Stock Market Illiteracy

Sometimes my total disrespect for the stock market leaps to the fore. It is an extraordinarily skittish place and seems to be full of the most short sighted and most easily swayed folks on earth. Analytically? Don’t even go there. Let’s just say that dunderhead isn’t close to the mark. They can’t read too well either. Take today’s data on incomes from the Bureau of Economic Analysis.

It shows that personal incomes rose in April by a ‘surprising’ 0.5%. I put surprising in quote marks because it appears that the market reacts more to the level of expectation than to the news itself. I too am surprised. Will I be doing back flips? No. Will I declare the recession over and the returns to the glory days upon us no? The stock market will and has. Dumb. Very dumb.

The data also shows that disposable incomes rose even more: by 1.1%. For those of you new to this, disposable incomes gives us an after tax view of how wages and incomes flow through to the point at which they can be spent or saved. The market loves that jump in disposable incomes. Presumably the market view is that we are on the cusp of a good old all-American buying binge. Which will drive consumption up, boost profits and hence drive the stock values higher.

Ummm. I wonder if they read line three of the report: personal consumption expenditures, [‘PCE’]. Had they read that far they might have noticed that PCE fell in April by 0.1% A small fall I admit. Almost insignificant. Except that it continues a trend we all, well I did anyway, noticed last month: the strong upturn in PCE of January and February has been followed by two weak months. That upturn was one of Bernanke’s original ‘green shoots’. It has withered entirely away.

This is not good news.

Look deeper into the data:

Most of the rise in incomes comes from obscure things. Wages fell. Rental incomes and transfer payments went up and produced the rise. Not many average Americans get rental income, so even if that continues I doubt it will lead us to the promised land of consumption growth. And ‘transfer payments’? As its name implies that’s income that is being shuffled around the board, it isn’t new. Think: ‘ American Recovery and Reinvestment Act of 2009’. Sound familiar? How about ‘stimulus package’? That’s right the most important factor pushing up PCE was the stimulus package. Hardly a long term improvement.

And how about the upturn in disposable incomes. Same thing. The stimulus package sucked out taxes. Hence ‘after tax income’ shot up. ‘After tax’ equals ‘disposable’. Duh.

Now keep looking at that data: the personal savings rate rose strongly fro 4.5% to 5.7%. Terrific. That’s the highest rate for fourteen years. We need to become more thrifty. We need to return to the savings rates of the 1960’s when families routinely socked away 10% of their incomes for a rainy day.

But not just yet.

First we need to spend every penny we have to get the engine running smoothly again. Then, once we are all back working we can start to save.

So here’s my, apparently contrarian, view: this data makes me a little queasy. Wages are weak and falling. The stimulus had far too much tax rebate in it, $300 billion of the roughly $800 billion, and what there was is now being saved. Just as I predicted. That means the stimulus will have less effect than it ought to have had. In jargon: its multiplier is too low. Just as Keynes would have argued.

The economy’s problem right now is not savings, nor is it incomes – especially when incomes are temporarily distorted by transfer payments and tax rebates. The problem is spending. In the jargon: final demand is too low compared with the economy’s capacity to produce. We have idle resources: closed factories and unemployed workers. We need to get that capacity back in use. Savings don’t help. Nor do lower taxes.

There is nothing new at all in any of this.

It’s just that the stock market suffers from attention deficit disorder and seems to have forgotten. Don’t worry though: there’ll be a new report soon that will send the market careening off in a negative sense. Probably for the wrong reasons.

And that’s why none of us should pay too much attention to the stock market. They can’t read down there.