By the irony of timing, the Dow hit an all-time high as markets opened. Even Apple rallied. Exuberance wafted through the air. Hype was flowing thickly. The happy days were back. New highs beget new highs. And everyone knew why: the Fed’s money-printing and asset-purchase operations. By the irony of timing… because 30 minutes later, kitchen-table reality polluted the scene.
Through surveys, the IBD/TIPP Economic Optimism Index measures how Americans feel about the economy—from the kitchen table, so to speak. After a 5.1 point nosedive, it hit 42.2, the lowest since December 2011 (50 = neutral). The 10.8% decline was the worst since August 2011. Personal financial outlook declined 4.4% to 52.2 but remained positive. Confidence in federal economic policies dropped 11% to 35.5. The six-month outlook plunged 18% to 38.8, the lowest since October 2011—which, the report said, “perhaps signals a turning point and an impending entry into a recession.”
“Americans across the board think that the economic outlook is grim,” the report explained, pointing out that 59% of Americans, given their declining real wages, if any, think that the US is already in a recession—readings that “haven’t changed much in recent months.”
Nevertheless, the Dow surged to 14,254. Previous record: October 9, 2007, when it closed at 14,164. Of course, on an inflation-adjusted basis, there is still some room left. But on this glorious day, we won’t quibble. Instead, we’ll look at what happened less than a month after the previous high: on November 7, 2007, Cisco CEO John Chambers said out loud what had been known for a while, and what the stock market had simply brushed aside.
After discussing Cisco’s earnings, which were just fine, he ventured into the future. US companies, he said, “probably as a surprise to no one,” were experiencing “some softness,” and growth in the US would be “very lumpy.”
Markets went south. The credit bubble was cracking. The housing bubble and other bubbles were blowing up before our eyes. The conditions that would become the financial crisis were lining up. A rough ride until stock markets reached their lows in March 2009. By that time, the government was running structural deficits of well over $1 trillion per year without end in sight, the Fed was handing trillions to banks, domestic and foreign, and other companies, like GE, to bail them out, and it was buying up ever more assets. Other countries did the same.
It started a bull market—and the largest credit bubble the world has ever seen, along with other bubbles, some obvious, some not so obvious, such as the farmland bubble, some of them mature, others in their infancy. And they all, as we’ve learned for the nth time, blow up—even while the Fed denies that they exist.
In Europe, the various bubbles also turned into a financial crisis, which turned into a debt crisis that morphed into an economic crisis. China re-inflated its bubbles with such vigor that now even insiders admit publically that they’re afraid of them: Wang Shi, chairman of Vanke, China’s largest property developer, when asked by CBS, if there was a housing bubble, simply said, “Yes, of course.” And if it burst, that would be a “disaster,” he said. A disaster not just for China but for the economies that depend on it, including big exporters, such as Germany and Japan.
But this time, it’s different. Again. Everybody knows why. Even the New York Times. It put an article at the top of its front page, specifically naming the Fed’s relentless money-printing and asset-purchasing operations as primary impetus behind the new high. There is no longer any pretense that this has anything to do with fundamentals or the economy or with corporate health. Even the New York Times admits that the driver behind this new high is the confidence that the Fed will continue to pump $85 billion a month into the markets, ad infinitum, and if anything “very lumpy” shows up, it will print even more.
Conversely, “everybody” knows something else: if that confidence ever sags…. We’ve seen the results. Twice. QE1 had a limit. When that limit approached, stocks swooned. QE2 had a limit, and when it approached, stocks swooned. So, QE3 doesn’t have a limit.
Yet, the benefits are reserved largely for those with access to this money. While some of it trickles down into the real economy, most of it simply drives up asset values, bypassing the people at the kitchen table.
But the day that the Fed ends its purchases, or declares that it will—rather than just palavering about it—the run for the exit begins. Those with 401(k) will be at work and won’t see their statements for weeks. When they do, the shock will freeze them into position. The process of decimation will start all over again.
Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate “beer money.” I appreciate it immensely. Click on the beer mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.