Today marks the five year anniversary of the Flash Crash, the day in 2010 when the US stock market fell drastically in a matter of minutes then recovered most of the losses.
Unlike sharp declines in the past, the Flash Crash happened for apparently no reason. Since then the government has launched multiple inquiries into what happened and recently charged a trader for alleged market manipulation. Figuring all of this out is considered a priority because the stock market is an important part of the economy and has an important place in economic policy.
But does the stock market really matter? And if it does, should it?
Stock market relevance to policy dates back to the crash of 1987, when Fed Chairman Alan Greenspan decided the Fed should respond boldly to market machinations. That emphasis on the importance of stocks was at the core of the Greenspan Fed and was continued by his successors Ben Bernanke and Janet Yellen.
Along the way economists increasingly factored stocks into their theories and the Wealth Effect – the idea that when people feel rich from their investments they spend more – gained prominence.
The 2008 financial crisis cemented the importance of stocks in economic management. Policy makers monitored falling stocks as if they were a good barometer for economic activity and reacted accordingly. In 2010, in an editorial defending the Fed’s then controversial Quantitative Easing program, Chairman Ben Bernanke pointed to rallying stocks as evidence the policy was working. In 2012 Assistant Attorney General Lanny Breuer, the man who presided over the Justice Department’s Criminal division in the aftermath of the financial crisis, said when considering prosecution of a bank executive they took into account the impact on the bank’s shares and financial markets. More recently Fed President Bill Dudley has stated that how the market reacts will play a role in how quickly the Fed raises interest rates back to normal.
The first thing we should recognize about the stock market is that it’s a pretty bad indicator for the economy. Today stocks trade at all time highs, but that’s not the case for any meaningful metric of the economy, like employment, GDP growth or wages. Real median household income, perhaps the purest measure of the vitality of the middle class, has steadily declined...
...while the stock market has rallied during the recovery.
The second thing we should realize is that stocks only matter to a small and peculiar subset of the population: large corporations and the wealthy. The employees of the S&P 500, the index consisting of the 500 largest public companies in America make up only 15% of all employed persons. Most jobs in this country are created by companies that can’t participate in the stock market. As for the minority that do, there is no evidence that higher stock prices lead to hiring. If companies added and subtracted employees based on volatile individual stock prices they would constantly be firing and hiring people in almost random fits that might have little to do with their actual business.
Shareholders also consist of a minority of the population, in this case the highly affluent. Most shares are not owned by average Americans, but rather executives and founders. Think of people like Mark Zuckerberg and Warren Buffet. Some academics estimate the top 10% in terms of wealth own over two-thirds of all stocks. Scan down a list of the world’s richest people and you will see why. Meanwhile, the most recent Gallup survey shows almost half of all Americans don’t own any stocks.
Given this reality, it should come as no surprise that the post-crisis era has seen a surge in the economic disparity between the haves and the have-nots. As policy makers have focused increasingly on stocks, they have committed resources to elevating the market thus improving the lot of the rich and powerful. Most of the Fed’s post-crisis programs for example would have been considered a failure if they weren’t constantly validated by a surging Dow Jones Industrials Index. There is a moral imperative to help the majority that has been left behind by this recovery, and it starts with paying closer attention to economic factors that measure their well being.
There is also a practical benefit to shifting our attention away from the stock market. Any market that can yo-yo 10% within a day for no apparent reason, or undergo multiple booms and busts in a 20 year period should not be given too much credibility. The wealth-effect on the way up always turns into the wealth-destruction effect on the way down.
If we can look away from the daily machinations of the unpredictable market we are more likely to work on the sort of structural reform that pays off in the long run, even if it doesn’t make the market go up today.
THE WHAT? NEVER HEARD OF THIS THING U R REFFERING TO SIR.
F the stock market as long as my 401K keeps going up!!!
?
My last pay check was $9500 working 12 hours a week online. My sisters friend has been averaging 15k for months now and she works about 20 hours a week. I can't believe how easy it was once I tried it out. This is what I do... www.jobs-review.com
“Masonic Police”: LA Sheriffs Arrest “Descendants of Knights Templars” for Impersonating Cops
"But does the stock market really matter?"
was this a trick question?
now back to our cardboard houses...
It's always been about bank recapitalization. Theories about the wealth effect or benefits to mainstreet are lies and just cover.
Including asset (real estate) reflation. The RE bubble could not be allowed to pop. Period. Fed is "all in" now. Attempting to either kick this pig to some sort of pseudo-neo-Keynesian next steady state or buy time before the economy is blown the hell.
Dont forget stocks turned up when they went to Marked to Unicorn by suspending FASB 157 (April 2009).
They haven't turned down at all for 6 years now.
They lost the potential for steady state long ago, the wild oscillations have yet to hit, only mild perturbations to date.
They are totally lost, now, just as breaking the sound barrier with wings protruding outside the sonic cone, the joy stick is useless. I suppose they could kill the engines and it wouldn't dive so fast. I wonder if a spare passport will serve as a parachute? It's not a gimme I don't think.
Structural reform of markets ? ... hell no... this thing's a teardown and rebuild.
Back to paper, pencil, phone and fax. Fixed.
It will only matter once the PTB can no longer keep the status quo in check. That time is near. The Dow and the S&P 500 are on the precipice. It won't take much of a shock to send them over the edge.
S&P 500
http://www.globaldeflationnews.com/sp-500-indexelliott-wave-update-for-w...
Dow
http://www.globaldeflationnews.com/dow-jones-industrial-averageelliott-w...
it is all fun to the pitchforks show up and they will
Let's be fair, the stock market does matter. It is a good way to get investment from people who don't have the scale to make direct investments.
The REAL question should be "Are the current lot of publicly traded companies worth it?" and the answer is a resounding "no", no matter which metric you use.
The problem is that TPTB cannot (will not?) let a market correct. Now, I'm not advocating one market system with another. You could have a centrally planned economy or "laissez faire" one. But if you choose to have a free market, you HAVE to let failures happen. Failures in a free markets are just as important as the successes. I don't know who said it but there's a brilliant saying which summed it up beautifully: "Capitalism without failure is like Catholicism without Hell". A free market NEEDS the failure process to work in order for the successes to get fair value and investment. But because TPTB have twisted it, all sense of what is real and what isn't is up in the air. The marketplace is resembling the end fight scene in "Enter the Dragon" (Which one's Han?).
I'm no economist (you don't say, Chuck?!), but it is so difficult to work out which company is fairly valued or which company can actually finance their investments properly, I'd rather wait until a crash and let that purge out the malinvestments. And when I say "Crash", I don't mean a "correction", I mean a proper blood bath. A scene which wouldn't look out of place in a Lucio Fulci film. I'm talking blue chip companies possibly going bankrupt. After all, we KNOW the banking sector is, to all intents and purposes, insolvent. They're just shell companies with very few real assets. That alone will be pretty grisly. Then, the tech-sector, isn't exactly what you'd call "sound". And that's just two sectors! You just KNOW there's some surprises lurking on the balance sheets of companies like, GM, Ford, ExxonMobil, Pfizer, etc. They'll ALL get exposed.
I do wonder if in about 20 years from now, if the crash has happened, economists will look at this period of history wonder "What the hell was going through their minds when they came up with this tosh?!". But you know there'll be one who will say "That does seem stupid; but maybe it could work now with some tweaking......."
Only after the troops are positioned throughout our land will the market crash.
the stock market does matter because when the fed bankers retire, the ones who will be paying them speaking fees and consulting fees will be the same people who got rich off the stock market wealth effect...quid pro quo...
It matters, insofar it's the place where you trade ZIRP/NIRP chits into "Claims on Real Assets".
If said Chits aren't free, you need not worry, as you won't benefit.
FOR EXAMPLE:
http://showrealhist.com
Of course stock prices matter....... if you're a fucking retard. The point of owning a business is to collect dividends from said business. Who are these retards who start a business just for the sake of selling it? Twitter, Yelp.... nevermind.
Bad incomes chart, adjustment factor bogus, plus it's bogus when it doesn't exclude the top 1%. So the reality is much worse. Still, one can argue that the stock market collapse was overblown, it does tend to overshoot. But clearly there's still huge divergence, and we know it's because of what Bernanke did with ZIRP, and is therefore not irrational or unexplained, that is it is no more irrational and unexplained than Bernanke himself.
This makes too much sense so it is a lost cause...
Here are some signs of a coming recession.
http://michaelekelley.com/2014/12/20/leveraged-loans-predict-crash/
http://michaelekelley.com/2015/02/20/fed-warns-of-two-bubbles/
http://michaelekelley.com/2015/02/24/would-you-pay-39-more-than-asked/
Here is how to prepare yourself.
http://michaelekelley.com/2014/10/16/8-things-to-do-when-recession-happens/
Good luck!
The stock markets do matter if you can grab a seat before the music stops (exit your positions before the upcoming meltdown).
Digital fiat does spend just fine still, thank you.
In this world, you have to play "the game" by their rules.
Adapt and survive.