The Stock Market, Like Pavlov’s Dog

Today the stock market has rebounded somewhat after a few tough days, although that result could turn on a dime.

What caused the stock market to plummet the last few days?  Poor sales by large companies?  Weak economic data?  Lingering concerns about an unemployment rate that remains too high and millions of Americans giving up on job searches?

Nah.  It’s because earlier this week Ben Bernanke may have hinted that the Federal Reserve is going to tighten its prolonged loose money policy and may actually reduce the amounts of cash it has been pumping into the economy.  Of course, whether the Fed actually is going to change its policy isn’t entirely clear.

It’s sad, really.  We’ve gotten to the point where the Wall Street titans and stock market wizards have become so addicted to the manipulations wrought by the Fed’s monetary policy that the market simply responds, like Pavlov’s dog, to the Fed’s opaque pronouncements.  Ben Bernanke sounds a bell, and the market starts slobbering like Fido expecting a wet can of Alpo to splat into his food bowl.

This should be a concern for all of us, especially those of us who are trying to save for retirement.  The stock market, where so many people keep their money, has become a one-note opera.  The overriding focus is on what the Fed will do.  Actual economic performance, actual company performance, and other “fundamentals” that used to be reflected in stock prices now are overridden by the aggressive actions of the Fed.

It’s not a good thing when the stock market is so easily manipulated, and when companies become so dependent on easy money.  The fact that it is an arm of the federal government that is doing the manipulating doesn’t make it any better.

What in the Heck is Going On ?

Look  (both hands chopping in a downward motion) – I’ve recently retired and figure I have done everything right okay – never carried any debt except for an occasional credit card bill and my mortgage payment (considered good debt). Always lived well within my means – paid cash for all of my cars – sold my house for a good price and traded down to a small condo back in 2004 which I recently paid off.

A week or so ago the Federal Reserve released a statement saying that they are keeping interest rates at or near zero through at least mid – 2013. So basically what they’re saying is this is a great time to buy or re-finance a house – thanks Ben (Bernanke) but you see I don’t need a house right now, I have one that is paid off ! Keeping rates low means interest rates on credit cards will remain low – thanks again Ben but I don’t use my credit card except when I am taking a trip or in case of  an emergency and I always pay the one credit card I have off every month.

YOU SEE BEN WHAT I WOULD LIKE IS SOME KIND OF RETURN ON MY MONEY FOR CHOOSING TO SAVE AND IT LOOKS LIKE I AM NOT GOING TO GET A GOOD RETURN FOR AT LEAST THE NEXT COUPLE OF YEARS. BEN, I DON’T WANT TO INVEST TOO MUCH OF MY SAVINGS INTO A RISKIER INVESTMENT LIKE SAY THE STOCK MARKET BECAUSE I AM RETIRED AND I AM GOING TO NEED THE MONEY SOME TIME IN THE NEAR FUTURE – I MEAN A BIRD IN THE HAND IS WORTH TWO IN THE BUSH ISN’T IT ?

So yesterday I’m opening my mail and I come to an envelope that says – Important Information About Your Property Value 2011 Reappraisal. I’ve read numerous stories on the internet about home values dropping like rocks and of course Columbus Ohio is no different right, so I open the envelope and WHAT – my condo is now worth 25% less than what it was in 2005 the last time my property was appraised.

THIS REALLY SUCKS ! Ahhhhh – they say that blogging is therapeutic and you know what I think it is, I feel so much better now ! I wonder what tomorrow will have in store for me !!

Should The Bush Tax Cuts Be Extended?

Beginning on January 1, 2011, the tax cuts enacted under President Bush will expire and significant tax increases — affecting Americans of different income brackets and many American businesses, and involving income taxes, estate taxes, capital gains taxes, and other forms of federal taxes — will automatically take effect as a result.  The Springfield News-Sun has published a helpful chart showing the changes in income tax rates that will occur if the Bush tax cuts are not extended.

Now Republicans and some Democrats are raising questions about whether raising taxes in the midst of a recession makes much sense.  The Obama Administration, through Treasury Secretary Timothy Geithner, says the tax cuts on the highest-income Americans should be allowed to expire, and they should pay an even larger portion of their income to the federal government.  As the Springfield News-Sun chart indicates, higher earning Americans already pay a significantly higher percentage in income taxes to the federal government.

Treasury Secretary Geithner refers to the higher-income earners as “the most fortunate” — as if the income they earn was the result of dumb luck, rather than hard work, opening their own businesses, developing a successful new product, intelligent investment risk-taking, or other activities that are rewarded in a capitalist economy.  That sort of bureaucratic attitude is infuriating, but typical.  If you’ve never held a job in the private sector where your hard work is rewarded, you tend to think that being successful in business is the result of happenstance as opposed to thoughtful effort.  That same attitude underlies the notion that, if the tax cuts expire, the highest-earning Americans will heedlessly continue to act as they have before and just pay more in taxes — as opposed to modifying their behavior in recognition of the fact that their hard work will put less money in their pocket.

In reality, of course, individuals and businesses do modify their behavior in response to tax rates.  That is why so many Members of Congress, and Fed Chairman Ben Bernanke, think that extending the Bush tax cuts would be helpful for our struggling economy, and that ending those tax cuts could potentially shove the economy into a deeper recession. Americans will have less to spend, and therefore the consumer spending that is one of the foundations of our economy will be weaker.  Businesses, too, may stay their hand on hiring or other activities because the tax burden is too great.

The battle over how to deal with the expiring tax cuts will be interesting, because it will play directly into the standard themes of the parties, with the Democrats saying that the Republican Party is interested only in business and the wealthiest Americans and Republicans saying that the Democratic Party is interested only in economic redistribution.  In the meantime, Americans will again be caught in the middle, wondering whether they should expect a significantly higher tax bill come January — and how they should plan their affairs given the continuing uncertainty.

Wall Street, Main Street, and 401(k) Plans

In the wake of the Massachusetts special election loss, President Obama has struck a more populist tune.  He and his supporters have been talking about “getting our money back” from “fat-cat bankers” on Wall Street who took TARP money.  Siding with “Main Street” rather than “Wall Street” is a time-honored theme in American politics.

I wonder whether the “Wall Street vs. Main Street” pitch still has resonance, however.  The reality is that many working Americans have 401(k) plans or some other form of retirement savings or pension plan that is invested in stocks and bonds.  According to the Investment Company Institute website, in 2008 49.8 million Americans had 401(k) plans that held an estimated $2.4 trillion in assets.  In short, lots of American families are invested with Wall Street.  They watch the Dow and the S&P 500 and hope that their 401(k) plans will appreciate in value and allow them to retire earlier and wealthier.

As a result, in the 1930s or 1950s there may have been a bright-line distinction between “Main Street” and “Wall Street,” but that bright-line exists no longer.  People may be upset by the size of the bonuses paid by banks that took TARP money, but I think many Americans not only aren’t reflexively opposed to Wall Street bankers, they hope that those investment bankers do their jobs well and create wealth that their 401(k) plans will share in.

If I am right in that perception, then politicians who want to rip into Wall Street should proceed with extreme caution.  In the last few days, the stock market has fallen at the same time President Obama has attacked Wall Street bankers and Senators have declared they won’t vote for a second term for Federal Reserve Chairman Ben Bernanke.  It may be coincidence, but it may cause many Americans to wonder why the President and the Senate seem to be playing politics with their retirement funds.