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Robert Reich: The Stock Market Rally Versus the World’s Economic Fundamentals

September 2, 2010

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By **Robert Reich**

What passes for business reporting in the United States is too often a series of breathless reports about the stock market. When the Dow rises precipitously, as it did today (Wednesday), the business press predicts an end to the Great Recession. When the stock market plummets, as it did last week, the Great Recession is said to be worsening.

Pay no attention. The stock market has as much to do with the real economy as the weather has to do with geology. Day by day there’s no relationship at all. Over time, weather and geology interact but the results aren’t evident for many years. The biggest impact of the weather is on peoples’ moods, as are the daily ups and downs of the market.

The real economy is jobs and paychecks, what people buy and what they sell. And the real economy—even viewed from a worldwide perspective—is as precarious as ever, perhaps more so.

Today’s rally was triggered by news that one of China’s official measures of its growth—its Purchasing Managers Index—rose. The index had been in decline for three straight months.

Why should an obscure measurement on the other side of the world cause stock markets in New York, London, and Frankfurt to rally? Because China is so large and its needs seemingly limitless that its growth has been about the only reliable source of global demand.

Many big American companies have been showing profits because they’re doing ever more business in China while cutting payrolls at home. American consumers aren’t buying much of anything because they’ve lost their jobs or are worried about losing them, and are still trying to get out from under a huge debt load (the latest figures show more consumer debt delinquent now than last year and a surge in personal bankruptcies). The U.S. housing market is growing worse, auto and retail sales are dropping, and the ranks of the jobless continue to swell.

Europe is in almost as much a mess. The problem there isn’t just or even mainly that Greece and other nations on the “periphery” have too much public debt. A bigger problem is European consumers aren’t buying nearly enough to generate more jobs. Unemployment remains high, and the trend is bad. Manufacturing growth there has slowed to its weakest pace in six months. Yet bizarrely, Europe’s large economies—Britain, Germany, and France—are paring back their public budgets. It’s exactly the wrong time, and a recipe for disaster.

Germany’s so-called “job miracle” (as Chancellor Angela Merkel calls it) is more mirage than miracle. Most of the gains in employment there have come from part-time jobs, often at low pay. Average annual net income per German employee continues to drop. This explains why domestic demand there is so sluggish and why Germany is desperately dependent on its exports of machinery and manufacturing components to Asia, especially China.

Meanwhile, Japan, now the world’s third-largest economy, is a basket case. Japanese consumers aren’t buying much of anything, and why would they? The country is still in the grip of a deflationary cycle that shows no end. Japanese consumers reason if they can buy it cheaper next week there’s no reason to buy now. Basically the only thing keeping Japan’s economy going are its exports of cars and electronic components to China.

Australia is booming, but look closely and you see the same buyer. Australia is making a boatload of money selling its minerals and raw materials to China (Australia is fast becoming one big Chinese mine shaft). The Brazilian economy is soaring. Why? Exports of wheat and cattle to China. Middle East oil producers are getting richer. Why? China’s insatiable thirst for oil.

Elsewhere around the globe the picture is as uncertain. Much of Pakistan is under water. Much of the rest of the Middle East is under tyrannical or corrupt regimes. Russia has suffered such a dry spell it’s hoarding wheat. Despite its wealthy few, India’s masses are still terribly poor.

The stock market could plunge tomorrow or the next day because the world’s economic fundamentals are so precarious.

The global economy cannot be sustained by one big, voracious nation—especially one that’s suffering bouts of civil unrest, actively repressing dissent, suffocating under a blanket of pollution and coping with other environmental hazards, and whose biggest companies are run by the state.

Copyright 2010 Robert Reich

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This entry originally appeared at RobertReich.org

Robert Reich.JPGRobert B. Reich is Professor of Public Policy at the Goldman School of Public Policy at the University of California at Berkeley. He has served in three national administrations, most recently as secretary of labor under President Bill Clinton. He has written eleven books (including his most recent, Supercapitalism, which is now out in paperback). Mr. Reich is co-founding editor of The American Prospect magazine. His weekly commentaries on public radio’s Marketplace are heard by nearly five million people.

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One comment for Robert Reich: The Stock Market Rally Versus the World’s Economic Fundamentals

  1. Comment by naveen jankar on September 3, 2010 at 4:19 am

    thanks for all the china-bashing.

    i was expecting a different realisation – when stock price indices rise it means that investors are paying more for the stocks reflected in the indices than say yesterday. The total number of stocks is remaining the same, so somebody who had the stock sold it to somebody else at a higher price than was prevailing yesterday. That somebody else was holding some other “investment” which had to be relinquished to buy the stocks. The other investment could be some other stock in some other stock market, currency bond, commodity option, or any other paper (including, tho highly unlikely, cash). If one understands this system, i dont see how the stock market has anything to do with the real economy.

    financial investors work in manipulating the herd mentality of financial investors. their profits are just a matter of timing – being ahead of the herd if the herd follows is what makes profits. but too much of the herd should not follow and no “run” should last too long or the system crashes. any cue could become an excuse for a run, the early runners wanting the undecided to support the run so that their profits are increased. now financial investors who are late starters want to ride the wave so they would want others to get into the run after they did and so the cue/ excuse has to be as credible as possible. Hence the myth that the stock market reflects the real economy. All the stock market does is reflect the runs made by market players in seeking profit thru the timing and scale of their participation in it.

    This is complicated by the fact that many of the players are insiders – CEOs and other management, banks and financial institutions who lend money to the corporates as well as invest in stocks and government officials who make and implement policy as well as invest in financial markets, media corporates who publicise and reenforce the cues/ excuses for the runs as well as the runs in themselves and investment in the market. Insiders can create credible cues/ excuses for runs as well have the best timing for maximising their profit. So in that sense the system is highly favored towards insiders, and if one studies the history of the institution, it can be said to have been invented for that very purpose.

    comprenez vous?

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