Dow Jones Smashes Record: Now What?


Dow Jones Smashes Record: Now What?

Is this the end of the ‘Lost Decade,’ or a bubble to end all bubbles?

The Dow Jones set a new record on Tuesday. Market commentators say this new record high is a big sign the economy is on the mend.

But is it possible that it signals something much more ominous?

Giddy investors shrugged off concerns over the economy sending the Dow Jones surging 100 points above both its intraday and closing records set in October 2007. The S&P 500 jumped within 2 percent of its record high. Including the Nasdaq, all three indexes are up between 6 to 9 percent on the year.

“With the Dow getting to all-time highs, is this signaling the end of the lost decade?” asked Jim Paulsen, chief market strategist at Wells Capital Management in Minneapolis. “[Y]ou wonder in some sense if that is the significance to this.”

Is America really on the verge of an economic boom?

Consider the bastion of America consumerism: Walmart. No boom here. Bloomberg reported leaked e-mails from Walmart executive officers indicating the worst start to sales in seven years!

“In case you haven’t seen a sales report these days, February [month to date] sales are a total disaster,” wrote Jerry Murray, Walmart’s vice president of finance and logistics, in a February 12 e-mail. “The worst start to a month I have seen in my seven years with the company.”

The same month, Cameron Geiger, senior vice president of Walmart U.S. replenishment, wrote in a separate e-mail: “Have you ever had one of those weeks where your best-prepared plans weren’t good enough to accomplish everything you set out to do? … Well, we just had one of those weeks here at Walmart U.S. Where are all the customers? And where’s their money?”

Both executives went on to blame the 2 percent increase in social security payroll taxes for the company’s plummeting sales.

But here is the point: If Walmart shoppers are broke—then we are all in trouble.

Walmart shoppers are the “barometer of the U.S. consumer,” says analyst Brian Sozzi. If the world’s largest retailer is struggling, other businesses definitely are.

“There’s no reason to be optimistic,” said Sozzi.

Walmart is a good gauge of the economy simply because it makes up such a huge proportion of America’s economic output. More than $1 out of every $45 spent in the country is spent at Walmart—that is more than 2 percent of America’s total gross domestic product. And because of its scale and copious amounts of data, company executives actually have better data about the economy than many economic forecasters.

So if Walmart executives are worried, people should pay attention.

And Walmart isn’t an outlier either. A string of major retailers have announced that sales are so bad it isn’t a question of whether they will close stores, but when and how many.

Best Buy, Sears, Kmart, JC Penny, Office Depot, Barnes and Noble, Gamestop, OfficeMax and Radio Shack have all announced they will close more than 100 stores each. According to analyst David Strasser, Family Dollar, Target and several grocery stores are also in trouble. Reuters reports that retailers had their worst Christmas since 2008. Where is the boom?

David Gallagher, ceo of Town Sports International, which operates fitness facilities, seems worried too. “As we moved into January, membership trends were tracking to expectations in the first half of the month, but fell off track and did not meet our expectations in the second half of the month. We believe the driver of this was the rapid decline in consumer sentiment that has been reported and is connected to the reduction in net pay consumers earn given the changes in tax rates that went into effect in January.”

These slumping sales are reflected in other data as well. Freight volumes have slumped for four consecutive months. In January they contracted for the first time since the great recession of 2007 to 2009. If consumers are not buying, what is the point in shipping goods?

Then there was the recent survey that found that new cars are increasingly out of reach for Americans. Median-income families in all but one major American city cannot afford the average price of a new car.

So why does everyone seem to be piling in to the stock market if retailers are struggling and everyday consumers are more stretched than ever?

Jack Ablin, chief investment officer at Chicago’s bmo Private Bank, which manages $66 billion, explains. Regarding the soaring stock market, he said, “It really does represent an achievement …. It’s a testament to what the Fed has done and what investors have done to move beyond the financial crisis.”

Note specifically his reference to actions by the Federal Reserve.

Since 2008, the Federal Reserve has embarked upon the greatest money-creating scheme in the history of the world. It has bailed out huge financial institutions. It is allowing big banks to borrow money at near zero percent interest rates. And it is printing money to cover government spending.

All told, the Federal Reserve has created almost $3 trillion out of thin air. Through the multiplier effect, it created much more.

At first, much of the money went to prop up the financial system—to keep it from imploding. Now the Federal Reserve is attempting to prevent the economy from tanking and unemployment from soaring.

But all is not going as planned.

Debt-bloated America is already saturated with debt. As Pimco’s Bill Gross recently highlighted, extra debt is no longer boosting the economy—it is consuming it like a supernova.

All the extra money being created by the Federal Reserve isn’t being put to productive use, but is instead fueling speculation and the markets. Just like the previous two times the Federal Reserve tried to avoid the consequences of a recession (dot-com and housing bubbles), low interest rates and easy money are inflating a massive bubble.

And it is not just the stock market. Over the past five years, the bond market and various commodities have soared in value too—despite deteriorating economic fundamentals on both the national and global scale.

The booming stock market—instead of heralding a new age of prosperity—may actually be signaling that the real economy is on life support, and that dangerous new wealth-destroying bubbles are forming.