Wall Street, the Happy Island (or Neverland)
We would need Edoardo Bennato, famed for his fairy tale-inspired songs, to recount the story of the U.S. stock market's new record this week. The happy island of Wall Street truly is Neverland, a market utopia that does not reflect the economic situations of the common people, the political malaise in Europe, America and China, or even the point of view of companies and entrepreneurs.
I was on the phone with one of the traders still in the old New York Stock Exchange — and not in front of a computer in New Jersey or Hawaii — on Tuesday morning, when the U.S. world markets’ index guide, the Dow Jones, hit a record 14,164.63 points. I was expecting an explosion of joy and other operators snatching up the phone to shout their exultation. Deep down, I was hoping to be invited to the record-breaking party, with champagne and caviar to celebrate the historic moment. Instead, there was a long moment of silence and then a sigh — perhaps relief, perhaps boredom. "Anyway… we'll see," said my trader. "We'll see." No cries, no calls, no caviar.
An Ordinary Day in the Life of the Market
This reaction would have been unbelievable in October 2007, when the Dow Jones reached its previous record. But that was before — before the financial crisis, before the Great Recession that saw the losses of homes and jobs for millions of Americans. Before the collapse of a financial system that has paralyzed the world economy. Before. The events of the last five and a half years have made markets, investors and savers sadder and more suspicious, less ready to uncork the champagne.
It's a shame; the U.S. equity market recovery has been extraordinary. The Dow Jones has more than doubled since March 2009, immediately after the crisis, and increased more than 9 percent this year. It only took 1,004 days to beat the previous record — a fast move if you remember that after the Great Depression, the Dow Jones went from 1929 to 1954 without breaking a record.
The statistics are not an end in themselves. In America, as in the world, the value of the market is important. Most investors invest in stocks, either directly or through pension funds. When markets rise, the effect is similar to the slot machines in Las Vegas: Players become richer in a few minutes without really doing much (unfortunately, the mechanism works in reverse when markets fail.) Economists call it the "wealth effect," a sense of financial well-being that helps consumer psychology and entrepreneurship.
But if this effect exists, we can't see it yet. The scars of the crisis are still too fresh in the minds and wallets of Joe and Jane Doe for them to return and spend and spend when they see that the Dow Jones is at a new record. It's not just a problem of mass psychology. The same factors that led to the stock market backfiring are also the basis of operators’ and investors’ skepticism. There is only one big deus ex machina in this Dow Jones miracle, and it's found in Washington, inside a heavy grey tower that looks like a medieval fortress: the Federal Reserve.
Ben Bernanke and his ilk are doing everything possible to revitalize an economy that was moribund after the crisis. Conventional measures — keeping interest rates very low — are almost useless. With fugitive politicians and the inability to reform the financial system — which would mean raising taxes or reducing pensions and health care — Ben's economists have put themselves to pumping money into the economy. Each month, the Fed spends $85 billion to buy Treasury bonds issued by the government. Money goes from one side to the other in Washington. But the simple fact that the Fed is buying en masse has depressed interest rates on U.S. debt, prompting investors to seek more lucrative investments. The stock market has been a major recipient of money printed by Bernanke. Pension funds, hedge funds and even retail investors have bought shares, though more while holding their noses than for true conviction.
The business world has helped them, announcing decent profits and demonstrating that the years of austerity during the crisis has served to cut costs, reduce debt and choose more sober strategies for growth at all costs. With budgets that are bursting with money but without great ideas of how to invest it, many companies have decided to give money back to the shareholders. Dividends and redemptions of shares are at record levels — another reason why it's worth buying stocks even if the economy is still down in the dumps.
These two factors — the money from the Fed and companies’ profits — are the two keys to understanding the mystery of the markets. Investors are like the beautiful young wife of an elderly rich gentleman: They are attracted to the market for the money — $85 billion per month, $300 billion in dividends a year, $117 billion of equity redemptions in 2013 — but there is no true love.
For optimists, this is a good sign. Imagine, they say, how the markets will go up when the economy really gets going again. For them, the strong employment numbers released Friday are a sign that the U.S. recovery is finally accelerating. Please note, however, another side of the coin: A market that has broken a record without a lot of fuel in the tank is a fragile market. Just recently, an external event — a long period of political instability in Italy, for example — or data that is not good for the American or European economy can make investors run for the emergency exit.
Enjoy your trip to Neverland.
I was on the phone with one of the traders still in the old New York Stock Exchange — and not in front of a computer in New Jersey or Hawaii — on Tuesday morning, when the U.S. world markets’ index guide, the Dow Jones, hit a record 14,164.63 points. I was expecting an explosion of joy and other operators snatching up the phone to shout their exultation. Deep down, I was hoping to be invited to the record-breaking party, with champagne and caviar to celebrate the historic moment. Instead, there was a long moment of silence and then a sigh — perhaps relief, perhaps boredom. "Anyway… we'll see," said my trader. "We'll see." No cries, no calls, no caviar.
An Ordinary Day in the Life of the Market
This reaction would have been unbelievable in October 2007, when the Dow Jones reached its previous record. But that was before — before the financial crisis, before the Great Recession that saw the losses of homes and jobs for millions of Americans. Before the collapse of a financial system that has paralyzed the world economy. Before. The events of the last five and a half years have made markets, investors and savers sadder and more suspicious, less ready to uncork the champagne.
It's a shame; the U.S. equity market recovery has been extraordinary. The Dow Jones has more than doubled since March 2009, immediately after the crisis, and increased more than 9 percent this year. It only took 1,004 days to beat the previous record — a fast move if you remember that after the Great Depression, the Dow Jones went from 1929 to 1954 without breaking a record.
The statistics are not an end in themselves. In America, as in the world, the value of the market is important. Most investors invest in stocks, either directly or through pension funds. When markets rise, the effect is similar to the slot machines in Las Vegas: Players become richer in a few minutes without really doing much (unfortunately, the mechanism works in reverse when markets fail.) Economists call it the "wealth effect," a sense of financial well-being that helps consumer psychology and entrepreneurship.
But if this effect exists, we can't see it yet. The scars of the crisis are still too fresh in the minds and wallets of Joe and Jane Doe for them to return and spend and spend when they see that the Dow Jones is at a new record. It's not just a problem of mass psychology. The same factors that led to the stock market backfiring are also the basis of operators’ and investors’ skepticism. There is only one big deus ex machina in this Dow Jones miracle, and it's found in Washington, inside a heavy grey tower that looks like a medieval fortress: the Federal Reserve.
Ben Bernanke and his ilk are doing everything possible to revitalize an economy that was moribund after the crisis. Conventional measures — keeping interest rates very low — are almost useless. With fugitive politicians and the inability to reform the financial system — which would mean raising taxes or reducing pensions and health care — Ben's economists have put themselves to pumping money into the economy. Each month, the Fed spends $85 billion to buy Treasury bonds issued by the government. Money goes from one side to the other in Washington. But the simple fact that the Fed is buying en masse has depressed interest rates on U.S. debt, prompting investors to seek more lucrative investments. The stock market has been a major recipient of money printed by Bernanke. Pension funds, hedge funds and even retail investors have bought shares, though more while holding their noses than for true conviction.
The business world has helped them, announcing decent profits and demonstrating that the years of austerity during the crisis has served to cut costs, reduce debt and choose more sober strategies for growth at all costs. With budgets that are bursting with money but without great ideas of how to invest it, many companies have decided to give money back to the shareholders. Dividends and redemptions of shares are at record levels — another reason why it's worth buying stocks even if the economy is still down in the dumps.
These two factors — the money from the Fed and companies’ profits — are the two keys to understanding the mystery of the markets. Investors are like the beautiful young wife of an elderly rich gentleman: They are attracted to the market for the money — $85 billion per month, $300 billion in dividends a year, $117 billion of equity redemptions in 2013 — but there is no true love.
For optimists, this is a good sign. Imagine, they say, how the markets will go up when the economy really gets going again. For them, the strong employment numbers released Friday are a sign that the U.S. recovery is finally accelerating. Please note, however, another side of the coin: A market that has broken a record without a lot of fuel in the tank is a fragile market. Just recently, an external event — a long period of political instability in Italy, for example — or data that is not good for the American or European economy can make investors run for the emergency exit.
Enjoy your trip to Neverland.