International Forecaster Weekly

The Economy in a Volatile Nutshell

There is one economy for the rich and wealthy, those who can afford to invest in the big hedge funds and sock away large amounts of money every month, and the very poor who continue to see their income decline in real terms year after year.

James Corbett | June 11, 2014

There's a pair of articles that appeared on Bloomberg the other day that tell the tale of the American economy in a nutshell. The first story, “U.S. Stocks Rise to Records Amid Small-Cap Rally, Deals,” tells the remarkable story of the equities market in the QE3 era. The S&P has hit a stunning 8 record highs in the last 10 days. The Dow has had three straight record high closes in a row. The Russell 2000 tracking small companies has hit a string of four straight gains, up 0.9% on Monday alone. Things have never been rosier, according to the same “analysts” who laughed at Peter Schiff 8 years ago when he warned about the housing bubble. Saith Michael Arone of State Street Global Advisors: “My view is the Goldilocks economy is back -- not too cold, not too hot, but just right. What we’re starting to see is companies starting to do capital expenditures and M&A to invest in their businesses.”

 

Contrast this with another story just a bit further down Bloomberg's front page on Monday: “Lean Retirement Faces U.S. Generation X as Wealth Trails.” This is all about the Generation Xers who were hit hard by the 2007 downturn and have never recovered. With the housing collapse and mortgages underwater or properties foreclosed on, still in many cases saddled with student loan debt and with no savings to speak of, Gen Xers are in the worst position for retirement of any generation in the past century.

So how do these two stories square? Quite easily if we take into account the “two economies” idea that I wrote about in last weekend's editorial. There is one economy for the rich and wealthy, those who can afford to invest in the big hedge funds and sock away large amounts of money every month, and the very poor who continue to see their income decline in real terms year after year.

Perhaps the most worrying thing about this is that those living in the have economy (as opposed to the have-not economy) are starting to buy into their own hype. Last Friday the CBOE Volatility Index, the “VIX” that measures the “financial stress” felt by Wall Street, fell to its lowest level since early 2007. This is worrying because the last time we saw this number so low was right before the housing bubble collapsed. In other words, we're so deep in the period of bubble formation (this time facilitated by the Fed's funny money QE scheme) that investors are actually starting to believe that this artificially inflated market is safe for investment.

In effect, what's happening is a feedback loop. Those who are living in the la la land of the bubble economy are becoming more and more convinced of their own economic immortality as every stock and every IPO and every junk bond and every derivative and everything else turns to gold. This confidence encourages them to pump more money in, inflating the bubble even bigger.

So what are the consequences of this feedback loop? Good question. And sadly we have a pretty obvious answer. That was the popping of the previous housing bubble. When the world gets full-on crazy and everyone seems more confident then ever, that's the time to be the most concerned. It seems that time has arrived.