Bidermanís Daily Edge 6/12/2012: Stocks Edging Closer to Financial Cliff
We live in interesting times. The value of all stocks is still almost double the 2009 lows, yet today incomes are barely growing and realistically with all the headwinds we face there is no hope for rapid growth anytime soon. Every few weeks I feel the need to warn all that at some point stocks are likely to plunge.
A little stock market history: Stock prices first rose above Dow 1000 early in 1983. The silicon revolution that started back then with the personal computer, led to the internet in the 90s and broadband in the twos. The huge productivity gains made possible by the silicon chip has dramatically increased global wealth; particularly the prices of stocks and bonds.
In 1982 wages and salaries for all with jobs, including bosses, was $1.6 trillion. That same year, the value of all US stocks, also known as the market cap, was around $1 trillion. Today wages and salaries are about $6.8 trillion, which is more than four times what people made 30 years ago.
While wages and salaries quadrupled over the past 30 years; the value of all US stocks has soared almost 18 times to $17.7 trillion today. One way of comparing wages and salaries with stock prices is that in 1982 the market value of all US stocks compared to wages and salaries was 0.6 to 1. That means that all wages and salaries were more than the value of all US stocks.
Today, the value of all US stocks at close to $18 trillion is more 2.6 times the amount of all wages and salaries. In other words while wages have gone up over four times, the value of stocks have gone up more than four times for each of the four fold gain in wages.
So why have stock prices gone up four times as fast as has wages? When wages grow fast enough so the basic human needs are more than adequately met, the next thing people do is buy a better house. After the new house, the next use of new money is to buy stocks. And if wages keep growing faster than spending, then there will be more new cash available then shares to invest in. More money chasing fewer shares and the multiple of stock prices to both earnings and wages and salaries will increase and multiply.
To summarize, faster growth in wages and salaries is a trim tab for stock prices. A trim tab sits on the edge of a capital ships rudder. The little trim tabs turns and that creates a vacuum that turns the rudder; which then turns the ship. I once heard Buckminster Fuller say to maximize change find the Trim Tabs. By the way Bucky’s tombstone says, Call Me Trim Tab.
But right now wages and salaries are barely growing adjusted for inflation. Yet stock prices even after the recent declines are still selling at almost double the 2009 lows. If in the past rapid growth in wages and salaries was necessary to give a multiple boost to stock prices, how can stock prices be this high if the economy is barely growing?
The obvious answer is that the central banks are trying to solve all the worlds problems via the printing press. Central banks are indeed powerful. But central banks are only one player on the global stage, yes the biggest, but still only one. At some point the central banks will get trashed and the equities markets will drop probably back to near the 2009 lows. Given how Europe is unraveling and emerging markets rates of growth are slowing rapidly, we might be nearer to a major correction then those with lots of money in stocks believe to be true.
If the above is confusing to you, please ask a question via comment and I will attempt to answer.
President & CEO
TrimTabs Investment Research