Last week we saw the Dow and the S&P 500 fall by 4% each. The Nasdaq lost 3.7%.
10% is correction territory and 20% signals a bear market. Stocks continue to fall this morning.
USA Today gave a couple reasons for the drops:
- The 10-year Treasury note reaching a seven-year high of 3.25%
- This is the result of all the good economic news we’ve had lately
The problem is…all this ‘good’ economic news isn’t really that good.
Last month it was reported that unemployment reached a 50-year low, falling to 3.7%.
Sadly, this number is wildly off.
Another aspect that economists point to is the 4.2% economic growth the US saw during the second quarter of this year.
This number is too high.
I’d like to run through these things, and offer a few reasons why the economy is a lot worse than it’s made out to be.
On History Repeating Itself
Our economy has become a house of cards, and anyone with a brain should see it.
Sadly, those in charge either don’t see it or don’t want to.
A few weeks ago, Chairman of the Federal Reserve Jerome Powell said that “our economy is strong. Growth is running at a healthy clip. Unemployment is low, the number of people working is rising steadily, and wages are up. Inflation is low and stable.”
It was the same story in 2008.
In February of that year, Fed Chair Ben Bernanke said the “economy is fundamentally strong, diverse and resilient.”
The next month Bear Stearns collapsed, even though a year before its stock price had been $172 a share, and a month earlier it’d been at $93.
JPMorgan Chase ended up buying the company for $10 a share, or $1.2 billion. Weeks before, Bear Stearns had been worth $18 billion.
The big problem 10 years ago was the record levels of debt that the Fed was encouraging people to take on.
Today the economy is also driven by debt.
On Debt-Driven Stock Buybacks
One of the biggest fallacies of our stock market economy is that actual earnings and real work are driving the growth.
The reality is that stock buybacks are driving the markets.
Back in June the AP put it like this: “Flush with savings from lower tax bills and profits from a growing economy, big U.S. companies are spending a record amount buying back their own stock.”
But this is misleading: with interest rates so low, companies like Apple borrowed money to issue bonds so they could then buy back their own stocks, even though the company had over $200 billion in cash stashed offshore.
For the first quarter alone, $189 billion was spent buying back stocks on the S&P 500. The previous record had been set in June 2007.
Apple alone has bought $23 billion worth of its own stock this year, mainly so it can reduce the number of shares, which means those with shares see a higher level of dividends.
It wasn’t sales and innovation that allowed Apple to reach $1 trillion in market cap. It was their constant stock buybacks.
Shareholders want this, as they want the highest price-to-earning ratio as they can get, as this means higher earnings for them.
Currently P/E ratios are out of control, with the stock market capitalization to national GDP ratio at 33.
This means that the stock market share prices are trading 33 times higher than what the company’s market values really are.
Back before the Great Depression started, the number was 32.
Goldman Sachs figures that $1.3 trillion will be spent by corporations on stock buybacks and dividend payouts this year alone.
Stock buybacks were made illegal in 1934 because people realized how much they’d contributed to the Great Depression.
Having forgotten that, Congress made the practice legal again in 1982.
Just 12% of Americans feel concerned about the economy today. Back in 2008 we know that 86% of people were concerned.
Inflation should be a real concern, as the only reason household wealth has gone up by $30 trillion since 2009 is that we have inflated asset prices.
Based on Trump’s UN comments that GDP is 4.2%, we should have an inflation rate of 1.2%.
Does anyone really believe this?
After all, insurance prices and fuel and rents have all gone up by more than 1.2% this year.
Three main fallacies are leading to this artificially-low number:
- The government assumes people are buying more goods online than they actually are, and that those goods are cheaper
- The government assumes the quality of goods sold is better today than in the past
- The government assumes that people with mortgages are paying rent to themselves, or what’s called imputed rents.
Lots of assumptions there, which means that our inflation number is nothing more than a guess.
The Consumer Price Index is more accurate, and if we went by that our inflation rate would be 2.7%, which in turn would lower our GDP to 2.7%.
If we went by the Fed’s PCE inflation index, then inflation would be 2.2% and GDP would be 3.2%.
We hear a lot that unemployment is at 3.7% today, but I don’t believe that.
That number is called the U-3 unemployment rate, which has been around since 1994, the year that long-term discouraged workers were kicked off the lists.
The U-6 unemployment rate includes short-term discouraged workers, and last month that was at 7.5%.
Some economists figure the true unemployment number is 15% to 18%, and some figure it might be as high as 21.3%.
None of this has diminished consumer confidence, which reached an 18-year high recently.
The last two times that consumer confidence was so high was in 2000 and again in 2008.
One of the big problems is that 50 million people in this country work part-time, are temp workers, work on-call, or are under-employed or don’t even have a job.
Trump claims that wages are going up 2.9% a year, but that number’s only accurate for full-time, permanent workers. That means upwards of 100 million people aren’t getting any wage increases, or at least increases well below 2.9%.
And when we compare the CPI inflation of 2.7% and the nominal wage increase of 2.9%, we realize that real wages are only going up by 0.2% a year, which means real wages are stagnant.
To make it even worse, if we do have higher inflation than we think, real wages might actually be going down. If inflation is at 3.5% for some families, their real wages will be falling by 0.6% a year.
Real wages have fallen in value for 100 million Americans every year since 2009.
“Alternate Unemployment Charts.” Shadow Government Statistics. Retrieved 15 October 2018. http://www.shadowstats.com/alternate_data/unemployment-charts
“Bear Stearns.” Wikipedia. Retrieved 15 October 2018. https://en.wikipedia.org/wiki/Bear_Stearns
Choe, Stan. “Stock buybacks reach record high.” AP. 26 June 2018. http://www.journalgazette.net/business/20180626/stock-buybacks-reach-record-high
Coppes, Chuck. “2008 Crisis Redux, Culture Wars & End of American Exceptionalism.” Chuck Coppes. 14 October 2018. http://chuckcoppes.com/current-newsletter/4592066389
Imbert, Fred. “Nasdaq drops 1% as Apple and Netflix lead tech shares lower.” CNBC. 15 October 2018. https://www.cnbc.com/2018/10/15/us-futures-point-to-a-triple-digit-fall-amid-saudi-arabia-tensions.html
Powell, Jerome H. “Brief Remarks on the U.S. Economy.” Board of Governors of the Federal Reserve System. 27 September 2018. https://www.federalreserve.gov/newsevents/speech/powell20180927a.htm
Rasmus, Jack. “Trump at the UN: Lies, Damn Lies, & Statistics.” Global Research. 28 September 2018. https://www.globalresearch.ca/trump-at-the-un-lies-damn-lies-statistics/5655456
“Table A-15. Alternative measures of labor underutilization.” Bureau of Labor Statistics. 5 October 2018. https://www.bls.gov/news.release/empsit.t15.htm
Shell, Adam. “Why did the stock market drop? Here are all the reasons for the Dow plunge.” USA Today. 10 October 2018. https://www.usatoday.com/story/money/2018/10/10/why-stock-market-went-down-so-much/1593803002/