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All-Time Records Were Hit on Friday, but Are These Highs Sustainable?

Tickers in this article: ^DJI ^GSPC

NEW YORK (TheStreet) -- U.S. stock markets hit new highs this week with the Dow Jones Industrial Average and the S&P 500 closing at all-time records on Friday.

The Federal Reserve's Flow of Funds accounts released this past week, indicated that wealth rose to a new record in the first quarter. It is common knowledge that the primary movers were stock prices and rising housing prices.

Let's look at what is driving these prices higher.

Economic activity does not seem to be the driving force behind these increases. Over the past four years, the economy has achieved annual rates of growth of 2.5% in 2010; 1.8% in 2011; 2.8% in 2012; and 1.9% in 2013. The year-over-year rate of growth in the first quarter of 2014 was only 2.0%. Growth rates are not expected to be much higher, if at all, in the near future.

These growth rates have not produced major improvements in corporate earnings and are not likely to do so in the future.

Also, we have not really seen a major rise in home buying by individuals or households. A lot of home buying has been done by hedge funds, private equity funds, and others. They mostly buy homes to turn them into rental units, with the idea of flipping them in the longer-term, after the new inflation in housing prices reaches an end.

So, why have stock prices and housing prices been increasing?

Well, one thing that Ben Bernanke, former chairman of the Federal Reserve, and current Chairwoman Janet Yellen have in common is a belief that rising levels of wealth in the middle class will cause people to spend more and this will get the economy growing faster in the future.

Monetary economist and historian Allan Meltzer has created a new class of people and their relationship to potential inflation. There are the "doves" who want more inflation and the "hawks" who want to combat more inflation. Meltzer has called Yellen a "goose" because she wants to continually "goose" the stock market...and the housing market...to increase people's wealth.

So, wealth is rising, why isn't the economy growing faster?

Well, it seems as if there are a couple of problems. First, the rising wealth seems to be distributed more toward those who had greater wealth. Wealthier people tend to save more.

Second, wealthy people have learned over the past 50 years to hedge the credit inflation created by the Fed by channeling money into assets that are havens for price increases. They invest in less-risky assets. Their money goes into houses, gold, stock prices, commodities, works of art and other assets that will increase in value.  It does not go into productive goods and services that are the major part of economic growth.

Third, the economy is going through a transition period in terms of its structural construction. America experienced one of these periods earlier in the twentieth century as we moved from an agricultural society to a manufacturing society. Now, the society is moving further beyond that manufacturing base to a society that is more information based, which some call a zero-marginal-cost society.

Economic growth is just not going to become too robust.