Economy 09:34 27/02/2015

Why is bad news from US economy good for Wall Street?

By Kristian Rouz, Sputnik

As evidenced by the recent dynamics in the US stocks just before and during Fed Chair Janet Yellen's testimony in Congress, investors fear signs of solid strengthening in the US economy, while any minor hint at its insufficient sustainability pushes equities higher. This situation is a paradox, one might say, if he or she is unaware of tricky mechanisms behind the Federal Reserve's unorthodox monetary policies and the structure of currently-robust American growth.

'Bad news is good news' has become a formula for the US stock markets during the last several years, and is closely associated with the so-called 'Quantitative Easing' policy exercised by America's highest monetary authority – the Federal Reserve. That means, when the US macroeconomic data come in showing a weaker-than-expected pace of the post-crisis recovery, or when figures fall short of previous estimates, one may be sure – on Wall Street, there'll be cheers of joy, accompanied by the buying up of stocks across all sectors. And vice versa – a quicker pace of economic expansion would render investors cautious and prone to selling equities more often than not.

Ever since US growth has become somewhat more solid during the past two years, this tendency has become even more self-evident. This seems weird as most advanced or at least industrialized-enough nations have been characterized by a direct correlation between the health of the real economy and stock valuations, save for the Eurozone, of course, where the situation is ever more specific than that in the US.

Wall Street's odd behavior, and tendency to openly play against America’s real economy, is only intelligible if one has a basic understanding of the mechanics of overtly-governmentalized growth, as well as the Fed’s unconventional monetary policies.

First of all, it is noteworthy that the main driver behind the currently robust economic growth in the US has been the accelerated pace in governmental spending. The other three components of economic growth – namely, individual consumption, business investment and its international balance sheet –only play a secondary role at this point, with the energy sector and manufacturing only gaining momentum to hopefully skyrocket in nearest future. Mind it – governmental spending does not have a direct link to the stock markets, while most of the private sector is listed in major indices. As for statistics, the preliminary readings of Q4 growth, released by the US Department of Commerce Bureau of Economic Analysis (BEA), have shown an annualized expansion of 2.6% (as compared to 5% in Q3).

"The deceleration in real GDP growth in the fourth quarter primarily reflected an upturn in imports, a downturn in federal government spending, and decelerations in nonresidential fixed investment and in exports that were partly offset by an upturn in private inventory investment and an acceleration in PCE (per capita expenditures)," the BEA report reads.

While the general trend in US foreign trade is that the nation has been importing less while exporting more, the changes in the balance sheet are not a significant factor here, and can be explained by seasonal fluctuations. However, government spending is a decisive one. Total federal spending in Q4 fell 7.5% (against a rise of 9.9% in Q3). Defense spending was cut by 12.5% (+16.0% in Q3). However, contributing to growth, nondefense gov’t spending accelerated to +1.7% (up from a meager advance of 0.4% in Q3), while real state and county-level expenditures rose by 1.3% (only +1.1% in Q3).

Across other components of growth, only consumption rose in Q4 above its Q3 level (+4.3% and +3.2%, respectively). Investment in Q4 (+1.9%) was far below its Q3 level (+8.9%). Foreign trade dynamics became negative again: in Q4 real exports rose by 2.8%, while imports jumped 8.9% (+4.5% and —0.9%, respectively, in Q3).

The BEA data show that, indeed, the generous hand of Washington is feeding US economic growth, and the nation’s economy is more akin to a Socialist model. Not that this is necessarily a bad thing – for instance, France experimented with ‘dirigisme’ for many years, and most Scandinavian nations managed to create high standards of living due to government spending. However, a state-driven economy is a perfect stranger to the financial sector, and stock markets, in particular.

The second reason that Wall Street is so depressed by the expansion in the US economy is a simpler one. The Fed had been buying government bonds, printing money, and providing an ultra-cheap credit to the nation in order to overcome dire consequences of the great recession of 2007-2009. Most of that money went straight to the financial sector, where huge capital has been emerging literally out of nothing; the whole phenomenon has been dubbed 'the virtual money economy'. Now, as the US economy strengthens, the Fed has been committed to ending this feast of readily available liquidity.

The Fed ended its bond-buying program last year (in mid-2013 an estimated $85 bln was being pumped into the economy each month) to Wall Street's deep dissatisfaction. Now the regulator is expected to start raising its interest rate, making credit liquidity dearer. The effects of such a move for the non-financial sector would be mixed, with consumption and investment suffering, but on the whole, the economy will be better protected from the possibility of overheating. As the same time, the main loser after an interest hike would be Wall Street, which will be deprived of yet another source of money-making (buying cheap borrowed money and re-selling it at a higher price), and made to play by the common rules within a more traditional monetary policy scheme.

The Fed is doing the right thing by returning to normality, as the currently reversed dynamics in the real economy and the financial sector are confusing and counter-productive. However, within the overtly-financialized US economy, such a transition will be an uneasy one, and sometimes painful and rocky, but necessary. Among the very healthy tendencies in the US economy are the shale oil boom and the yet moderate growth in manufacturing, which, if supported (including, by the government), can help the nation overcome the virtual nature of its economy, and get back on track by establishing growth which is driven by real entrepreneurship as opposed to the yet-dominating financials and government. 



Source Panorama.am
Share |
Տեքստում սխալ կամ վրիպակ նկատելու դեպքում, ուղարկեք խմբագրին հաղորդագրություն` նշելով տվյալ սխալը, այնուհետև սեղմելով Ctrl-Enter:

Newsfeed

16:45
Opposition MP slams Pashinyan's Artsakh statements
Opposition Hayastan faction MP Ishkhan Saghatelyan has expressed support to the Artsakh government in exile following Armenian Prime Minister...
16:04
MP Aghvan Vardanyan visits arrested activists
MP Aghvan Vardanyan, who represents the opposition Hayastan faction, on Thursday visited the Armavir Penitentiary where activists Vazgen...
15:36
Armenian opposition MP visits border villages
Opposition MP Tigran Abrahamyan has visited the villages of Voskepar and Baghanis in Tavush Province adjacent to the border areas demanded by...
15:04
Ex-Yerevan mayor setting up new party
Former Yerevan Mayor Hayk Marutyan is setting up a new party in the near future, his team has confirmed to RFE/RL’s Armenian Service....
14:36
Armenia to send 29.94 tons of humanitarian aid to Gaza
Armenia will deliver 29.94 tons of humanitarian aid to Gaza ravaged by the conflict with Israel. The decision was approved at a cabinet...
14:07
Expert: Pashinyan decided to terrorize Artsakh leaders
Political analyst Suren Surenyants has criticized Prime Minister Nikol Pashinyan’s statements on Artsakh leaders at a cabinet meeting on...
13:35
Analyst: The West doesn't care about Armenia
The West wants Armenia and Azerbaijan to sign a peace treaty as soon as possible and Armenia's territorial losses do not matter to it,...
13:06
Moscow concerned over anti-Russian bias of Armenia-EU-US meeting
The Armenia-EU-US meeting scheduled for April 5 is causing Moscow’s concern as Washington and Brussels are openly discussing its...
12:37
Pashinyan: Some circles displaced from Karabakh take actions threatening Armenia's security
Prime Minister Nikol Pashinyan warns that the actions taken by “some circles” forcibly displaced from Nagorno-Karabakh (Artsakh)...
12:04
Artsakh dissolution decree was 'the only way' to save people, president says
President Samvel Shahramanyan claims his decree ordering the dissolution of the Artsakh (Nagorno-Karabakh) Republic was the “only...
11:30
Japanese supplement products recalled after two deaths and over 100 people hospitalized
Health supplement products believed to have caused two deaths and sickened more than 100 people have been ordered to be taken off store shelves...
11:15
Today is Holy Thursday
The week leading up to Easter or Holy Resurrection is called Holy Week (in Armenian Avak Shabat). During this period, the Armenian Apostolic...
11:00
Upcoming Armenia-US-EU meeting not directed against any third party – Foreign Ministry
The high-level meeting scheduled for April 5 in Brussels is aimed at strengthening Armenia-EU-US cooperation and is not directed against...
17:00
Azerbaijan's team opts out of Sambo World Cup in Yerevan
Azerbaijan's national team will not participate in the Sambo World Cup to be held in Yerevan, Armenia, Azerbaijani Sambo Federation official...
16:45
Biden calls Putin 'butcher'
US President Joe Biden has disparaged his Russian counterpart Vladimir Putin for the second time in two months, publicly calling him a...
16:30
Armenian parliament speaker defends land handover to Azerbaijan
Armenian National Assembly Speaker Alen Simonyan has defended the plans to hand over border villages in Tavush Province to Azerbaijan. He...
16:04
Azerbaijan must create conditions for safe return of Armenians to Nagorno-Karabakh, UK says
The UK government is clear that Azerbaijan must create the conditions for a safe and secure return of ethnic Armenians who were displaced from...
15:35
Photo campaign calls for release of political prisoners in Armenia
A photo campaign for the release of Armenian opposition activists has been launched in Yerevan. Photos of political prisoners Narek...
15:15
Arthur Abraham's father dies at 68
German-Armenian boxing star Arthur Abraham’s father, Grigor Abrahamyan, has died in Berlin at the age of 68. “We’re deeply...
15:00
Armenian MP warns of threats after possible land handover to Azerbaijan
Opposition MP Tigran Abrahamyan has warned of threats to a number of settlements in Armenia amid Prime Minister Nikol Pashinyan’s signaled...
14:31
EU mission hosts French ambassador to Armenia
The EU Mission in Armenia (EUMA) on Wednesday hosted French Ambassador to Armenia Olivier Decottignies and members of the French...
14:06
Azerbaijan opposes Armenia-EU-US conference
The Azerbaijani Foreign Ministry has deplored the EU-Armenia-US joint conference scheduled for 5 April, warning that it will create...
13:36
Political prisoner Vazgen Saghatelyan slams Pashinyan in letter from prison
Political prisoner Vazgen Saghatelyan has blasted Armenian Prime Minister Nikol Pashinyan and his regime for efforts to silence their critics in...
12:34
U.S. aims to encourage Armenia and Azerbaijan to bridge differences – State Dept.
The objective of the United States is to encourage Armenia and Azerbaijan to bridge their differences, U.S. State Department...
12:15
Ukraine tells EU to hand over 'missing' €5B in Russian asset profits
Ukraine is pushing for another €5 billion from the proceeds generated by frozen Russian assets that the EU has decided to withhold from the...
12:00
Eurovision 2024: Semi-final running orders revealed
The running orders of the Eurovision Song Contest 2024 semi-finals have been revealed. Armenia’s Ladaniva will perform 8th in the...
11:45
Today marks Holy Wednesday
The week leading up to Easter or Holy Resurrection is called Holy Week (in Armenian Avak Shabat). During this period, the Armenian Apostolic...
11:30
Denialists Erdogan and Netanyahu shamefully exploit the term genocide to bash each other
By Harut Sassounian www.thecaliforniacourier.com For several decades, Israel and Turkey were in a honeymoon, supporting each other...
11:10
SME loan portfolio of Ameriabank reported more than 30% growth in 2023
The small and medium enterprise (SME) loan portfolio of Ameriabank increased by more than 30% in 2023 to reach to AMD 222.6 billion as of...
11:00
Lemkin Institute calls for pressure on Aliyev regime to release Artsakh officials
The Lemkin Institute for Genocide Prevention "energetically" condemns the continued and unlawful imprisonment of Armenian officials...

Follow us and get updates!

Most popular articles

{"core.blocks.header.spell_message1":"Selected mistake: ","core.blocks.header.spell_message2":"Send a message about the mistake?"}