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Will This Manic Stock Market Rally End In Tears?
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
Can the stock market completely ignore these changes and keep powering higher on the fumes of Mario Draghi's promises?
Judging by October's rocket launch, the stock market is back to where it should be, i.e. in rally mode. Yee-haw! All it took to keep the party going was another rate cut in China, another "whatever it takes" assurance from Mario Draghi and blowout earnings from a few tech giants.
So we seem to be right back we we've been for seven years: more central bank easing triggers more stock market mania, and stock buybacks and "earnings surprises" push stock valuations ever higher.
But a couple of things have changed recently:
1. China's expansion has ground to a halt. China's insatiable demand for commodities and capital has pulled the global economy's cart for seven long years. Now that this demand is faltering, there is no equivalent economic/financial engine of demand to replace it.
2. Income for the bottom 90% in the developed world is stagnant/declining. The most basic assumption of central bank monetary policies since 2008 (QE, etc.) was that household income would rise as the economy recovered, enabling more household consumption/debt.
This has not turned out to be true: for a variety of structural reasons, income of the bottom 90% of households has actually declined since 2000 when adjusted for official inflation.
3. The "wealth effect" from boosting global stock and junk-bond markets has been very limited. The second basic assumption of central bank monetary policies since 2008 was that the rise in financial assets (stocks, bonds and real estate) would "trickle down" to households who would respond to the psychological sense of increasing wealth by borrowing and consuming more.
What actually happened was the assets of the bottom 90% were gutted in the crashes of 2000-02 and 2008-09 and in many cases never recovered.
In terms of stocks, many in the bottom 90% decided against gambling money in the stock market after being wiped out by the dot-com crash. As a result, they missed out on the extraordinary gains of the past seven years.
Many of those who traded up in the housing bubble of 2000-2008 and took on big mortgages found that the recovery in housing prices has at best restored their marginal equity but hasn't enriched them (with the exception of those who managed to buy in Manhattan, West L.A., San Francisco, etc., where gains have now exceeded the 2007 highs).
Millions of households that do not own homes in these hyper-hot globally attractive (and relatively small) markets are either still under water (they owe more than the home is worth after commissions and closing costs), or their equity is so limited that it doesn't create a "wealth effect."
4. None of the structural problems that triggered the 2008 Global Financial Meltdown have actually been fixed. I don't mean risky banking or lending fraud, as destructive as these were--I mean the demographics that have mooted the entire financial foundation of pensions, the rise in healthcare costs (let's estimate 750 million Baby Boomers globally are going to retire and need more medical care--75 million in the US alone), the unstoppable rise of automation that replaces human labor, the environmental disasters that have been papered over but not actually solved--the list is long.
5. The Oil Head-Fake I have often described is playing out. As demand plummets, oil producers have no choice but to keep producing to service their debts or fund their social welfare program costs. This sets up a mismatch in demand and supply that has pushed energy prices lower, gutting the budgets of oil exporters and crushing their currencies.
The Decline of Oil: Head-Fake or New Normal? (September 9, 2015)
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So the question going forward is: can the stock market completely ignore these changes and keep powering higher on the fumes of Mario Draghi's promises and another rate cut or three in China?
At some point reality will trump fumes, and the manic rally will falter and the mania in stocks will end in tears.
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If any Russian or American planes are shot down in Syria, we could see some consequences in the markets. The Nobel Prize Winner is ramping up US war in Syria and Iraq.
US signals military escalation in Iraq and Syria
By Barry Grey26 October 2015
Amid a flurry of diplomatic activity regarding a possible political settlement in Syria, the Obama administration is signaling its intention to escalate US military action in both Syria and Iraq.
On Friday, the same day as an inconclusive meeting in Vienna between US Secretary of State John Kerry and the foreign ministers of Russia, Saudi Arabia and Turkey on the civil war in Syria, Defense Secretary Ashton Carter told reporters there would be more US combat actions like the one the previous day that had resulted in the first US troop death in Iraq since 2011.
On October 22, US special forces participated in a joint attack with Kurdish Peshmerga fighters against an Islamic State (ISIS) installation near Kirkuk in northern Iraq. Master Sgt. Joshua Wheeler was killed in what the Pentagon claims was a successful action to free 70 prisoners being held by ISIS. The attack was the first publicly acknowledged US combat operation since Washington launched its new war in Iraq, ostensibly against ISIS, in June of 2014.
The operation and the death of Wheeler shattered the repeated claims of President Barack Obama that the current US intervention in Iraq would not involve direct American combat actions. But Carter, far from presenting the Kirkuk incident as an aberration, unconditionally defended the operation and seized on it as an opportunity to assert the intention of the US military to intensify its operations in Iraq.
http://www.wsws.org/en/articles/2015/10/26/iraq-o26.html
Can the stock market ignore these 5 economic points? The answer quite simply is YES, as long as every central bank on the planet continues to debase their currency and agressively support asset price inflation.
Don't bite the hand that Feds you.
Tears or suicides.
Tears of nostalgic joy and pride for the banksters and their handlers. For the rest of us real tears, for our grandchildren and the future we will be handing them.
What other casino is available to bet in? Answer: none. So that is why we keep placing bets as they spin…
RabbitOne: It's beyond casino. At least in a casino you know the odds. I've been trying to think of a more appropriate term.
I suggest Grave Robbery.
(only modest hyperbole)
Low imterest rates = mania in stocks
Low interest rates = house prise rises due to want to be landlords
Everyone is chasing yield and untill they get taken to the wood shed they will then pile into some other thing to get yield.
Not to worry, I'm sure someone will be waiting at the door to guide us to our new vehicles...
What's he talking about, "changed recently"? Every one of his bullet points was evident before the Aug-Oct drop/pop. Which means this post explains nothing and is predictive of nothing.
I never realized just how important Mario Draghi's marketing efforts were to Apple's iPhone sales.
The US government's redistribution policies, EBTs, etc have allowed a lot of people financial breathing room to buy iPhones. From there, increased Twitter and Facebook useage, ATT, Verizon use.
Direct and indirect government subsidy of private industries.
What you have before you is a perfect example of government propaganda supporting a market that doesn't exist. How long before someone figures out the brown clown is just that. . . a joke.
great piece. well written, i enjoyed it.
i lost 250k reading these stories and shorting about ten times.
that is it.
janet: no hike
appl: record earnings
sp 2100.
that's all, folks
i guess as long as fake free money is acceptable then they can continue rallying the ShitShow....what's to stop them?
it is no fun...till you are throwing bankers from skyscrapers!
You guys are obsessed with trying to make the stock market crash.