Posts Tagged ‘Stock Market’

Qualitative easing and the Obama recovery

March 25, 2016

SPX-10-yr-yield-and-fed-intervention

The Federal Reserve Board’s policy of qualitative easing has helped the stock market recover.  But Americans who work in the real economy are still struggling.

Qualitative easing is the Federal Reserve Board’s policy of creating new money to buy Treasury bonds in order to keep interest rates low.  The greater the demand for bonds, the lower the interest rates, and the interest rate on Treasury bonds is generally the benchmark on all Treasury bonds.

The Fed’s Operation Twist was a sale  of medium-term Treasury bonds and purchase of 10-year bonds.  The Federal Funds rate is the interest rate for overnight loans among banks so they can meet the Federal Reserve’s requirement for reserves.

The chart above shows how QE correlated with the ups and downs of the stock market.  But, as I indicated in a previous post, American corporations did not advantage of low interest rates to invest in their businesses.  Instead they have transferred the gains to stockholders in the form of stock buybacks.

An economic recovery has taken place.  Most Americans are better off than they were at the depths of the crash.  But as economic recoveries go, this one has been weak.

2.household-income-monthly-median-growth-since-2000

The chart shows how important is it to always adjust for inflation.  A dollar in the year 2000 is not the same thing as a dollar in the year 2016.

Although corporate executives did not take advantage of Qualitative Easing to invest in America, there was nothing besides politics holding back the federal government from investing in public works.  There is a lot of urgent work that needs to be done in maintaining and upgrading American’s physical infrastructure, such as upgrading public water systems to get the lead out.

With a lot of public work that needs to be done, a lot of people who need work and financing costs at historic lows, why not put the unemployed and under-employed to work doing what needs to be done?  Fiddling with interest rates and the money supply is not enough.

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The stock market in 100-year perspective

August 26, 2015

 DowJones1914-2014-Constant-e1440525772683Source: American Enterprise Institute

The Dow Jones Industrial Average of 30 industrial stocks was at 54.6 at the end of 1914.  By the end of 2014, it was at 17,823.

But adjusted for changes in the Consumer Price Index, the gain is much more moderate—about 2.7 percent a year. The average dividend yield on DJIA stocks was about 4.1 percent.  So the total average annual gain was 6.8 percent.

What the chart shows is that there have been long periods when stock prices declined or were static.  You can’t count on stocks always going up.  The 1920s and 1990s booms were not necessarily typical.

I’m not smart enough or stupid enough to predict how the stock market will go, but you’d have to be very optimistic to think the boom will continue.

I don’t think the recent rise in stock prices reflects the real economy.  I think it is a result of the Federal Reserve Board holding down bank interest rates, so that savers are driven to buy stocks in order to get a yield on their money.

Many CEOs are buying back the companies’ stocks, thereby driving up the price, instead of investing in expanding their businesses, which would benefit the nation as a whole.

This is another example of Stein’s Law:  If something cannot go on forever, someday it will stop.   The recent stock price boom could not go on forever.

LINKS

The stock market in 100-year perspective by Alex J. Pollock for the American Enterprise Institute.

Wall Street Panic by Mike Whitney for Counterpunch.

Quick Thoughts on the Stock Market and the Economy by Dean Baker for Beat the Press.

Smoke and Mirrors of Corporate Buybacks Behind the Market Crash, an interview of Michael Hudson for the Real News Network.

∞∞∞

Update 8/27/2015.  I made some changes in wording that didn’t change the meaning of this post.

Forgetful mutual fund investors perform best

September 15, 2014

c-75Proponents of Social Security privatization say that the average investor will do better investing the money that goes to Social Security taxes in the stock market.  The chart above, which is from Business Insider, shows the problem with this.

It is true enough that, over a long period of time, stock market averages, such as the Russell 2000 or the Standard & Poor’s 500, do better than Treasury bonds.  But most of us don’t do that.

We get overoptimistic when stock prices are going up and panic when stock prices are going down.  So we buy high and sell low—the opposite of what a smart investor should do.

The following is from an exchange between Barry Rithotz, a financial adviser and blogger, and James O’Shaughessy, of O’Shaughessy Asset Management, on Bloomberg Radio.

O’Shaughnessy: “Fidelity had done a study as to which accounts had done the best at Fidelity.  And what they found was…”

Ritholtz: “They were dead.”

O’Shaughnessy: “…No, that’s close though! They were the accounts of people who forgot they had an account at Fidelity.”

via Business Insider.

Ritholtz told about some of his experiences in estate planning, where a family fought over inherited assets for 10 or 20 years, didn’t touch them in the meantime and found those 10 or 20 years were the best period of performance.

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The minus-$18 billion-dollar man

August 26, 2013
Double click to enlarge

Double click to enlarge

Alex Tabarrok, an economist at George Mason University, pointed out that the market value of Microsoft increased by $18 billion Friday when CEO Steve Ballmer announced his retirement.   Tabarrok made an interesting argument that if the choice of a CEO really changes the value of a company by $18 billion, then it isn’t unreasonable to pay the CEO an eight-figure salary.

cn_image.size.ballmer-spread

Steve Ballmer

Of course if you valued corporate employees by the damage they could potentially do, many of us would be paid more than we are.   When I was a newspaper reporter, I saved my company millions of dollars by not writing anything that was libelous, but I don’t think that ever was reflected in my paycheck.

One of Ballmer’s bad innovations was “stack ranking,” which meant ranking employees in order of some performance standard and firing the ones at the bottom.  One thing wrong with that is that it gave the employees an incentive to undermine each other rather than working together to make Microsoft a good corporation.  The other is that, as W. Edwards Deming noted, rank order is meaningless.  What counts is whether your performance meets or exceeds the desired standard.

Click on The Value of a CEO for Alex Tabarrok’s post on Marginal Revolution.

Click on How Microsoft lost its way for my earlier post on Microsoft and stack ranking.

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The extremely slow U.S. economic recovery

May 6, 2013

The Dow Jones average is back to where it was before.   The American job market still has a long way to go.

Dow hits record high
april-hiring
EmployRecApril2013

There is less to these charts than meets the eye.  Stock prices and jobs are rebounding, but investors are not doing all that well, and job-seekers are doing worse.

The Dow Jones average for the past six years has not kept up with inflation, even though the rate of inflation is extremely low.   And the bottom chart shows just how slow the rebound in jobs has been compared to previous economic recoveries.  Just as the stock market ought to keep up with inflation, the job market ought to keep up with population growth.  In other words, even when the number of jobs gets back to what it was in 2007, we’ll still be behind.

The official unemployment rate for April was 7.5 percent.  Economist David F. Ruccio pointed out that this means there are 11.6 million Americans still looking for work, four years after the supposed beginning of the economic recovery.

The Bureau of Labor Statistics reports its U-6 rate of unemployment, which includes jobless people who’ve given up looking for work, and part-time workers who want to work full-time, is 13.9 percent.   This is 21.9 million Americans, roughly one in seven eligible workers.

Click on Why Good People Can’t Find Jobs — What You’re Up Against for a good report on why it’s tough to find a job.

Click on occasional links and commentary for David F. Ruccio’s web log, which is crammed with good information.

The stock market and the job market

July 9, 2010

Click on THIS CHART to see that the stock market appears to be rebounding from the recession.

Click on THIS OTHER CHART to see that the job market does not appear to be rebounding from the recession.

I think economic policy should be directed at people who earn their living from making things and providing useful services more than at people who get their living from owning financial assets.  I think the financial markets should be the servants of the real economy, not its master.

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Why the middle class isn’t making it.

April 19, 2010

This article shows why a middle class income can no longer sustain a middle class standard of living. It originally appeared on the Zero Hedge web log, and was forwarded to me by my friend Daniel Brandt.

_________________________________


IT’S IMPOSSIBLE TO ‘GET BY’ IN THE UNITED STATES

Submitted by Graham Summers of Phoenix Capital Research

While the market cheers on the fantastic job “growth” of March
2010, the more astute of us are concerned with a growing tide of
personal bankruptcies. March 2010 saw 158,000 bankruptcy filings.
David Rosenberg of Gluskin-Sheff notes that this is an astounding
6,900 filings per day.

This latest filing is up 19% from March 2009’s number which
occurred at the absolute nadir of the economic decline, when
everyone thought the world was ending. It’s also up 35% from last
month’s (February 2010) number.

Given the significance of this, I thought today we’d spend some
time delving into numbers for the “median” American’s experience in
the US today. Regrettably, much of the data is not up to date so
we’ve got to go by 2008 numbers.

In 2008, the median US household income was $50,300. Assuming that
the person filing is the “head of household” and has two children
(dependents), this means a 1040 tax bill of $4,100, which leaves
about $45K in income after taxes (we’re not bothering with state
taxes). I realize this is a simplistic calculation, but it’s a
decent proxy for income in the US in 2008.

Now, $45K in income spread out over 26 pay periods (every two
weeks), means a bi-weekly paycheck of $1,730 and monthly income of
$3,460. This is the money “Joe America” and his family to live off
of in 2008.

Now, in 2008, the median home value was roughly $225K. Assuming our
“median” household put down 20% on their home (unlikely, but it
used to be considered the norm), this means a $180K mortgage. Using
a 5.5% fixed rate 30-year mortgage, this means Joe America’s 2008
monthly mortgage payments were roughly $1,022.

So, right off the bat, Joe’s monthly income is cut to $2,438.

According to the US Department of Agriculture, the average 2008
monthly food bill for a family of four ranged from $512-$986
depending on how “liberal” you are with your purchases. For
simplicity’s sake we’ll take the mid-point of this range ($750) as
a monthly food bill.

This brings Joe’s monthly income to $1,688.

Now, Joe needs light, energy, heat, and air conditioning to run his
home. According to the Energy Information Administration, the
average US household used about 920 kilowatt-hours per month in
2008. At a national average price of 11 cents per kilowatt-hour
this comes to a monthly electrical bill of $101.20.

Joe’s now down to $1,587.
Now Joe needs to drive to work to make a living. Similarly, he
needs to be able to drive to the grocery store, doctor, etc.
According to AAA, the average cost per mile of driving a minivan
(Joe’s a family man) in 2008 was 57 cents per mile. This cost is
based on average fuel consumption, tires, maintenance, insurance,
license and registration, and average loan finance charges.

Multiply this cost by 15,000 miles per year and you’ve got an
annual driving bill of $8,550. Divide this into months (by 12) and
you’ve got a monthly driving bill of $712.

Joe’s now down to $877 (I’m also assuming Joe’s family only has ONE
car). Indeed, if Joe’s family has two cars (one minivan and one
sedan) he’s already run out of money for the month.

Now, assuming Joe’s family is one of the lucky ones (depending on
your perspective) they’ve got medical insurance. Trying to find an
average monthly medical insurance premium for a family in the US is
extremely difficult because insurance plans have a wide range in
deductibles, premiums, and co-pays. But according to eHealth
Insurance, the average monthly premium for family policies in
February 2008 was $369.

So if Joe has medical insurance on his family, he’s now down to
$508. Throw in cell phone bills, cable TV and Internet bills, and
the like, and he’s maybe got $100-200 discretionary income left at
the end of the month.

This analysis covers all of the basic necessities of the average
American household: mortgage payments, food, energy, gas, driving
expenses, and medical insurance. It also assumes that Joe:

1) Didn’t overpay for his house

2) Made a 20% down-payment of $45K on his home purchase

3) Has no debt aside from his mortgage (so no credit card debt,
student loans, etc)

4) Only has one car in the family and drives 15,000 miles per year

5) Keeps his energy bill reasonable

6) Does not eat out at restaurants ever/ keeps food expenses
moderate

7) Has no pets

8 ) Pays for health insurance but has no monthly medical expenses
(unlikely with two kids)

9) Keeps his personal budget under control regarding cable TV, Internet,
and the like

10) Doesn’t spoil his kids with toys, gadgets, trips to the movies, etc.

11) Doesn’t take vacations.

Suffice to say, I am assuming Joe maintains EXTREMELY conservative
spending habits. Personally, I know NO ONE who meets all of the
above criteria. However, even if the above assumptions applied to
the average American, you’re still only looking at $100-200 in
“wiggle” room for spending per month!

If Joe:

1) Overpaid on his house

2) Didn’t have a full 20% down payment

3) Owns two cars

4) Eats at restaurants

5) Splurges on heating & A/C bills

6) Has any medical expenses aside from monthly premiums

— he is running into the red EVERY month.

I also wish to note that my analysis didn’t include real estate
taxes and numerous other expenses that most folks have to pay. So
even if you are extremely frugal and careful with your money, it is
impossible to “get by” in the US without using credit cards, home
equity lines of credit or burning through savings. The cost of
living is simply TOO high relative to incomes.

This is why there simply cannot be a sustainable recovery in the US
economy. Because we outsourced our jobs, incomes fell. Because
incomes fell and savers were punished (thanks to abysmal returns on
savings rates) we pulled future demand forward by splurging on
credit. Because we splurged on credit, prices in every asset under
the sun rose in value. Because prices rose while incomes fell, we
had to use more credit to cover our costs, which in turn meant
taking on more debt (a net drag on incomes).

And on and on.

Does this mean the market is about to tank? Not necessarily, stocks
have been disconnected from reality since November if not July.
Bubbles (and we ARE in a bubble) take time to pop and this time
around will be no different.

Best Regards,

Graham Summers

END

Click on this for the original version of the article on the Zero Hedge web log.

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