What's going on?
The real economy is catching up with the financial economy, as it
always does eventually. Wall Street is built on smoke and mirrors, while
the real economy is based on jobs and wages. Smoke and mirrors can only
take you so far -- as we learned so painfully three years ago.
Jobs and wages stink, if you haven't noticed. They've been bad for
months, even before this week's data made it fairly clear the recovery
has stalled.
Stock prices had been rising nonetheless. That was partly because big
corporations were enjoying big sales and fat profits from their foreign
operations. But foreign sales are slowing. Chalk that up to the
European debt crisis, Europe's insane austerity measures, Japan's
tragedy, and China's concerns about inflation.
Meanwhile, other companies have been busy restocking inventories in
the hope American consumers will be in a mood to buy. But that hope is
coming to an end, as the reality dawns that American consumers can't and
won't buy very much, given their shrinking home values, high debts, and
job worries.
Stock prices were also rising because of Wall Street's certitude that
it can make loads of money from the gullibility of millions of small
investors. Here's where the smoke and mirrors come in.
Over the past year, the Street lured small investors back into the
market on the smokey promises that the worst is over and stock prices
are bound to rise. The lure became a self-fulfilling prophesy. As
investors re-entered the market, they bid up stock prices. Hence, the
mirror.
Insiders on the Street are always the first to bail when they sense
they've been overselling, as they started to do a few weeks ago. This
gives them a second opportunity to make money off small investors -- by
selling short.
The nation's second-largest financial redistribution in history (the
largest, on a percentage basis, occurred in 1929) came in 2007 and 2008 --
from small investors and their pension funds to the Street's savvy
traders who shorted them. Now it's been repeated, although on a smaller
scale.
And Washington? Completely clueless. Our representatives in the
nation's capital continue to obsess about future budget deficits and
games of chicken over raising the debt ceiling -- neither of which has
anything at all to do with the stalled recovery and the carnage on the
Street.
Otherwise, the airwaves are filled with Weiner's tweets, Gingrich's
implosion, and Palin's emails. When times are tough we look for
entertainment.