stocks

The Great American Wealth Transfer to the Super Rich

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The rich get richer and the rest of us get the economic shaft.  That is the theme of this so called economic recovery since 2009.  A new Pew Research report, A Rise in Wealth for the Wealthy; Declines for the Lower 93%, analyzes newly released Census data on wealth.  What they found is the rich got richer and the rest of us got poorer.  The great American wealth transfer continues.

Wall Street Realizes the Crazies are Running the Asylum

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money waterfall
Wall Street exits, stage right, from the United States economy. The Dow closed 513 points down today and is down over 1,200 points since July 21. Both the Nasdaq and the S&P. This is the worst one day drop since October 2008, otherwise known as the great financial Armageddon.

 

 

Only three of the 500 stocks in the Standard & Poor's 500 index had gains. Oil fell by 6 percent. The yield on the two-year Treasury note hit a record low as investors sought out relatively stable investments.

All three major stock indexes are down 10 percent or more from their previous highs, a drop-off that is considered to be a market correction. A drop of 20 percent or more signifies the start of a bear market, an extended period of stock declines.

The Revenge of Main Street

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"You can fool some of the people all of the time, and all of the people some of the time, but you can not fool all of the people all of the time."
- Abraham Lincoln

Wall Street has a problem.

You see Wall Street functions much like Las Vegas. Their immense wealth depends on the continuing myth that their games aren't rigged, and the willful denial of reality by the suckers.
Just like Vegas, no one wants to talk about the money they lost playing the stock market. Instead, all you here about is how everyone is getting rich at the blackjack table. If you aren't getting obscenely wealthy betting on interest rate spreads then there must be something wrong with you.

In reality, the reason why you lost money is because the game is rigged. The House always wins in the end. The suckers are the ones who think there are rules. Like Wall Street, Vegas exists to separate you from your money.

Wall Street may seem all powerful, but like Vegas it has an Achilles Heel - if the people don't feed the beast it will starve.
If the greed of The House gets to extreme, and the rigging of the games becomes too obvious to ignore, people will stop gambling at the casinos and in the stock market. The House goes broke.

That tipping point, where the willful denial of Main Street starts to break down because the game rigging is so blatant, may have finally been reached.

The Ultimate Stock Market Sucker's Rally

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By now we've all seen reports about the amazing stock market rally of 2009.

The widely followed stock market measure broke above 1,000 on Monday for the first time in nine months as reports on manufacturing, construction and banking sent investors more signals that the economy is gathering strength.
...
The day's reports were the latest indications that the recession that began in December 2007 could be retreating. Better corporate earnings reports and economic data propelled the Dow Jones industrial average 725 points in July to its best month in nearly seven years and restarted spring rally that had stalled in June.

If you listen to the financial news long enough you would know that the all-seeing, all-knowing stock market has declared the Great Recession to be over.

A Big Picture comparison of long-term Bear Markets

Like bonds, which move in ~60 year interest rate cycles (called the Kondratieff cycle), stocks also have very long, secular cycles that become apparent when we step back for the 30,000 foot view. For example, there was a long-term bull market from 1946-1966, followed by a long-term bear market from 1966-1982, followed by a long-term bull market from 1982-2000. Now we are in the midst of another long-term down cycle.

In this diary I will compare past long-term declines to estimate how steep a similar decline in the stock market and the economy is likely in this long-term bear market.

Black September

Introduction

On December 3, John Bergstrom of Bergrstrom Automotive, a major auto dealer, appeared on CNBC and said,

on about September 10, we saw our business fall off 30-35%.

A similar sudden decline in consumer spending during September was reported by Shoppertrak:

Throughout 2008, the American shopper has endured record high gasoline prices, hurricanes and flooding, and a stalled housing market in their quest to shop. While the consumer has remained fairly resilient during this time, two very recent events are dramatically impacting mall visits and consumer confidence.
- Once the financial crisis emerged at the beginning of September, retail traffic declined even further. Between August 31 and September 20, SRTI total U.S. traffic fell an estimated 9.2 percent per day....
- After the failure of Washington Mutual, President Bush’s address to the nation, the presidential debate and the initial rejection of the TARP bailout, traffic fell by an average of 10.5 percent (September 21 – 29).
- The day the TARP bailout package was rejected by congress (September 29) and the NYSE Dow Jones Industrial Average lost 778 points, consumers again responded negatively as shopper traffic fell 12 percent as compared to the same day in 2007
- Sales, which were up 4.0 Percent for the Month of July, and up 3.5 Percent for the Month of August, fell 1.0 percent in September – "the first year-over-year sales decline since March 2003."

Shoppertrak has subsequently reported that "retail sales rebounded slightly, posting a very slight 0.7 percent increase in October. sales for the week ending November 15 dropped 3.1 percent as compared to the same period in 2007." But car sales have not recovered at all. In August car sales were already down about 19% YoY. In September the loss was 21%. In October it was 23%. By November car sales had declined close to 40% from already depressed levels in 2007.

And the stock market, which was only down (-18%) from its all time high in 2007 of 1565 to 1282 at the end of August, by October 10 was down (-43%) to 899.

In the 40 day period between September 1 and October 10, the shallow recession which had crippled the housing industry and Wall Street, but left Main Street virtually intact, suddenly metastasized into a collapse of the consumer economy that some were beginning to liken to the 1930s.

This diary is "the first draft of history", an attempt to look at not only what has happened, but as best we can tell from the vantage point of several months later, why it happened.

No, this graph is NOT reassuring!

This week's edition of Barron's contains an article entitled, "Does Extreme Stress Signal an Economic Snapback?" the thesis of which is carried in the subtitle: "More than a decade's worth of equity gains has evaporated. But history suggests that stocks won't fall much further." The article includes the following graph offered in support of the main thesis:

We are supposed to all think that our 201k's (formerly 401k's) are undervalued now and will at least grow back to the historic norm.

Don't know about you, but I find that graph FAR from reassuring: in fact, it appears to support the opposing thesis.

The American consumer capitulates

Back in August 2007 I wrote a diary entitled, Are Hard Times near? The Great Decline in interest rates is ending, that began:

The American consumer has had largely stagnant wages since 1974. While from 1980 through 2006, the median income of an American household has risen only from $39,700 to $48,200 in real terms, house prices for example have shot up form nearly $125,000 to $246,500. Consumers have responded generally by taking on more and more debt. Total household debt service has risen from 16% in 1980 to 19.4% in 2006.