Friday, March 27, 2009

A Portrait of Onanist Delight

That's a year-to-date chart of the Dow Jones Industrial Average (all charts click to enlarge). The DJIA, and its turgid performance during the last two years of the Bush Presidency, are what allowed MSNBC, CNN, NBC, Powerline, and pretty much every pundit and bloviator tied to the corporate media to proclaim that the economy was doing just fine, thank you very much, in spite of rising jobless claims and mushrooming foreclosures.

Compare these charts of Initial Jobless Claims and New Home Sales

With this chart of the S&P 500:

It's a little hard to see because the scale of the graphs isn't perfectly aligned. ignore the point where the S&P falls off the table in October of 2008, and its fluctuations that spring and summer tend to look more like white noise in a stabilizing pattern at a very high level.

In the meantime, however, during the spring and summer of 2008 when practically every business analyst from Kudlow and Cramer to John Sidney McCain were telling us that the "fundamentals of the economy are sound," jobless claims were creeping steadily up and housing starts were declining.

I bring this up not to point out how wrong they were (which they were), but rather to highlight a huge blindspot in the media's vision: they are slaves to shareholder profits.

They don't analyze the economy. They tell you whether or not rich people are making money, and they mistake that for the same thing. If the stock market is performing well, that's all they're interested in. Cash is flowing in, baby! The fundamentals of the economy must be sound.

No one getting paid to tell the world what's what analyzes the economy. They report (take dictation from) the market. Sure, there were some whispers around the edges. But hey! Are you gonna listen to those nattering nabobs of negativism? Or do you wanna come for a swim in my pool of cash?

Now look at the top graph again. What you see there is an Obama-induced bounce. The markets are up about 20% since the early days of March. Not many people are talking about it, but that's mostly because they want Obama to fail and they've spent the last three months claiming every drop in the DOW was his fault. Suddenly they've got nothing to talk about.

But that's not my main point. My point is, this isn't necessarily good news. The "fundamentals of our economy" are but a whisker more sound now than they were last October, and only because we're starting to put on the brakes.

If the status quo system likes what's going on and the market is going up, I'm not filled with confidence. Here's another chart for ya (click to expand):

Since the '50's (when there were 14 tax brackets and income over $400k was taxed at 91%), the rate of growth was a steady-state economy. In the 1980's we bought into the supply side logic of the infinitely expanding market. We slowly took bankers and investment houses off the leash and shackled the wardens. 1992-2008 was as close as I hope we'll ever come to a financial anarchic utopia (for bankers) / dystopia (for workers).

I guess you can tell where that gets you.

So, finally the point: taking into account the growth of a world-wide market, or at least the introduction of that potential, I figure a good place for the DOW to be is a steady-state economy at about 4,000-6,000. In other words, a bit below where we are this Friday as I sit here typing away.

If this is where we should be, then we can probably expect another crash. Sometime this summer, I expect. Which will be blamed on Obama. Which will be right, in part. But also necessary. There is still a lot of waste in the private sector. Here's what I mean by "waste:"

Capital is created by labor, which adds value to the product being worked on. That value is sold to a market. The employer siphons off most of that value and pays his/her labor with the balance. Much more complicated than that, of course, but that's essentially the deal.

Over the last 40 years, more and more of that value has been lodged at the top. This is "supply-side" or "trickle-down" theory, which depends on two things being true: 1) If you feed the suppliers/oligarchs enough to keep them fat and happy, they'll keep the wheels of commerce turning by seeking infinite wealth, thereby employing you and keeping you fed and out of the rain. (With just enough extra to buy you off.) 2) We will never run out of markets to expand in, so the money will be able to continuously flow up the ladder and, mostly, stay there.

Something happened to this fairy tale. The money wasn't flowing fast enough. So the oligarchs (in this case, investment bankers and the lawyers who work for them) created a variety of investment baskets that allowed them to essentially sell the same "value" (from the "value added" equation, above) over and over again, and to package it with thousands of tiny risks (iffy mortgages) which themselves had been packaged multiple times and resold.

This worked well enough except for one thing: the need for more and more capital at the top of the ladder outstripped both the workers' ability to generate it, and the market's rate of expansion.

The butterfly in Thailand caused a tornado in Brussels. Or, in this case, some dude in Nevada finally failed to pull the ends to meet, tapped out his credit, and his home was foreclosed on. Then his neighbor, and his neighbor on the other side.

That was the pin in the balloon. It started small, but once that vacuum of capital was in the room -- a literal absence of money to fill a hole -- the game was over and the void spread very quickly up the chain and sucked the fancy house of cards into the shitter.

So anyway. The market is up in March. But I don't expect it to stay there, nor do I think it should.

These assholes just can't believe the party's over. And we're all going to take the bullet/pay the piper/sell our vacation homes.

What? You don't have a vacation home?


crumtheteacher said...

Yes! I really enjoyed reading this--good analysis.

Anonymous said...

I don't think you understand economics and you certainly don't get capital markets. Are you really such an ideologue that you can't recognize the limits of your own knowledge on this stuff? If you think only the rich profit from a rising stockmarket and only bankers and lawyers are to blame for our current crisis, then you're foolish on top of being misinformed.

Jim said...

Did I actually say any of that? Huh.

Courageous anonymous comment.