Thursday, January 9, 2020

Why the Irrational Exuberance In Such A Dangerous Year?

Financial FAQs


We are now living in a much more dangerous world, because there is the possibility of war in the Middle East that is accompanying the various trade wars waged by the “Make America Great” White House.

In fact, it may have already begun with the “revenge” missile attacks by Iran against two Iraqi military bases housing U.S. personnel—though no casualties were reported. My wonder is that stocks are rallying on the news, with the DOW Jones up 200 points at this writing. Have stockholders forgotten the irrational exuberance reigning during Fed Chairman Greenspan’s tenure in the last decade?

It was such that Greenspan, et. al., raised the Fed’s interest rates 16 times (a total of 4 percent) over 2 years, which ultimately led to a busted housing bubble and the 2017-19 Great Recession that hasn’t been a full recovery for the majority of Americans.

In fact, median household incomes are still at 1970’s levels when inflation is subtracted, because most of the growth has been in stocks owned by just 50 percent of households, not with the wages and salaries of working folk. Hence the record income inequality that isn’t getting better, even at full employment.

And what if stocks plunge again as during the Great Recession that lost an estimated $9 trillion in value, with housing values also declining almost as much (the mainstay of middle class wealth)?
Greenspan had held rates too low for too long to finance the Bush/Cheney Iraq and Afghanistan occupations while cutting taxes at the same time, resulting in rising inflation and the largest federal budget deficit of the time.

In fact, we seem to be at the beginning of another period of irrational exuberance. The Fed dropped interest rates three times last year to boost slowing economic growth.

Manufacturing activity has been declining for the last five months, per Reuter’s Wrightson ISM Manufacturing Index graph above, mainly due to the various tariff hikes that bumped up prices on European and Chinese imports.

The service industries have been declining from a higher level of activity to the current 55 percent, reflected in the latest ISM non-manufacturing survey (also see graph, where a 50 percent result of those surveyed means breakeven growth).
“The upside surprise (of non-manufacturing survey) was almost entirely due to the subjective general business activity index, which rebounded by nearly six points to 57.2,” said Reuters.  “The employment and new orders indexes both fell.  The drop-off in employment was minimal (down 0.3 to 55.2), but the orders index fell off noticeably (down 2.2 points to 54.9, versus an annual average of 57.5). ”
Also important is the effect on world oil prices and economic growth in general, as I said in my last column, since the only reason the U.S. economy is continuing to grow is the very low inflation coupled with very low, recession-level interest rates. And that can’t be maintained if oil prices spike for some reason.


We are skating on thin ice, economically, as I said, even if oil prices and inflation don’t spike as they did during the early and mid-2000s. Oil may not be as important, but 39.7 million Americans still live at or below the U.S. poverty level, which is $21,300 for a family of three in 2017, per the U.S. Census Bureau, and median household incomes after inflation are not improving.

So the real question is why on earth did the U.S. kill Iran’s leading general and several Iraqi militia commanders at a time of recovery from the Great Recession, slowing worldwide growth, amid growing geopolitical uncertainty?

It has to be another form of irrational exuberance held by certain parties that believe this will make America Great Again, but without the friends and alliances that made America great until now.

Harlan Green © 2019

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

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