Much ado about the stock market increasing by 22% in less than eleven months, hitting 16,000 yesterday; a new record in that it is the third time that it has reached even multiples of 1000 in a single year. This is hailed as signaling a robust economy, with no one seeming to notice the rather startling disconnect between an extrapolated 26% annual growth in the stock market and a rather paltry 2.3% annual growth rate in the economy.
That’s because the stock market no longer has anything to do with the economy.
The stock market was originally formed for the purpose of providing a vehicle whereby businesses could obtain capital to create or expand their business. It no longer makes any pretense of fulfilling that role, as witness the “initial public offerings” of Facebook and Twitter. Not one cent of the money raised by those public offering went toward the expansion of those business, and neither business was functionally changed by the capital raised in the stock market. Every drop of that money went toward the personal enrichment of the principals of those companies and of the backers of the offerings.
Evan more blatant was the consideration of a public offering being made for the future earnings of NFL running back Arian Foster. There was no possibility that any capital raised in that offering could improve his performance or extend his career; the offering was being proffered purely as a speculative venture than participants could profit from it much as one would do by playing the lottery. The offering was derailed by an injury which happened prior to the offering, but had it happened afterward the “lottery” would have enriched the player enormously and the participants would have been massive losers.
The stock market today is, in effect, a lottery with participants speculating on factors almost entirely divorced from the companies which the stock market supposedly represents. The main factor for this speculation is the operation of the Federal Reserve and how long it will continue pumping more money into the financial system. Concrete evidence of the nature of that speculation can be seen when forecasts that indicate a weakening economy, and which spell hard times for the companies represented by the stock market, actually cause the stock market to rise because they assure that the Fed will continue to inject money into the financial system.
Note that I do not say, as the media usually does, that the Fed is “injecting money into the economy.” That is because the money that they inject does not go into the economy, it goes directly into the stock market. They inject that money by buying treasury bills, which they buy from investors. Those investors do not spend that money, they put it into the stock market, which is why the stock market is growing at an annual rate of 26% while the economy is stumbling along at a rate that does not even keep up with population growth and inflation.