To listen to the talking heads on financial television, happy times have returned to the U.S. economy. In stark contrast to last year's consistently gloomy and worrisome headlines, the news is now saturated with how the "Goldilocks Economy" has supposedly been revived. We're also regaled with talk of how the rising stock market trend is pointing to even better times ahead for the economy.
The idea that a rising stock market is predictive of economic prosperity has become commonplace today, in large part fueled by the writings of the early Dow Theorists, and resurrected in recent years by a barrage of books and academic research in the wake of the late '90s bull market and economic super boom. But is this necessarily so? Not at all, as fate would have it, since most economic recessions and depressions could not possibly have been predicted by looking at the stock market as a barometer.
On the other side of the coin, a falling stock market doesn't always mean that bad times lie ahead for the economy, either. For example, during the 1973-74 bear market which saw huge declines in the U.S. stock market as measured by the Dow and also by the Value Line index (down over 80%), the economy actually grew along with corporate earnings. Bert Dohmen of the Wellington Letter asks rhetorically, "Could it happen again? It certainly would surprise the bulls." But the point here, as Dohmen shows, is that there is no correlation between the stock market and the economy.
Bull markets are not born of a prescient view toward a strengthening economy, but rather in response to expectations of higher corporate earnings. Extended stock market rallies might properly be called "corporate earnings bull markets." What is good for the business establishment is good for stocks; but what is good for the mainstream economy is not necessarily good for stocks.
So are things really looking all that great for the economy? Do not be lulled into a false sense of security by the mainstream press - there are some storm clouds on the horizon. Whether or not these clouds create a mere shower or a thundering downpour in the next several months ahead is yet to be seen. Money supply growth, for instance, has gone from the double digits last year to practically nothing this year. As Don Hays has described, this has never failed to produce at least an economic slowdown if not an outright recession.
Another sign that the economy is headed for another period of softness is in the recent statistic a few months ago which showed consumer credit to have fallen to its lowest level since 1990. The barrage of television and radio ads which offer credit counseling, debt consolidation, and exhort the consumer to "get out of credit card debt now!" are precursors to a consumer economy contraction.
The Federal Reserve has also raised interest rates eight or nine times consecutively and show no sign of letting up just yet. Although the Fed justifies the rate increases as being part of its war on inflation, rate rises can actually produce inflation in some areas of the economy as history has abundantly shown.
In its infinite wisdom and putative goal of controlling inflation and keeping the economy on what it deems an "even keel," the Fed has only succeeded in suppressing economic growth and derailing those sporadic periods of economic prosperity that have occasionally visited middle class Americans. In his economic study "Leakage," Treval C. Powers demonstrated that Fed-induced economic constrictions has kept the economy operating far below its potential growth, which Powers demonstrates to be a near-constant 11.4% per capita, per year. This is in contrast with the Federal Reserve Board's target of about 2.5%.
The big story this year in the business world has been the record windfall profits of U.S.-based multinational corporations. U.S. corporate profits as a percentage of GDP have exploded since the early 2000s bear market when they fell to a low of 7% of GDP. They recently hit a record high of 11% as the graph below shows, originally printed in the London Financial Times.
The growth of corporate profits has coincided with the decline in incomes for the average American working man and the yawning chasm separating the haves and the have-nots continues to widen. Steven Rattner, writing in the August 8 edition of Business Week, notes that the top 1% of earners take a larger piece of the economic pie now than at any time since the 1920s. "Over the past 30 years, the share of income going to the highest-earning Americans has risen steadily to levels not seen since shortly before the Great Depression," writes Rattner.
Rattner tells of how the disparity between rich and poor has progressively widened over the past 30 years, with the share of income garnered by the top 10% of Americans growing by nearly a third, while the share of the top 0.01% of households with an average income of nearly $11 million has multiplied nearly four times. The blame for this situation, according to Rattner, is in part globalization (the emergence of the Global Economic Order), the employment of cheap labor in emerging markets to the exclusion of American labor, and an increasingly regressive tax code.
To the above list we can probably add the periodic resurgence of stock bull markets, since they tend mainly to the aggrandizement of the haves and to the penury of the have-nots. This has been eloquently described in George Brockway's magnum opus, "The End of Economic Man." In his book, Brockway details how the stock market can only rise by sucking in more and more money, which is thereby denied to the producing economy.
"The bull market that started in 1982 took five years to absorb a trillion dollars," wrote Brockway in 2000. "The bull market that started in 1988 absorbed a trillion dollars in less than four years and is well on its way to six trillion more...but the devastation, disorder, and despair resulting from the extraction of $7,000,000,000,000 from the producing economy in less than twelve years challenge our capacity to understand."
He concludes, "The economics of the rational greedy economic man failed our forebears. It is failing us. We fail ourselves if we refuse to understand that failure."