What's driving Wall Street higher and higher?

Corporate America has been driven up by not just income changes but unnatural economic settings. And in a strange way, the sequester will continue to boost Wall Street.

Behind the surge in the Dow index to record levels are fundamental changes taking place in the American economy which many will find disturbing. And as the regulators try to adjust they are fuelling the bull market.

The New York Times reports that in the third quarter of 2012 corporate profits were 14.2 per cent of national income – the largest share at any time since 1950 – while the portion of income that went to employees was 61.7 per cent, near its lowest point since 1966.

Since the end of 2008 US corporate earnings have risen at an annualised rate of 20.1 per cent but inflation adjusted disposable income lifted by a miserly 1.4 per cent over the over the same period.

We have not seen anything like this in post-World War America. Companies are discovering they can use the latest technologies to use labour more productively and outsource activities overseas so that American workers are competing with foreign labour in many instances.

But there is more driving the stock market that this fundamental income shift change. The Federal Reserve is pumping money into the economy by buying mortgages and says that it will continue to do this until unemployment gets down to somewhere near 6 5 per cent, compared to a current level of 8 per cent.

A vast amount of that printed money ends up boosting the stock market. The low interest rates force savers to go into equities to gain a return and the market sucks in the sloshing Federal Reserve money. Probably around half the American market’s rise is due to the liquidity factor so when the Federal Reserve even hints at turning off the tap, Wall Street falls.

But Congress is instituting a program of expenditure restraints which will boost unemployment. US companies that have lower orders as a result of government cuts will simply retrench workers. Markets pop the champagne. Worker sackings means that the Federal Reserve’s money tap will stay on longer and send shares higher.

So in a strange way the so-called sequestration program is boosting share prices. I find something artificial about this process so periodic corrections are likely, but for the moment the underlying trends shows no signs of stopping.

Here in Australia our companies have also cut costs although capital expenditure estimates indicate they have not fundamentally changed their business models to make those cuts permanent.

Whereas the US market is driven by money printing scenarios we are driven by events in China. China is changing direction but, as in the US, income disparity in China is rising and the Chinese fear revolution if the trend continues.

As a result they are hooked into uneconomic capital works by the state-owned enterprises. As long as that continues mineral demand will remain strong. But again it has a ring of artificiality.

America has the looming boom created by shale gas and oil and that may lift worker participation.

But if it does not and US democracy continues to deliver unequal outcomes then the next presidential election may see a candidate who stands on a policy to tackle the disparity. That would not be good for Wall Street but it is a long way off.

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