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The Zombie Economy

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The Zombie Economy

Since the beginning of July, the U.S. stock market has been abnormally calm. Especially given the various troubling signs in the global economy, as well as the seemingly constant twists and turns of the presidential election, a lack of volatility of Wall St comes as a fairly surprising development.

If you subscribe to the idea that there are still serious underlying problems with the entire financial system, the calm on the stock market almost appears like the slow saunter of the living dead.

Searching for Growth

Ever since the lowest points of the financial crisis were put to rest through massive bailout efforts, economists have been waiting for a clear sign that the U.S. has fully recovered. Despite an unusually long seven-year string of constant economic expansion, this sign has yet to materialize. The consistent growth over the last seven years has not only been modest, but has been disproportionately enjoyed by Americans who are already wealthy.

German-EU-stock exchangeThis is because, essentially, the stock market bounced back with vigor while the rest of system remained stagnant. Forget for a moment that the underlying case for why stock valuations keep pushing higher is basically a shrug of the shoulders. The continuing period of (inexplicably) calm-and-steady on Wall St would seem to be an alarm bell that equities can't stay buoyed for much longer. For over four months, for instance, the benchmark S&P 500 index has traded in a very tight range—only about 2% above or below its current levels. Although volatility has begun to tick up this week, the long period of calm is still a warning sign.

There are reasons to believe that elusive growth is the new normal. Some analysts have pointed out that the "economic recovery" is really just a mirage fueled by more money-printing and more debt.

The economist Robert Gordon's book released this year, The Rise and Fall of American Growth, makes the case that the unprecedented gains in productivity due to technology and innovation in the U.S. between 1920 and 1970 is decidedly a thing of the past. Fortune explains:

"The central argument of Gordon’s book is that technological revolution, the kind that gave us indoor plumbing, the electrical grid, the automobile, and the Internet, is not a very common phenomenon in human history."

The "Fed Fix"

Given Gordon's thesis and our current economic realities, what is animating the abnormally steady equity markets? What makes these zombie markets appear to be alive?

contagionDavid Haggith's Great Recession Blog convincingly points the finger at the Federal Reserve and ruinous monetary policy in general. With the U.S. in the midst of an election year, Haggith argues that the Fed is fixing or rigging how the economy looks to keep up the facade of recovery. Its most obvious mechanism for doing so is the stock market. For some length of time, the Fed can prop up stocks and inflate a bubble in equities. The subdued volatility on the markets smacks of such artificiality.

Even with the potential for a disastrous economic situation over the horizon, the Fed and other government agencies may well be creating zombie markets. The only truly safe place if and when this financial manipulation unravels is gold—particularly physical gold bullion that can be kept outside of the system.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.

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