"Federal Reserve Has Done a Good Job Lifting the Market"

Read Nelson Schwartz's frontpage article today, "Recovery in U.S. Is Lifting Profits, but Not Adding Jobs." After quoting a Bank of America Merrill Lynch executive who dismisses the likely impact of the sequester on corporate profits by saying, "the market wants more austerity," Schwartz outlines our new, post-meltdown economy:

As a percentage of national income, corporate profits stood at 14.2 percent in the third quarter of 2012, the largest share at any time since 1950, while the portion of income that went to employees was 61.7 percent, near its lowest point since 1966. In recent years, the shift has accelerated during the slow recovery that followed the financial crisis and ensuing recession of 2008 and 2009, said Dean Maki, chief United States economist at Barclays. 

Corporate earnings have risen at an annualized rate of 20.1 percent since the end of 2008, he said, but disposable income inched ahead by 1.4 percent annually over the same period, after adjusting for inflation. 

“There hasn’t been a period in the last 50 years where these trends have been so pronounced,” Mr. Maki said.

Businesses are socking away productivity gains as profit. Workers are laid off rather than seeing a wage bump. Check out this naked capitalism post from Saturday, a Real News Network interview with Dr. Heiner Flassbeck of Hamburg University. Flassbeck is talking about the negative impact of the sequester on employment and wages. But what really struck me were the graphs accompanying the interview showing the huge productivity gains over the years with an almost complete stagnation in wages. The promise of twentieth century capitalism was that workers would share in productivity gains. This promise has been repeatedly broken for the last three decades. Capitalism is a failure for the 99%.

The last three paragraphs of his story Schwartz explains the phenomenon of the skyrocketing stock market:

The Federal Reserve has also played a crucial role in propelling the stock market higher, economists and strategists say, even if that was not the intent of policy makers. The Fed has made reducing unemployment a top priority, but in practice its policy of keeping rates very low and buying up the safest assets to stimulate the economy means investors are willing to take on more risk in search of better returns, hence the buoyancy on Wall Street amid the austerity in Washington and gloom on Main Street. 

Of the broader market’s 13 percent rise in 2012, about half was a result of the Fed’s actions, Mr. Harris of Bank of America Merrill Lynch estimates.

“The Federal Reserve has done a good job stimulating financial conditions and lifting the market,” he said. “It’s been less successful in stimulating job growth.”

For a dire prediction of what will happen in the next couple of months check out Chris Martenson's post on the Counterpunch web site this past weekend, "Warning: Stocks Likely to Crater from Here":

The summary here is that if stocks do indeed retreat from here, a triple-top failure will deliver quite a punishing blow to the current efforts to repair the public’s trust in the stock market as a place to send their hard-earned savings to grow. It would be quite difficult to engineer a run at a fourth top, given the importance of retail participation in providing fuel for the rise of stocks – especially given that the boomers are retiring at the rate of 10,000 per day and drawing upon their investments instead of adding to them.

The younger generation(s) have been the main victims of the high unemployment and general wage stagnation that have been the hallmarks of the Great Recession. It is not likely that they will be able to save and invest at a rate equal to the boomer’s withdrawals, creating one more equity headwind for the Fed to overcome.

I think this is right. I think if there is a significant drop in the market then due to structural issues of our new economy -- unemployment, massive student debt, boomers leaving the workforce -- it will be difficult to mount another quick run to the top. I think that a significant drop in the market will be sparked when a large nation, like Italy, leaves the eurozone. If you read Liz Alderman and Elisabetta Povoledo's frontpage article on Beppe Grillo and his Five Star Movement, I think you'll come away, as I did, thinking that Grillo is a formidable politician. The question is does he really want Italy to scrap the euro. I think he does; I think he sees that it's the only way out of the widening gyre of Brussels-Berlin mandated austerity.