Last month, the US economy lost jobs (33,000) for the first time since 2010. Most attributed this loss to the destructive and deadly storms that hit Texas, Florida, and Puerto Rico. That explanation, however, failed to clear the ominous cloud that formed over the report. Today, the Dow blasted past 23,000 points for the first time in the history of American capitalism. As Trump proudly tweeted, the stock market has increased by $5 trillion dollars since Nov 9, 2016. (The Dow was 18,333 on Election Day.) Trump wants voters to believe that the “record business enthusiasm” is a consequence of the confidence the markets have in his management of the economy. But the economy itself has not boomed; it has grown within the limits of the momentum initiated by the policies of the previous president. Everyone with a brain knows that. So, why the Trumphoria? Why are the equity markets breaking records?
CNN reports that it’s because of the soundness of the fundamentals:
“The U.S. economic fundamentals are pretty good. And the global economy is accelerating,” said David Joy, chief market strategist at Ameriprise Financial.
You can believe that if you want to. Or you can believe this: There is no fear in the market, and so greater and greater risks are being packed into it.
The thing we learned from the market’s boom and bust in the previous decade is that serious money cannot be made without increasing risks in the system. If investors are cautious, the returns are conventional. If you do not want returns that are chained to economic reality, and want to “beat the gun,” as John Maynard Keynes called it, then you have to repeatedly make the riskiest bets (and the greater the risk, the higher the return), or plain cheat, or have enough money to afford an army of experts to manage a portfolio. Because only a few investors are in the last category, we have to assume the rest are in the first two, and fuel a boom. Those in the second category need no explanation (cheating is cheating), but those in the first do: Why are so many investors fearless? Because of good old moral hazard.
My guess is that there are two reasons for why at this moment the “idea that ‘investors are’ protected in some way from risk” and so will take them (moral hazard) is because 1) the feeling (the confidence) that Trump will not punish them when risky bets go bad and crash the system, and 2) the knowledge that a club of prosecutors, which included Jenny Durkan, did not punish bankers and investors for the crash of 2008, despite obvious irregularities that inflated stock prices between 2004 and 2007 (this makes cheaters also fearless). So, we have in the past evidence that risks and shady bets will go unpunished and a president who is deregulating the system and exposing it to more and more risks in the future.
The upshot? Every rise observed in the equity markets is not an indication of how fast the economy is growing but how much money will be transferred to public debt when the market crashes.
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