Mighty Dow Powers Up U.S. Economy

by John M. Curtis
(310) 204-8700

Copyright Feb. 28, 2013
All Rights Reserved.                                         

         Proving that Wall Street’s the economy’s best friend, the Dow Jones Industrials powered up to 14,164, within 89 points of its all time high in Oct. 2007.  While some, like PIMCO’s Mohammed El-Erian see the market heading South, Wall Street laughed off the bears and pushed toward new territory.  Unlike 2007, where the nation’s biggest banks ran out of cash, the Federal Reserve Board remains committed to record low interest rates through 2015.  Whether the Fed keeps its promise is anyone’s guess and probably dependent on the Open Market Committee’s read on inflation.  “The market psychology has clearly shifted.  It’s no longer sell the rally, it’s buy the dips,” said Dan Veru, chief investment officer of Fort Lee, N.J.-based Palisade Capital Management.  “The economic data continues to be strong,” understating what everybody but the GOP knows that the economy’s on the mend.

             Gone are the bleak days when banks ran out of cash and capital markets were depleted by investors heading for the exists.  Short-selling seems like a distant nightmare, the once favorite practice of hedgefunds making quick-cash on rapid market run-ups and declines.  Bond-investors, like El-Erian, can only dream about a steep market correction for now.  Bears, like New York University Stern School Nouriel Roubini, can only wait it out before the next grand market correction.  While predicting the 2007-08 meltdown, Roubini has been waiting in vain for another market collapse.  Government tax receipts have benefited from the 85% run-up in equities since President Barack Obama took office Jan. 20, 2008.  When Veru talks about “economic data,” he’s referring to more than corporate profits.  He’s looking at indexes like the manufacturing index showing robust gains.

             As long a Wall Street continues its upward trend, the jobs picture looks bright going into the foreseeable future.  Economists, like Harvard’s Michael Porter, see the fledgling oil shale boom driving economic growth and jobs for the next 20 years.  While Porter sees a shrinking middle class, he also sees more jobs on the horizon as the U.S. ramps up its new oil-fraking industry, much the way Canada did 20 years ago.   No one knows how Obamacare will expand the health care industry but most nonpartisan economists see the country adding thousands, if not millions, of new jobs.  One thing that happens when Wall Streets smells profits ahead, businesses begin hiring more employees to accommodate pent up demand.  Investors have come out of the woodwork pouring trillions into stock mutual funds and shifting asset allocation back into residential and commercial real estate.

             If the White House and Congress could get on the same page with respect to $85 billion in spending cuts, there’s no limit to where the economy could go.  When bipartisan National Commission on Fiscal Responsibility and Reform convened in 2010, the economy was stuck in neutral.  Budget deficits were rising because government tax receipts couldn’t keep pace with public spending.  When the unemployment rate dropped below 8%, the U.S. Treasury began to rake in more tax dollars, reducing the deficits automatically, without spending cuts.  Even the nonpartisan Congressional Budget Office forecasts that deficits will continue to drop over the next several years, eventually balancing the U.S. budget.  Knowing this, members of Congress need to stop partisan bickering and accept the CBO’s predictions.  Slashing the budget is no longer needed to balance the federal budget.

              Instead of whipping up fears about jobs losses, the president should be citing the CBO’s report that indicates slashing the budget isn’t needed to deal with deficits and balance the budget in the next few years.  As the real estate market recovers, more homeowners will have the cash needed to help fuel the next boom in the consumer economy.  When the housing bubble burst in 2007-08, it robbed homeowners of the cash needed to fuel the economy.  “Some encouraging news for the bulls has been the housing data that has come out over the past couple of days,” said Todd Salamone, director of research at Blue Ash, Ohio-based Schaeffer’s Investment Research   While Salamone sees a possible pull-back in the short-term, Schaeffer Research remains bullish on equities in the medium and long-term.  As the market picks up steam, the hiring picture looks brighter in 2013.

             Letting the market drift upward enables publicly traded companies to continue piling up cash in their capital accounts.  When cash accounts fill up, companies ramp up hiring, putting a big fat smile on the faces of recent college grads joining the employment market.  While things looked dismal a few years ago, the flegling oil-shale and health care industries should propel the economy ahead going forward.  With the Fed committed to its cheap interest rate policy, there’s nowhere for investors to turn other that equities to make a decent return on investment.    More cash pouring into the stock market bodes well for the jobs picture and continues reductions in the unemployment rate and federal budget deficits.  Congress needs to step away from the partisan feud and accept real economic facts to base policy decisions.  Slashing the federal budget has become an obsolete way to stimulate the economy.

 John M. Curtis writes politically neutral commentary analyzing spin in national and global news.  He's editor of OnlineColumnist.com.and author of Dodging the Bullet and Operation Charisma.