This recovery is fake

New York Stock Exchange © Getty Images
US stock market: hit new records.

Dow Jones down 179 yesterday. Let’s see, to make the maths easy, that’s about 1% of the stock market’s value, and the total value of the stock market is about $17trn. So, yesterday erased about $170bn worth of ‘wealth’. By our reckoning, there’s about $7trn left to go.

It’s too early to call a top, but we wouldn’t want to be sitting on the uppermost branch of this tree. The higher up you go the more dangerous your perch. From where we stand on the ground, the whole thing looks scary.

There are too many people in that tree already, all of them counting on calm, sunny weather and a longer growing season for their money. What a shame it would be if the tree fell over!

Everybody invests in stocks hoping to ‘beat the market’. But everyone is the market. Only a few outliers beat it – usually by accident. Of course, last year’s stock buyers were happy just to ride along with the market. Beating it wasn’t necessary.

As we reported, the rich saw their wealth rise by $3.7trn last year. Much of that came from the stock market, which hit new records. Investors are hoping for a repeat of this performance in ‘14. Even if it does half as well, they tell themselves, it will still be an impressive gain.

But we have some questions: against whom are they gaining ground? From whom are they taking the loot? Or, to put it another way, who’s on the other side of the trade?

The economy as a whole rose at a 2% rate. So, there was a grand total of about $340bn in real, extra wealth to divvy up. How was it possible for shareholders to get ten times as much as the value of the wealth the economy created? But wait. The mystery deepens.

Since the depths of the crash in ‘09, household wealth has gone up by $21trn. Roughly, it went from $50trn to $71trn. During that same time, real household earnings for the typical family have gone down. Wages have gone down. And the net worth of the typical family has also gone down. Growth rates have declined. And, as a proportion of the population, the number of people with jobs has also declined.

Look at a chart of real GDP and you’ll see that it is only about 6% higher than it was in 2007. So, household wealth went up nearly 20 times faster than GDP since ‘09. How could that be?


Bill Bonner on markets, economics & the madness of crowds

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The Bernanke team was trying to goose up asset prices. They succeeded. The ‘wealth effect’ brought an additional $21trn to the nation’s balance sheets. This was supposed to increase demand, which would lead to more spending and investing,

Say’s Law tells us that you have to produce before you consume (more or less). But here we have about $20trn of excess spending power that seemed to come from nowhere. How could that be?

Wealth is either physical, as in owning a big house or a painting by Modigliani, or it is paper wealth. Now we have new claims on $21trn of real output and real wealth. If there is no increase in real wealth, that money just competes for the same goods and services that were already priced at $50trn five years ago. We’re not a dime wealthier in other words.

All paper assets are a claim against real goods and services. And you can’t get more goods and services than the economy can produce. Since the economy of ‘08 to ‘13 produced only a fraction as much real wealth as the claims against it, those claims will have to be applied to future output.

So, when will the economy produce $21trn of new wealth so that these new claims can be realised? Let’s see: “… the future looks sluggish”, wrote Financial Times lead economist Martin Wolf.

The FT editor joins Larry Summers who argues that US growth is stuck in the mud, and may not get out any time soon. “Since the start of this century”, writes Summers in The Washington Post, “annual US gross domestic product growth has averaged less than 1.8 per cent”.

Hmm… that’s about $300bn. How long do you have to wait – at $300bn per year – to cover $21trn in claims? Answer: 70 years!

Well, that’s not going to happen, is it? Long before 2084 rolls around, those claims will be marked down and written off.

In other words, the additional wealth is mostly a mirage.

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6 Responses

  1. 27/01/2014, mr clyde wrote

    Excellent argument and a very timely reality check. However the problem is how do you side-step the market other than being sensibly diversified? I would suggest that even a big house or a modigliani are not necessarily immune to asset price deflation as and when it arrives. In fact, out here in the provinces, a big house is still something of a liability.

  2. 03/02/2014, David W wrote

    I fully agree with Bill Bonner. It is a mirage. Printing paper to buy bonds which are held by governments . The government balance sheet is unsustainable . Assets prices are unsustainable . After 5 years of rising prices there will be a correction . Wherever you look growth is miserly and the level of unemployment especially in Western Europe and the US means that there is insufficient demand to support or justify the equity valuations in the US. 4 th quarter and 1st quarter earnings will disappoint with very little top line growth. The end result is that equities on a p/e cannot be supported.

  3. 03/02/2014, robin wrote

    Excellent article.

    But what happens, (as an extreme example) when we have invented robots to labour away producing everything we need. Industrialists will then fire all their staff and use capital investment to produce and hope that consumers will find other work in order to keep consuming.

    Free market thinking blindly presumes that other work will be found. But this other work surely will have to produce what we want rather than what we need. What if we don’t want that much? What if what we really want is not something produced as much as something that exists; such as a house in a nice neighbourhood?

    What after arriving at this point; we conclude that some of us don’t need to work and should be given money so they can consume anyway? What if the notion of people who are on permanent benefits is anathema to us? And maybe rightly so. What would we aspire to if our sole purpose in life is to consume? How would we say one person is more successful than the other? Well perhaps we should invent a game where people compete to win and lets call the winnings ‘profits’ and call the game ‘the stock market’.

    Maybe we need this paper market to convince ourselves that the world is the same as it was before the information revolution. We all do still need to work and when you earn your money, it is rightly earned as you are so much more cleverer than those hapless idiots on the dole and yes, the stuff you do is to forward the advance of human civilisation.

    Just remember that when it does come crashing down, people can still mostly read and write, we have medicines that work for the moment, and sunshine is still sunshine. Hopefully we won’t completely descend into a syrian apocalypse.

  4. 11/02/2014, whoknows wrote

    Numbers always tell a story in the raw.
    The governments of the world must know we are tottering on the edge of the abyss and doing the la la la thing hoping its all gone away by the time they open their eyes.
    Mountain of debt private and state and what are we encouraged to do, borrow more.
    We are all doomed.
    The last crash was just a taster, the next one, hmmm can quantitative work again.
    Cant see it myself, enjoy the ride cus the tally man has to be paid.

  5. 12/02/2014, Real world wrote

    In the uk and prob the world savers are getting robbed to help pay the debts of the creators of the greed and debts they made by not working for it but wanting it first so when in five years the big correction comes savers like me who near killed themselves working to the bone and saving for the rough times that as come and having to spend real cash as there are no interest to be had have nout left what then.im a simple tradesman which sees the rate setters and so on as educated theives and gangsters stealing of the decant people of this world.i now look at the governments and the useless educated who are above me on the ladder as commen theives.how as a disabled person now that can not work get by as my large accident settlement as been stolen from me ? Dirty world

  6. 12/02/2014, Real world wrote

    Also been saying to people that this is also fake as the tittle says as the uk and prob most goverments as larger debts than before it all started and they look at me like i have two heads. These people have degrees and i was not educated but money as been my Life as i wanted material items in retirement but could wait until i could buy a house car etc.this is a saying in which i made and stood by throw my life, the first time you pay interest on a credit card and continue whats the point on going to the sales as you will never get a bargain in your life again.simple but true.policies need changed and quick or we are heading to oblivion,i do not say that lightly.hope i am within the terms and conditions of this chat and have not said to much.i have not had any children as i do not want to be the. Blame for there suffering in this misguided world.

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