The Dow Jones Industrial Average soared to post more than 26,500 points by the Friday close this week. Some are calling this the longest bull run in the nation’s history, beginning in Obama’s final year and ramping up an incredible 5,000 points during President Trump’s time in office thus far.
The president, not known for his modest style, is sure to grab credit for the market moves, citing his business acumen as the primary driver. The economically illiterate, which comprise greater than 90% of the country, will assume tax cuts or increased productivity are fueling Wall Street’s prodigious performance.
The true factors behind these historic gains are far less savory to the working class, and less likely to get much media attention.
Probably the most important contributor of all is the incredibly long period of sustained low interest rates. Set by the Federal Reserve, the Federal Funds Rate today stands at 2.5%. It has crawled up at an extremely gradual pace from zero since the official end of the last recession, and still sits at a historically low and unhealthy level.
The FFR establishes the interest that major banks must pay to “borrow” money from the Fed. This rate is of course marked up before it reaches debt consumers, who pay double on average for their home mortgages. An economy firing on all cylinders can easily support a federal rate of around 5%.
Even though Fed Chairman Jerome Powell has been cautious in his rate increases, incrementally adding 25 basis points (a quarter of a percent) was enough to trigger President Trump’s ire. The president knows very well that maintaining the illusion of a growing economy depends on keeping interest rates artificially low.
The problem with low rates is that it pumps more liquidity into an already saturated debt market, which in turn causes inflation and dollar devaluation. In short, as Wall Street’s power grows, the spending power of average Americans suffers.
Another facet of the paper economy is home prices, which have been flying high in recent years. An unprecedented number of cities have popped the million dollar median home price benchmark and kept on going from there. Markets all over the country have seen house prices skyrocket due to low interest rates, foreign demand, and newly minted affluence from the technology and oil sectors. This is great for institutional real estate holders like Blackstone, but terrible for working people and young families attempting to purchase their first home.
Finally, we have been absolutely swamped with immigrants, both legal and illegal, in record numbers since Trump took office. Between the illegals flooding the blue collar trades, and the H1B visa holders gobbling the premium technology jobs, average Americans have been squeezed out while corporate profits shoot to the moon.
There is nowhere for this artificial economy to go but down, and the only question is whether it will be sustained through the election year or not. If the current trajectory holds, Trump will emerge the winner when ballots are counted in November 2020. Nobody wants to change horses midstream when the economy is roaring. However, cracks are already starting to show in the housing market, and American workers haven’t seen real wage increases in a very long time. More borrowers are delinquent on their automobile loans than ever. The country is awash in cheap money, and there is a growing corporate debt crisis.
The rumbles of discontent are becoming louder as Main Street is denied participation in the boom that Wall Street has been enjoying for years. If President Trump fails to stem the tide of mass immigration, or to grow manufacturing jobs, he can expect a very tough re-election fight.