One of the Reasons for the Recent Stock Market Downturn Should Make You Mad (or Think the Economy is Rigged).
Investors fear that the fed may see the gains in wages among average workers as a sign of impending inflation.
PHOTO CREDIT: Getty Images
It's been a volatile couple of weeks for the stock market.
The recent up and down of the Dow Jones Industrial Average reminds me of a scene from The Office, where Michael Scott is venting his frustration about having had a vasectomy, then a reversal, then a re-vasectomy (pretty sure that's not a word) to Jan Levinson, his girlfriend and former boss.
During the scene Scott says, "You have no idea the physical toll that three vasectomies have on a person!"
Similarly, you have no idea the toll this type of stock market volatility has on politicians and pundits who equate the entire economy to the stock market. You can almost feel CNBC hyperventilating. (Disclosure: I am a regular contributor to CNBC, though I recognize how over the top their reactions to small changes in market conditions can be.)
That said, there was some troubling insight if you read into one of the main reasons for the original selloff. Apparently, investors are worried that the Federal Reserve will try and clamp down on inflation by raising interest rates. With low unemployment, strong job creation, rising wages, and median household income increasing for the first time in years, some relatively well-informed people (investors) believe that the architects of the economy, or at least interest rates (the Fed), will pump the brakes--despite inflation that is still well beneath the Fed's target of 2%.
Let's take a moment and unpack that logic.
Over the past decade, corporations have experienced record profits, with some companies sitting on piles of cash that rival the financial resources of small nations. Executive pay and bonuses have continued to rise, sometimes regardless of company performance. Investors throw piles of money at startup founders who've never managed to demonstrate a viable business plan, let alone generate a single dollar of profit. The top 1% continue to gobble up a greater percentage of domestic and global wealth.
Yet, none of that inspired investors to fear that the Fed would clamp down on inflation. Like everyone, even genius investors aren't always right and can demonstrate herd mentality. However, one would have to believe that knowing a little something about likely Fed behavior is Stock Market 101. In other words, investors know (or at least strongly believe) that to the Fed an indicator of an overheated economy isn't record corporate profits or Oracle co-founder Larry Ellison purchasing his own Hawaiian island.
No, to use an infamous example cited by Paul Ryan's, the apparent indicator of inflation is a teacher making an additional $1.50 a week.
Every teacher making an additional $1.50 a week does add up. In Missouri, my home state, there are about 66,000 public school teachers. If each of them made an additional $1.50 a week, that would add up to $5,167,344.
Five million dollars is a lot of money.
It's also about what Mike Pearson, CEO of disgraced pharmaceutical manufacturer Valeant, made every eight days in 2015--the same year Valeant's stock dropped more than 30%.
Markets and economies are complicated. The risk of inflation might be real.
But the fact that it only became a market-altering concern when a tiny, tiny fraction of the wealth generated by one of the longest bull-runs in the country's history finally trickled down past the 1% is enough to reinforce the widely held belief that the stock market is no reflection of the real economy, and that the entire thing just might be rigged to benefit a limited number of very wealthy people, at the expense of everyone else.