A small note on the frankly hilarious news that the Dow Jones Industrial Average smashed through to all-time-highs.
First of all, while stock prices are soaring, household income and household confidence are slumping to all-time lows. Employment remains depressed, energy remains expensive, housing remains depressed, wages and salaries as a percentage of GDP keep falling, and the economy remains in a deleveraging cycle. Essentially, these are not the conditions for strong organic business growth, for a sustainable boom. We’re going through a structural economic adjustment, and suffering the consequences of a huge 40-year debt-fuelled boom. While the fundamentals remain weak, it can only be expected that equity markets should remain weak. But that is patently not what has happened.
In fact, it has been engineered that way. Bernanke has been explicitly targeting equities, hoping to trigger a beneficent spiral that he calls “the wealth effect” — stock prices go up, people feel richer and spend, and the economy recovers. But with fundamentals still depressed, this boom cannot be sustained.
There are several popular memes doing the rounds to suggest, of course, that this time is different and that the boom times are here to stay, including the utterly hilarious notion that the Dow Jones is now a “safe haven”. They are all variations on one theme — that Bernanke is supporting the recovery, and will do whatever it takes to continue to support it. Markets seem to be taking this as a sign that the recovery is real and here to stay. But this is obviously false, and it is this delusion that — as Hyman Minsky clearly explained last century — is so dangerous.
There are many events and eventualities under which throwing more money at the market will make no difference. Central banks cannot reverse a war, or a negative trade shock, or a negative production shock, or a negative energy shock simply by throwing money at it. And there are severe limits to their power to counteract financial contractions outside their jurisdiction (although in all fairness the Federal Reserve has expanded these limits in extending liquidity lines to foreign banks). Sooner or later the engineered recovery will be broken by an event outside the control of central bankers and politicians. In creating a false stability, the Federal Reserve has actually destabilised the economy, by distorting investors’ perceptions.
But, of course, some analysts think that this time really is different. Here’s a chart from Goldman showing the S&P500 by sectoral composition:
The implication here is clear — with no obvious sectoral bulge like that of the late 1970s, the tech bubble, and the financial bubble — there is no bubble. But what if the bubble is spread evenly over multiple sectors? After all, the Federal Reserve has been reinflating Wall Street in general rather than any one sector in particular.
Wall Street leverage is, unsurprisingly, approaching 2007 levels:
Is this the final blowout top? I’m not sure. But I would be shocked to see this bubble live beyond 2013, or 2014 at the latest. I don’t know which straw will break the illusion. Middle eastern war? Hostility between China and Japan? North Korea? Chinese real estate and subprime meltdown? Student debt? Eurozone? Natural disasters? Who knows…
The wider implications may not be as bad as 2008. The debt bubble has already burst, and the deleveraging cycle has already begun. Total debt is slowly shrinking. It is plausible that we will only see a steep correction in stocks, rather than some kind of wider economic calamity. On the other hand, it is also plausible that this bursting bubble may herald a deeper, darker new phase of the depression.
With every day that the DJIA climbs to new all-time highs, more suckers will be drawn into the market. But it won’t last. Insiders have already gone aggressively bearish. This time isn’t different.
azizonomics 
@ Aziz: “Central banks cannot reverse a war, or a negative trade shock, or a negative production shock, or a negative energy shock simply by throwing money at it”
Worked when they were teenagers. Daddy’s credit card was infinite, and now they have infinite control over money.
LUNACY!!!!
100’s Thousands of financial brains on the net all trying to understand why their logic does not compute with Ben’s logic. Is Ben a savant economist? Are we humbled by his wisdom?
Or is he suffering hubristic cognitive dissonance? Is the lunatic in charge of the asylum?
They have re-located manufacturing to Asia. Workers in the West are either unemployed, under-employed or paid little. Governments collect less tax from corporations that have relocated to Asia. Western workers cannot borrow to consume. All this adds up to huge problems for governments and ordinary people in the West. And bubbles in the stock market are not going to make things better when they burst.
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Until people are willing to take complete responsibility for their own affairs, you will have these hucksters, e.g., Ben Bernanke [complete with monkey (Krugman)], selling the people financial nostrums [debt-money] guaranteed cure all of their economic maladies.
Human history is the same stuff over and over and over… .
May we called it “Cooperations’ Stocks Buying Back Bubble?
They have made tones of money buy laying-off workers, cutting corners and cost by reducing size and quality of their products jacking up prices, not investing for future production etc etc. They are so fatten up and don’t know what to do with the tons of money they made so they use those cash + the almost zero interest rate money borrowed buying back their stocks to make even more money by keep their stock prices higher or stable. Their CEOs Execs get larger fatter pays and their stockholders all are making money. Everyone is happy thanks to Ben Bernankee.
They say they deserve that because they are the people willing to take the risk investing in their company while others back off and done nothing.
Until their sales and profit drop drastically they can stand high and mighty. But then they are monopolizing the market while many of the small businesses are dead or dying. They are the corporate gangsters mafias back by the government and the central bank.
I agree they are using all that cash to buy back the stock, and will use their capital clout to ride out the depression, cannibalising smaller players. We will see more and more monopolistic business, with less consumer choice. Like Communism (1 generic product) with a few wealthy elites owning all the property and means of production.
Jim Cramer was on “The Today Show” today and said that DOW companies are posting record-breaking profits not because they are selling a record-breaking number of products and services, but because they have increased worker productivity to the point where an absolute minimum number of workers are needed get the job done as quickly and accurately as possible, thus maximizing company profits. Maybe this is true for companies within the DOW, but it’s not true for large companies within the hospital space.
Over the last three or four years, large hospitals have hired record numbers of nurse managers, nurse educators, and nurse coordinators, despite much of what they do can be easily automated. (If you didn’t already now, nurse coordinator largely deal with insurance and scheduling issues.) Isn’t automation one of the most sure-fire ways to increase worker productivity? Apparently this is not what is happening when it comes to hospitals and their hiring practices.
Perhaps nurse managers and other non-clinical nurses wouldn’t be such a drag on productivity if their salaries were more in line with the salaries of clinical nurses. But this it isn’t so. Most newbie nurse mangers and other newbie non-clinical nurses make 20% to 30% more than the most seasoned clinical nurse, despite the fact that most of these armchair nurses wouldn’t know how to diagnosis and treat a patient if their life depended upon it! Nor, do they play any sort of meaningful role in improving patient care or reducing hospital stay — the two most important factors in determining a hospital’s profitability, especially under ObamaCare.
It’s very hard for me to understand why any hospital nurse who doesn’t have to put their license on the line every time they come to work, and who never has to experience the stress and stain of having to deal with life and death situations has a significantly higher paycheck than a hospital nurse who does have to put their license on the line every time they come to work, and who oftentimes has to experience the stress and stain of having to deal with life and death situations. This is why I have pretty much come to the conclusion that within the hospital setting, nursing management and nursing education are nothing more than a corporate welfare program for master’s and doctorate prepared nurses.
The American health care system is a pyramid scheme. Apparently these nurse managers are making more money for the corporation than are clinical nurses.
It’s really that simple.
Unlike clinical nurses, nurse managers and other non-clinical nurses can’t bill their services to Medicare or any other health insurer for that matter. And since these armchair nurses are being hired in record numbers and rewarded with record-high salaries and benefits, despite most of what they do can easily be automated and replaced by an average-intelligent computer, they act as a huge drag on productivity, making them far more costly than beneficial to hospitals.
So tell me, how in the world are these high-cost, low-productivity employees making hospitals more profitable?
I am not a hospital administrator, so I can not tell you exactly why, but if it walks like a duck, and quacks like a duck, it probably is a duck.
I am somewhat familiar with how this health care system operates, so if I had to guess what these people might be doing, I would say they are finding ways for the hospital to save money, as do all “managers.” They are probably trying to figure out a way to get rid of clinical nurses [through better time/resource management].
Otherwise, you are correct, they would not be there.
Impermanence,
As a general rule, hospitals hire outside consultants rather than use their own nurse managers to do time management studies on their clinical nursing staff. And because outside consultants are oftentimes in cahoot with nurse managers and other nonclinical nurses, even if outside consultants were to do a time management study on nurse managers and other nonclinical nurses, they’d fudge the numbers to make them appear as though they’ve got their noses to the grindstone, working their tails off. This is what happens when you pal around with the same circle of friends, you protect each other from scrutiny. This is what is happening between nurse managers and outside consultants, they protect each other from scrutiny.
In the hospital industry, most people have heard about corruption at the executive level, but very few of them have heard about it at the middle management level.
Cynthia – I agree that the cost of health care is being driven up by the middle layer, which is bureaucracy in other words. This is in existence not to benefit the patient or even the hospital or medical practitioners, it is there because of the many insurance companies that require huge amounts of paperwork for every procedure, examination and treatment. We need to go to a single payer system or have a government entity that competes with private sector insurance to keep their profits at a reasonable level. Even though there are folks who think single payer is “communism” or “socialism”, if our society is to survive we will have to adopt something like this model. It is already in existence in the US to support the largest “socialist” institution in our country, the US Military. If you look up the definition of socialism, you will see that I am not defaming the military, of which I am a retiree, but since the state provides everything for the members of the military, if it looks like a duck, etc. The Medicaid system is another example where you get the most bang for the healthcare buck compared to the private system.
Thanks for the detailed insight into a very important part of the economy. Administrators always justify their high pay by complicating a process with regulation. Same in any Government bureaucratic organisation.
My mother is doing an Aged Care course, like a nursing degree, but it is very bad pay. However at her age it is the only work she will get, looking after the elderly. BTW she is told if they are about to fall don’t grab or break their fall. let them fall so liability is limited.
If my elderly Grandmother was about to fall, and I did not try to save her, I would be branded sick. And our society is now moving towards this!
Corporate Profits are at 11% of GDP and rising. The average over the last 50 years was about 6% of GDP. If and when they return to normal levels, the DOW will need to fall 45% to maintain it’s current PE ratio.
The bubble right now is in Corporate Profits.
You suggest corporate profits are at 11%, but look around the world, does this make sense?
Europe is a mess, Asia not so great, the Americas so-so. Does this add up to 11%? Who’s buying all this stuff [literally and figuratively], people living at the poles?
I’m not suggesting anything, it’s a fact. Also, that 5% of GDP translates to about $800B. If that money were going to wages instead of profits, GDP could be close to potential – it’s about $1T below potential right now.
It’s a fact? Document please.
OK.
http://research.stlouisfed.org/fred2/graph/?g=ggj
Isn’t the better interpretation of that graph that corporate profits have been in a constant, steady, predictable rise since 1984 or thereabouts? Perhaps because of technology, perhaps because of offshore workers…But at some point a 30 yr trend stops being a bubble and starts being a new paradigm.
I am sorry, I was not aware that you were speaking of corporate profits as a percentage of GDP as opposed to net profits.
Profit is a rubbery figure. Are headline sales growing? Margins growing? Is it from restructuring and lay offs? Once off items.
Who are the key customers? Are they getting more disposable income? Will sales grow in the future. Like Henry Ford said, if he pays his workers more they can buy his cars.
I read that consumer credit is blowing out. Is the profit derived from sales funded by credit? Is it funded by student loans? Is it international internet sales, i.e. China India buying online (Buying back their own products, just packaged in the USA)
Australian Retail sales are down, but are we buying online from the USA? Is the world?
The USA could be the next hyper market for the world. Their military budget investment in the internet paying off. With natural Gas reducing manufacturing costs (Higher Profits) this could justify higher P/E ratios.
This time may be different. I am unsure, but I keep an open mind. I am not a Doomer. I am a Rationalist. I change my opinion as new information comes to light.
These profits appear to be coming mostly from employee pay cuts. Since 1980, Employee Compensation has fallen 5% of GDP (from 49% to 44%) while Corporate Profits have risen 5% (from 6% to 11%).
http://research.stlouisfed.org/fred2/graph/?g=ggf
Could this be an indirect relationship where workers retirement accounts reflect the change in compensation. In Australia we have a system where 9 percent of wages is paid into a retirement account. Instead of pay rises businesses agreed to pay into a market based investment trust. We call it the Superannuation system. USA calls it 401k.
So Corporations have made more profit but workers are indirectly stock holders.
But I agree, workers have had real declines, as much of this profit is controlled by shareholders both international and domestic that are upper class. The ratio has declined.
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Excellent six-minute video depicting in graph form what 92% of American people believe would be a fair distribution of wealth, what they THINK the distribution of wealth is at the present time, and then what it ACTUALLY is. What a great video.
Take back your country, America!
Great posts that give another view opposite of that provided by corporate sponsored media. Great military men from Andrew Jackson, Smedley Butler, and Dwight Eisenhower have been warning us about bankers and the war profiteers and we have ignored them at our own peril. Our current system of democracy is on a path to destruction as capitalism evolves into plutocracy on a world wide basis which makes it impossible to resist from just one country.
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You won’t get any argument from me – this runup in the DJIA has everything to do with the un-sterilized QE going on right now. Given the low levels of the VIX it can be a great time to snag a few long-dated puts for when the lights come on and the cockroaches scurry for cover.
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