Well, At Least Wall Street is Having a Good Time

Stan G. Duncan

There’s an odd thing happening on Wall Street, and it doesn’t look good.

Overall since January, most companies on the stock market have gone up in by about 20 percent while their earnings have gone down by about 29 percent. That’s an odd thing to happen. Normally, if a company is losing money, investors will bid the price of its stock downward because it means they were getting less money to send home to the shareholders. In today’s dismal environment, however, investors were bidding the stock up because they had been expecting companies on Wall Street to be much worse.

And it’s no wonder. These days, making up for past sins when Wall Street analysts would say that any company with a pulse was a Titan, they have been projecting nothing but doom and gloom. Here’s the best description of the economy that I’ve heard, in the words of Tatyana Shumsky, “The economy is in free fall, the Fed funds rate is effectively zero, unemployment is heading to ten percent, and the Antichrist is coming to get your puppy.”[1]

But today, analysts seem ecstatic that the companies on the S&P 500 are alive at all. The Dow Jones Industrial Average has in fact been rising for the last quarter and was up in the 9000s for most of the last week. This, of course, has little to do with whether or not the companies are making any new widgets and a lot to do with the fact that investors are pleased that the companies are simply doing better than expected. It’s like seeing an old friend and saying, “hey you look wonderful, I thought you were dead.”

That’s fine, but the part that bothers me is that their “better than expected earnings” are not the result of making and selling anything, but because they have been offshoring jobs and firing a truck load of people and thus have lowered their costs. Their profits are up because their employees are down. That makes them look good on paper and their earnings-per-share numbers come in above the analysts’ projections, but it also means your brother-in-law is still living in your garage (to quote myself from a previous post). The model seems to be that if a company fires enough people, it gets to keep a lot of money in its pocket (and watch its stock go up), even if its sales are bupkes, and Wall Street is happy. Bob Herbert, writing in the New York Times on this said, “That’s not recovery, that’s mumbo jumbo.”[2] I couldn’t have said it any better.

There are two problems with this. First, obviously, if they keep using this technique to raise profits, eventually there will be nothing left but wealthy stock holders and a home office in the Bahamas. Second, when giant corporations cut jobs to appear to be making money that means that we consumers have less money in our pockets, which means we spend less money (either because we’re out of a job or simply too scared to spend), and if we spend less then the companies will earn less, and if they earn less money then they’ll have to fire more people, and so it goes. It’s the downward spiral of economic death. That was the great fear behind the stimulus package last year and it hasn’t quite gone away yet.

Commenting on this phenomenon, Robert Reich says that “If investors begin putting more money into the market, then the market will automatically rise, leading more investors to put in more money — until, that is, the rally ends because nothing has fundamentally changed in the real economy.”[3] And we’re back to bubbles and the glories of 2007. I can’t wait.

Meanwhile, the message is to try not to focus on the cheerleaders on CNBC, Wall Street Journal, or the Fox Business Network. Look instead at jobs, food, people, and the environment: that is, the places where a real economy lives. If the bottom is doing well, the top will do just fine. It’s the trickle up theory and I think Jesus said it first.

From the "Just when you thought it was safe to go back in the water" department

One more thing. Most of the horrors of last fall revolved around the horrific number of subprime mortgages that people could no longer pay on, which dried up the money going to Wall Street, which dried up money to your IRA, and your local bank, and which then threatened to end life on earth as we know it (and the Anti-Christ was coming to get your puppy). After about five trillion dollars were invented out of nowhere to bail them out, most of us came to believe that at least that crisis has been diverted. It’s now time to move on to an easier problem—like peace in the Middle East.

But that may be wrong. The new black cloud on the horizon is the fact that over a hundred thousand middle class people have lost their jobs since 2007, and a huge number of them are now getting to where they are having trouble making payments on their loans. And when that happens, they won’t be able to refinance because their homes will have gone down in value with the first wave of the recession. Many economists are now predicting a Next Big Wave of foreclosures that will take our breath away just when we thought we could start breathing normally again.

Sorry. I meant to bring you some good news.

[1] Tatyana Shumsky, “Are Investors Ignoring Job Losses?” http://thefastertimes.com/wallstreet/2009/07/30/are-investors-ignoring-job-losses, July 30, 2009.
[2] Bob Herbert, “No Recovery in Sight” (New York Times, June 27, 2009), p, A19.
[3] http://robertreich.blogspot.com/2009/07/wall-street-rally-watch-your-wallets.html

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