Until you got to this tax and spending deal a year ago, it was one of the most hated bull markets. The markets steadily climbed one wall of worry after another, and the problem was that the economic data did not confirm it.
That’s right. The market was not rising for the past ten years due to a healthy underlying economy. On the contrary, the market was rising due to the Federal Reserve pumping out stratospheric amounts of thin-air money, all of which needed somewhere to land.
It was targeted by the Fed to land in stocks and bonds. Their goal, stated long after the fact, was to create a strong economy by what I would consider a reverse strategy of inflating money supply in order to pump up stocks in order to create a wealth effect that would cause companies to expand and people to buy more, etc.. The plan was that wealth would spill backward into the economy, rather than wealth emerging out of a strong economy.
The plan was nuts.
One of the beautiful ironies of this whole situation is that in 2018 you finally feel like the economy is normalizing to what we knew before the crisis.
By 2018 the wealth effect appeared to be finally working, but mostly what was working in 2018 was the new tax gift to the rich. The corporate tax cuts in particular made companies look much more profitable by improving the bottom line because “earnings” are calculated after taxes. So, it appeared profits were soaring because of corporate economic vitality. In addition, stock buybacks made earnings-per-share look better still because the increased buybacks reduced the number of shares over which the earnings were distributed.
It all looked great on the surface. Employment was historically low, and we started the year with housing prices in many areas well above housing’s pre-crash peak. This created the illusion that the economy was percolating along splendidly … just as the Fed had planned.
And then it wasn’t … because it never was.
Why was the market so hated?
Hated it was, and for many the rally represented a moral quandary, particularly in the early years, when stocks served as a kind of daily referendum on actions by the Fed to end the financial crisis. In that role, buoyant markets became a target for those who saw a charity program for the very people who laid the economy low. At the other end of the spectrum, critics accused the Fed’s Ben Bernanke of engineering gains to hide economic wounds that never healed. Profits rose, fueling the bull, but wages stayed stagnant. Most of the time since 2009, gains in the S&P 500 have surpassed gains in GDP and worker pay by gaping margins.
Exactly. Stocks were not going up because the flaws in the economy were being corrected so that the economy was standing on an increasingly stronger foundation. Stocks were only going up because the Fed’s new money was targeted to go into stocks. The rich banksters who created economic catastrophe were being Fed with wads of new money and had to put it someplace, so they put it in stocks. The market rose, and everyone knew it would continue to rise so long as the friendly Fed kept giving new money to the crooks who broke the market in the first place.
Almost every point where I said the market would hit trouble was a point where the Fed had announced it would change its plans — stop creating new money, then start raising interest rates, then start actually sucking the new money out of the economy, then increase the rate at which it sucked money out of the economy. At each point the market faltered in a big way. That’s what made those scheduled changes in Fed policy and the market’s corresponding moves so predictable — the knowledge that the whole recovery was an illusion built on nothing but huge financial liquidity being concocted by the Fed and then mainlined by banks into stocks.
That is why the bull market was hated by so many (like me) who didn’t want to buy in when they knew the whole thing was an illusion of success, built over a deeply flawed economic foundation, who knew the whole illusion of life would fail when the Fed pulled the plug. The average Joe like me wasn’t being given the new money to play with virtually risk free, so we couldn’t afford to go on that ride. The people who broke the economy were.
That is why the wealth effect created a widening gap between the 1% who were receiving the money directly and the 99% who were not. Now there were actually about 10% of the people at the top who benefited because those who rub shoulders with the 1% got a fair amount of rub-off benefit. But those who depend on the money trickling down in the form of better wages got … nothing!
If that wasn’t all just an illusion, why did the market fall in January as soon as the new tax breaks kicked in?
The market fell hard in January for the reason I said it would: The Federal Reserve doubled the rate at which it was unwinding its balance sheet in January, and its reduction happens mostly at the end of each month. The removal of life support that had supported the illusion of a fundamentally strong economy suddenly caused the otherwise lifeless patient to convulse. With the withdrawal of life support getting more seriously underway, the largest tax breaks in history were not enough to even keep the economy stable, much less cause it to return to health.
That looked like this:
The market had been flatlining until Trump got elected. That was because the Fed had stopped quantitative easing so no new sugar was going into its veins. The Trump Rally began like a blood transfusion, but by the last quarter of 2017, the Fed started to unwind its balance sheet wherein it actually sucks blood out of the patient.
The Fed’s first extractions of liquidity were too incremental to be noticed. The basis I gave for saying the market would most likely wait to take its first major leg down until January of 2018 was that the Fed would double down on its rate of unwind at the end of January when its big Treasury roll-off happens. Even though the Trump Tax Cuts would kick in at the same time, I believed the Fed’s unwind would undercut the tax cuts sufficiently to render them ineffective.
The Fed trumped Trump
That is why Trump complains so much that Fed Chair Jerome Powell is spoiling his party. That the market fell apart so badly as soon as the absolutely massive Trump Tax Cuts began is proof that the Fed’s former infusions were the only thing keeping the market alive.
Now stocks are plunging as the stimulus Bernanke enacted is being withdrawn by a new Fed chairman, Jerome Powell. Inevitably, it’s spurring debate over how much of the financial crisis lingers today.
“The reason I’d say it’s still with us is look at the Fed’s balance sheet,” Zaccarelli said. “This year has been impacted by quantitative tightening. As the Fed continues to run off its balance sheet, it’s a vestige of the crisis and it’s still with us today. Investors remain very scarred by what happened in 2007, 2008 — you can see it in investor anxiety.”
Probably the ONLY place you have heard over and over that the Great Recession never ended and that the recovery was nothing more than an illusion — an artifice propping up the belly of the Great Recession — is here on The Great Recession Blog. AND the only place you have heard it said over and over that people will start to realize we are still in the Great Recession when the prop is removed is here on The Great Recession Blog. That is why I called it that, even though I started writing this blog after the Fed’s fake recovery had begun and after the government bean counters had officially declared the recession over! Folks, it won’t ever be over until we’ve corrected the problems that caused it! So, we had best get on with the real work!
The problems — economic cankers — of the Great Recession are still entirely with us. One metaphor I’ve used many times is that the patient remains effectively dead because no surgery has been done while under life support to restore the patient’s underlying health. We’ve spent ten years in a coma while our surgeons did nothing to correct our fundamental health problems! Therefore, remove the life support, and it will become clear the doctors have not restored the patient to life.
With the life support now bleeding out, we have gained nothing sustainable during the entire “Great Recovery” period. Period. We could have used that time to correct our ailments by jailing bad banksters, instead of pouring all of the new money through them, breaking banks that were too big to fail into much smaller banks (like the nation did with Ma Bell), instead of forcing them to merge with troubled banks and become even bigger(!), reinstating Glass-Steagall and other banking regulations that were set up after the Great Depression to protect us from this kind of reckless banking interference in markets, and insisting in the Trump Tax Cuts that companies who chose to benefit from the cuts have to refrain from stock buybacks or dividend increases or even reinstating the regulation that largely barred companies from buying their own stocks back so the money would be forced into capital spending, R&D, new market development, wages, etc.
(The Trump Tax Cuts, by the way, did not pay for themselves; the federal debt is up $1.37 trillion since last Christmas when the tax cuts were passed! Mexico did not pay for the wall and clearly never will, or we wouldn’t be shutting down the government just to wring out enough money to build a small part of what is now just a fence; and the tax cuts clearly will never pay for themselves either, as the stimulus benefits were largely front-loaded into 2018. So, if they didn’t pay for themselves then, they certainly won’t thereafter. And they didn’t. Your share of last year’s debt increase is an additional $11,000 per household. Merry Christmas.)
There are a lot of things we could have done and didn’t do because they would have been tough work, and congress was too weak and lazy to take leadership. Most likely the majority of citizens were also too cowardly to go in for the surgery that was needed. So were all the president’s along the way, including Trump, who has done nothing to right the manifold wrongs that have been built by the establishment into the economy.
No one took the Wall Street bull by the horns and wrestled the establishment to defeat the corruption and greed within it. No one in power, that is, because they all benefit from the programs that have created our massive bubbles and recessionary cycles — Trump included. The White House was never so full of establishment payers as it was during Trump’s second year (after he booted out the few anti-establishment players he had).
That is why after the greatest tax cuts in history, coupled to a big increase in government stimulus spending, the economy is now going down with the stock market, instead of up as Trump believed it would. It is all about the bursting of the Everything Bubble that the Federal Reserve created with its Great Recovery program now that the Fed’s artificial life support is being pulled away.
The Fed will, of course, soon recognize that it cannot remove life support and will return to life support, but the damage will be too great for them to save the already rotting corpse. That is because the illusion that their plan was creating sustainable recovery is already breaking up, as the Bloomberg article quoted here reveals. It’s the first article in the mainstream press I’ve seen that clearly backs up what has been the core theme of this blog since its inception.
The world is wising up to the fact that the Fed’s recovery plan requires artificial life-support forever, and what kind of life is that? All illusions, once their techniques are revealed, no longer work. That is what will be different about the next cycle. Most of the people in the audience will know it is an illusion that only holds so long as the artifice remains intact.
Moreover, the Fed’s illusion requires increasing doses of Fed Med because the Law of Diminishing returns is still as active as it has ever been, in spite of the fact that economists largely stopped believing in that economic law years ago. Economists, after all, have been blind guides leading the blind because the majority of them now ascribe to philosophies (not truths) that plug up the brains of otherwise intelligent people just like Alzheimers does. That is why they never saw the Great Recession coming, and it is why they were almost all foolish enough to believe Fed Med would actually work, and it is why they didn’t see the present crash coming either, and it will be why they will counsel us to go back onto Fed Med immediately!
The few old-school economists left (the real ones) like Dr. David Stockman saw through the illusion right away. If you’ve been reading here, you were enabled to see through it, too; or maybe you are reading here because you are among the few who already saw through the illusion, and you were looking for a rare watering hole in what has become a dessert of economic truth.
The breakdown of the Fed’s illusion of recovery and all the economic wreckage that ensues will be the story of 2019. I will be writing about it during 2019 if we make my fundraising goal. If we don’t make that goal, the end of 2018 is a good place to leave off because the story has finally come full circle as we start to crash back into the Great Recession, which is where I said at the start of the story seven years ago we’d end up. Finally, even the mainstream media, like Bloomberg, is picking up on it.
Hopefully, I’ll still be writing here in 2019 to start the sequel to the story as we move into part two of the Great Recession Years (or GR 2.0 as I’m calling it). If so, my first article (available to subscribers only) will lay out the numerous headwinds that the general economy and the stock market will have to buck throughout 2019. You can read that article if you become a supporter at the second-tier $5 per month subscription level or higher.
You will want to subscribe, if you are able, before you miss that article. If you can only subscribe at the $1 level, just know that support of any kind is vital to reach a goal that will keep this site going through the blustery times ahead. Support at that level is a way for people who know they have benefited regularly here to say, “I won’t keep taking for free.”
I will, however, keep as many articles available for free as I can afford to, so long as we hit minimum support, so that The Great Recession Blog can serve as many as possible through the wintry economic season ahead. That’s my part. I’ve given my time entirely for free for seven years to this effort; but, as we move into the tumultuous economic nor’easter and deep freeze of 2019 when the illusion breaks up and cold realization sets in, I, too, need to focus on activity that keeps the home fire burning. Please become a patron now as there is very little time left to keep this blog burning a bright light through a dark winter. It’s up to you.