The stock-market "boom" may not be a bubble, but that doesn't mean it's good news for most of us

"Today, there's a growing divide between the fortunes of corporate America and those of the majority of Americans. . . . The stock-market boom is real, but most Americans have been left on the outside looking in."

-- James Surowiecki, in his latest New Yorker
"Financial Page," "Boom or Bubble?"

by Ken

So what do you think, is this great stock-market boom really another in our recent series of stock-market bubbles?

I confess I haven't given the matter much thought. I'm not even sure I was aware that there is a stock-market boom. I've had, um, stuff on my mind. A stock-market boom doesn't figure heavily in my stuff. A stock-market bubble, however, might force itself on my attention, judging by that recent history of market bubbles, which somehow came crashing down on those of us who thought we were pretty remote from either tech or housing hysteria.

Not surprisingly, The New Yorker's financial columnist, James Surowiecki, has been paying attention.

With the stock market setting new highs on a nearly daily basis, even as the real economy just slogs along, there seems to be one question on everyone's mind: are we in the middle of yet another market bubble? For a growing chorus of money managers and market analysts, the answer is yes: the market is a house of cards, held up by easy money and investor delusion, and we are rushing all too blithely toward an inevitable crash. Given that we've recently lived through two huge asset bubbles, it's easy to see why they're worried. But in this case the delusion is theirs.

The bubble believers make their case with a blizzard of charts and historical analogies, all illustrating the same point: the future will look much like the past, and that means we're headed for trouble. Smithers & Company, a London market-research firm, says that, according to a number of market indicators, stocks are, by historical standards, forty to fifty per cent overvalued. The bears admit that corporate profits are high, which makes the market's price-to-earnings ratio look quite normal, but they insist that this isn't sustainable. They think that earnings will return to historical norms, and that, when they do, stock prices will be hit hard. Today, after-tax corporate profits are more than ten per cent of G.D.P., while their historical average is closer to six per cent. That's a vast gap, and it's why bears believe that the market is, in the words of the high-profile money manager John Hussman, "overvalued, overbought, overbullish."

As you may have guessed, Surowiecki isn't in the "bubble camp." He allows that "It's certainly unusual for corporate profits to soar during a slow recovery."

But the argument for a stock-market bubble is flawed: when it comes to the role that corporations play in the U.S. economy, the present looks very different from the past, which means that historical comparisons to the nineteen-fifties, let alone the thirties, tell us little. The four most dangerous words in investing may be "This time, it's different." But this time it is different.

Different how?

* Taxes. One reason to believe in today's corporate profits is that corporations now are paying so much less in taxes. "In 1951, corporations had to pay almost half of reported profits in taxes. In 1965, they had to pay more than thirty per cent. Today, they pay only around twenty per cent."

* Globalization. Another reason to believe: So much more of the corporate bottom line today comes from foreign earnings, which 'account for almost a third of corporate earnings," almost three times the case in 2000. "The global economy, even with its current woes, is projected to grow more briskly than the U.S. economy over the next decade, so corporations will continue to benefit."

* "Labor's share of the economy has fallen steeply." Unions have no power, and apart from some skilled workers, neither do workers. There may not be new profits to be racked up by squeezing the stuffing out of whipped-to-the-mat workers, "but keeping profits where they are doesn't look all that difficult."

Which brings us to what for me is the money quote, and we take it in whole.

It's still possible that investor hysteria could eventually inflate stock prices, or that investor panic could send them crashing, but there is no profit bubble and, for now, no stock-market bubble, either.

For investors, that's obviously good news: there's nothing wrong with profits, and the rebound of the stock market has helped restore many Americans' battered finances. Still, it's unsettling that companies and investors are doing so well while the economy as a whole is stuck in the mud. Throughout the postwar era, high corporate profits were coupled with rising wages and strong economic growth. Today, there's a growing divide between the fortunes of corporate America and those of the majority of Americans. You might hope that people could make back as investors some of what they're not getting as workers, but in fact only about half of Americans have any money in the stock market, and most of those who do have only small sums. What's more, the crash of 2008 scared many ordinary investors out of the market, so they haven't benefitted from the recent profit boom at all. "There's a lot of residual shell shock at work, and that's made investors still pretty gun-shy," [Doug] Ramsey [chief investment officer for Leuthold Weeden Capital Management] said. The stock-market boom is real, but most Americans have been left on the outside looking in.

Once upon a time we heard some political chatter about "The Two Americas." Thank goodness we stopped hearing about that! The compact coterie of Americans Who Matter just don't want to hear about the rest of us, because, after all, by definition we don't matter.

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