Stock Market
Watch your wallet, even with the Dow at 10,000
We're just pretending to get richer -- it's not the real thing
Specialists Michael Scavone, left, and Michael Sollitto react as the Dow Jones Industrial Average crosses 10,000, on the floor of the New York Stock Exchange Wednesday, Oct. 14, 2009. How did the Dow break 10,000 when the rest of the economy is in the toilet?
1. Corporate earnings are up — mainly because companies have been cutting costs. Payrolls comprise 70 percent of most companies’ costs, which means companies have been slashing jobs. In the end, this is a self-defeating strategy. If workers don’t have jobs or are afraid of losing them, they won’t buy, and company profits will disappear.
2. Federal borrowing has filled the gap that consumers and businesses created when the latter began to reduce their debt. Federal debt, in other words, has kept the economy from tanking. Can’t keep up forever, though.
3. With such horrid employment numbers, Wall Street figures the Fed will keep interest rates low for some time, and continue to flood the economy with money. That’s good news for the Street because it means money stays cheap — and with cheap money the Street can make lots of bets on almost everything under the sun and moon. As a result, the Street’s earnings are way up. But this, too, is temporary. At some point the Fed is going to worry about inflation and a falling dollar.
4. Investors of all stripes want to get in early and ride the wave. Pension funds, mutual funds, and other institutional investors figure the bull market has more oomph in it because, well, other investors will jump in. Think Ponzi scheme. Nice for now, but watch out if you’re one of the last in.
In other words, this is all temporary fluff, folks. Anyone who hasn’t learned by now that there’s almost no relationship between the Dow and the real economy deserves to lose his or her shirt in the Wall Street casino.
Robert Reich, one of the nation’s leading experts on work and the economy, is Chancellor’s 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. Time Magazine has named him one of the ten most effective cabinet secretaries of the last century. He has written 13 books, including his latest best-seller, “Aftershock: The Next Economy and America’s Future;” “The Work of Nations,” which has been translated into 22 languages; and his newest, an e-book, “Beyond Outrage.” His syndicated columns, television appearances, and public radio commentaries reach millions of people each week. He is also a founding editor of the American Prospect magazine, and Chairman of the citizen’s group Common Cause. His widely-read blog can be found at www.robertreich.org. More Robert Reich.
