A Good Time to Get Out of the Market

I started investing in the stock market in 2005. I didn't know anything. I thought of it as an experiment. Could I teach myself? When my ex-girlfriend sold (fortunately at the peak of the real estate boom) a condo she had purchased with money we had saved together during our 11-year relationship she paid me out my share of the principal, about $30,000. I took that money and opened a couple online brokerage accounts. At first I got bit by the irrational exuberance of the renewable energy stocks when oil was pushing towards $150 a barrel. For a moment I was looking like a genius. But in the end I made some hasty and poor purchases of penny stocks, and I lost thousands of dollars. Then came Lehman. Riding that out took some intestinal fortitude.

Now the stock market is back to where it was before the meltdown. And I'm getting out. Slowly I plan to unwind if not all most of my stocks before May. My reason? I don't think the eurozone is going to make it. This is from a naked capitalism post today, "Is the Eurozone Nearing a Make or Break Point?":

One of my colleagues studied in Germany, has extensive, high level political and economic contacts there, and reads the press daily. He also describes his sang froid as “somewhere between that of a Chinese sage and a dead animal.”

Needless to say, he not prone to overstatement or overreaction and also has a propensity to makes Delphic remarks.

He said the Eurozone is over. In pretty much those words, a simple sentence, no caveats or conditionals. I nearly fell out of my chair. This apparently reflects the German recognition as a result of the Italian elections that they will not be able to surmount domestic opposition in Italy and potentially other periphery countries and would rather pull the plug than continue funding their trade partners. He said there was a fair bit of discussion of Germany leaving the Eurozone after the election. I quizzed him on how they thought they could do that, since the new DM would presumably trade at a big premium to the Euro. We discussed that the likely outcome would be further labor “reforms”. Maybe I am naive, but I don’t see how this would not undercut an critical German strength, that of the good, if also sometimes combative, relationship between German workers and management. My source finally said widespread recognition of the existential impasse at most a couple of months away. He’s never this definitive.

There is an argument being made that the break up of the eurozone would be good for US markets; that it would lead to increased liquidity that would be pumped into infrastructure. Here's the naked capitalism response to this idea:

Anyone who can fathom how you get to that conclusion (beyond religious faith in the Fed), please explain it to me. Have they not considered what happens to all that debt the ECB bought if there is no Eurozone, or the Eurozone is very much shrunken? And Germany has so much nice shiny infrastructure already they had trouble in the crisis finding anything more to do on that front. This whole crisis is in large measure the result of the iron grip neoliberal thinking has on policy-making. That wasn’t dented one iota as a result of the global financial crisis. Why should a second eruption change that, absent a lot of further upheaval in terms of who is in the power seat?

For a good example of this "iron grip" of neoliberal thinking, take a look at today's lead unsigned editorial in the New York Times, Egypt Needs to Act. How should Egypt act? By embracing IMF-prescribed austerity:

Mr. Morsi’s job is to persuade the political opposition to join him in a suite of economic reforms that would raise taxes, trim energy subsidies and pave the way for a much larger $4.8 billion loan package from the International Monetary Fund. The I.M.F. loan, in turn, would open the door to even more aid and investment from financial institutions and other countries.

This is a perfect illustration of the mental illness afflicting elite institutions. The Times has been arguing vociferously against austerity on the home front (less so in the case of Europe). But overall the Old Gray Lady is still a megaphone for neoliberalism.

"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.