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?