Crowd-sourcing question: Why is the stock market still going up?

I understand that the Dow Jones average consists of a very cherried-up bunch of stocks.  Nevertheless, it usually is at least somewhat tied to what’s going on in the real world.  That doesn’t seem to be true lately.

In the face of Middle Eastern instability; Iran being months away from having a nuclear bomb; a stagflation economy; a potential shutdown and, if Obama ignores the 14th Amendment, a default; and the Obamacare exchange’s disastrous, with all the future trouble that portends, the stock market keeps going up.  That seems very counterintuitive.

I have to believe that what’s going on with the stock market now is a bubble.  After all, because a stagnant job market, a weak economy, and unstable national security are all inconsistent with a strong, healthy market.  Add in the fact that the constantly-changing Obamacare rules, regulations, and crony exemptions keep employers and investors befuddled and cautious, there should be no reason for the market to rise.  And yet it’s rising. . . .

My question is twofold, I guess:  Am I right that this is a bubble?  And if I’m right, what the heck is causing it?  Nothing I look at today signals to me that investors should be cheerful and optimistic.

It looks like someone in the MSM needs a review of the “Parable of the Broken Window”

It looks as if someone at Mayor Michael “the friendly fascist” Bloomberg’s eponymous report needs some education in basic economic principles.  Bloomberg Views’ Matthew Klein took it upon himself to comment upon a New York Post story about several burglaries in a high-end New York building.  Klein suggests that there’s no reason to be upset because — hey! — the targets are wealthy:

When the thief fences $10,000 or $100,000 in jewelry from an heir who barely knows what he owns, the thief will feel much richer and spend most of that money. Maybe he will buy a new car, or go on a bender at strip clubs, or rent a villa in a beleaguered European country. The heir might be somewhat upset, but it’s hard to believe that he will suddenly cut back on his spending because he needs to recoup a relatively small loss. In fact, the heir might end up spending more money as he tries to make his apartment safer from future robberies.

You can understand a lot about America’s dire economic straits if you realize that this kind of idiocy shows up in one of the country’s premier financial publications.  What Klein says is a variation of the “broken window fallacy,” which Frédéric Bastiat’s wrote about in 1850, albeit with a soupcon of Marxism thrown in for good measure:

Have you ever witnessed the anger of the good shopkeeper, James Goodfellow, when his careless son has happened to break a pane of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation—”It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?”

Now, this form of condolence contains an entire theory, which it will be well to show up in this simple case, seeing that it is precisely the same as that which, unhappily, regulates the greater part of our economical institutions.

Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier’s trade—that it encourages that trade to the amount of six francs—I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.

But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, “Stop there! Your theory is confined to that which is seen; it takes no account of that which is not seen.”

It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented.

I understand that Klein would say that he’s not describing the “broken window” fallacy because there’s no preliminary destruction involved here.  There’s just the transfer of wealth from the undeserving rich to the somewhat deserving, albeit criminal, poor, with a substantial decrease in value along the way.  But what Klein does is to assume that the rich contribute nothing to the economy, while the poor — even the poor burglars – do.

Klein’s error lies in his belief that only feelings matter:  the rich don’t feel the pain of deprivation, while the poor do.  That’s true, but it has nothing to do with economics.  Lost in that emotionalism is Klein’s fallacious economic point:  redistribution (from rich to poor at the point of a gun) will spur the economy.  It’s more likely that the diminution in value of the goods as they travel (forcibly) from rich to poor will hamper the economy.  The rich man who spends $1 million on a diamond is certainly conspicuous in his consumption, but he’s undoubtedly sending more money into the economy than the poor man who reduces that diamond to $1,000 in cash, much of which we can assume will be spent on drugs and prostitutes.  (And even there, assuming the target is decadent, the poor man pours less in the economy buying pot and a $50 a night girl, than would the target who spends on designer drugs and high-end call girls.)

The above ruminations, of course, involve private wealth.  Government expenditures (such as Obama’s lavish vacations, all of which require millions in travel and security expenses that the taxpayers bear) simply rob Peter the taxpayer, while paying only a small cut back to Paul the taxpayer.

Hat tip:  Best of the Web

The Obama generation is beginning to understand that it’s being cheated out of the American dream

We have Sirius satellite radio in our cars.  I often have mine tuned to current hits channels, both because I ferry kids and because I too like a lot of the music.  This morning, my daughter was running late, so I gave her a quick ride to the bus stop, so I wouldn’t have to give her a long ride to school.

On the way back, I flipped on the radio — and heard the three early morning talk show hosts on the “Hits 1″ channel saying that they and their listeners were the first American generation since the Depression that had it harder than their parents.  The three lightweight talking heads said that their parents got out of college, got jobs, and could have a life where dad worked and mom stayed home with the children, and that this was impossible to imagine for the current crop of young people leaving high school and college.

The bit about stay-at-homes isn’t exactly true, because even in my generation, a stay-at-home mom was a luxury.  Nevertheless, their perception — and the one that they wanted their radio audience to have — is that this young generation is well and truly shafted.  And even if the bit about stay-at-home moms is wrong, everything else is correct.  These young people don’t leave college for a job, especially a job reflecting their degrees.  If they get a job at all, it has nothing to do with their studies, and that’s true even if their major wasn’t Womyn’s Studies or Puppetry.

Sirius 1 never gets into political attacks, so I didn’t hear any “and it’s all Obama’s fault” during the two or three minutes I listened to the talking heads exclaim over the fact that they and their generation face a dismal economy with equally dismal prospects.  One does wonder, though, if they or anyone in their audience is thinking “Obama promised us the moon and the stars, and all I get when I sent him to the White House was this lousy unemployment check.”

This generation will be the next Yorkshiremen:

How the sequester works — an easy to understand analogy

Weird family n kitchen

Dad works hard at a job that pays reasonably well and Mom runs the house.  She’s an okay manager, but somewhat careless.  On Dad’s salary, which includes a 4% raise every year, she provides all the basics, such as feeding, clothing, and educating their two children.  Every year, without fail, the family heads to Disneyland, and has some great memories and a nice photo album to show for these annual jaunts.  But she’s also a bit careless.  She periodically pays the mortgage and credit card bills late, incurring penalties and interest.  She leaves unnecessary lights burning whenever she leaves the room.  She’s an excellent cook, but she occasionally buys some expensive food and then forgets to use it, so she has to throw it out when it spoils.  She’s an impulse shopper, so her closet has clothes that she wore once and then never again.  She always forgets to put money in the meter, so she has a backlog of parking tickets.  That kind of thing.  None of them are a big deal, but taken together, they definitely drain away a small, but solid percent of the family’s money.

One day, Dad comes home and says, “Mom, the boss told me that, because of the recession, instead of getting my 4% annual raise, I’ll only get a 3% annual raise.  We’ll still be bringing in more money than last year, but not quite as much more as we had expected.  We may have to retrench a little.”

Mom is livid.  “How dare your boss do that!  You’ve been a great employee.  Well, if we have to retrench, I’ll show him!  And I’ll make you suffer too for working for such a cheapskate.”

Here’s what Mom does not do:  Mom does not pay her mortgage or credit bills on time; she does not pay attention to turning out the lights; she does not make sure to buy food she wants and then use that food; she does not curb her occasional impulse clothes spending; and she makes no effort to pay attention to parking meters.

Here’s what Mom does:  she tells the kids they’re never going to Disneyland again; she starts serving only Mac ‘n Cheese from a box; she only buys the family clothes from goodwill; and she constantly tells them that it’s not her fault that their lives have become so miserable.  She’s just responding to Dad and his mean boss.

Keep that parable in mind the next time you don’t get to see the Blue Angels fly, or you don’t get a tour of the White House.  And keep it in mind as the government continues to spend money on studies about condom use and monkey poop and whatever else stupid thing it keeps funding with your dollars.

And that ends today’s lesson….

(And for those of you who think it’s sexist that Dad works and Mom is the vicious, greedy harpy who keeps the house please feel free to make up whatever gender roles you like:  working Mom and housekeeping Dad; working Mom and housekeeping Mom; or working Dad and housekeeping Dad.  Gender isn’t the point.)

A good way of putting the sequester in perspective

Scale

Caped Crusader sent me a wonderful squiblet that puts the sequester in perspective:

If the Federal budget weighed 200 pounds and went to see Dr. Michelle Obama (world renown weight expert and fat butt reduction subspecialist) would she say losing 3 pounds is so severe it would cause death or permanent impairment? Think about it!

That is what all the caterwauling is about! A government so necessary and efficient they cannot find 1 1/2 % that is not necessary!

The fact that the sequester has actually been in effect for two weeks without the world coming to an end reveals how accurate this little story is and how reprehensible the Democrat Chicken Littles were (and are).

Trying to understand the sequester

Obama is demagoguing the sequester like mad.  David Angelo provides a pleasant breath of common sense:

Incidentally, to the extent Obama says that the sequester will result in federal prosecutors having to abandon cases, that may be a very good thing. The news lately has too many stories about federal prosecutors run amok. Here are just a handful of links:

US attorney Carmen Ortiz strikes yet another sleazy deal.

Prosecutor aids DEA as it tries to seize a $1.5 million building over a $37 pot deal.

Oh!  Carmen Ortiz is in the headlines again for prosecutorial overreach.

And then there’s the corruption….

(Thanks to Earl for all these links.  He has been appropriately concerned for years about prosecutorial abuse.)

Why the market roars as the economy whimpers and sighs

A couple of weeks ago, I asked you all to explain to me why the stock market is so excited, even as the dollar is weak, unemployment is high, and national debt soars.  Naturally, I got many interesting answers back, with inflation being cited as the chief culprit.  Robert Arvanitis, who already provided an information-packed response, hasn’t forgotten that post, and he sent me an interesting update:

To follow-up prior discussions, here’s an excellent exposition at WSJ on inflation. [Note from BW: This article might be behind a paywall. Both Robert and I have accounts, so we can't tell if it is.]

In short, the Fed is fabricating a trillion dollars a year. Direct inflation is already deadly, but for now is buried at the banks.

Even before we suffer the direct inflation, the monetary failure is already having bad effects.

· The markets no longer give us the right price signals, so vast capital is being misallocated.

· Borrowers, most notably Obama himself, are getting a destructive free ride from low rates. More accurately, I should say Obama is “borrowing 1,000 billion a year.” Too many people don’t realize it’s meaningless for Obama to say “We borrow just one trillion but have cut 10 billion….”

· Meanwhile, any thrift is punished harshly by those low rates. Here the elderly suffer most.

As Glenn Reynolds would say, “But watch the whole thing…”

Bookworm here, with my summary:  Big bubbles, big explosions. Or to shift metaphors, the smart ones should be looking to hop off this merry-go-round. It’s about to break down and there’s not going to be anything romantic about it:

In answer to my question about economic issues…. by guestblogger Robert Arvanitis

In an earlier post, I asked several questions about economic issues that confuse me.  Robert Arvanitis wrote a comprehensive reply, but then couldn’t get the Word Press comment system to accept it.  Because it is so comprehensive and informative, I’m putting it up here as an independent post.  All that I ask of the rest of you is that you don’t let its length and depth dissuade you from chiming in with your own two cents (or, with inflation, four cents) on the subject.  There’s a lot to be said here.

And now . . . Robert Arvanitis:

Why, if the economy is contracting and the labor market is flat-lined, has the stock market gone up?

Will the stock market stay up (long-term and short-term predictions, please)?

In normal times, the stock market is a reflection of true economic activity; stocks typically trade at multiples of earnings from 10 to 14 times. So the yield is the inverse of that — if you pay $10 for $1 yield, that’s a 10% return. Likewise if you invest $14 to get $1 then that’s like a 7% return. That’s the norm, 7-10% for “risky” equities in contrast to the “safe” bond yields of 3-4% or “really safe” bank accounts at 2-3%.

Alas, we are not in a yield-trading market. Rather, we are seeing the impact of inflation caused by printing of money at the Fed. Our GDP, the value of everything we produce, is like $16 trillion. But if we suddenly doubled our money supply, then the GDP would be, nominally, $32 trillion. Same loaves of bread and haircuts, but now “worth” twice as many dollars. Kinda like the story of the boy who sold his dog for a million dollars. Dad asks how he got so much money. Boy replies “No, I got two, $500,000 cats…”

Same with our stock market. Right now up to 14,000 on the Dow, but that’s not any more loaves of bread that the 10,000 Dow of just a few years ago.

Bad news — wealth effect makes people falsely confident, so they go spend and do other stupid things. Good news — at least it’s something of a hedge against inflation. You can still get the same number of (now more expensive) loaves of bread when you’re hungry.

The IRS says that families will be paying $20,000 for health insurance. It also says that the top penalty for failing to buy insurance is less than $3,000. Medical insurance companies can no longer turn away people with pre-existing conditions. This means that people can avoid the $20,000 fee, pay the small penalty, and buy “insurance” only at the time they need it. (Or, more accurately, buy “cost shifting” when they need it.) Can the insurance companies stay solvent under these circumstances?

If insurance companies cannot stay in business with this non-insurance fee structure imposed upon them from above, how will they change? Most are diversified. Will they simply abandon health insurance? They cannot refuse to pay onerous fees, because payments are forced upon them by law.

Will the death of insurance companies create a medical black market, where people pay cash for services? In a way, this wouldn’t be so bad, because it would do away with the moral hazard that comes from both huge insurance companies and government interference. With those huge systems, people have no incentive to shop around for better or more affordable treatment.

Take a step back. We must separate the various functions. First is health care provision. Doctors, nurses, drugs, hospitals, equipment… That is a service sector that will rise with demand and shrink with price-controls. Obamacare = less service, fewer doctors, worse outcomes.

Second is true insurance. You have a one in a hundred risk of losing 100,000 (car crash, home fire, serious illness). Being rationally risk averse you’ll gladly pay $1,000 (expected value of 1% times 100,000) as a premium. Heck, you’ll even pay like $1,500, just to be safe. That extra $500 pays for agents, and underwriters, and insurers’ capital, and all the rest.

Third is what we have today — redistribution masquerading as insurance. Young/healthy should pay a fair premium of like $4,000. Old/ill should properly pay $20,000. But Obamacare, to hide redistribution, says everyone will pay $12,000 each, the average of the high and the low. Insurers wouldn’t care how they get paid, EXCEPT the young/healthy aren’t stupid. They won’t pay $12,000 for insurance worth (to them!) a mere $4,000. Hence the unconstitutional (shut up Roberts!) mandate.

(Side note — this use of phony insurance to hide redistribution is just the latest iteration of the continuing fraud. It starts with “tax Peter to pay Paul.” Steps then include high rates with unfair deductions, borrowing to tax the unborn, inflation to rob lenders and the poor, unfunded mandates, and finally scams like Social Security and Obamacare. Details on request.)

Ok, that’s the real economics. Now the politics. Even with all the arm-twisting, and bribing, and parliamentary cheats, and brief supermajority, Obamacare could NOT pass with anything close to the necessary punitive taxes needed to get the young/healthy. That’s why the penalty is so foolishly low.

But to the left, that’s a feature, not a bug. It’s OK if insurers get squeezed out of health insurance. They’re just capitalist parasites anyway, and we’re one day closer to single-payer, that is, a government-monopoly on when you die.

Obama’s Consumer Financial Protection Bureau is forcing banks to give unsecured, low-interest home loans again. These loans, and the machinations into which the financial industry entered in order to protect itself from the downside risk of such loans, triggered the 2008 recession. What will happen this time around? Will banks go out of business? Will they come up with some grand new scheme? I assume that, if they do the latter, it will implode. The last time, it took around two decades before the Ponzi scheme collapsed. How long will it take this time?

We have a problem that banks got “too big to fail” because of government distortions of the credit markets. The Fed taught markets that serious losses get “socialized” (fall on taxpayers, not the true failures).

We also have a problem that government misallocated credit via the “Community Reinvestment Act.”

So what does government do? Makes an utterly irrelevant move into more controls. Plus an additional misdirection of credit.

We do not learn from our mistakes. We simply make new and more subtle errors.

It’s like this. A hippo gets into the bathtub. Water overflows everywhere. Hippos declares an emergency and nationalizes all the towels…v

I seek answers from those more economically sophisticated than I am

Begging

I have a few questions to ask, all of which involve economic trends.

Why, if the economy is contracting and the labor market is flat-lined, has the stock market gone up?

Will the stock market stay up (long-term and short-term predictions, please)?

The IRS says that families will be paying $20,000 for health insurance.  It also says that the top penalty for failing to buy insurance is less than $3,000.  Medical insurance companies can no longer turn away people with pre-existing conditions.  This means that people can avoid the $20,000 fee, pay the small penalty, and buy “insurance” only at the time they need it.  (Or, more accurately, buy “cost shifting” when they need it.)  Can the insurance companies stay solvent under these circumstances?

If insurance companies cannot stay in business with this non-insurance fee structure imposed upon them from above, how will they change?  Most are diversified.  Will they simply abandon health insurance?  They cannot refuse to pay onerous fees, because payments are forced upon them by law.

Will the death of insurance companies create a medical black market, where people pay cash for services?  In a way, this wouldn’t be so bad, because it would do away with the moral hazard that comes from both huge insurance companies and government interference.  With those huge systems, people have no incentive to shop around for better or more affordable treatment.

Obama’s Consumer Financial Protection Bureau is forcing banks to give unsecured, low-interest home loans again.  These loans, and the machinations into which the financial industry entered in order to protect itself from the downside risk of such loans, triggered the 2008 recession.  What will happen this time around?  Will banks go out of business?  Will they come up with some grand new scheme?  I assume that, if they do the latter, it will implode.  The last time, it took around two decades before the Ponzi scheme collapsed.  How long will it take this time?

I will appreciate any and all answers to these questions.  I truly don’t understand what’s going on in today’s economic world.  Incentives are flipsy-wopsy and trends make no sense.

Money

More thoughts on robots and the future

Robot

I wrote last week about the fact that the lapdog media is finally catching up with Obama’s claim that the problem with America’s economy is that ATMs are job destroyers, and that’s why our economy is a mess.  Many of you commented that, in your own industries, you’ve seen automation chip away at jobs so that a handful of people are doing what it once took dozens or even hundreds of people to do.  I agree completely.  Technology definitely destroys jobs.

What I was trying to say, though, is something different.  What’s unique about this ongoing recession/depression, is that the government has been working overtime to depress the new jobs that usually arise as a result of technology.  Absent government intervention, our transitions in the wake of a major technological change have usually been beneficial to the majority, even though there’s no doubt that a minority saw itself lost to history’s backwash.  For the first time, though, we’ve got a government so busy grieving for the minority who are becoming obsolete, that it’s enacted policies to ensure that the majority will suffer too.

I speak quite personally about this, because I’m a perfect example of someone who took modern technologies and spun off a new career.  My new career has been less profitable than my old one, but infinitely more enjoyable, not to mention a better match with parenting.

My graduating year from law school was one of the last years that saw new associates arrive at law firms that didn’t have desktop computers.  We had Word Processing departments, which would use primitive word processing machines (who else remembers old Wang systems?) to finalize briefs or, if they were particularly sophisticated, they had primitive software to do the same task.  To get a brief done, the attorney would hand write or dictate a brief, and then walk it over to a secretary, who would transcribe it.  It was a very time-consuming process.

Law books

Legal research was also done the old-fashioned way, which meant surrounding oneself with heavy books.  To research a legal question, you’d go to the Westlaw Digests.  You’d start by perusing the Decennial Digests (massive volumes that broke the law down into categories).  These were good, because you could do ten years worth of research in a single category.  If it had been nine years since the last Decennial Digest, though, you’d then have to go through nine years worth of annual digests, including the pocket updates stuffed in the back.  Once you had hand written a long list of potential cases, you’d head for the stacks and pull out volume after volume of case reporter.  You’d page through to your cases, and hope that at least some of them were on point.  Once you found them, you’d either write notes by hand, or you’d spend hours (and dollars) photocopying.

Both Westlaw and Nexis did have computer research available, but it had to be done on dedicated machines and it cost a small fortune.  It was much cheaper to pay an associate to do fifty or even one hundred hours of research, than to go onto Westlaw and spend a couple of hours writing and printing.  (Keep in mind that, back in those days, all connections were dial-up and were incredibly slow.)

Old desktop computers

Within a few years of my starting to practice law, the world turned upside down.  Lawyers got desktops and dedicated word processors became obsolete.  That’s when I fell in love with Word Perfect, which is still my favorite word processing software because you have the best control over the look of the final product.

In the beginning, those desktop computers were stand-alones, so you still had to walk to your secretary’s desk, only this time you’d hand over a floppy, rather than a sheaf of yellow paper or a little tape recording.  Just a year or so later, with the firm’s four walls, those floppies were obsolete, as the firms had become networked.  Suddenly, you didn’t even need to stand up to send your secretary that pleading that needed to be finalized.  Instead, you just pushed a button.

Online legal research continued to be expensive, but Lexis and Westlaw now had software that enabled you to use your laptop to connect directly to those services.  This was another technological advance that meant you didn’t need to get up from your chair.  (Right now, I’m seeing, not only a technological trend, but a trend in lawyers getting flabby and gaining weight!)

Woman at computer

One day, I sat at my desk and realized that I was totally self-sufficient. I didn’t need a secretary, since I’ve always been a better typist and word processor than any secretary I ever had, and I didn’t need access to a law library, since my desktop had become a law library.  I also realized that home computer prices were dropping and that the case-reporting services were dropping their prices in response to the increased competition that accompanied increased demand.  Since I hated going to court, and loved doing research and writing, I quit my job and set up a home practice.

Floppies

As the years went by, having a home office became easier and easier.  In the old days, I still had to put my documents on floppies, or print them up, and then hand-deliver them to my clients.  Within a short time, however, either my clients got email, so I could just send an attachment, or they upgraded their network services so that I could connect from home and simply upload my work onto their systems.

The new systems made hoards of young lawyers unnecessary.  While it had once been cheaper to give a second or third year associate a fifty hour research job, it was now much cheaper to contract the work out to me.  With my on-line research, home computer and printer, and network or email connections, I was not only faster and better than a young associate, I didn’t force the firm to carry me during the dead times, nor did it have to pay any benefits to me.  Technology would have destroyed my old job, but instead it created a new job for me, and one that I liked much better.

In the Obama economy, though, I have no work.  If I were a young lawyer done out of a job by new research and writing technology, it would be impossible for me to set up my own thriving business (and it did thrive for many years), because there is no work to be had for anyone, whether in a firm or outside of it.  The old jobs are dying, but the economy is too regulated, taxed, and constrained to create new niches.

And that’s what I meant when I said only Progressives believe that robots are job killers.  Their belief is true only to the extent they’ve made it so.  I fervently believe that, in the normal, non-Obama world, even as technology kills many jobs, a free market, coupled with human initiative, can create many more (better ones too).