Thursday, March 18, 2010

The Stock Market As Propaganda

The Stock Market As Propaganda

Since 91% of stocks are owned by the Plutocracy, the much-ballyhooed rise in the stock market as proof the recession is over is perception management/ propaganda.

The 75% rise in the stock market from its lows a year ago is ceaselessly offered as "proof" the economy is recovering. Too bad very few Americans are drawing any benefit from this stupendous rise. As I detail below, the Great Middle Class owns at best only 7% of all stocks and mutual funds.

So the constant, breathless heralding of the stock market's carefully manufactured ascent has only one purpose: to create perceptions of "recovery"and distract the populace from the fact that in terms of employment and tax revenues, the U.S. economy is still shrinking rapidly.

Let's begin with the facts presented in the Wealth, Income, and Power website (G. William Domhoff).

In the United States, wealth is highly concentrated in a relatively few hands. As of 2007, the top 1% of households (the upper class) owned 34.6% of all privately held wealth, and the next 19% (the managerial, professional, and small business stratum) had 50.5%, which means that just 20% of the people owned a remarkable 85%, leaving only 15% of the wealth for the bottom 80% (wage and salary workers).

In terms of financial wealth (total net worth minus the value of one's home), the top 1% of households had an even greater share: 42.7%. Table 1 and Figure 1 present further details drawn from the careful work of economist Edward N. Wolff at New York University (2009).

In terms of types of financial wealth, the top one percent of households have 38.3% of all privately held stock, 60.6% of financial securities, and 62.4% of business equity. The top 10% have 80% to 90% of stocks, bonds, trust funds, and business equity, and over 75% of non-home real estate. Since financial wealth is what counts as far as the control of income-producing assets, we can say that just 10% of the people own the United States of America. (end of excerpt)

Here is a chart from the website:
wealth distrubition

According to the asset class breakdown on Wealth, Income, and Power, the bottom 90% owned 18.8% of all stocks and mutual funds in 2007. Since the bottom 60% own very little (only 22% of the bottom 60% own stock/mutual funds worth more than $10,000), and the bottom 80% own a mere 8.9% of all stocks/mutual funds, then the top 10% owns 81% of all stocks (of which the top 1% own 38%) and the "managerial/professional" slice between 80% and 90% owns about 10%.

Some 47% of the "middle class" (those between the bottom 40% with few financial assets and the top 20% with the vast majority of the assets) own stocks/mutual funds worth more than $10,000, but since the bottom 80% own a mere 8.9% of all stocks, it seems the Great American Middle Class owns about 7% of all the stocks and mutual funds in the U.S. (with the bottom 40% holding the remaining 2%).

According to BusinessWeek, the profits of the S&P 500 corporations rose in 2009 to over $500 billion--a vast sum presented as "yet more proof" that the recession is over.

Over for some perhaps, but not for the bottom 80%. It is no secret that the spurt in productivity which fueled those gargantuan profits was made by reducing headcounts and getting more work out of the remaining workforce. Bully for the S&P 500 managers and those who reap the profits.

Since there are about 130 million U.S. households and total corporate profits are around $1 trillion, we can do some simple math to see where all those profits flow.

If you dig through the BEA website and other sources, you find that Corporate profits were about 13 percent of GDP in 2007, their highest level in 40 years and significantly above the post-World War II average of 9.4 percent of GDP. Nonfinancial profits for 2006 were $1.08 trillion. Real GDP peaked in Q2 2008 at 13,415.3 billion; in Q3 2009 GDP was 12,973 billion (calculated annually).

Even assuming corporate profits have dropped back to 9% of GDP, we still get a number around $1 trillion in profit for 2009.

Based on the ownership of stock and mutual funds, we can estimate that 9% ($90 billion) of all that profit flowed to the bottom 80% of households (104 million), $100 billion flowed to the 13 million Managerial/Professional households (the 10% of all households between 80% and 90%), and $810 billion flowed to the top 10% (13 million households), of which $400 billion flowed to the top 1% (1.3 million households).

Since total household income runs about $9 trillion, then the $90 billion distributed among 104 million households doesn't really ring a lot of chimes when the estimated loss of wealth in the U.S. as the credit bubble popped has been estimated at $15 trillion.

The rise in the stock market and corporate profits benefitted the relative few--yet is touted in the mainstream media as heralding the end of the recession for the entire nation. That is pure propaganda. How easy it's been to manufacture a rising stock market, compared to engineering a recovery in the economy.

Indeed, the biggest problem facing the manipulators is the lack of participation by the professional and middle classes which have steadfastly kept their cash in money-market funds ($3 trillion) and put money in "safe" bond funds (about $350 billion went into such funds in 2009) while they withdrew money from the stock mutual funds.

The Grand Game has always been to engineer a rising stock market, sell to the middle class suckers and then go short, making a fortune as the bubble pops and the middle class loses the "sure bet."

Now that the middle class isn't responding to the endless propaganda about how great the stock market is doing, then the Powers That Be are forced to trade between themselves--hence the low daily volume and high-frequency trading.

The stock market isn't about building middle class wealth, and the middle class seems to have finally figured that out. The equity market is all about concentrating wealth and managing perception: if the top 10% is doing well, then the bottom 90% are supposed to feel better about the whole thing, too, even if they are poorer by every financial metric.

Charles Hugh Smith has been an independent journalist for 22 years. His weblog,, draws two million visits a year with unique analyses of global finance, stocks and political economy. He has written six novels and Weblogs & New Media: Marketing in Crisis and just released Survival+: Structuring Prosperity for Yourself and the Nation.


Venkatesh Babu K R said...

I liked Dr. Singh when India faced the "artificial" so called recession created by west. But now I feel this entire recession, war etc... is just a drama being played by the governments of different countries.

India might grow by any leaps and bounds, but the government is not leaving any scope for Indians to grow. We - the middle class continue to be the scapegoats always. I wish somebody creates a land with equal rights and opportunities for all.

Anonymous said...

Nothing is going to happen. The ruling party will try to do whatever it takes to please the "very rich" anywhere in the world. Same with India.

shailesh said...

I think the story about Stock market is absolutely right. The same is true for India. Most builders point to market and say prices are justified. Most people also look at the percent rise and think someone somewhere is making lot of money and buying these expensive properties.

The reality is most individual investors are not able to time the market. Hence very few if any go the upside from market.

Anonymous said...

Be a contrarian. If the markets are going up fantastically, sell!

If the markets are plunging downwards, buy!!

Right now RE is going upwards and no matter what the Sundaas Bhai's and Sussuu's of the world tell you about this time it being different in India, due to whatever reason (black money, liquidity, slum dwellers and what have you..), refuse to buy!


Anonymous said...

- US and Europe is in deepest recession (depression) of 70 years.
- 60% IT business comes from US, 30 % from Europe and 10% from rest of geographies.
- Quite a few organisations and banks have gone bankrupt and are still going bankrupt.
- US and UK governments have bailed out many big organisations and the orgs are still struggling.
- IT is a discretionary spending.
- If these organisations are struggling themselves and as IT is discretionary spending, how can they spend on IT to this extent (as reported by IT companies) ?

In the context of above points, how did IT companies report such handsome revenues and profits during recession ?

Their accounts and balance sheets need to be audited again to reveal the reality.

Anonymous said...

Builders, bankers and politicians are colluding with each other to hold the country to ransom by artificially maintaining high RE prices.

Somebody should file a PIL (Public Interest Litigation) in Supreme Court to expose the loans provided to RE sector, the restructured loans, the NPAs, also regarding transactions done with ARCIL for troubled assets, so that RE bubble gets burst.

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