Can the stock market completely ignore these changes and keep powering higher on the fumes of Mario Draghi’s promises?
Judging by October’s rocket launch, the stock market is back to where it should be, i.e. in rally mode. Yee-haw! All it took to keep the party going was another rate cut in China, another “whatever it takes” assurance from Mario Draghi and blowout earnings from a few tech giants.
So we seem to be right back where we’ve been for seven years: more central bank easing triggers more stock market mania, and stock buybacks and “earnings surprises” push stock valuations ever higher.
But a couple of things have changed recently:
This has not turned out to be true: for a variety of structural reasons, income of the bottom 90% of households has actually declined since 2000 when adjusted for official inflation.
What actually happened was the assets of the bottom 90% were gutted in the crashes of 2000-02 and 2008-09 and in many cases never recovered.
In terms of stocks, many in the bottom 90% decided against gambling money in the stock market after being wiped out by the dot-com crash. As a result, they missed out on the extraordinary gains of the past seven years.
Many of those who traded up in the housing bubble of 2000-2008 and took on big mortgages found that the recovery in housing prices has at best restored their marginal equity but hasn’t enriched them (with the exception of those who managed to buy in Manhattan, West L.A., San Francisco, etc., where gains have now exceeded the 2007 highs).
Millions of households that do not own homes in these hyper-hot globally attractive (and relatively small) markets are either still under water (they owe more than the home is worth after commissions and closing costs), or their equity is so limited that it doesn’t create a “wealth effect.”
So the question going forward is: can the stock market completely ignore these changes and keep powering higher on the fumes of Mario Draghi’s promises and another rate cut or three in China? At some point reality will trump fumes, and the manic rally will falter and the mania in stocks will end in tears.
Courtesy: Charles Hugh Smith
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