community organizer and an academic, neither of whom have had to make a living in that free market.

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