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Friday, June 12, 2015


It's no secret that investors are frightened. A fog of uncertainty hangs over US equity markets, with Wall Street mavens reassuring each other that the course ahead is promising. Activity is down and performance volatile, with institutional investors and fast traders catching small waves at the end of trading days. Fear over Greek negotiations and a possible Federal Reserve increase in interest rates haunt the investment banks, fund managers, and other institutional investors.
US commentators hopefully hail any modestly positive economic news-- an encouraging employment gain here, a small spike in consumer spending there. At the same time, they are deathly afraid of a dampening interest rate hike. Frequent bad news -- like the first-quarter drop in GDP in three of the last five years -- is either dismissed as weather related or conveniently attributed to other non-systemic factors.

Cautious, wary signals crop up in newspaper headlines: “Postcrisis Financial-System Risk Casts a Darkening Shadow” (WSJ, 4-9-15), “A World Awash in Almost Everything” (WSJ. 4-25/26-15), “Tech Investors See the Froth, but None Dare Call It a Bubble” (NYT, 5-25-15). Warnings about “bloated” stocks by the Fed chairman, and alarm over declines in business investment, industrial production and worker productivity, all cast a shadow over the cheer leading of stock purchase evangelists and other financial hucksters.
And then there is the eccentric David Stockman-- President Reagan's former budget director-- who makes a convincing case regularly that the sky is falling. He forewarns:
What is coming, therefore, is not their father’s inflationary spiral, but an unprecedented and epochal global deflation...
What ultimately stops today’s new style central bank credit cycle, therefore, is bursting financial bubbles.
That has already happened twice this century. A third proof of the case looks to be just around the corner. (4-5-15)
Where Are We Headed?
Despite riding a lucky hunch before the 2008 crash, I believe Marxists should avoid the speculative temptation of announcing impending crashes. The fashionable practice of revealing a “tipping point” is just that: a fashion, and not science. One should follow the sage advise of Marxist political economist, Alfred Evenitsky: “...if one is a Marxist intent on understanding the underlying forces which move and shape the capitalist economy, the ‘trigger,’ while not insignificant, is of less importance than the underlying economic configuration which is being ‘triggered.’ This is a difference in emphasis and point of view, but it is more than that. It is also a difference in the depth of analysis, for ‘triggers’ are in their nature surface phenomena and provide few clues to the subterranean forces they release.”
So what are the subterranean forces shaping the US economy (and the global economy) in mid-year 2015?
Comparisons with earlier downturns-- 1980, 1983, 1991, 2002-- show that the post-2009 “recovery” is by far the most tepid and problematic. Significantly, each successive decline has delivered a successively weaker rebound, culminating in the tentative, stumbling growth after 2009.
Clearly, the enormous boost that global capitalism (and especially US capitalism) received from a several-decades-long tonic of classical and state-monopoly policies (deregulation, privatization, the easy substitution of workers from cheap labor markets, and state intervention on behalf of the monopolies), along with the demise of the economic community of European socialism and the concurrent expansion of global markets, is reaching exhaustion. The historically unprecedented oddity of roughly one-third of the world's population joining or re-joining the global market economy in little more than a decade provided a powerful thrust to a struggling capitalism mired in a toxic swamp of high inflation and slow growth. Neo-liberal ideology fit the moment well, bringing a seductive world view to potential elites throughout the formerly socialist world and to other countries with a tempered stance towards capitalism.
But that unique moment is passing and those who were convinced that “there is no alternative” are surely having second thoughts. The triumphant capitalism of several decades earlier now seems far less sure-footed.
From the perspective of working people, the post-2009 “recovery” is no recovery at all. Change in average hourly earnings is trending below its generally pathetic long-term performance over the last thirty-five years; non-farm payrolls, disposable personal income, and consumer spending growth largely trail previous expansions; and total household debt is marching steadily toward the previous high of the third quarter of 2008.
Both the harsh discipline of unemployment and the lack of effective representation (no mass political voice, frail class-based organizations) batter the US working class. The growth of employment since 2009 exists largely in the low-wage, temporary, and contingent sectors, exerting little pressure on employers to raise wages and benefits. Chastened by the financial crisis, workers have been hesitant to take on mortgage and credit card debt. But this cautious posture has been more than offset by exploding student loan and automobile loan debt. Consequently, household debt has skyrocketed to levels unseen since 2007 (only 6.5% below its 2008 peak).
For those on the other side of the class divide, the post-2009 period has been most generous, thanks to high profits, low interest rates, exploding equity prices, improving home prices, and friendly government policies. The Dow Jones Industrial Average has recovered smartly from its February, 2009 low of around 7,000 to over 18,000 in May of this year-- an increase of well over 150%!
How can the stock market grow so explosively when Gross Domestic Product-- an, at best, exaggerated measure of real value generation-- grew by only 21% in constant dollars in the same period? What magic lies behind the good fortune befalling the ownership class?
The explanation of explosive stock market inflation begins with the enormous concentration of wealth in the hands of those buying and selling equities. The capitalist imperative to invest, to pursue a return, drives money back into a market filled with “bargains.” And “free” money, available through virtually interest-free loans, amplifies the surge in stock purchases. Publicly traded firms, flush with cash and able to fund investments with “free” money, buy back caches of their own stocks, inflating the price of stocks remaining in the market. Firms also pump up their dividends with their bloated cash reserves. And most significantly, the Federal Reserve's policy of quantitative easing-- gobbling up financial instruments and depressing the yield on bonds (and driving up their prices!)-- effectively herds investors seeking attractive returns into equity markets.
That equity prices have departed dramatically from economic reality is easily shown. Traditionally, investors grow suspect of equity prices when they exceed historical relationships of price-to-earnings (the p/e ratio). The p/e of the Standard and Poor's 500 has reached 17.5, well above its 10-year average of 15.8 and sufficient to strike alarm bells.
For comparative purposes, another gauge of the sustainability of equity pricing is the so-called Buffet indicator, the ratio of the Federal Reserve's estimate of corporate capitalization over the concurrent gross domestic product. In 2015, the ratio topped 1.32 (corporate capitalization 132+% of GDP). Immediately before the 2008 crash, the ratio was approaching 1.15. Before the 2000 “dot com bubble” burst, the ratio was 1.53, a level easily within reach in the next year or two given the current trend. Clearly, equity inflation has taken the stock market into a danger zone associated with the last two downturns.
Do the apparent dangers signal economic speed bumps or serious systemic issues?
Policy makers-- limited by ideology and class loyalty-- sought to escape the jaws of the 2008 crisis by pumping up the prospects of corporations and the ownership class. The corporate bail-outs (too often conditional upon downsizing and layoffs), the near-zero interest-rate policies, and a host of other corporate-friendly moves paved the way for the consequent surge in profits and the stock market frenzy.
These policy makers were counting on corporate coddling and painless credit to encourage firms to invest vigorously. They were determined to create a climate with investors and corporations choking on cash, with ready access to interest-free loans, and anxious to make even more money through hiring and expansion.
Indeed, with massive layoffs, labor productivity jumped as production continued and the hours worked declined (raising the rate of exploitation), fixed business investment grew at a satisfactory rate, and profits exploded (S&P 500 companies' earnings soared 30% in 2010).
But this jump-start was not sustained. Federal Reserve policies (low interest-rate policies and quantitative easing) encouraged corporations to satisfy stockholders through mergers and acquisitions, stock buy-backs, and dividends rather than invest in plants or hiring. Consequently, corporations successfully decoupled market capitalization from earnings performance. Since 2011, corporate capital returns (to investors) have exceeded capital expenditures. As profit growth declined since the 2010 explosion, stock values nonetheless continued to climb, leaving investors overjoyed.
Broadly speaking, the three key factors of fixed business investment, productivity and, corporate profits have been trending downward for three to four years. First-quarter 2015 fixed investments fell 3.4%, not surprisingly, output per hour (productivity) fell by 3.1%, and earnings were expected to barely move. These three interdependent and fundamental indicators underscore the critical weaknesses in the US economy. Capitalism has wrung as much sweat as it can from workers, managers are reluctant to invest in new or advanced means of production, and US corporations are experiencing a decline in the rate of profit.
Are the problems besetting the US economy and confounding bourgeois economists fleeting or deeply embedded in the 21st century capitalist system?
A recent Wall Street Journal (World Awash in Almost Everything, 4-25/26-15) makes some interesting, relevant observations. Authors Josh Zumbrun and Carolyn Cui note: “The current state of plenty is confounding on many fronts... Global wealth-- estimated by Credit Suisse at around $263 trillion, more than double the $117 trillion in 2000-- represents a vast supply of savings and capital, helping to hold down interest rates, undermining the power of monetary policy.”
They might add that this extreme accumulation of capital also overflows existing channels of profitable investment, exerting downward pressure on profit growth and encouraging ever riskier investment choices. Capital will not remain idle. In an environment of over-abundance, conventional profit opportunities become scarcer and investors reach desperately for yield.
As with pigs foraging for truffles, too many foraging pigs reduce the chances of any individual pig finding the treasured fungus. Profit-seekers -- like truffle-seekers -- will go to any length and take any risk to secure their goal. Today, there are 65 venture capital investments of over $1 billion each (CB Insights says there are 107), drawing funds from yield-hungry retirement funds, mutual funds, and hedge funds. Whatever the number, all agree that the total capitalization of these investments in firms that are little more than start-ups approaches or exceeds the capitalization of the similar “dot com” firms that blew up in 2000. Like the “dot com” fiasco, capital is flowing freely to almost any garage enterprise with little more than a rough business plan and a clever idea. The search for yield is that intense.
As New York Times writer Conor Dougherty (Tech Investors See the Froth, but None Dare Call It a Bubble, 4-25-15) comments:
But the tech industry's venture capitalists - the financiers who bet on companies when they are little more than an idea - are going out of their way to avoid the one word that could describe what is happening around them.
Once again, the US economy suffers from a case of hyper-accumulation coupled with a declining rate of profit, seducing investors into riskier and riskier bets. As with the lead-up to the 2000 downturn and the 2007 crash, too much capital is pursuing too few attractive investment opportunities. Consequently, rampant speculation follows, risk intensifies, and the profit-making engine runs off the rails.
From time to time, we all need to be reminded that the capitalist system runs on profit and the confidence that profit-making opportunities will be available tomorrow. Even Marxists need to be reminded that Karl Marx placed the process of accumulation and its tendencies at the center of his analysis. Careful study shows that the challenges to continued profit growth have not been wrung from the US economy. As investors have emigrated from traditional productive sectors or service areas of the economy in search of further investment opportunities, they have shaken the system's foundations with risk and insecurity. But given the dynamics of 21st century capitalism, given the enormous concentration of wealth that relentlessly and necessarily seeks to grow ever larger, investors must accept more risk and insecurity. There is no alternative, to steal a quote from the enemy. Therefore, they must continuously put the capitalist system in harm’s way.
For those who-- like the popular social democratic thinker, Thomas Piketty-- think that we can redistribute the obscene concentration of global wealth through tax policies and set capitalism merrily on its way... think again. Should, by some miracle, the ownership class surrender their grip on the state, capitalism would, in time, reproduce the inequalities that lead to the concentration of capital and crises. That's its nature. As the great song writer Oscar Brown Jr. reminds us:
Take me in, tender woman," sighed the snake
"Now I saved you," cried the woman
And you've bit me, even why?
And you know your bite is poisonous and now I'm going to die"
"Ah shut up, silly woman," said that reptile with a grin
Now you knew darn well I was a snake before you brought me in...”

Zoltan Zigedy

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