Ep. 44 Booming Stock Market Indicates Bad Times, Says Krugman

24 July 2016     |     Tom Woods     |     3

Is a rising stock market an indication of economic health? Not necessarily, says Krugman, and on that he’s of course correct. But what accounts for rising stock prices today? He says a lack of alternative options for investors — another way of saying the economy stinks, even though he devotes half his columns to defenses of Obama.

Krugman Column

Bull Market Blues” (July 15, 2016)

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Related Column

The Social Function of Stock Speculators,” by Bob Murphy

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Ep. 43 Krugman Says Investors Have Given Up Hope…So, What Happened to that Obama Recovery, Paul?
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  • https://www.facebook.com/david.rogers.hunt David_Rogers_Hunt

    It’s obvious that Krugman is covering Clinton’s ass for when the inevitable market correction occurs. Isn’t it obvious from the way the establishment is throwing this election that they what Gary Johnson in office so they can blame capitalism/freedom/self-responsibility for their decades of confusing debt with true wealth, and to then rescue us all by means of more edicts from our better’s/philosopher kings! It’s brilliant!

    Okay,… tougue-in-cheek,… but really,… don’t you think that Krugman may already suspect that the jig-is-up! Sure, it’s all heads, I win; tails, you lose, economic rationalizations,… but I am begining to sense a sense of … dare I call it,… FEAR!!

  • http://www.jamesbbkk.com/ jamesbbkk

    It is a wonderful thing that the average Joe has access to the stock bourses, where before he was shut out. It is true that it is disturbing that we (and especially retirees) are basically forced to be punters in an age of financial repression and in competition with front running algorithms in what David Stockman calls the casinos of Wall Street just, as Tom said, to keep standing still. But that is due to financial repression and taxation of investment, not the new choices we have for ownership of shares of some great and some not so great companies across the surface of the globe. Low (and now negative! what a farce) fixed income yields and high taxes on capital gains and non-municipal interest income (taxes on both without regard to the drag of either government-claimed or real consumer price inflation and taxes on interest without regard to costs and fees associated with keeping interest bearing accounts) are major culprits driving the chase for yield and speculations for outsized capital gains on non-dividend-paying companies, which – together with easy money – bid up prices in already price-levitated markets.

    Stocks are liquid opportunities to own pieces of great companies. This makes them among the best assets – assuming markets without secret government-sponsored interventions and manipulations. Much better than houses, which are really just illiquid, expensive, consumer goods which are often vanity projects and herd following purchases.

    I would like to hear sometime if Tom and Bob are concerned about the migration from defined-benefit to defined-contribution retirement plans. That was a major driver to stock ownership by individuals, I think. I doubt it, but was left with the impression that the expressions of concern did not settle on the cause or relative benefits of this ownership concentration compared say to the 1920s or what might exist in a fully free society.

    Would that the girls in the employee benefits departments and Fidelity not be government-supported through excessive rulemaking and the limits on retirement funding not cripple the opportunity to fully fund retirement during peak earnings years. It’s just dribs and drabs and reports. At least they finally gave us brokeragelink and freed us from the binds of high priced mutual funds. As I said in 2008, “I can lose 35% of my money by myself.”

  • Bill Huber

    When I read Paul Krugman’s op-ed, Bull Market Blues, I realized I had at least three ideas that explained the bull market blues better than his idea that “stock prices reflect profits, not overall incomes”. Here are my top three ideas.
    Federal Reserve’s Co-dependent Relationship With The Stock Market
    By far the biggest impact on stock prices has been the question of when will the Federal Reserve stop its zero interest rate policy. To buyers and sellers in the stock market the latest speculation about the Federal Reserve decision is far more important than either actual profits or profit guidance. Almost every week there is a financial reporter saying the market has gone up or down based on speculations about Federal Reserve actions. This link is stronger now than at any time in the history of the Federal Reserve. After seven years a large group of buyers and sellers have cynically embraced the thought that the zero interest rate policy has created a stock market bubble and is the only thing holding up higher stock prices. Although the Federal Reserve loathes to admit it, it is their fear of declining stock prices that caused their policies to devolve into this co-dependency relationship. Now they are stuck with a policy that can written off as “trickle down economics” for banks but is increasingly necessary to keep the stock market bubble intact. It reminds me of the Federal Reserve easy money policies during the 1920s and we know how that stock market bubble ended. There is nothing that gives me the blues more than to see how quickly the Federal Reserve backs off of a rate increase when the stock market tumbles for a couple of days. It is as if the Federal Reserve cares more about the stock market than the economy. At some point the Federal Reserve will regain its focus on the economy and all of us will have to endure the stock market blues until we can purge the market of its excesses.
    The FANG Portfolio
    In 2015 the S&P 500 would have declined if not for the FANG portfolio, Facebook, Amazon, Netflix, and Google. Despite Mr. Krugman’s belief that stock prices reflect profits these companies are prime examples of growth stocks that are richly valued by their expected profit growth and not their minuscule profits. They also represent the leading edge of the Unicorn Companies who have rich valuations and almost no earnings. To paraphrase former Federal Reserve chairman, Allan Greenspan, there seems to be an irrational exuberance for these unicorn companies. As an example of this irrational exuberance, Salesforce.com has almost never had a profitable quarter and presently sports a price to earnings ratio of -4,213. How does this company deserve a market capitalization of $54 billion and get its name on the tallest building west of the Mississippi?
    Financial Engineering
    One of the interesting trends since the last economic expansion that was based on productivity gains has been the growth in financial engineering tricks. Since financial engineering was one of the technologies that enabled the sub-prime mortgage bubble and the 2008 stock market crash, it is foolish to overlook its importance. Despite reforms from the 2008 crash financial engineering remains largely intact, profitable, and does not require many people to implement. To many companies it is more attractive than investing in productivity improving ideas such as direct capital expenses and employees. It is also one of the main reasons middle class wage increases have stagnated since 2000. In its most recent incarnation many companies have taken advantage of low interest rates to buy back their own stock in an effort to raise their stock price. The executives and stock holders of these companies realize they will be rewarded with higher stock prices despite the fact the sales for the company are unchanged. If the best investment idea for these companies is to buy back their own stock, it is also a condemnation of these executives whose primary job is to grow sales and reduce costs via new products, greater innovation, and productivity. The worst case scenario is that one of these days the Federal Reserve will be successful at creating higher interest rates and inflation and these companies will have too much debt to invest in new products and productivity improving ideas.