Tag Archives: unemployment

Wall Street Adrift

The erratic movements of the stock market since the beginning of 2014 reflect the sense of uncertainty that grips the wealthy investors and institutional buyers who dominate the market. (The 1% own 33% of all stock wealth.)

Trader Reacts to 1987Over time, stock prices reflect current corporate profits and expectations about future profits. Without the Federal Reserve pumping $85 billion each month (over $1 trillion in 2013) into the financial system, few investors believe corporate profits will continue to rise.

The irony is strong – signs that the American economy will grow more rapidly in 2014 and that unemployment will continue to decline actually reinforce the fears on Wall Street that corporate profits and stock prices are about to take a fall.

The current situation highlights the agonizing contradictions the U.S. economy has developed over the last 40 years. Without innovative policies emanating from Washington D.C., prosperity for the general population will continue to remain elusive. The profit squeeze scenario has three elements:

1) The main way in which corporations have increased their profits is by clamping down on worker salaries – that is, workers’ wages have actually fallen since the 1970s, with an acceleration in the decline since 2008, while worker productivity has increased. A 4% fall in wages along with a 2% rise in productivity means a 6% increase in profits, even with small increases in sales. Now, as the economy slowly picks up, business economists argue that a 6.5% unemployment rate will lead to a shortage of skilled labor and a resulting rise in wages. Their claim is that many of the 4 million long term unemployed and most of the 5 million people who have dropped out of the labor force since 2008 are no longer employable as skilled labor. If they are right, then wages for skilled workers will soon rise – squeezing corporate profits.

This is doubly threatening to stock prices because, after the internet bubble burst in 2000 and even more since 2008, corporations have used their profits to artificially push up the value of their stock by buying it back, thus increasing the value of the remaining securities left on the open market. For example, in 2013, corporations invested more than $600 billion buying back their own stocks. If profits go down, fewer companies will be able to carry out this strategy.

2) Another reason corporate profits have been very healthy since the Great Recession is because American businesses have become adept at “financial engineering.” Financial engineering is a business strategy designed to ensure that corporate profits are high and grow almost every quarter. With the great increase in financial speculation that began in the1980s and 1990s, Wall Street began severely punishing companies that don’t report higher profits every quarter. This is feat is almost impossible in an economy where demand and supply rise and fall in unpredictable ways.

However, corporations have discovered they can create steadily rising profits by borrowing money at low interest rates and investing those funds in short term financial products such as derivatives and commercial paper. Now, as the Fed cuts back on its $85 billion per month subsidy, the possibility of rising interest rates threatens the viability of this profit-making strategy.

3. Finally, Wall Street knows there is a major flaw in the Keynesian argument that greater consumer spending will jump start the economy by triggering increases in sales that will improve corporate profits. The flaw is, without tariffs to balance out price differences, American consumers will use wage increases to buy huge quantities of less expensive or higher quality foreign products. Even in a slow growth economy, we continue to run huge trade imbalances with China, with Japan, with Germany, with South Korea, with Singapore, with Saudi Arabia, with Venezuela – the trade deficit with China alone was $440 billion in 2013.  Thus, pumping up our economy is like putting air into a leaky tire – there is lots of huffing and blowing, but the tire stays limp.

In the 1980s, the 1990s, and then the 2000s, the Federal Reserve and the Federal Government joined consumers in debt binges that together, blew hard enough to make our economic tire fill up. However, in the world of 2014, both Federal institutions are cutting back their stimulus efforts. This is why Wall Street investors are afraid; they believe we are headed for a brief period of prosperity, followed by a withering away of corporate profits and then of economic growth.

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Don’t Buy at the Top of the Stock Market

The Stock Market is reaching the end of a long rise in values, so heed the yellow caution signs. There are many indications that when the downturn comes, investors who brought their money late to the party will end up taking a financial bath.

It is not time to run, but it is time to put your cash in a safe place.

Our modern Stock Market is not deeply tied to the fate of the real economy; with hedge funds, e-trading, derivatives, and “shorting,” the markets have plenty of things to do with their cash without worrying about messy things like investing, manufacturing, and selling. However, there is one thing that gets everyone’s attention – the candy machine known as QE 3, the U.S. Federal Reserve program that injects $85 billion into the financial markets every month, providing cheap money for banks to use as they please.

The key is to remember that the third round of Quantitative Easing since 2010 (thus QE 3) does not consist of the Fed buying government bonds, which would facilitate deficit spending and stimulate the entire economy. Instead, QE 3 consists of the Fed buying housing bonds from banks and other bundlers of mortgage bonds, thus giving money to these financial firms to spend on stock market purchases, commodity speculation, and maybe a few bank loans. It is the trickle-down theory in a financial management disguise. Give money to the rich and let them do things that will get the economy moving.

In practice QE 3 has two results: (a) mortgage rates are very low, so if you have a good, steady job you can get a cheap mortgage and, (b) financial firms have a lot of money to invest in stocks. Thus, the stock market has steadily risen during QE 3.

So, when Fed Chairman Ben Bernanke told a Congressional Committee on May 22 that the Fed might decide to reduce the number of housing bonds it purchases at one of the “next few meetings” the stock market trembled. Then, the minutes of the April Fed meeting were released later that afternoon and people discovered that “a number” of officials wanted to begin reducing the program in June. Investors panicked. The Dow lost more than 80 points in two hours and other indexes fell, too. With wild rumors about the Fed’s intentions still flying about, the Dow lost 138 points on Wednesday the 29th and 240 points on Friday, May 31st.

These events essentially confirm what many people suspected; the vigorous rise in the stock market since last fall is primarily a function of the Federal Reserves’ stimulation policy. It must be, because the real world economy is in decline:

The Eurozone, the world’s largest economic unit, is trapped in its 7th consecutive quarter of declining growth;
China’s growth is slowing to less than 7% a year (the smallest rate since 1990);
Cuts in federal spending will reduce U.S. economic growth in the second part of the year; and
The gradually falling U.S. unemployment rate is largely a product of 6.5 million people leaving the workforce.

In this environment, stocks will continue to rise only as long as the Federal Reserve keeps pumping $85 billion dollars into the financial markets each month. A major cut-back in that subsidy is likely to lead to a drop of 10% to 20% in stock prices. That means that if you put money in the market when the Dow is at 15,200 and it rises to 15,500 and falls 20%, then it goes back to 13,000 or less and you lose a good chunk of your investment. Wait and buy at the next market bottom, when you see Washington and the Fed stimulating the real economy.

This Economy isn’t Working

Full time jobs are hard to come by and many people have stopped working all together. Feeble economic growth is imposing hardships on people of all ages.

Millions of people may never work again.

Here are three charts that dramatically demonstrate our jobs problem. The first shows that the percentage of the population working in full-time jobs is at its lowest levels since the 1950s. In 2007, just as the housing bubble was bursting, more than 52% of the adult population had a full time job. By 2009, six million of those jobs were gone – and we have not gained any of them back during the economic “recovery” that began in 2009. Just 47% of the adult population had a full time job in February of 2013.

What are those six million people without full time work doing? The next chart shows there has been an increase of about 400,000 part time jobs since the recession ended. The next chart shows that the drop in the unemployment rate is largely the result of people leaving the workforce. In 2007, before Bear Stearns collapsed and started the financial crisis, 66% of the working-age population was employed or seeking employment. Today, just five years later, a little over 63% of that group of people is in the labor force and the trend line is almost straight down – about five million people have retired prematurely, work entirely in the underground economy, live at home with mom and dad and watch television, became homeless, or do chores at home while a partner works.

This is frightening, because we know that most of these individuals will never work again, or at least not in regular, full-time jobs. I remember the fear I felt in 2009 and 2010 that if I, as a worker over the age of 55, lost my job, I might never find a steady job again – I would be left to wander on the fringe of society. Keep in mind how much a person’s sense of self-worth, pride, and energy is wrapped up in feeling like a useful, paid participant in society. At least five million Americans don’t feel that way anymore.

So far, theirs is a quiet desperation. Since the late 1960s, women have been entering the labor force in large numbers. Note on the last chart how the labor participation rate rose steadily after 1966, from 59% to a high of 67% in 2000. That means two-thirds of households used to have two wage earners and the five million lost Americans are, in most cases, being supported by other members of the household and by programs like food stamps. In fact, food stamp participation has soared from 28,223,000 in 2008 to 47,791,996 in December of 2012.

Tragically, the sequestration budget cuts will chop away at some of the public supports for these families. The general attitude toward these individuals now on the fringe is similar to that of the Lawrence mill owner talking about the immigrants who worked 14 hour days in his textile factories, “they don’t suffer, they can’t even speak English.”

On Our Own

The business pages of the Boston Globe seldom have deep stories analyzing economic trends.  The main healines are reserved for stories about the ups and downs of local and regional businesses and the people who manage them.  However, buried in smaller stories are bits and pieces of information that, when put together, give us clues to trends in our dismal economy.

For example, on January 29th, a small A.P. story noted that durable goods orders (things that last a while like refrigerators and televisions) rose only 0.3% in December, far less than the 2% rise predicted by professional economists.  Traditionally, when our economy rebounds from a recession, durable goods orders jump as consumers begin spending again.  The latest number was a huge disappointment, given that durable good orders fell 20% during 2009.  The same article points to the reason – 470,000 people filed claims for unemployment benefits the week before – that is, even as government statistics show the GDP going up, nearly half a million Americans got laid off.

On January 30th, a small A.P. story reported that even if you kept your job during 2009, things got worse.  Overall, wages rose an average of 1.5% in 2009, far below the official (doctored-down) inflation rate of 3%.  On February 1st, a tiny Bloomberg News article reported that Nouriel Roubini, the economics professor who predicted the financial crisis before most “experts” noticed there was a problem, said that unemployment will remain over 10% even if statistics show the GDP is growing.  He said, “It’s going to feel like a recession even if technically we’re not going to be in a recession.”

On January 28th, Michell Singletary wrote about President Obama’s “Middle Class Task Force,” which has, after a year of study, recommended that debts for the Federal college Loan Program be forgiven after the student pays 10% of his or her income for twenty years – a reduction from the current 25 year requirement.  This minor change comes from an administration that has fully cooperated with the Bush administration’s handout of more than $600 billion to banks and hedge funds with no requirements for increased business lending, no requirements for renegotiation of mortgages with individuals who are facing foreclosure, and no significant limitations on management bonuses.  Highlighting the contrast, an A.P. article on the same day noted that the Federal Reserve reported that lending is still contracting.

I could go on, I clipped out a week’s worth of stories with the same message – the aftermath of the great financial crash of 2008 is not going to be a return to normal.  While GDP “growth” might be trumpeted in the news, our friends, neighbors, and family are going to be unable to find jobs and the purchasing power of those who keep jobs will continue to decline.  Meanwhile, the Obama administration, moving in slow-motion as it follows the advice of its Wall Street born and bred economic advisors, will only propose tiny changes at the margins, while right-wing Republicans in the Senate will howl about government deficits and bloc even those reforms.  We are on our own.

Obama the Eskimo

We are experiencing an extraordinary collective moment in American history.  The Bush economy is driving many people to despair and the stock market is matching that by exhibiting all the symptoms of a nervous breakdown.  After watching President Bush’s empty performance at the world economic summit last weekend, the market has plunged all week.  However, it turns out that hedge fund managers and IRA-owners alike are waiting to be saved by one man: President-elect Barack Obama.  Perhaps we should set it to music:

Everybody’s building the big ships and the boats — Some are building monuments –Others, jotting down notes — Everybody’s in despair — Every girl and boy — But when Quinn the Eskimo gets here — Everybody’s gonna jump for joy — Come all without, come all within — You’ll not see nothing like the mighty Quinn!  (Bob Dylan, The Basement Tapes)

How is it that a dangerous socialist radical, a scary multi-racial man, an elite lawyer from Harvard, a first-term Senator, has suddenly become The Answer?  Who knows, but when word leaked that Obama was choosing Tim Geithner, currently head of the NY Federal Reserve, to be Secretary of the Treasury (not a very surprising choice) the stock market rose 500 points IN ONE HOUR.  Rarely has a new president been so eagerly awaited, never before have people wailed and moaned about the terribly long time between election day in November and inauguration day in January.  It seems to me that he is being given an extraordinary opportunity to propose bold new steps in both domestic and foreign policy – let’s hope he seizes this historic moment.

But when Obama the President gets here — Everybody’s gonna run to him — Come all without, come all within — You’ll not see nothing like the mighty Obama!