Stagnation Ahead
O’s empty economic boasts
‘THE economy’s better,” President Obama said smugly toward the end of Friday’s press conference, noting that he hadn’t been asked about it (albeit because the questions focused on the chaos around the world).
Indeed, Obama & Co. don’t miss an opportunity to trumpet just how much the economy has improved: Jobs are being created, they say, unemployment is falling, housing prices are firming up. And inflation? Well, there isn’t any.
But much like pennystock pushers, the Obama sales team is obfuscating the muchgrimmer reality — and Thursday’s 300plus point stockmarket plunge is only a taste of the bad news.
Sure, the market had been on a great run rising above 17,000 on the Dow Jones industrial average. But Thursday wiped out the year’s gains and Friday added to the misery with another 70point drop. The S&P 500 fell 2.69 percent for the week, the steepest weekly drop in more than two years.
It’s not just the lousy, market-threatening headlines out of Gaza, Ukraine and debtdefaulting Argentina. The insiders will tell you the real worry is here in the United States.
It begins with the Federal Reserve, and noises out of the normally dovish Chairwoman Janet Yellen that the nation’s central bank is looking to raise interest rates sooner than anticipated — especially if the economy continues to improve.
Most investors I know don’t buy that “prosperity is around the corner” pitch. Yes, corporate profits are decent, more people are working and wages are up. GDP even grew more than expected in the second quarter.
But all those factors are up only from pretty bad lows. And little of it has much bearing on the average Joe, who is the key to sustaining growth in an economy that relies so much on consumer spending as ours does.
First, unemployment isn’t really 6.2 percent; it’s closer to 12 percent once you factor in all those who are also working parttime because they can’t find fulltime jobs. The laborparticipation rate — which measures what share of the adult population is actually working or seeking a job — is still at its lowest levels in nearly 40 years.
GDP rebounded after a dismal (negative, in fact) first quarter, but most economists expect it to “normalize” somewhere south of 3 percent — that is, not high enough to break us out of the wagestagnating “new normal” of the Obama era.
And those corporate profits are good, but not really because business is booming here. Companies have gone global and learned the easiest way to keep profit margins up is to keep wages low, and if you have to hire, try to do it overseas.
And smaller business is still having trouble finding the cash to grow. Obamaera regulations have local banks reluctant to lend — and, anyway, they’re being bought up by the “too big to fail” banks that get favorable treatment under the DoddFrank law.
Put it all together, and what you have is an economy that will find it difficult to sustain the Dow at 17,000 without the heroin of easy money that the Fed has flooded into the system since the 2008 financial crisis.
But Yellen, who was thought to be even easier than her predecessor Ben Bernanke when it came to “accommodative monetary policy” (aka printing money), finds herself somewhat in a box — which is why she’s hinting that she might have to raise interest rates faster than anticipated.
One problem is that pockets of inflation are starting to appear. We don’t see all of this in such broad measures like the Consumer Price Index, but average people know that gas prices are too high even as we produce more oil here, and food prices are moving up markedly.
Such pockets of inflation are a direct reaction to low interest rates: With cash cheap, especially for big wheelerdealers, traders are snapping up commodities such as oil futures.
The Fed’s low rates were also behind the Dow’s runup: Money’s been flowing to equities because it’s the only way to get any return.
In other words, that bubble in socialmedia stocks that Yellen warned investors of a couple of weeks ago is partly her doing. Even to make money in equities, investors have to take more risk and buy securities with higher potential returns.
But plenty of smart traders think last week’s wipeout signals that the stock party may be coming to an end. With the Fed ending or “tapering” its moneyprinting (“quantitative easing”) and Yellen signaling that she may also start hiking shortterm interest rates, the markets are sensing they will have to rely on the “strength” of the Obama economy.
And judging by Thursday’s 300point implosion, they don’t like what they see.