Screw the Stock Market

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Nearly every day, Trump tweets about how the stock market is doing fantastic. The president is always quick to repeat the claim:

Stock Market just hit another record high! Jobs looking very good.

 

Of course, while Trump may be the most prolific tweeter out of our presidents, his predecessors were not exactly shy about bragging about the stock market under their administrations. Obama states in a speech:

“I can answer unequivocally, ‘Are you better off now than you were four years ago?'” Obama said.

“And the answer is on just about every economic measure, you are.”

He then listed his accomplishments:

  • “So when I take a unemployment rate from 10% down to 5.5% …”
  • “When I drive the uninsured rate to the lowest it’s ever been …”
  • “When I restore people’s 401ks …”

[…]

While Obama didn’t directly talk about the stock market, he did talk about 401(k)s, which are a principal retirement account type that most Americans use. (Or at least supposedly do, more on that in a bit.) It’s not just a Democratic or a Republican thing to brag about the health of the financial sector; everyone appears to want it to rise. Some so-called experts also chime in, claiming that the stock market basically is “vote of confidence in the economy”

Since the stock market is a vote of confidence, a crash can devastate economic growth. Lower stock prices mean less wealth for businesses, pension funds and individual investors. Companies can’t get as much funding for expansion. When retirement fund values fall, it reduces consumer spending.

So it appears to be a given. The higher the stock market goes, the better we do. Anything that helps the equity market helps real working people in addition to major investors.

But does it actually mean anything? Does the performance of the stock market really imply anything about the financial health of everyday Americans? Or could it actually be inversely tied to the financial success of working families?

In the United States, median incomes have not increased in over 40 years. While the GDP continues to increase year after year, incomes for everyday families have stagnated. At best, incomes have risen at a fraction of GDP, while at worst, incomes have fallen while the economy continued to grow. How has this happened? What’s causing this?

The Cold Truth for the American Family

The ultimate reality is that our economy no longer rewards work. By extension, that includes all working people. While Bernie Sanders highlighted damning statistics about how income inequality has grown so much over the past decades, that doesn’t answer how the elite in America have actually captured all of our economy’s gains. The truth is that through financial instruments across the board, the wealthiest people have managed to turn income that should be going to workers into income that goes to themselves.

Perhaps the best way to see how rewarding it is to work in the US is to see real median income of households. This is probably the best way to see how much money a regular Joe family gets in the country. (All of this data comes from the Federal Reserve)

Screen Shot 2017-12-09 at 1.17.48 PM

We can clearly see how median income has stagnated since the mid-1970s. Previous to that decade, incomes rose continuously across the board. Yet after the stagflation of the decade and the deregulation of the Reagan years, income has never kept up with the economy. Here is the real GDP per capita, which is the entire economy divided by the number of people.

Screen Shot 2017-12-09 at 1.22.06 PM

Unlike the median household income, the GDP per capita is generally continuously rising, as you would expect given a continually growing economy. Nearly every year, the wealth in this nation has risen, yet the average person appears to be getting almost nothing. Occasionally, we can see that median incomes rise, but then the fall again. Indeed, in the Obama years, median incomes fell while the economy grew, for his first term at least. It all adds up to meaning that the average American family today has the same amount of money they had in 1990. Nearly 30 years of progress, and the vast majority of us have absolutely nothing to show for it. Where did all of this money go?

It’s a complex issue involving lots of different financial and capital instruments, but a big part of the issue is the stock market — one of the biggest financial markets of any kind in the world.

The truth is that the stock market has almost no relevance to the average person at all. The first sign was that median incomes fell under Obama’s first term, while the stock market nearly doubled in value. Similar effects are seen across the previous decades.

Why is that? Most Americans have no stake in it at all.

Half of Americans Can’t Afford the Stock Market

CNBC states that 52% of Americans have nothing in the market:

More than half of Americans, 52 percent, are currently not investing in the stock market—either by buying individual stocks or mutual funds, or through a retirement account such as a 401(k) or IRA, according to a new Bankrate.com survey. Among the non-investors surveyed, 53 percent said they don’t have the money to invest and 21 percent said they don’t trust stock brokers or financial advisors.

Strangely and somewhat condescendingly, that article’s title is “Half of Americans avoid the stock market”, which seems to imply that Americans are just too dumb to invest, when they naturally would love to but just can’t afford it. I mean, who would willingly turn down double digit returns on investments year after year? That’s free money just waiting to be taken.

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What does this all mean? For the majority of the people, the stock market doubling again under Trump will have nearly a null effect on them. Just like it did under Obama, Dubya, Clinton, HDubya, and Reagan.

It’s Time to Start Ignoring Wall Street

Of course, we don’t want to completely ignore the market, but it’s high time we realize that the market does not reflect the fortunes of average people. In fact, the market really only indicates the fortunes of the wealthiest among us. According to NPR, the market is lopsidedly owned by the wealthy, but the extent is a bit wild:

As of 2013, the top 1 percent of households by wealth owned nearly 38 percent of all stock shares, according to research by New York University economist Edward Wolff.

Indeed, nearly all of the stock ownership in the U.S. is concentrated among the richest. According to Wolff’s data, the top 20 percent of Americans owned 92 percent of the stocks in 2013.

Put another way: Eighty percent of Americans together owned just 8 percent of all stocks.

The Stock Market Has Done Exceptionally Well Only Recently

The stock market has only picked up since the Reagan years. Prior to that, it was begrudgingly on the sidelines of American policymakers, with okay-but-not-stellar returns most years. Indeed, looking at the inflation-adjusted S&P500 (an index measuring the 500 wealthiest companies in America), we can see a clear and distinct point where the market suddenly grew much faster than usual.Screen Shot 2017-12-09 at 6.38.50 PM

Compare this with the previous median income chart and we can clearly see that there are several times where the income of average people declines while the stock market increases. The most damning was 2008 to 2012, where incomes fell several thousand dollars while the stock market nearly tripled in value. Obama’s term just didn’t help the average person. (Neither has many other recent presidencies, but that’s another topic.)

What is truly astounding is how rapidly the market made gains over the past decade especially. Below is the market capitalization and volume of the stock market as a percent of gross domestic product. Market capitalization is the total value of the stocks, while volume is the amount of stock traded. Screen Shot 2017-12-09 at 6.47.41 PM

This data may seem meaningless, but it shows that the stock market has had an enormous jacking up in the past decades. Investors are dumping money into it at an unprecedented rate, and the stock market is now worth more than the entire US economy on an annual basis. Moreover, the stock brokers are trading over double the entire value of the economy every year. How did this happen?

It all ties back into how financial instruments have become a mainstay in wealthy Americans’ toolbox for raising their own wealth. To see how this has happened, we only need to look back for the most recent incident of dumping money into stock markets.

Trump’s new tax plan axes dozens of tax breaks for working people (earned income) in order to cut capital taxes (unearned income). The tax burden shifts from from the wealthiest to the poorest. But surely, the tax cuts will cause businessmen to dump more money into their businesses and produce more, which will create jobs and raise incomes of everyone? It’s classic Reagonomics, otherwise known as supply-side economics. Give money to the producers and they will produce more, which will allow consumers to consume more, making everyone happier.

But take a look at what happened when a reporter asked a roomful of CEOs what they will do with their enormous tax refund:

An awkward — but extremely telling — moment arose yesterday at a Wall Street Journal “CEO Council” event that featured the Trump administration’s top economic policy hand, Gary Cohn, as a key speaker.

John Bussey, an associate editor with the Journal, asks the CEOs in the room, “If the tax reform bill goes through, do you plan to increase investment — your companies’ investment — capital investment,” and requests a show of hands. Only a few hands go up, leaving Cohn to ask sheepishly, “Why aren’t the other hands up?”

What do they plan on doing? Well, they will do what they’ve always been doing: capital investments back into capital, not production. The truth is, no company will invest money in more production if they can’t sell more products. To sell more stuff, they need to have buyers — the demand must increase as well. But the consumers — the American household — will almost certainly not have more money after this tax plan. Indeed, the vast majority of Americans will actually have less money after the passage of the tax plan.

So the wealthiest among us will have more money, but what will they do with it? We already know they aren’t going to hire more employees or give raises to their current ones. So what will they do?

Buy more stocks, of course.

According to Forbes, one of the biggest mistakes in the deregulation scheme of the late 20th century was the legalization of stock buybacks.

In November 2016, Goldman Sachs’ chief equity strategist David Kostin estimated that, in 2017, S&P 500 companies will spend $780 billion on buybacks — a new record.

That’s crazy.

Stock buybacks is when a company buys its own stocks to raise its price, rather than investing in more production. A company effectively gives its investors a large bumper rather than hiring more people or buying more equipment to produce more stuff. Why do they do this?

Metrics in the Market Have Strangled the US Economy

There’s dozens of different metrics that investors use to quantify how well a company is doing. One is the Earnings Per Share (EPS). It’s the revenue of a company divided by its outstanding shares. There’s two ways to improve this metric: either improve the revenue, or lower the number of shares outstanding. Buying back shares is an extremely effective way to rapidly raise the EPS while doing nothing to improve the economy or even the company itself. Shares are removed from circulation, and stocks rise, but the economy didn’t get any better for it. It’s an easy, but ultimately pointless exercise that rewards its own players at everyone else’s expense.

According to that same Forbes article,

For most of the 20th century, stock buybacks were deemed illegal because they were thought to be a form of stock market manipulation. But since 1982, when they were essentially legalized by the SEC, buybacks have become perhaps the most popular financial engineering tool in the C-Suite tool shed. And it’s obvious why Wall Street loves them: Buying back company stock can inflate a company’s share price and boost its earnings per share — metrics that often guide lucrative executive bonuses.

As Reuters wrote recently, “Stock buybacks enrich the bosses even when business sags.” 

Buybacks are one of the most egregious examples of the elites in America enhancing their own position while doing absolutely nothing to help build America. There is no doubt that Trump’s tax cut will end up with companies buying back more of their own stock rather than investing it in themselves and their communities. Other metric chasing ideals also show why the stock market has boomed while the rest of the economy, and its people, have languished in peril.

Build and Create, Don’t Just Play Money Games

While I will not prescribe specific policy positions to rectify this, it’s quite clear that the US seems to be spending far too much time and effort on the wrong ideas. As Matthew McConaughey said in Wolf of Wall Street, referring to stockbrokers, “We don’t create s–t. We don’t build anything.” We need to build America up again, and allow everyone to revel in the economic progress we make every day. But we can’t do that until we unshackle ourselves from these money games. We have much to do.

Screw the stock market.

 

-Vineet Kallanagowdar

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