Summary: Today we have a guest post about the often discussed but still mysterious disconnect between the US risk markets and the US economy — between Wall Street and Main Street. Since the crash, economists and investment strategists have confidently predicted it will close soon, certainly when the economy accelerated back to near normal speed. So far neither has happened. Today’s guest post by Lance Roberts examines this important phenomenon.
From StreetTalk By Lance Roberts
23 February 2015
Posted with his generous permission.
Since Jan 1st of 2009, through the end of 2014, the stock market has risen by an astounding 148.8% (based on Fed Reserve quarterly data). With such a large gain in the financial markets we should see a commensurate indication of economic growth.
The reality is that after three massive Q.E. programs, a maturity extension program, bailouts of TARP, TGLP, TGLF, etc., HAMP, HARP, direct bailouts of Bear Stearns, AIG, GM, bank supports, etc., all of which total to more than $33 Trillion and counting, the economy has grown by a whopping $1.9 trillion since the beginning of 2009. This equates to just 13.5% growth in real GDP during the same period that the market surged by more than 100%.
However, as shown in the chart above, the Fed’s monetary programs have inflated the reserve balances of member banks by roughly 403% during the same period. The increases in reserve balances, which the banks can borrow for effectively zero, have been funneled directly into risky assets in order to create returns. This is why there is such a high correlation, roughly 85%, between the increase in the Fed’s balance sheet and the return of the stock market over that period.
Unfortunately, while Wall Street benefits greatly from repeated Federal Reserve interventions – Main Street has not. Over the past few years, while asset prices surged higher, personal consumption expenditures have remained mired at levels typically associated with very weak economic expansions. This is reflective of continued weak income growth which has been a function of a large amount of slack in the labor force.