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CHRISTOPHER TAYLOR'S BOOKS

Thursday, July 31, 2014

THE STOCK BUBBLE

"I have a million dollars in the stock market, because if I lose a million dollars, I don't personally care."
-Suze Orman

There was a time in the past when one of the finest indicators of not only the mood of businesses in America but the general economic health was the stock market.  If it boomed then people were confident and the economy was doing well.  If it plunged, the opposite was true.
That hasn't been true for a while.  In fact, the stock market seems just about useless as an indicator except in extreme disaster.  If the market crashes massively as it has every decade or so lately, you know something awful has happened, such as the banking crisis of 2007.  But instead of being an early indicator of trouble or a metric of business mood, the market seems random and unrelated to the economy most of the time.
Recently its been booming, with a new record high set last month in several sectors.  But the economy is doing badly.  Inflation continues to plague sectors people are most affected by (energy and food), unemployment is still high even by the official numbers, the number of people out of the job market is horrific, and the last quarter showed contraction, not growth.
So why is the stock market doing so well?  What on earth is going on here?  Well as I wrote a while back, two factors stand out.  First, Quantitative Easing has been making huge loans available at very low interest rates, which are meant to help the economy.  The problem is that they're primarily being used not for building and expanding business - because businesses are very leery of doing any sort of expansion right now - but to gamble in the stock market.
QE makes more money available for loans at lower interest rates so that people can use it to invest.  It has no effect on you and me unless those people invest in hiring and expansion of business.  But in this economy and with the uncertainty of the future with the ACA ("Obamacare") looming over all business, hiring and expansion is the last thing on most businesses' minds.


But with that cheap money out there to play with, investment is a great scheme.  Basically QE has flooded the nation with super cheap loans that only the very richest can really take advantage of, and they are doing so not in ways that create jobs or boost the economy, but in ways that make them rich.
Big time investors and corporations love this stuff, because its cheap money to play with.  That's where the huge spike came in June that gave us the new record high:
The central bank said Wednesday that interest rates aren't expected to rise until 2015.

Investors love that message. The S&P 500 closed at a record high of 1,957 while the Dow jumped almost 100 points (0.58%). The Nasdaq also bounced to finish at its highest level in 14 years. Stocks were down most of the day prior to the Fed news.
OK so far, so good, but there's more to it.  For example, the oil boom has made a lot of people really rich - and in my opinion has gone a long ways to preventing the bad economy from being a total crash.  There's one sector that's been doing well and propping up the nearly-collapsed tent, and that's fracking and oil business in the US.  Mind you environmentalists have done everything they can think of to destroy that, but its still going on, probably in large part due to the White House realizing that its the only thing between now and a depression that makes the one in the 30s look like a slow day at Taco Bell.
Another factor is the use of microtransactions.  As I noted in the previous article, these are computer-driven super fast purchases and sales done on stocks other people buy and sell.  Basically when you log on and tell a site you want to buy 50 shares of ACME Coyote Supplies, these microtransaction programs see that and react to it with either buying or selling that stock based on your actions and other trends.  Hundreds of them can be going off between you saying "I want this" and confirming it.
Now, this means the price of what you try to buy is different than what you get by the time the payment goes through because its been affected by possibly hundreds of these little transactions.
But there's another factor.  Pam Martens recently wrote in Wall Street On Parade of a lawsuit against the Chicago Mercantile Exchange, the Chicago Board of Trade and other individuals involved in leadership roles at the CME Group.
The most stunning allegation in the lawsuit is that an estimated 50 percent of all trading on the Chicago Mercantile Exchange is derived from illegal wash trades.

Wash trades were a practice by the Wall Street pool operators that rigged the late 1920s stock market, leading to the great stock market crash from 1929 through 1932 and the Great Depression. Wash trades occur when the same beneficial owner is both the buyer and the seller.  Wash trades are banned under United States law because they can falsely suggest volume and price movement.
I know what you're thinking: there's no way such fine, upstanding paragons such as big business owners and stock market traders would ever engage in such a dishonest thing.  I'm joking, of course you believe this is at least possible, if not plausible.  There are billions to be made, and any time there's that kind of power and wealth available, there are men and women who would line up to be a part of it.
Terrence Duffy, the Executive Chairman and President of the CME Group has already been called before congress to testify about his business and the Chicago stock market so its obvious someone is seeing smoke somewhere.  Whether there's fire or not to me is a question of how widespread, not if.  Someone suspects this is happening in Chicago, and that makes me wonder where else it might be or is happening?
The thing is, all this adds up to something very, very ugly.  The last time these wash trades were going on was... right before the big crash in the 20s.  The stock market is flooding very rich people with huge sums of cash, which they are thoughtfully recycling a portion of back to campaign funds of politicians to keep that gravy train coming and look the other way.
But this is not sustainable.  I keep thinking back to sitting on a friend's porch on the fourth of July 2006 watching fireworks in the city below and talking about how the housing system could not keep going.  How little did we know that it was coming to an end so soon.

1 Comments:

Anonymous Eric said...

I do have to say that even as my income has gone down significantly over the last 6 years, thanks to the booming stock market my retirement savings and my daughter's college fund have done very well. I am about to take a lot of that stuff out of stocks, but not for any better reason than I simply believe the political stress of mid-term elections is likely to shake up the stock market.

But it's not just rich people who have benefited from the stock boom.

I am really in limbo as to what I think about the economy and the stock market anymore. For most of my adult life I pretty firmly bought in to the conservative and libertarian explanations of how the market behaves, but using those models we should be in a very different place right now in terms of inflation and the overall economy. Those things aren't doing great, but they should be doing catastrophically bad right now according to the economic models I used to adhere to.

That's not to say I now buy in to the liberal Keynesian models. More like I am starting to believe the field of economics is populated by witch-doctors and charlatans. I'm starting to think the economy is controlled by psychology and not much else.

10:07 AM, August 04, 2014  

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