Friday, May 24, 2013

Why Stocks Have Risen: Stimulus, Stimulus, and Indefinite-Stimulus, i.e., Transfer of Wealth from Main Street to Wall Street

Since bottoming out at an intra-day low of 6,467 on March 6, 2009, the Dow Jones Industrial Average (DOW) has risen to 15,295 as of May 23, 2013 - a gain of approximately 130% in just over 4 years. The S&P 500 has shown similar results, advancing from an intra-day low of 666 to 1,650 for the same period, a gain of approximately 125%. Stellar returns.

As to why the markets have risen at historic rates during times of austerity economics? The answer is simple, it’s due to quantitative easing (QE) began by centralized banks after the market crash of 2008 – “fundamentally a regressive redistribution program that has been boosting wealth for those already engaged in the financial sector or those who already own homes, but passing little along to the rest of the economy.”

The amount of stimulus used varies depending on your definition of stimulus, so we won’t bother keeping tabs on the trillions that have been dumped into the markets in the last 4 years. We’ll just make note that at present the Federal Reserve is continuing its unlimited quantitative easing program to the tune of $85 billion a month, a last resort, desperate measure that the FOMC began in 2012 to maintain its ‘growth’ targets.

As for the consequences of what is taking place, considering that “affluent households typically have their assets concentrated in stocks”, it’s a transfer of wealth from Main Street to Wall Street:
“In terms of types of financial wealth, the top one percent of households have 35% of all privately held stock, 64.4% of financial securities, and 62.4% of business equity. The top ten percent have 81% to 94% of stocks, bonds, trust funds, and business equity, and almost 80% of non-home real estate. Since financial wealth is what counts as far as the control of income-producing assets, we can say that just 10% of the people own the United States of America.”
click to enlarge - source

As to when the party will end, probably a few weeks to a few months before the end of stimulus. So if you’re playing this game, make sure you’re not left holding the bag when the bubbles burst (1, 2, 3, 4, 5, 6, 7, 8, 9), because they will, and when they do, the 2008 crash will seem tame in comparison (pdf).
“Each time, this QE has served only to start the cycle all over again. The stock market rises strongly in response to a new dose of QE. Economic growth, however, does not keep rising, and resulting disappointment leads to a weaker stock market. The Fed announces more QE, and stocks rise again but growth does not….

“Should the pace of growth slow below 1 percent, as we expect, the stock market will likely sell off as it has done over the past three years when growth has slowed. The Fed will probably respond with QE4, another round of monetary easing that boosts stock prices without improving growth.

“The hope will be that the Fed will get lucky on its fourth try. But with Europe in recession, China slowing, and tighter fiscal policy, there is little reason to believe that having the Fed buy another $1 trillion–plus of bonds from banks will increase growth or reduce unemployment further. Whether or not a new round of QE boosts stocks again remains to be seen. I wouldn’t bet on it.
One thing to keep in mind, this transfer of wealth is not just a U.S. phenomenon, it’s occurring across the globe (see below).

And as for how this has played out? In June 2012 when it became clear that more quantitative easing was on its way, I began to take some screen shots of Bloomberg’s front page. Below you will find some pages of interest, starting from June 2012 to May 2013. They highlight some of the shenanigans of some of our centralized governments. Relevant dates have been marked, stories of interest highlighted, and links provided:

click to enlarge – Story at: “U.S. Stocks Cap Biggest Rally in 2012 on Stimulus Bets”

click to enlarge – Story at: “European Stocks Rise Amid Speculation of China Stimulus”

click to enlarge – Story at: “Draghi Says Officials Agree on ECB Unlimited Bond-Buying”

click to enlarge – Story at: “Fed Seen Starting QE3 While Extending Rate Pledge to 2015”

click to enlarge – Story at: “Bernanke Says Premature Tightening Would Endanger Recovery”