Wednesday, August 15, 2012

Why So Much Cheer on Wall Street?

Last Friday's 217 point rise on Wall Street was triggered by some good news on the jobs front. Trader's cheered a modest increase in payrolls, and politicians trumpeted (as they have other months) that we have finally turned the corner, and the recovery is ready to take off like a rocket.  But what do the numbers tell us?  Let's look st some historical data.

Not exactly a robust 3 1/2 years of job creation for the current resident in the White House.  Now let's look at the info represented in a slightly different format.

Again, hardly a reason for cheer in any recent news.  In fact, not much room for cheer since the Dotcom bubble burst in the late 1990s.  The lost decade of stock performance now threatens to stretch into two decades.  We can look to the usual suspects for the poor performance: aging demographics with an avalanche of Boomers set to retire, a poor educational system that fails to match skills to employment needs, the inability of workers to retrain for new careers, union quasi-wage controls that deter employment and send companies to source products from abroad, an outdated immigration system that restricts the entry of highly skilled workers (engineers, doctors, software designers, etc.), and last but not least, government regulations that deter employment such as minimum wage rules, high employment taxes (FICA, SSN), the burden of health care plans, the highest corporate tax rate among OECD nations (39.2%), and artificially low interest rates that punishes savers and subsidizes borrowers. Things have only gotten worse on many of these fronts in the past 3 1/2 years, or the past 12 years, or the past 20 years.

The recent stock market cheer, in my opinion, represents the triumph of hope over reality, and the fatigue of a sideways market for the past 10 years. In all likelihood a pullback is coming from these lofty level that are unsupported by the current economic reality. Expect a sideways market for the next 3 - 5 years while the economy works through the current round of excesses, artificial manipulations, and malinvestments. Only when politicians give up on trying to "fix" the economy will we see a sustainable turnaround and real recovery.

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