Rising tide lifts all boats, except when it doesn’t

I loved James Saft’s heretical tone as he pointed out the difference between a rising stock market and a robust economy.   Nestled 13 pages deep in the business section of yesterday’s Globe and Mail, Saft’s article shares a page with headlines such as, “is it time for dividend investors to switch back to bonds?” and “let’s try to put investors’ hopes in context,” plus a Bloomberg News insert providing background to Amazon.com’s juicy $11.37 gain to $856.22 (U.S.) per share. (The article can be found here, via Reuters.)

What a fascinating juxtaposition. It’s almost as if Saft knew, when he wrote his column for Reuters, that he’d have to amplify his arguments to be heard amid the din of self-congratulatory market chatter in the Globe and the other papers which carry his work. The whole page, the whole section, and the whole paper - like business media everywhere and like the policy makers who live and breathe the fractional shifts in share values - assumes that everyone’s wellbeing is connected to the stock market. Saft’s is a lone voice, warning us not to believe it.

And so he uses dramatic language to lay out arguments drawn from history, current affairs, personal experience, and deductive reasoning to make the point that parallel developments in financial markets and the economy as a whole are largely coincidental. He further illustrates the danger of believing too strongly in stock prices as a leading indicator of economic change.

stock market economy chart

His arguments are indisputable. He says nothing contentious. He just reminds us of what we already know, and challenges the assumed linkages between market strength and economic growth.

I’m less interested in his arguments than by the apparent need to caution us in this way. It’s more than Trump’s recent claims that improved market performance demonstrates his success in strengthening the economy. As Saft points out, this is not a new argument: Obama and presidents before him, cited positive market trends as economic achievements.

There is something more fundamental in Saft’s stridency.

I think it has to do with the fragility of an apparent economic recovery, which is masked by a dramatic but apparently robust market recovery in the years since the depths of 2008. While the market surged on the strength of bailouts and restructurings, the economy languished for most ordinary people. Employment lagged years behind the recovery of corporate profits and assets, and the value of employment, in terms of wages, benefits, and security, never recovered.

Saft raises the possibility that a Trump-fired stock market may pull away from the economy beneath it as a result of the massive wealth transfers entailed by his policy agenda. Deregulation, privatization, debt-financing of infrastructure and military expansion, possibly exacerbated by a trade war or two, create the perfect conditions for investors to prosper while impoverishing the nation, the hemisphere, or, given Trump’s megalomania, the free world.

Again. This trick was last performed by Bush Jr., who cut taxes and further deregulated financial services, while engaging in massively expensive wars. The market ran wild until it collapsed. After a brief time during Obama’s first term, the financial service industry resumed without missing a beat while unemployment and foreclosures devastated denizens of the true economy.

Maybe the whole topic seems funny to me because most ordinary people understand the disconnect between the investment class and working class. Only the politicians, media, and investors seem to miss the point, which is why Saft feels he must roar while bearding the lion.

I’ve experienced this disconnect first hand when trying to explain the simple premise of the Occupy Movement, or Thomas Piketty’s Capital in the 21st Century to genuinely mystified, and superficially sympathetic rich people. They suffer a kind of cognitive dissonance when they consider how their disproportional share of income and accumulated wealth is acquired and secured by arcane rules, written by them and their kind, generation after generation, creating ever more extreme and destabilizing social disparities.

Even the most enlightened philanthropists, those with the grace and generosity to share, seem unwilling to think critically about the origins of their financial power. They enjoy their affluence too much to use their influence for changes to structures and systems that protect their advantaged positions, while relegating more and more people to a permanent underclass. Something just doesn’t click intellectually, despite education and social conscience. What’s the sports analogy – some people are born on third base, believing they’ve hit a triple.

It first struck me when, as a child watching the television news, I realized that five minutes at the end of every national broadcast was devoted to the price of commodities and precious metals in financial markets, even though I didn’t know anyone who cared. Even at that young age, I could tell that the newsreader didn’t understand the significance of the numbers. Nor did anyone I know have a direct stake in the fluctuations of currencies abroad or cattle at auction out west. This was news for someone else, about someone else, somewhere else, perhaps someone I’d never meet. Yet it was part of the daily fare fed by the media to every household in the nation.

It was when I heard a broadcaster unwittingly contrast employment growth with market decline that it all hit home. The people with money wanted low employment numbers, believing that desperation would make the cost of labour would go down. So when people were less desperate for work, wages would go up and profits would go down. And since the markets invest in companies and commodities, not people, the stock market was trending opposite to economic conditions, as experienced by millions of ordinary people. To this day, no matter how slavishly we strain to reconcile this contradiction, the average person is either mystified or disengaged by the hourly announcement of stock and commodity prices around the world.

Attempts to democratize the markets occurred in the 80’s and 90’s, as people were frightened into trying to build retirement funds, using a variety of investment and savings vehicles sanctioned by government. The markets swelled with investment from boomers, and with nowhere else to go, this capital windfall swelled stock values and broker bonuses for a decade. But small, amateur investors are no match for captains of the investment class, and once a decade, market reversals clobbered retirement savings, and mutual funds. And in truth, most people’s money was controlled by fund managers according to strategies they never understood, and too late grasped the risk of their arm’s length investments in failed companies like Nortel, for example. Large chunks of personal retirement savings were vaporized, to the astonishment of the folk who had been scared into playing the market to secure their futures. Whether they were seniors, gambling their funds in self-directed RRSP’s, or passive investors, allowing their pension fund managers to play with their money, they remained outside the club of rentiers for whom the byzantine mechanics of international capital investment were designed.

But back to the distinction between people and companies, the former being the concern of economic policy, the latter being the concern of financial markets, and when the two join, it's only coincidentally, according to Saft.  Anyone doubting the divergent interests of these two general concerns should try looking for people in a company’s financial statement. Under generally accepted accounting practices, people show up as an expense, but the balancing value of their labour is concealed on the revenue side of the P&L statement as an unacknowledged portion of goods sold. Even companies that advertise the quality of their work force, proclaiming as many do, that people are their greatest asset, actually state people as a liability on their balance sheets. In accounting terms, the workforce is recognized as an financial obligation rather than a human resource, with negative values ascribed to the pensions and benefits that help to build and retain the best people. Lofty sentiments and enlightened words aside, the impression conveyed by corporate financial reporting is that things would go better if there were fewer people in the company.

So markets are about companies and economies are about people. Not only are markets, as economic indicators, largely indifferent to the wellbeing of most people, but the companies they trade in also regard their people as a burden. (Other people - consumers and clients - who buy their goods and services weigh positively on the P&L statements, so get greater consideration in plans and reports).

Given this schizophrenic attitude to people in the tracking of corporate financial results, and given the market’s corporate rather than broad social focus, why should Saft have to remind us that stock prices are not good indicators of economic strength? Economics is about human behavior, after all.

Among the social sciences, economics borrows most heavily from math and the exact sciences. However, beneath all the pretence of figures, charts, and graphs, economics fails to predict vast, slow-developing phenomena like the subprime mortgage disaster, the Asian currency collapse, or the dot com bubble burst.  And, it fails with such regularity that its “laws” offer none of the certitude found in hard sciences like physics.

Economics is about people, stock markets trade corporations and commodities, and as Saft points out, sometimes they can be divergent as often as they’re convergent. There’s no revelation here. It’s evident in all the ways Saft argues, and in some that he doesn’t. The reason he argues so vehemently is because he’s astonished that the mindless connection between the market and economy still persists in political discourse, media reporting, and in the minds of those who benefit most from the artificial link between them.

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