There is a fetid odor emanating from Wall Street these days. It has the distinct aroma of Obamanomics – a system propped up by cheap money, a jury-rigged regulatory system and a flow of taxpayer money to special interests. It manifests itself on the observable facts that the rich get richer, the poor get poorer and the middleclass contracts for lack of access to capital and an excess of governmentally mandated costs. And all the while its chief architect, President Barack Obama, rings his hands in mock despair over the victims of his policies.
No one would count me among the Friends of Obama who populate Wall Street and contribute mightily to his campaigns, and yet I have benefited significantly during his administration. It has nothing to do with being a shrewd investor but rather from an early recognition of the effects of Mr. Obama’s policies. In point of fact, in a column I wrote in June of 2013 that included:
“I have decided to become a Barack Obama Democrat. For years Mr. Obama and his branch of liberalism have scolded me and other conservatives as supporting the rich at the expense of the poor. Despite my protestations and the fact that I give more money to charity in a month than does Vice President Joe Biden in a year I cannot shake the antipathy of the left. Despite my unshakeable belief that the road out of poverty is through job creation rather than welfare, I cannot shake the labels of greed and profiteering cast by the likes of Reps. Nancy Pelosi (D-CA) and Maxine Waters (D-CA). And despite my routine criticism of the public employee unions for greed and avarice at the expense of the taxpayers, I cannot escape the label of being ‘against working people.’
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“So there it is. I’m done being a conservative and by default a Republican. I’m going to be an Obama Democrat and enjoy my increasing wealth while the rest of you go whistle. I’ve been practicing getting dewy eyed and developing a quiver in my voice when I talk about the children – and I always talk about the children. I’ve been practicing my empathetic frown when I hear the plight of the poor, or the down trodden, or whatever group we are feigning concern about this week. And I’ll be at the rallies marching with my brothers and sisters (just as long as you hold the march after trading has closed on Wall Street – first things first, eh.)
“And mind you, I don’t want to be just any kind of Democrat – only an Obama Democrat or a public employees union Democrat so I can retire to the beaches of Mexico with large women in purple T-shirts, drink margaritas and laugh at the rest of the world.”
But I digress. The whole purpose of the Federal Reserve Bank’s decisions to provide cheap (nearly free) money by reducing the interest rate paid on government bonds was to drive available capital out of the relatively safe environs of the bond market and into the investment market which would stimulate economic expansion. In theory, that would lead to economic expansion and greater employment. That’s right out of the hallowed halls of academia (the source of most wrong-headed decisions by liberal politicians) but it turned out to be wrong. And it turned out to be wrong, principally because it failed to include the human drivers – in this case, greed.
Despite the stock market downturn primarily effecting financial institutions, the major businesses in America – the ones who provide products, rather than extract profit from the transfer of other people’s money – had plenty of capital. More than sufficient capital to fund the type of investment required of an anemic economic recovery. (Let me digress again. The officers and directors of most large businesses are not dummies. They recognized the signs of a weak economic recovery and the advantages of cheap money.) They understood from the outset that the heavy hand of the Obama government was going to ensure that, like the lost decade in Japan during the 90’s, America’s recovery was going to be long and slow. They seized upon the cheap money policies of the Federal Reserve Banks as an opportunity to horde existing capital as a hedge against further economic downturns and to utilize the cheap money to fund investment albeit at a rate no greater than they would have had they used their own capital.
Meanwhile, back in the real world where Americans are trying to eke out a living, the paint continues to peel on the mainstreet economy. While the Obama administration touts the numbers published by the United States Bureau of Labor Statistics (BLS) reporting a gain of 271,000 jobs in October and unemployment claims falling to five percent – a figure that previously defined “full employment” it ignores the more telling information that describes the real condition of the economy. The percentage of working age Americans actually employed, as determined by BLS’ Labor Force Participation Rate remained at its lowest rate in nearly four decades at 62.4 percent. That rate has declined consistently since Mr. Obama took office.
You might ask how we can gain 271,000 jobs and still have a lower percentage of Americans working than in the last four decades. Well, while the workforce is actually increasing, it is not increasing at a fast enough rate to absorb the number of new people entering the workforce. Yes,Virginia – the population of America is increasing. And you might ask how the unemployment rate can drop and we still have the lowest percentage of people working in nearly four decades. Well, that is because the unemployment rate has only a tangential relationship to real unemployment. The unemployment rate published by the BLS represents the number of people receiving welfare payments in the form of unemployment payments. It does not include those who have exhausted their eligibility for benefits, those who have become so discouraged that they have given up looking, those who have decided that they prefer a life on welfare rather than work, and those who have been forced to accept part time work in lieu of a full time job. The highly politicized unemployment numbers published by the BLS are, for all intents and purposes, worthless for evaluating the health of the economy.
So while there may be more people “working” today than prior to the Bush/Obama recession, there are also even more people unemployed. In addition, the number of new small businesses begun annually which was on the rise from 2005 through 2008 has dropped precipitously since Mr. Obama took office. According to Statistic Brain Research Institute small business creation fell from 626,400 in 2008 to 514,332 in 2014. According to the Small Business Administration, small businesses have accounted for over 64 percent of all new jobs in period of 2000 through 2008. That number, not surprisingly, has fallen off to approximately 60 percent during the Obama years.
And even though Wall Street has prospered under Mr. Obama, even there the cracks are showing. The stock market rose steadily through 2014 and then began to stagnate in 2015. A mild decline in the spring was followed by a better than expected summer but was followed by a dramatic decline in late August and a significant but less dramatic recovery in October. A look back over the past two years indicates that there has been a series of rapid declines followed by a recovery followed by another decline. This is important because the titans of Wall Street are now making the millions by replowing the same ground in quarterly segments. On Monday morning the Dow-Jones Industrial Average dropped over 200 points. The financial wire service MarketWatch from the Wall Street Journal family noted:
“U.S. stocks opened lower on Monday as investors were cautious following six straight weeks of gain. Last week’s surprisingly strong job report increased the odds of a Federal Reserve rate hike in December.”
The AppealDemocrat also weighed in with another recurring theme:
“U.S. stocks are sliding in early trading as customs data from China suggests a sharp decline in global trade.
“Customs data released on Monday showed China’s imports fell by 18.8 percent in October from a year earlier.”
These were precisely the same reasons given for previous declines but ignored as the market recovered – usually based on the expectation that the Federal Reserve will again postpone an interest rate hike and thus signaling that the era of cheap money is over.
More worrisome are recent reports that while declines in the stock market are spread uniformly, recoveries are becoming increasingly isolated to a handful of large companies. A Tuesday article in USA Today by Adam Shell stated:
“Where’s the breadth? No, not the famous Wendy’s TV ad back in the ‘80s with the catchy slogan, ‘Where’s the beef?’ Wall Street is worried about the shrinking number of stocks that have been increasingly responsible for driving the U.S. stock market higher since the market low in August.
“While Monday’s 1% sell-off on Wall Street was blamed on the market’s reaction to the rising odds of coming interest rate hikes later this year after a strong October job report on Friday, Wall Street was already worrying about the lack of so-called market “breadth.”
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“In the report, they rolled out some shocking statistics to drive their point home. Last week, for example, the broad S&P 500 stock index hit a 65-day high – yet only 14% of the 500 stocks in the index matched that performance. But the stat that really drives the point home that just a chosen few names are driving market gains this year.
“’The 10 largest stocks in the S&P 500 have contributed more than 100% of the year’s roughly 2% gain’ heading into this week’s trading,’ Verrone and Sohn noted. ‘By comparison, both 2013 and 2014 saw the 10 largest stocks contribute less than 20% of the year’s advance.’”
For those of you forced to endure a teachers union led education in the Portland public schools, that means that while 10 companies gained in value, the remaining 490, in composite, declined in value. Not a sign of a healthy economy, but reflective of the plight of small business and an economy moving from anemic to failing. (My friend, Jim Stack of InvesTech Research, who has accurately predicted the last two major market downturns now warns that we are testing the top of the market and that signs are pointing towards the end of this bull market in the near term.)
It is also emblematic of an administration that has failed at everything it has touched. Out of studied ignorance and a stubborn adherence to a failed ideology, Mr. Obama will have left America in its own Lost Decade. With less than fourteen months to go, it appears the Mr. Obama will be able to skate past the damage he has done domestically and internationally and blame his successor for the failures his policies have sown.