Wednesday, November 18, 2009

I Want A Stock Market Like My Great-Grandpa Used To Know

And it looks like we've got one too.

I disagree with Robert Reich: the economy CAN recover without consumers. But still, in this new world, it will truly suck to be a consumer, especially a consumer that remembers what nice places shopping malls used to be and how a trip to Salvation Army wasn't required to buy Christmas presents.

Several generations ago, consumers had a lot smaller piece of the economy than they do nowadays, so if we try to reverse-engineer the consumers out of the economy, it'll be just like it was in the good old days (just so long as I can keep running water - they can keep hot running water, just so long as I can keep some running water).

The stock market will go up and down based on other considerations than what fickle consumers are up to. The part of me that will rely on the 401K will be happy (and the part of me that requires a job in order to put money in the 401K will be sad).

No sir, we don't need no stinkin' consumers. They never did anything good but get into debt and go bankrupt anyway:
How can the stock market hit new highs at the same time unemployment is hitting new highs? Simple. The market is up because corporate earnings are up. Corporate earnings are up because companies are cutting costs. And the biggest single cost they’re cutting is their payrolls. So they let people go and, presto, their balance sheets look better and their stock prices rise.

In the old-fashioned kind of recession decades ago, big companies laid off people with the expectation of rehiring them when the economy turned up. Then a few recessions back, companies started laying off people for good, never rehiring them even when the economy recovered.

In the Great Recession of 2008-09, companies are going a step further. They’re using this sharp downturn to cut payrolls even below where they were when times were good. Outsourcing abroad, setting up shop in China and elsewhere, contracting out, replacing people with software and automated machines -- they're doing whatever it takes to get payrolls down so earnings bounce up.

Caterpillar earned $404 million in the third quarter, or 64 cents a share. Analysts had expected only 5 cents. Caterpillar’s stock is up 165 percent since March. How did Caterpillar do it? Not by selling more bulldozers. It did it by cutting more than 37,000 jobs.

The result, overall, is an asset-based recovery, not a Main Street recovery. Yes, the economy is growing again, but the surge in productivity is a mirage. Worker output per hour is skyrocketing because companies are generating almost as much output with fewer workers and fewer hours.

The Fed, meanwhile, has become an enabler to all this, making it as cheap as possible for companies to ax their employees. Money costs so little these days it’s easy to substitute capital for labor. It’s also easy to buy up foreign assets with cheap American money. And it’s now blissfully easy for Wall Street to borrow money almost free and buy all sorts of interests in foreign assets, especially commodities. That's why we're seeing the prices of foreign commodities and other assets go through the roof.

...The Fed and the Teasury have, in effect, placed a huge bet on a recovery driven by asset prices. That’s a bad bet. The great disconnect between the stock market and jobs is pushing stock prices way out of line with the real economy. This isn't sustainable.

No economy can recover without consumers. Yet American consumers, who constitute 70 percent of the U.S. economy, are facing mounting job losses as well as pay cuts. They’re in no mood to buy and won’t be for some time.

Where is this heading? No place good. Without a major shift in policy -- both at the Fed and in the White House -- the economics point to a big stock-market correction and a double dip.

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