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"The Market Is Not The Economy" And The Winner-Takes-All Society

Tyler Durden's picture




 

You hear that old saw that "the market is not the economy," a lot these days, and for good reason. As ConvergEx's Nick Colas notes, the S&P 500 breaks to record highs - but U.S. labor markets remain sluggish; investor portfolios do well - but over 47 million Americans (more than 15% of the population) are still in U.S. food stamp program – the same as August 2012. The important question now is: "Is the market TOO different from the economy?"


Record corporate profits – the reason for all-time highs in U.S. equities – come with little hiring or wage gains.  The hottest growth stories are business models with lots of customers but very few employees. The recently purchased WhatsApp – for $19 billion – has 55 employees. Investment payoffs – and increasingly social outcomes as well – are technology-enabled, asymmetric and sporadic. How soon before we reach a tipping point?

Via ConvergEx's Nick Colas,
 
Last week the local government of San Francisco announced that Google has promised to give $6.8 million over the next two year to pay for over 31,000 low-income young people to use the city’s mass transit system for free.  Mayor Edwin Lee applauded the company for helping ease San Francisco’s “Affordability crisis for lower and middle-income families”.  Without Google’s help, the successful pilot program would have run out of money in July of this year.
 
Google’s initiative seems to be a direct response to numerous local protests over its practice of providing free shuttle busses throughout the city for the sole benefit of its employees.  Local and often long-time residents, fed up with cost of living inflation from their new stock-option enriched neighbors, see the busses as a symbol of an out-of-touch elite and the companies they serve.  Some of the protests have turned violent.  Even Wired magazine, a widely read voice of the merits of technology, sees the problem.  In the most recent issue: an editorial entitled “Breaking Point: Silicon Valley Can’t Avoid the Haters”, and a back page questionnaire – “Am I a Silicon Valley Douchbag?”
 
There’s an old Wall Street aphorism that goes “The market is not the economy”, something akin to “A Google bus is not the San Francisco economy.”  In both cases, you’d think there were would some correlation.  A hugely profitable Silicon Valley should mean a broadly wealthy and generally content “City by the Bay”.  And a rocking stock market should indicate a U.S. economy solidly on the mend after the Financial Crisis and accelerating in 2014.  Neither seems to be true.
 
That old school maxim about the market and the economy used to be accurate for the following reasons:

The eyes of the equity market face forward, not to the sides.  Investors price assets based on future expectations of earnings and interest rates.  In the depths of a recession, stock markets tend to rise – think the early 1980s and 1990s – as they anticipate improvements in corporate earnings.  These moves may seem out of sync with current economic data at the time – high unemployment and low consumer confidence – but they eventually prove prescient as those indicators start to improve later in the cycle.

 

It takes time for the Wealth Effect of higher stock prices to translate into increased consumer spending.  Consumers who own investment portfolios need to see their net worth rise for some time before they act on their improved financial situation and spend some of their gains.  This feedback loop is important, for it ties the “Real world” economy – especially job growth - to the financial markets.

 

Recessions in the U.S. don’t tend to last very long, so the workforce in place at the end of the last expansion is still largely relevant and employable at the beginning of the next recovery.  Of the 11 recessions since the end of World War II, 8 of them lasted less than a year.  Workers who got a pink slip during a slowdown had some confidence that their next job would be available soon enough.  This confidence limited the impact of a downturn on consumer confidence, spending, and even social policy.

At least by these factors, the current equity market’s link to the real economy is obviously different; “The market REALLY isn’t the economy” this time around.  A few points here:

U.S. stocks are at record highs largely because public company profits are strong as well.  There may not be much revenue growth, true.  But that’s not exactly a secret.  Interest rates remain low, providing support for stock market valuations.

 

Five years into the current economic “Expansion”, however, and the “Real world” remains sluggish.  The U.S. Supplemental Nutrition Assistance Program (SNAP, more commonly known as Food Stamps) still serves over 47 million Americans on a monthly basis.  That is 15% of the population, and this ratio is essentially unchanged since 2012.  Unemployment may be down to 6.7%, but even the Federal Reserve acknowledges that this number is suspect for both demographic issues and unforeseen shifts in how many people want to work.

 

If you follow the “Smart money”, you’ll see more of a flashing yellow light than a verdant green one.  Mergers and acquisitions, famously cyclical and tied to CEO confidence, are far from boom levels.  Bet the corporate ranch on a big deal?  “No, thank you” say most CEOs to their bankers.  Low risk bolt-on purchases rule the day.  Conversely, the pipeline for Initial Public Offerings, where private investors sell to the public, is very robust so far in 2014.  “Good market to be a seller”, this patch of smart money seems to say.

Most commentary on this front tends to focus on income inequality, but this narrative may well miss the real point.  Markets price securities based on whatever society deems most valuable.  Earnings and cash flow are two indicators of value, to be sure, and historically the growth of a business was an alchemy of allocating human and physical capital to maximize the growth of the bottom line.
 
Now, the priorities seem different. 
Incremental improvement is out; disruption is very much the word of the day.  Consider the following:

Facebook recently paid $19 billion for WhatsApp, a company with 55 employees.  That’s the monetary equivalent of hiring 19,000 people and paying them $100,000 for ten years.  Facebook itself only has about 5,800 employees, according to Bloomberg, and a market cap of $174 billion.

 

Other highly valued tech companies also sport relatively low total headcounts.  Google, after the sale of its handset business, should have about 40,000 employees for its $408 billion market value.   Relative newcomer Snapchat has 30 employees and turned down a $3 billion bid last year.  Yep, from Facebook.  We’re clearly not in Kansas any more.

 

Market commentators from Mohamed El-Arian to Larry Summers are warning that this trend has meaningful implications for capital markets and interest rate policy.  El-Arian wonders if corporate America’s reluctance to invest in capital and people is tied to the risks of getting it wrong.  If a new mobile app can disrupt a large company like Facebook, is anyone safe from innovation?  And Summers points to the problem of piles of corporate cash with nowhere to go keeping interest rates lower than historical norms.

In the end, everything from Google’s busses to El-Arian’s conundrum and even equity prices reflect an increasingly “Winner take all” society.  Again, that’s not an indictment but rather an observation.  The Great Recession and its aftermath align precisely with an explosion in technological innovation. In a slow growth economy, public market investors see growth, rather than just capital, as the true scarce social commodity.  Thanks to technology, growth no longer means incremental employment.  In fact, recent transactions like WhatsApp seem to point to the opposite.
 
This trajectory seems unsustainable, but the answer does not need to be nihilistic.  Markets, investors, and societies tend to self-correct with time.  We do seem to be a point where the problems – slow growth and still-high unemployment – are obvious, while the answers are not.

 

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Mon, 03/03/2014 - 21:05 | 4504465 max2205
max2205's picture

Fuck Larry

Mon, 03/03/2014 - 21:10 | 4504481 zaphod
zaphod's picture

This is a nonsense chart Tyler.

The profit axis is an inflationary metric that rises with inflation and population growth.

The employment percent axis is not. 

Apples and Oranges do not mix

Mon, 03/03/2014 - 21:13 | 4504494 dow jones 20000
dow jones 20000's picture

I think his point is that one would assume that an increase in corporate profits would lead to a reinvestment in the workforce.

At least that's what our Keynesian Liberal Democratic Overlords want us to believe.

Mon, 03/03/2014 - 21:29 | 4504542 GeorgeHayduke
GeorgeHayduke's picture

"Keynesian Liberal Democratic Overlords"

What? I love that twisted line of reasoning.

I thought giving more money to corporations and the wealthy was the essence of Reagan's "Trickle Down" economic theory, and the line told to us by every neocon since Gingrinch's so-called "revolution". Haven't we also heard that same line of crap from Rush, Hannity, O'Reilly and the rest of their ilk 24/7/365 for the past several decades?

Given that, if Obama is trying to do as you claim, then perhaps he's not the socialist all of you conservatives and Tea Party folks are trying to portray him as. He's just another president giving us the old Republican "Trickled Upon" economics.

Tue, 03/04/2014 - 00:52 | 4505287 hobopants
hobopants's picture

Your reasoning isn’t exactly state of the art either. There is no Red team or Blue team buddy. Neocons, Liberals and the tea party are just theater to distract you from the fact that you are being ass raped by a small group of people who use those monikers like a puppet show for the masses. “it's a big club and you ain't in it”.

Oh and socialism is the biggest "trickle down" economics theory you've ever heard of, except the group pissing on you is a bunch of technocrats instead of crony capitialist. What an improvment.....

Mon, 03/03/2014 - 21:06 | 4504466 Mr. Fix
Mr. Fix's picture

This will not end well.

Mon, 03/03/2014 - 21:22 | 4504524 Carl Popper
Carl Popper's picture

According to expectations theory all we have to do is just believe things will get better and start spending more and then things do get better.

This can end well if everyone just believes.

Start spending! Don't you believe in America?

Mon, 03/03/2014 - 21:07 | 4504471 dow jones 20000
dow jones 20000's picture

aint nothin more important than the shekels

Mon, 03/03/2014 - 21:09 | 4504474 agent default
agent default's picture

The winner takes nothing.  The numbers are meaningless.  When your numbers don't relate to physical reality you are by definition a crackpot.

Mon, 03/03/2014 - 21:10 | 4504479 buzzsaw99
buzzsaw99's picture

the maggot eCONoME

Mon, 03/03/2014 - 21:16 | 4504501 venturen
venturen's picture

Enron had a huge market cap....what happened there? They just elected a virtual communist in NYC where Wall Street is.... There are going to be real problems as people realize what has been done to them. Preceding the depression there were anarchist as robber barons conived with Washingon to game the people. History will repeat it self. It isn't only up from here!

Mon, 03/03/2014 - 21:27 | 4504536 RichardENixon
RichardENixon's picture

Tickets for Wrestlemania here in New Orleans going for as much as $6,000. Clearly the end is imminent.

Mon, 03/03/2014 - 21:46 | 4504606 Clowns on Acid
Clowns on Acid's picture

How can anyone respect the opinion of this author if they don't emphasize the $ % Trillion of fiat currency printed out of thin feckin' air ?

 

Mon, 03/03/2014 - 22:07 | 4504698 Duc888
Duc888's picture

 

 

Oblabla's "economy" is to rob from the taxpayers and hand out EBT cards.

Mon, 03/03/2014 - 22:23 | 4504775 LawsofPhysics
LawsofPhysics's picture

Risk, what risk.? Don't these corporations all get bailouts? FAIL

Mon, 03/03/2014 - 22:26 | 4504783 BeetleBailey
BeetleBailey's picture

"....but U.S. labor markets remain sluggish"

Sluggish??? WTF

THEY'RE DEAD ON ARRIVAL CHUMP!

WAKE THE FUCK UP, AND STOP USING ASININE RHETORIC....

Until Fuckbama and the criminal CONgress, along with the multinational US "based" cunt companies (see: GfuckinE, and a host of other motherfuckers) - unNAFTA this shit show, all this noise is just that;

A cacophony of shit.

Tue, 03/04/2014 - 00:39 | 4505265 Wait What
Wait What's picture

I luv me som asymmetry!! It trickles down! it trickles down I say!! the lesser the number of people employed in 'normal' jobs, the more are available for jobs like prostitutes, shoe-shiners, and servants! you can get, like, 3 primo hookers for a night for the bargain price of 1 share of GOOG!

Tue, 03/04/2014 - 04:29 | 4505691 mumbo_jumbo
mumbo_jumbo's picture

"And a rocking stock market should indicate a U.S. economy solidly on the mend"

 

it would be if some of that money would end up in the hands of working Americans, but it doesn't and it won't

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