Monday, July 17, 2017

Economy and Markets

There is a reason the wealth effect from a rising stock market isn't improving the economy.  It's because most people own a negligible amount of stocks.  It's another one of the reasons why the Fed are clueless.  Bernanke believed in the wealth effect of rising stock prices, which is why he tried to goose the economy by doing 3 QE programs.  He only goosed the stock market.  He thought that people would spend more money if their stocks and funds went up.  The problem with his thinking was the people who didn't need more spending money were the ones who got all the benefits.  The people who did need it got none of them, and in fact got punished with higher rents and home prices.

The wealthy will just keep investing more if they have more money.  They already have almost everything they want.  The marginal utility of a third home is much less than a first home.  Same with cars, electronics, etc.  They don't need more stuff.  So when they got higher stock prices thanks to Bernanke's repeated QEs, they just put it right back into financial assets, not the real economy.  That's why you aren't getting the big inflation numbers despite all the central bank money printing.  All that money is just sitting there in brokerage accounts of the wealthy, or stuck in some luxury real estate.  

It is a little bit like the 1920s, except the average person isn't involved in the stock market.  The financial markets have become its own ecosystem, mostly detached from the real economy.  That is why the stock market would rather have a mediocre economy and low rates than a good economy and higher rates.  Higher rates mean much less wealth for the fixed income portion of the wealthy's portfolios.  A stronger economy isn't enough to offset that.  The market pundits think tax cuts will boost this market further but it would probably be a net negative as it would push up interest rates, which would curtail stock buybacks.   

Labor is cheap now.  There is too much supply of global labor.  That keeps wages low, profit margins high, and fuels the growing inequality and mediocre economy.

The only way the economy gets better is helicopter money.  Universal basic income.  If you gave everyone $1,000,000, consumer spending would rise so fast your head would spin.  Economic growth would skyrocket.  But the power players in Washington don't want it, because that would crush their fixed income portfolios, and they are just fine with the status quo of low rates and high equity prices and will lobby aggressively to maintain it. 

Market is a bit stronger than I expected.  It really does seem like investors were worried about a Fed that was too tight.  Now that monkey is off the back, we are getting a wave of buying.  Not ready to fight it yet, but the higher it goes, the more interesting the short side looks.  

1 comment:

Anonymous said...

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