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Thursday, September 24, 2020

October Surprise: Market Apocalypse?


That’s the word that Wall Street uses when investors are getting nervous. And Wall Street and the financial pundits should and are getting nervous now.

The major US equity markets-- the Dow Jones, S&P, and NASDAQ-- have enjoyed a strong, and, to many, a paradoxical recovery since the pandemic shuttered much of the productive economy. While unemployment has soared and is only slowly reversing, while growth has collapsed, and while earnings are challenged, stock markets are marching forward, restoring nearly all of their previous losses by the end of August.

To many of us, it is not unusual to see stock performance far outpace the general economic welfare of the people. That is a commonplace of the capitalist economy.

Nor is it unusual for investors to expect that the stock market will outperform the economy in general. After all, that was the point of Piketty’s celebrated, thorough historical study of capital which showed that, all things being equal, the rate of return on investment will grow faster than the rate of economic growth. As a result, capitalism necessarily generates what we Marxists insist is exploitation.

But equity markets are not free floating, independent systems; they must intersect at some point or some time with the real economy. Stock performance must reflect the underlying ability of its associated corporation or enterprise to produce something of worth to the investor: profit. 

So if stock values in the five or six months of the 2020 pandemic seem dissociated from the economy, what is going on?

The Wall Street Journal offers a useful, if incomplete, explanation of the anomaly. How Stocks Defied The Pandemic (September 15, 2020) suggests five factors: 1. Stimulus from the Fed and Congress, 2. Expectations of a strong recovery, 3. The dominance of the tech giants, 4. The return of individual investors, and 5. Momentum trading.

Certainly the Federal Reserve and the two parties’ elected officials acted swiftly in the wake of the pandemic shut-down. Absorbing the lessons of the 2007-2009 crisis, they cranked out trillions of dollars’ worth of stimulus, they sanctioned easy loans, and they collapsed interest rates swiftly. 

But it is telling that equity markets appear to have been bolstered more significantly than other aspects of the economy, including those aspects protecting or promoting the fate of those most vulnerable to the catastrophe. In short, the investor class seemed to reap the greater benefit of their actions.

Though maybe unintended, the bailout encouraged hungry investors to devour stock market opportunities, with bond yields decimated and other interest-generating instruments foreclosed by the Federal Reserve’s actions. Capitalists must land their capital somewhere in order to preserve the accumulation process-- the system’s blood flow; the impact of institutional intervention by the Fed left them few promising alternatives outside of the equity markets. And that is where they put their money.

As for “expectations” of a quick recovery, any notion that such expectations could be built on anything more solid than hope and faith must be discarded. This singular event-- a crisis of public health, economics, politics, and racial conflict-- generated profound fear more than expectations.

The WSJ correctly located the outsized influence of Tech stocks-- principally, Apple, Amazon, Microsoft, Alphabet (Google), and Facebook-- in the stock boom. Without the investment flowing into tech stocks, mainly the big five, there would be no notable market rally. Apple, alone, has gained 57% in 2020 and now has a valuation greater than the FTSE 100, an index of the top companies on the London Stock Exchange. At the same time, the frenzy for tech stocks frightens pundits and advisors. Apart from Amazon, tech stocks play in a virtual universe that challenges real-world valuation. Moreover, they have been notoriously volatile. And the gains have been concentrated in the Big Five, with other companies far less successful. 

Past stock market collapses have been preceded by a dramatic increase in individual investors bent on taking advantage of an overheated market. The return of the “rubes” has always been a signature benchmark of an impending decline. From the casual dabbler before the Great Depression to the day trader and dilettante of today, the engagement of “amateurs” is always a harbinger of market disaster. 

Some would be surprised to learn that in the modern era, individual investors-- day traders and the like-- only account for roughly one in ten trades. The rest are made up by institutional investors, funds, etc. But, in 2020, the number of trades by individual investors has doubled, accounting for about 20% of equity market action. 

With social media tipsters and discussion boards, the born-again investors have accounted for many stock valuations that puzzle and concern wiser investors. Tesla, for example, has gained 438% this year, establishing the maverick car company as the highest valued auto company in the world and the eighth largest corporation in the US by market value.

Fed by social media gossip, investors jacked up share prices of Eastman Kodak by as much as 614% before losing most of the gains! This kind of euphoria-driven investment has mature investors and advisors shaking in their boots.

Creating momentum through bets on overheated valuations only generates greater momentum. Easy money and the fear of missing a surge amplifies the momentum. Add the attraction of derivatives and the likelihood of a market bubble increases dramatically. 

Stock options-- the purchase of a contract to buy a stock at a price fixed before the actual purchase of the stock-- have exploded in 2020. They are attractive to investors who want to risk their capital on a bet of future gains and increase the potential return on the bet by spreading the capital over more, less costly options. Goldman Sachs reports that the volume of option trades exceeded the volume of stock trades for the first time this year. Three years ago, option-trading volume was only 40% of stock volume. In August, option trading topped 120% of stock trading. Small investors bought half of a trillion dollars’ worth of options in August alone, five times the amount bought in any previous month, as reported in the WSJ.

Much of this market craze is occurring against a backdrop of over three weeks of net decline in the US stock market indexes. Moreover, the employment recovery is stagnating, with new unemployment claims remaining at an historic high, and the pace of retail-spending growth slowing. Earnings-- the crucial factor in capitalist behavior-- is expected by some to fall by as much as 22% in the third quarter. 

Conditions are ripening for another market crisis not unlike that brought on by the 2000-2001 collapse. Billions, if not trillions, of nominal value stand to disappear.

Likely such an October Surprise would be fatal to Donald Trump’s reelection prospects, since most polls show that respondents see the economy is his greatest strength against Biden.

But whether Biden or Trump wins, the depth of the emerging crisis will make it almost impossible for either to rule effectively. Neither offers a way out. Only a profound, radical political realignment will blaze a path forward.

Greg Godels

Monday, September 7, 2020

Treading in Deep Water

With less than two months remaining before the US elections, expectations are growing. Even the most indifferent citizen senses that the US (and much of the world) is faced with a host of seemingly intractable crises, unprecedented in scope. These crises-- epidemiological, social, political, and economic-- have intensified and brought greater divisions, heightened tensions among the people. Fear and confusion reign when people sense a loss of direction and an absence of clarity. Since little bold, far-sighted, and imaginative leadership is emerging prominently, people predictably put their fate in the hands of the two political parties that are vying for power in November.

There is little reason to believe that either party offers much beyond the feeble, inadequate answers that have already surfaced. Moreover, the mounting pressures of the two-party horse race have placed electoral victory ahead of any meaningful, deeper public discussion of the unfolding catastrophe. The two presidential campaigns spar while health, welfare, and economic prospects fall.

For his part, Trump trades on both the basest fears and hatreds and the frustrations of those largely taken for granted for years by the Democrats. He hopes to win the disgruntled economic “losers” from the devastating corporate deindustrialization that plagued and still plagues the Midwest. While racism and nativism are important factors in the voting of this constituency, inequality, neglect, and powerlessness play a decisive role. 

One example shows this well: Kenosha County, Wisconsin, focal point over the past weeks of outrage over a police lynching and vigilante murders and the former home to now-lost manufacturing jobs, supported the Democrats until 2016, giving large majorities to Obama/Biden in 2008 and 2012. But the county gave Trump a slight majority in 2016. 

The example of solidly Democratic constituencies supporting Obama in two elections, but turning in desperation to Trump in 2016, is repeated frequently in the Midwest, where a treasure trove of key electoral college votes lie. The convenient explanations offered by Democratic elites of viral racism and know-nothing ignorance is not sustainable. Better to look at desperate self-interest.

With his previous promises of reindustrialization and the restoration of industrial jobs unfulfilled, Trump is now resorting to race-baiting and crime-hysteria. Polls show that the media’s sensationalism over urban uprisings has given Trump a slight lead over Biden on how he would handle crime, an issue that he is pressing aggressively and recklessly.

Large sectors of the capitalist ruling class have made pragmatic peace with Trump, enjoying his tax regimen, a charging stock market, and the fruits of his nationalist extortion of global imperialist rivals. Unlike in 2016 when all but a few wealthy donors dared back Trump, his campaign coffers are filling more rapidly. In July, Trump raised $72 million to Biden’s $63.5 million, an obscene amount in both cases. By comparison, in July of 2016, Clinton outraised Trump by over 42%. (Early results for August show Biden-- Trump’s numbers are yet to be reported-- raising $364.5 million, a monthly election record. And people still believe our pay-to-play politics is a democracy.)

Trump’s team has substituted a screeching negative message warning of an assured disaster under Biden in place of the 2016 positive, but vacuous and unintentionally revealing “Make America Great Again.” In 2016, “...Again” said it all to those who gave it a thought: the empire was in decline, the US was losing its way, no longer the anointed City on the Hill. In that election, Trump was trading on mass dissatisfaction, the ridiculous notion that Trump would put the US back on the rails of destiny.

Today, facing a formerly unimaginable disaster, Trump’s message has turned negative: Biden will make everything far worse. 

This is where the evolution of US politics has taken us. 

And the Democrats are today counting on their own unspoken version of Trump’s simple message “Make America Great Again.” A vote for Biden will restore the era of the beloved Barack Obama, a time-- we are told-- of social justice and prosperity. The election results of 2016 and the Sanders phenomenon should have taught the Democratic Party elite that the Obama era was not perceived by everyone in just that way.

In any case, Obama-nostalgia cannot put that metaphorical toothpaste back into the tube, and that tube would be impotent in the face of the catastrophe ahead.

The Democrats are running on the idea that everyone sees that the Trump postures conjure the image of a home-grown Mussolini. That is, Biden is making the election a vote against Trump’s buffoonery and not an election for anything substantial. The Democrats have long cast away their last ideological pillar, the remnants of the Rooseveltian New Deal. In its stead, the party opportunistically cobbles together real, immediately felt grievances against coalition constituents with the promise of costless, painless remedies. The Democratic Party has become the party of shallow identity empathy.

Ideologically, the Democratic Party is so bankrupt that it featured Republican speakers at its recent convention. The party warmly welcomed former Ohio governor John Kasich, a Neanderthal who opposes virtually every traditional Democratic social, labor, and economic position: abortion rights, marijuana legalization, abolishing the death penalty, collective bargaining, public schools, etc

The late Senator John McCain’s wife was similarly feted. A former rodeo queen, Cindy McCain is purportedly the richest woman in Arizona. Apart from hating Trump, her most notable policy position was denouncing Bush for not sending more troops to Iraq.

And of course Colin Powell, who also spoke, was one of Bush’s great prevaricators on weapons of mass destruction. Former NJ governor Christine Todd Whitman, former H-P CEO Meg Whitman, and former Congresswoman Susan Molinaro were other prominent Republicans featured. 

The welcome, active support of the self-styled Lincoln Project-- a gaggle of prominent Bushite Republicans-- captures the flavor of the Biden campaign.

In addition, a group of 300 ex-Bush officials have formed a PAC in support of Biden. And much of Bush’s foreign policy apparatus and Obama’s foreign policy interventionists are offering their support and “expertise” to continue the USA’s active, and often violent, meddling in the affairs of every other nation. As they are absorbed into any Biden administration, they promise an even more reactionary, more dangerous foreign policy than Trump’s sometimes-isolationism. 

By contrast, the Democratic Party’s progressive wing, the ascendant social democrats, were largely shunted by the party’s convention managers. After such a sharp, insulting rebuke to the party’s left, it is a wonder that they didn’t demonstrate their disapproval or disavowal of the virtual spectacle. Spineless or soaked in Trump-hatred?

With the race tightening, the Democratic operatives are pressuring Biden to begin the ritualistic Democratic Party retreat to the right (believed to bring the center voters into the tent) that cost former candidates like Dukakis and Mondale their late leads in the poll. Biden has qualified his support for the popular and persistent anti-racist actions and backed away from his pledge to ban fracking. Undoubtedly, he will move farther to the right as the election grows closer.

Since the post-Civil Rights movement loss of the South to the Republicans, the Democrats have relied more and more upon the white, suburban vote. This demographic swung sharply to Carter in 1976 out of disgust with Nixon’s dishonesty and vulgarity exposed by Watergate.

Since that time, the Democrats have courted this vote intensely, one explanation for the extreme timidity of their program. 

Once again in 2020, Party elites are renewing that courtship. Trump hopes to deny the Democrats that vote by brazen appeals to racial safety and fear of all things urban.

One healthy development appearing on the political scene was the recent People’s Convention for a new People’s Party, a fresh attempt to build a new party around dissatisfied progressives alienated from or disgusted by the Democrats. According to RT, the virtual convention drew over 400,000 virtual participants. One speaker, Chris Hedges, astutely summarized what a vote for Biden means:

[B]y voting for Biden you do vote for something.  You vote for the humiliation of courageous women such as Anita Hill who confronted their abusers. You vote for the architects of the endless wars in the Middle East. You vote for the apartheid state in Israel. You vote for wholesale surveillance of the public by government intelligence agencies and the abolition of due process and habeas corpus. You vote for austerity programs, including the destruction of welfare and cuts to Social Security. You vote for NAFTA, free trade deals, de-industrialization, a decline in wages, the loss of hundreds of thousands of manufacturing jobs and the offshoring of jobs to underpaid workers who toil in sweatshops in Mexico, China or Vietnam. You vote for the assault on public education and the transfer of federal funds to for-profit and Christian charter schools. You vote for the doubling of our prison population, the tripling and quadrupling of sentences and huge expansion of crimes meriting the death penalty. You vote for militarized police who gun down poor people of color with impunity.  You vote against the Green New Deal and immigration reform. You vote for limiting a woman’s right to abortion and reproductive rights. You vote for a segregated public-school system in which the wealthy receive educational opportunities and the poor are denied a chance. You vote for punitive levels of student debt and the inability to free yourself of debt obligations through bankruptcy. You vote for deregulating the banking industry and the abolition of Glass-Steagall. You vote for the for-profit insurance and pharmaceutical corporations and against universal health care. You vote for bloated defense budgets. You vote for the use of unlimited oligarchic and corporate money to buy our elections. You vote for a politician who during his time in the Senate abjectly served the interests of MBNA, the largest independent credit card company headquartered in Delaware, which also employed Biden’s son Hunter.

I can only answer with one good reason for voting for Biden: should he win, Democrats will not be able to continually blame all of our sorry politics and capitalism’s contradictions on Trump. And the experience of a Biden government might well hasten the defection from a moribund Democratic Party.

Greg Godels