Home > Uncategorized > What goes up. . .

What goes up. . .

from David Ruccio

Must come down. . .

I’m not referring to karma or the application of Newton’s law of universal gravitation. No, it’s just the way capitalism works.

DJIA

Take the stock market, for example. Last Friday, the Dow Jones Industrial Average closed down 666 points, or 2.5 percent, its biggest percentage decline since the Brexit turmoil in June 2016 and the steepest point decline since the 2008 financial crisis. 

The large decline is really no surprise, since the U.S. stock market—a thoroughly speculative institution within contemporary capitalism—has been on the rise, based on soaring corporate profits, since 2009.

Rising stock values are related to corporate profits in two ways: First, they are bets on corporate profits, in the sense that stock speculators expect future prices to track the rate at which corporations are able to extract surplus and realize profits from their workers. Second, the profits themselves are distributed by corporations—internally, to buy back their own stocks, and to wealthy individuals (such as CEOs and recipients of dividends), who are in the position to capture their own portion of the surplus and use it to engage in speculative stock-market purchases.

So, stock-market indices went up—and then, last week, they came down.

No one knows why the stock market plummeted, although there are many stories out there. One of them is the jobs report—indicating 200 thousand new jobs in January and an increase in workers’ wages—and the risk that the profit rate might fall.

That’s another one of those up-down features of capitalism. And every time the profit rate falls, as if like clockwork, a recession or depression is just around the corner. Corporations cut back spending, workers are laid off, and then—perhaps, always maybe—the conditions are created for another economic upturn.

wages

Here’s what’s interesting: while average hourly earnings for all employees on private nonfarm payrolls once again increased (in January by 9 cents to $26.74, following an 11-cent gain in December, and thus, over the year, by 75 cents, or 2.9 percent), average hourly earnings of private-sector production and nonsupervisory employees increased by only 3 cents (to $22.34, or 2.4 percent on an annual basis) in January—in both cases, just a bit more than the rate of inflation. And by another measure—real weekly earnings—wages actually fell (by 1.1 percent) during the last quarter of 2017.

So, there’s no clear indication that workers’ wages are finally ready to take off (as mainstream economists and business commentators keep promising) or that they’ll make a large dent in corporate profits.

prod-wages

In fact, as is clear from the chart above, workers’ wages continue to lag far behind increases in productivity—literally no change compared to an increase of almost 9 percent, respectively, since 2009.

Still, even the threat that workers’ wages might rise seems to have spooked the stock market, which tells us something else about capitalism: the members of the small group who, in terms of wealth and power, stand above the rest by benefitting from and betting on corporate profits are themselves no more than uncertain followers of the herd.

Up and then down again. . .

  1. February 6, 2018 at 12:43 am

    It’s very interesting reading the NY Times coverage of what happened today, the single largest daily point drop in the Dow in history, 1,175 points. Or 4.6 percent, which was not the largest on that basis. But the Times seemed to studiously avoid citing that 1175 points “largest in history” perspective and stuck to the less cataclysmic sounding percentage drop.

    It’s tough to know what is going on behind and under the surface events: David’s got part of it, here, a little good news for workers sets off alarm bells; but beyond that I’ve read the old “inflation” fears and stock-bond market interactions…as long term bond rates edge up.

    Robert Shiller sounded the warning in September, here: https://www.project-syndicate.org/commentary/us-stock-volatility-bear-market-by-robert-j–shiller-2017-09 – the third highest CAPE ration in history; the two higher ones were for 1929 and the 1997-2002 run up.

    We’ll see. Is there still a “plunge protection team” operating, as some alleged, many times in the old days of 2007-2009?

  2. February 6, 2018 at 1:46 am

    My guess is that most of those who are selling now are institutional traders who foresee a short term drop in the coming weeks/months and so their plan is to sell now at relatively high prices and then buy those shares back later at a lower price once enough of the “less professional” traders are scared away from the market.

    A huge, catastrophic, historic collapse of the stock markets? I seriously doubt it. The Trump administration is pumping way too many dollars into the pockets of rich people now, who are virtually certain to use that money to buy financial assets. The fuel is there to produce “new highs” in the stock market by the end of the year.

    Unless there is something else going on that I’m not aware of—and I have honestly been paying very little attention to Wall Street—any possibility there may be of an eventual economic catastrophe—a true Minsky Moment—arising from these incipient tremors is something we’ll have to look for quite a bit further down the road, IMO…

    • February 6, 2018 at 6:23 pm

      It appears now that the impetus for all of this selling is a very reasonable decision by portfolio managers to do some “risk shifting.”

      The most recent economic data coming in (low unemployment + big tax cuts) have given market cycle readers good reason to suspect that policy makers and investors will for the foreseeable future become increasingly concerned about signs of inflation.

      What comes with that increasing concern is a bull market in bonds, so best to buy them now when there is good reason to expect they will sell at ever higher prices up until the time when the Fed decides to throw the economy into the next recession.

  3. February 6, 2018 at 4:21 am

    Looks more like a drop in the bucket to me. If the index dropped 10,000 points we might be closer to real market values of the companies involved. As it is, monies from the casino economy have flooded the stock market.

  4. February 6, 2018 at 1:54 pm

    If you believe that stock indices fluctuate according to a normal distribution law (a law most often assumed in financial technology), a fall of 4.6% with compared to a normal deviation of around 1 % is quite astonishing. The index fall more than 4.4% takes place only once for each 500 years. However, the stock index moves according to (truncated) Lévy distribution. It is not rare that we observe a fall more than 6% or more. We must say that this kind of fluctuations is “normal.”

    Here is a list of big fall of Nikkei Stock Average (Nikkei 225). Some others may do the same thing for other stock markets.

    Nikkei stock index 225 (including periods of Dow and Nikkei-Dow indices)
    Date, Absolute points, and the Down fall rate (in percents) 1949-2014

    1. 1987.10.21 21910.08 14.90
    2. 2008.10.16 8458.45 11.41
    3. 2011. 3.15 8605.15 10.55
    4. 1953. 3. 05 340.41 10.00
    5-7. 2008.10.10, 10.24, 11.08 – 9% or more
    8. 1970. 4.30 2114.32 8.69
    9. 1971. 8.16 2530.48 7.68
    10. 2013. 5.23 14483.98 6.98
    11. 2000. 4.17 19008.64 6.98
    12. 1949.12.14 98.50 6.97
    13. 2008.11.20 7703.04 6.89
    14. 2008.10.22 8674.69 6.79
    15. 1953. 3.30 318.96 6.73
    16. 2001. 9.12 9610.10 6.63
    17. 1972. 6.24 3421.02 6.61
    18. 1990. 4.02 28002.07 6.60
    19. 2008.11.06 8899.14 6.53
    20. 2008.10.27 7162.90 6.36

    (Data: My calculation from published data)

    • February 7, 2018 at 6:40 am

      I am sorry that may table is so difficult to read. Before it was posted, I arranged columns and it was visible. Please remind that last three or four digits is the rate in percentage of the fall of Nikkei average,

  5. February 7, 2018 at 3:57 pm

    Well, since I’ve stuck my neck out back on Jan. 2, 2018, sensing with the help of Robert Shiller’s data, that something major – a correction or worse was in the cards, date unknown, let me comment on the last three days of trading, Friday Feb. 2 through Tuesday the 6th.

    All the programmed selling and buying makes sorting out a genuine downward trend from short run data very difficult. Yesterday’s resurgence on the DOW of more than 500 points started soon after the opening bell at 9:30 had the market down another 500 points: so huge swings. Many commentators felt it was buying programmed to kick it at a certain trigger point of previous drops which buoyed up the market.

    But I’m trying to reconcile that knowledge with the question: how much of daily trading is driven by this: if it is so powerful in magnitude wouldn’t it forever prevent crashes, as long as enough money was ready to buy; leading further, at what point do client or institutional “nyet’s” disable the automatic buy signal? Thus respecting investors right to say “I’m out of this market?”

    And that line of reasoning leads me to ponder George Soros’ work during the most intense times of troubles, 2007-2009, his “New Paradigm for Financial Markets,” of the “struggle of competing paradigms” as reflected in the trading professionals and institutions, the ups and downs as different explanation theories about where the economy is and going to – fight it out, including an underlying optimism-pessimism frame, and I guess, “correction” falling in between the outright bulls and bears.

    I’m assuming that at some point the new dominant paradigm eventually will be reflected in even the logarithms now dominating the markets. If not, then its even more chaotic and harder to read for outsiders than we think. And Krugman can make all the distinctions he wants that the “trading markets” are not the underlying economy, but sooner or later the two have to reflect each other or we truly have smoke and mirrors – or is just that the 20% will keep jugging along in a permanent boom and the rest of us suffer “what we must” to echo Yanis Varouvakis.

    At this point I can’t tell (Wed. morning NYSE), but in the coming months, say 2-4 out, I’ll bet with Robert Shiller that a serious correction or worse is in our economic future. With feed back loops between the steepness of the drop and the spending inclinations of the top 20 percent, with all due respect to Krugman. And I think he knows that, that there are such loops connecting trading with underlying realities.

    Sorry if I’ve offended techies and trading professionals with my “layman’s” translation here.

    And I could be quite wrong about what is going on.

  6. February 8, 2018 at 3:58 pm

    “Here’s what’s interesting: while average hourly earnings for all employees on private nonfarm payrolls once again increased (in January by 9 cents to $26.74, following an 11-cent gain in December, and thus, over the year, by 75 cents, or 2.9 percent), average hourly earnings of private-sector production and nonsupervisory employees increased by only 3 cents (to $22.34, or 2.4 percent on an annual basis) in January—in both cases, just a bit more than the rate of inflation. And by another measure—real weekly earnings—wages actually fell (by 1.1 percent) during the last quarter of 2017.” David Ruccio.
    Yes, very interesting as an empirical tool for estimating one of many causes of change in ‘demand – when ‘wage income’ increases are less than ‘debt cost’ increases there will be a decrease in demand for goods and services. As “Justaluckyfool”, I must invite you as a “MemberFool”. That is -Anyone that believes they can predict a future price is a fool; if by chance correctly, then they are JUSTALUCKYFOOL. Albeit, still a fool.

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