Only the stock market matters for the oligarchy

I was listening to a news report this morning on a special election for congress in southwest Pennsylvania to be held on March 13 to replace a Republican congressman Tim Murphy who had been forced to resign in disgrace due to (what else?) a sex scandal. The district is heavily Republican but the party is nervous that that the current turmoil in the White House might put that seat in danger and they are pulling out all the stops. The Republican candidate was giving a speech and his main pitch was how well the stock market was doing since Trump was elected. That, for him, meant that everything was just peachy in the country, whatever else might be going on.

Like most people, I do not actively invest I the stock market by buying and selling shares. Of course, I am affected by the market because my retirement plans invest in it. I really do not understand what drives the market prices up and down. But one thing for sure is that for most politicians, it is the stock market that matters most. They do not care much about unemployment, bankruptcies, housing crises, or any of the things that affect ordinary people. But if the stock market suddenly takes a dive, then they become very concerned while if the market values rise, they think that the economy is doing very well. As long as the market indices keep rising, it does not matter a damn to them what is happening in the rest of the economy.

But what makes the market rise and fall? Every day, news reports chart the change in the stock market indices and then give reasons for it but it always struck me that these were facile and glib. How could one possibly determine the reasons for millions of trades made by so many people? As Bob Garfield pointed out some time ago on the program On the Media, such single factor analyses are mostly guess work and largely bogus.

Every trading day, reporters at the Associated Press, Bloomberg, Reuters, USA Today, The Wall Street Journal and a dozen other news organizations are expected to distill millions of discrete financial decisions and divine a single motivating factor. Some days it’s a Commerce Department report on business inventories. Sometimes it’s a jump in IBM’s earnings. Sometimes it’s the mysterious “technical factors” or dropping oil prices or terrorism jitters or investor optimism or the magical, all-encompassing “profit-taking.”

As far as I can tell, there are only two factors that make sense in driving stock prices: inflation and unemployment rates. Richard S. Warr, a professor of finance at North Carolina State University, explains the inflation-stock market link. He says that expectations of rising inflation should in theory affect stock prices both positively and negatively and thus cancel each other out but in reality only the negative side seems to occur.

There’s lots of evidence, including my own research, that many investors suffer from something called “inflation illusion.” They worry about the present value effect of inflation of stocks but they ignore the growth in cash flows and profits that result from higher inflation. This results in stock prices falling when they shouldn’t.

However, there’s a third, indirect way inflation affects stocks. And this might be what is causing the concerns in the markets today. This effect has inflation playing the role of a canary in a coal mine, warning that bad times are coming.

At the beginning of a cycle, inflation is often low. (It was practically nonexistent or even negative following the financial crisis of 2008.) But as the economy heats up and people have more money to spend (as is the case now), companies begin to sell more goods and services at steadily increasing prices, earning higher profits, while most people are able to find work.

As more stuff is being created and sold in the economy, the demand for raw materials and workers increases. Besides pushing up prices, this can also result in higher wages. The fastest increase in take-home pay in nine years was another “warning sign” that spooked investors recently.

Kate Aronoff and Ryan Grim argue that the gyrations in the stock market are a sign of a rigged economy that tries to keep people unemployed.

KARL MARX USED to say that unemployed people were capitalism’s reserve army. Though he didn’t invent the term, he meant that capitalism drew its strength from this army, standing at the ready to take a worker’s job if the current one didn’t like it. If unemployment levels are high enough, bosses can pay lower wages and treat workers poorly. If one of them quits, there are plenty more in reserve. But if the reserve army is depleted — if the economy is at full employment, and everybody who wants a job has one — then bosses can’t treat workers as disposable, and they can’t indulge their racism and sexism in the same way.

A boss who treats women or people of color poorly, or refuses to hire them, is at a supreme disadvantage if there’s no reserve army.

Now, when analysts say that the Dow Jones industrial average went up or down for this or that reason, they are often just guessing. What specifically moves a body as complex as the stock market is in some ways unknowable, but it is useful to explore the cause being ascribed to last week’s crash — rising wages — apart from its implications for the market. What it says about the way our economy is structured is much more profound.

Start with the suggestion, which seems odd on its face, that the market crashed because wages were seen to be rising. Anybody outside the financial system would immediately see wages going up as a good thing. After all, it’s what every politician in every party says they want to see happen. But for market analysts, it’s a bad thing, because it is said to be a signal that inflation is around the corner.

And if inflation is coming, then the Federal Reserve is likely to raise interest rates to slow down the economy and cool off the inflation. When the Fed raises interest rates, bonds become more attractive, so people move money from stocks to bonds — and the stock market dives. It becomes harder to borrow, so businesses and homeowners have less capital to throw around. Profits get squeezed by high-interest payments. And as interest rates rise, the value of older bonds, which pay out a lower interest rate, goes down. So people are losing money all over the place. All because wages started to go up.

Everything in the structure of the economy, then, is geared toward making sure that wages never rise. And for nearly half a century, this task has been accomplished. Wages haven’t budged since the 1970s.

They say that it need not be the case that low unemployment leads to high inflation.

The current recovery in particular has shown that the economy can maintain significantly low unemployment — below the 5 percent “natural rate” — and not experience inflation.

In a tight labor market in which demand is high, employers have to make a better sell to workers to either stay on the job or take one in the first place, since it’s easier to find something that either pays better or is offering better working conditions. It’s also harder for companies to find people to work for them, as there are fewer people looking for jobs. In that context, bosses sweeten the deal, promising perks like higher pay, bonuses, and vacation pay — in all, shelling out more money to entice and keep the workers they need. “As all employers are doing this,” Mason said, “they’re competing with each other and bidding up the price of labor. Competition leads capitalists to act in a way that contradicts their collective interest.”

That’s where the Fed comes in, he added, to “protect businesses from their own worst impulses of giving workers higher wages.”

The recent Dow Jones fluctuations have very little to do with a legitimate fear of inflation. The stock market panicked largely because CEOs and shareholders fear that they’re losing their upper hand over a workforce that’s cutting increasingly into their record profits. The Fed’s response to that may well be worse for the average American than anything that happens on the floor of the New York Stock Exchange: It may throw workers who are already hurting under the bus in the name of a stopping something — inflation — that’s nowhere to be found.

It is this that really bugs me about the stock market, that increased employment and higher wages are seen as bad things that cause it to go down. For me, those are good things but for people whose only concern is their stock portfolio, they don’t care that more people are now able to make ends meet and possibly emerge from debt.


  1. says

    First things first. The DJIA reflects the weighted average of 30 large companies. It does not reflect the average of the entire market. Depending on your investments, the Dow could be climbing while you’re losing, and vice versa.

    The other thing is, and this just my opinion based on my own experience and observations, the market is not at all what it is purported to be. That is, the price of stock reflecting the inherent worth of the company. This *could* be true if people looked at companies and conditions rationally, and invested for the long term, but they don’t. Back in the 1980s I decided to invest in some stock and being an electrical engineer, I figured I would use my knowledge of semiconductors to my advantage. Among other things, I bought some stock in a large, well-known semiconductor company that had excellent market share and prospects. Having used some of their products, I knew their reputation was appropriate, not just marketing hype. The stock price was growing at a moderate rate but then began to slip. To this day, I can find no rational reason why. The true “value” of this large and stable company could not have slipped the way the stock price did. So I have come to the conclusion that the stock market runs on 1) insider or near-insider knowledge, 2) A variation on the Dunning-Kruger effect where people actually know very little about what the company really does but instead focus on quarterly reports and short-term gain, 3) The bigger fool hypothesis (namely that it doesn’t matter what the price of the stock is so long as there is a “bigger fool” than you who is willing to buy it from you at an even higher price than you paid.

    Needless to say, I got out of building a stock portfolio. The average person (without either the time to invest or the connections) cannot win against the pros.

  2. says

    I hate the stock market to the point that the only words I can think to describe are that it’s one of the greatest evils in the world today (and I’m not a fan of the word “evil”). When everything is done to maximize shareholder profits, then it is working against making this world a better place. The first time I heard of profitable corporations laying off workers to increase profits is when I first twigged onto this. Then there is the union-busting, the lobbying for deregulation of all sorts (including environmental and worker safety), the offshoring, the lobbying for tax cuts, the complete lack of ethics and accountability… The investor class is actively working to make the world a worse place in the name of making more money. The whole thing should be scrapped.

  3. mnb0 says

    “The whole thing should be scrapped.”
    Then prices of all kind of goods would fluctuate worse than they do now -- meaning that economic crises would become more frequent and would become worse. Also companies would be robbed of capital to invest, holding the economy down.
    There are kind of things wrong with stock markets, but this cure would be worse than the disease.

    “how well the stock market was doing since Trump was elected”
    If The Donald is serious with his threat to start an economic war with the EU (always a highly doubtful assumption) the stock market will go down next few weeks. To quote him:

    “If the E.U. wants to further increase their already massive tariffs and barriers on U.S. companies doing business there, we will simply apply a Tax on their Cars which freely pour into the U.S. They make it impossible for our cars (and more) to sell there. Big trade imbalance!”
    The EU is a weird institute: militarily and politically weak, but economically very strong, especially when meeting external threats like this one. The EU has won economic wars before against the USA. Wall Street is not going to like it.

  4. flex says

    As the stock market is a secondary market, the only benefit companies get out of it is the ability to borrow more money. That’s not true of the officers of the company, who can make millions with stock options without benefiting the company a single dime.

    The stock market is a closed system, a zero-sum game, the money which can be taken out of the market is money which is put in by other investors. Companies negotiate with banks, or other financial institutions, to trade stock in the company for investment dollars. The banks then sell that stock onto the market, for whatever price they can get the punters to purchase at. Companies do not sell stock on the market directly.

    At one time people would purchase stock because the company would pay dividends to the stock holders. Dividends are rare these days because the tax laws encourage trading stock for a profit rather than taking dividends as profit. Gains on the stock market, even though they provide no benefit to companies and can only occur because some other investor purchased the stock you owned for more than what you paid for it (or your company paid if it was a stock option), are taxed at a lower rate than other income. So we encourage company officers to manipulate the stock values (which do companies no good), rather than invest in company growth.

    If we are really interested in growing companies, we would alter the tax laws to make dividends taxed at a lower rate (even tax-free), and tax capital gains from stock transactions at >50%. The net result is that corporate officers would prefer to generate dividends with the stock options rather than sell them, and the only way to generate dividends is to have a healthy company. Stock prices can be manipulated by press releases, dividends require positive revenue.

    I don’t think the whole thing should be scrapped, but we have created in our tax laws an incentive to manipulate the stock market for personal gain. The tax incentives for personal gain should be linked to company revenues, not to the public belief in company value. Public belief can be, and we have evidence that it is, manipulated.

  5. says

    The tax incentives for personal gain should be linked to company revenues, not to the public belief in company value.

    What you won’t hear of happening is a company saying “we have had such a great year that we are going to pay all our employees a big bonus!”
    No, that goes to the shareholders, who did all the work.

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