The Dow is back, long live the Dow Jones Industrial Average. But what about us?
What about the 7 million who lost their jobs since the equity index last visited the 14,000 level? Or the 20 million additional Americans who are on food stamps since October 2009? Are they not the economy, too?
Truth is, the stock market is setting new highs daily, extending what is now the sixth-largest bull market move since the Great Depression, only because of master matador Ben Bernanke. The Dow has soared 128 percent since the first hint that the Federal Reserve would start its quantative easing in March 2009.
Despite all the grandstanding, podium pounding and prognosticating coming out of Washington about how the fiscal cliff and sequestration were going to hurt America, the benchmark index laughed right through it, knowing that Fed chief Bernanke was going to provide on average $4 billion a day of liquidity to the markets.
Citigroup could be considered the poster child of the “bifocal economy.”
The bank took in $45 billion in Troubled Asset Relief Program money and got an additional $45 billion line of credit from the Treasury Department along with a government guarantee of $300 billion for its own troubled assets. And to this day, Citi struggles to find its footing.
The bank continues to lay off people by the thousands. Citi, which at its height in 2007 had 357,000 employees, today only has 260,000 and announced three months ago that an additional 11,000 cuts are to come. And new Chief Executive Michael Corbat has forewarned that if the bank’s businesses do not grow, things will get even worse.
But you wouldn’t know things were so dire looking at Citi’s share price, which has risen nearly 200 percent on split-adjusted basis since March 2009. Investors know that, just like the millions of unemployed, the bank lives off Uncle Sam’s largess.
TARP may have saved Citi, American International Group (AIG), Fannie Mae and others, but Bernanke’s QE and zero interest-rate policy is what bolsters the balance sheets.
Wall Street banks profit most by having the cost of capital — their lifeblood — at near zero while lending at 12 percent to 18 percent on credit cards and 3 percent to 5 percent on mortgages.
The banks can and have survived on this, but they cannot thrive — just like the economy.
On Citibank’s balance sheet, interest rate-based assets rise in value as the Fed just keeps buying up Treasuries and mortgage bonds. The profits keep coming as long as the Fed sustains the impetus.
In a recent research piece, BTIG’s Dan Greenhouse aptly pointed out that corporate earnings were up 128 percent from the lows of March 2009 — and so is the market!
Profits are what move the equity markets, not the quality of those profits. If you cut payroll or avoid taxes by leaving money overseas, the markets pay no mind. And the 30 Dow stocks and the 500 in the Standard & Poor’s index have the most flexibility to execute such moves.
Typically, stock markets and economies work in sync: A strong economy drives a strong market and vice versa. Ordinarily, you don’t get earnings to rise in weak, stagnant economies like this one — unless there’s some mischievous meddling going on like ultra-low interest rates for a protracted period, which forces pension funds and annuities to abandon the bond market and pitch into the stock market.
In Spain, every once in a while a spectacular fighting bull is spared in the ring due to his vigor and cunning, and is returned to his native ranch to breed.
Only time will tell if the snorting bull sent to markets by Bernanke will live a long, full and enriching life.