Some sobbering observations about the DOW
First of all, we first crossed the DOW 10,000 mark 10 1/2 years ago. At
that time, unemployment was a little over 4%, we had a budget surplus
and less than half the national debt. We were involved in NO wars, and
the military was being slowly downsized (one major reason for the
surplus). We had just realized the twin boons brought about by A. The fall of Communism and the opening up of world markets. Who would have thought in 1990 that Red China would become a major capitalist market with its own vibrant stock market?
B. A computer and then an Internet revolution.
There were other reasons, some not so benign for the boom, which I'll get to in a moment.
It's a bit hard to get excited to see the DOW return to its 15-year average, especially after we had two 50% crashes in the last ten years (if you average the three major indexes). The Nasdaq has never recovered beyond 50% of its old 2000 high since falling more than 70% in 2000-2003. People nowadays tend to say the Nasdaq is not as important as the DOW and the S&P, but in the 90s, it was the hot new tech-laden index and the index of the New Paradigm that was going to make us all rich - without working. Yet, even now, it is still off some 60% from its 10-year ago high.
Needless to say, stock markets are not supposed to work this way. In retrospect, the late 90s boom should never have happened either. People like to blame the speculative Tech bubble, and that was certainly a major factor, but at least as big a factor was the massive frenzy caused by deregulation, including the near fatal repeal of Glass-Stegall, which had kept the gambling Investment Banks separate from Commercial Banking since the Great Depression. Freed-up financial institutions went wild, speculating with depositor's money and record amounts of leverage. Where staid, safe commercial banks had never been able to invest beyond a 10:1 loan (and ONLY loan) to asset ratio, suddenly they were able to create all sorts of fancy derivatives and increase their leverage to 40:1, than to 100:1 and even beyond (no one really knows the value of the underlying instruments of the $600 Trillion derivative market).
The series of decisions to make derivatives unregulated either as gambling instruments (which they are) or as investments like stocks and bonds, or like what they were alleged to be most similar to - Insurance, was a near-fatal one. In fact, derivatives were none of these things, they were far worse. They were gambling instruments which, unlike poker chips in a Casino, could be had in virtually unlimited supply based on unprecedented leverage by players who would use their "holdings" to goose their fictitious earnings.
Bernie Sanders is exactly right in his recent video about the failure of salaries and assets of the bottom 90% (and since when did 90% of anything become the "bottom" instead of just the "vast majority?") to keep up, and indeed to retreat. In fact, the bottom 90% of workers have not seen their wages go up in inflation-adjusted dollars since 1973.
Who knows? The bailed-out financiers may be able to gun the DOW higher, even to a new high in a few years, with their twin ammunition of bail-outs and leverage, but then it'll crash again (probably sooner than that). The real economy is sick and the market gyrations are just another sign of that. They are not the sign of "Price Discovery," "Market Internals," "Supply and Demand," or any other such nonsense. They are over-leveraged bets made by players who make money in either direction, or if they miscalculate, get bailed out by the American people and, increasingly, by foreign investors. Well, both are tapped out, and the next time, what should have happened this time, will happen, and the crooks will go to jail for their fraudulent contracts (these were not "mistakes" - it is not a "mistake" when JP Morgan carries $84 Trillion in Derivatives - according to the Office of Comptroller of the Currency - despite having barely a Trillion in real assets, and even these would only be mostly sellable in Chapter 7, not Chapter 11, Bankruptcy). These people know full well they are over-extended - they just don't care.
Obama and Congress haven't enacted a single reform, and to paraphrase Rahm Emanuel, "A Crisis is a terrible thing to have wasted." Now that the megabanks - who have about as much in common with community banks as community banks have with piggy banks - are back on top, making profits, and giving out record bonuses, again, they will fight reform with every lobbyist they've got. Dylan Ratigan has it exactly right when he said in an editorial yesterday that Wall Street's "only apparent skill is rigging the game."
So, let's not celebrate the DOW returning, yet again, to its 15-year average, let's focus on how to reform the real economy so that it, and not the tail-of-the-dog market, leads the way to a better future for the "bottom" 90% of America.
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