US Stocks: Inflating Stock Market Bubbles Have No Economic Impact?

There is this impression that inflating stock market bubbles won’t have pernicious effects on the economy.

Such impression are likely manifestations of blindness from either (for bulls) overconfidence or (for bears) capitulation to current record stocks.

I have a simple example. I have X currency units. I have options. I spend these currency units on food, housing, or entertainment OR I can invest this in lemonade stand OR I can buy stocks. If I chose stocks over the rest, how will my choice affect price levels of the above variables? And now what if because of zero bound rates imposed by central banks such has induced a significant number of economic agents do the same way as I, how will these impact the economy?

Dallas Federal Reserve President Richard Fisher says that the above has a political economic context, it redistributes wealth in favor of asset holders or “a gift to the wealthy”…

you know that this gift of near-cost-free debt as measured in inflation- and tax-adjusted terms has thus far been used primarily to finance stock buybacks, increase dividends and fatten cash reserves, and recently, finance mergers by the most creditworthy companies. For those with access to capital, it was a gift of free money to speculate with. (One wag—I believe it was me—quipped that there was, indeed, a “positive wealth effect… the wealthy were affected most positively.”)…

Fed Chairwoman Janet Yellen says that such leads to overvaluations

Nevertheless, valuation metrics in some sectors do appear substantially stretched—particularly those for smaller firms in the social media and biotechnology industries, despite a notable downturn in equity prices for such firms early in the year. Moreover, implied volatility for the overall S&P 500 index, as calculated from option prices, has declined in recent months to low levels last recorded in the mid-1990s and mid-2000s, reflecting improved market sentiment and, perhaps, the influence of “reach for yield” behavior by some investors.

Aside from invisible confiscations, politically induced yield chasing in the financial markets engenders distortions in the economy. As example US 3Q economy has manifested doldrums in key private sector activities where much of the 3.5% growth has been due to a spurt in military spending, as business investment and consumer spending has been lackluster.

In addition, increasing engagement by firms in financial engineering via stock buybacks, M&A and or LBOs weakens corporation’s balance sheets which is even made pronounced by debt financing of such activities. Moreover systemic leverage which continues to mount poses as greater risks from a debt blowup. 

The misallocation of resources as Forbes’ columnist Michael Pollaro observed has been funneled to the financial markets which now serve as the epicenter of imbalances,

This current in-flight boom-bust cycle is fundamentally different. It has been largely about huge swathes of newly created money being injected directly into the pockets of financial market investors and speculators via the Federal Reserve’s asset purchase programs. Then, after levering up that swathe of money on the near zero rate financing orchestrated by that same Federal Reserve, those investors and speculators have largely been spending and re-spending that money in the financial markets. In other words, ground zero in this boom-bust cycle is the financial markets.

Even more interesting has been the results of the last US elections in the face of record stocks

Prior to the elections, surveys or polls like the Gallup suggested that the chief concern by the average American has been the economy. 

Yet even after elections, results from exit polls indicate that American voters were not as optimistic with the future. 

Notes the Wall Street Journal Real Times Economics Blog: (bold mine):Many American voters are wary of the current economic recovery, voicing concerns that an economy they find not so great won’t improve or could worsen in the next year, according to national exit poll data from Tuesday’s election. Voter concerns about the economy’s long-term trajectory were even more severe. Roughly half of the people interviewed as they left the polls said they expected life for the next generation of Americans to be “worse than life today.” White House officials have spent several months touting the economic recovery, noting the lengthy string of monthly job gains, two quarters of stronger-than-expected growth, and a shrinking budget deficit. The White House has tried to use these data points to draw a stark contrast between now and the state of the economy during the financial crisis. Likewise, many incumbent GOP and Democratic governors touted economic recoveries in their states.

Here is the outcome of the US congressional elections for both houses.

Senate election results (new york times)

House election results (new york times)

The outcome of the national elections has basically been a landslide for the GOP or Republicans in both houses which renders the POTUS a lame duck.

Curiously going into the eve of elections disapproval ratings for both parties were at either at record highs or near record highs. According to the ABCnews.com: Congress overall, for its part, has a 20 percent approval rating, one of its worst heading into a midterm election in polling dating back even farther, to 1974. With something there for nearly everyone to dislike, a bipartisan 77 percent disapprove of its job performance.

In sum, despite record high stock markets which has benefited mostly the elites who are most exposed to the stock market (see chart from zero hedge), the average American chose between the devil and the deep blue sea. The frustrated average voting Americans largely ousted the incumbents represented by the Democratic party because of economic issues. It can be read that such eviction signifies partly a backlash against record stocks. Let’s see what happens when the bubble implodes. 

Will there be riots, calls for secession? We will see.

The  spurious claim that inflating stock market bubbles have no or little impact to the economy would seem like “As economic booms progress, greed mounts and the excuses become thinner, more nearly gossamer bubbles” to quote historian Charles Kindleberger in his classic Manias Panics and Crashes A History of Financial Crises (p 191) .

As for the US Congressional elections I seem them as a farce, where both parties mostly share the same essence. To quote Judge Andrew Napolitano at the Lewrockwell.com

The two major political parties are more alike than they are different. On the two paramount issues of our day — war and debt — they are identical. With the exception of Democratic progressives and Republican libertarians, the two parties stand for perpetual war and perpetual debt. Both stances increase the power of the government, and each invites present and future destruction.