Marty Graham 5:30 p.m., Sept. 29
Wall Street's Party Depends on Main Street's Misery
Wall Street rejoiced yesterday as the Dow Jones Industrial Average once again went over 10,000. This time, however, there is a dangerous set of circumstances that could lead to social unrest. Two major factors are pushing stocks: 1. A worldwide ocean of liquidity -- zero short term interest rates in the U.S., and artificially low long rates; 2. Companies boosting profits by laying off workers. This is why stocks zoom while employment plummets. As long as the unemployment rate remains high, the Federal Reserve says it will keep interest rates at low levels. Wall Street speculators can borrow at extremely low (almost zero) rates and gamble with the money. Washington has assured large banks that they are too big to fail. So if the banks' gambles backfire, they know they will be bailed out. This is why, despite all you read, Wall Street does not want a solid economic recovery. It prefers a "not too hot, not too cold" tepid economy such as we had in the 1990s, when stocks also soared. Wall Street does not relish the prospect of a significant decline in unemployment -- Main Street's fervent wish. If the economy showed stout growth, the Federal Reserve would have to raise interest rates -- anathema to Wall Street. As long as the Fed keeps short rates at zero, we could be headed for another bubble. Commodities are already in something close to a bubble, and so are Treasury bonds, whose yields are quite low. It is not likely that we will see a bubble in residential or commercial real estate; both are in the tank.
The Dow first crossed 10,000 in March of 1999. A year later, the market crashed. Slowly it climbed back above 14,000 in October of 2007, but crashed again. It is still 29% below that peak but is up 53% from March of this year, when it hit 6,547.
I still predict that the Dow will end this year at 9,000, as I said at the beginning of the year. But the Wall Street/Main Street split is very disturbing. Also, if we have proved anything in the last decade, it is that bubbles are not healthy. But the Fed seems to think that bubbles (asset inflation) are better than inflation (product and service prices rising).