Everything Is Nonsense
If I had a world of my own, everything would be nonsense. Nothing would be what it is, because everything would be what it isn’t. And contrary wise, what is, it wouldn’t be. And what it wouldn’t be, it would. You see?
– Alice’s Adventures in Wonderland
A public service message from the Mad Hatter – bad news is bad. Ominous, even. Hat help us all!
Illustration credit: Bob Kane
BALTIMORE – The Dow rose the fifth week in a row last week, ending with a 120-point jump on Friday. This has put the index firmly in the black for 2016. Well, this is a showdown, isn’t it?
Either us… or the great mass of investors – one of us is wrong. In the weeks to come, we’ll find out who (notice to new readers: It could go either way). But wait a minute…
Our old friend Rob Marstrand, who writes at Of Wealth.com, explains why the great mass of investors has little to do with it. Apparently, corporations have nothing better to do with their money than buy their own shares.
“There’s a dirty little secret in the U.S. stock market. Corporate America is paying out more cash to shareholders than it earns in profits. This means there’s nothing left to invest in business growth. It also means debt levels are going up, increasing risk…
Analysis by Bloomberg shows that those companies are on track to spend $590 billion a year on buybacks in 2016, at the first-quarter rate. That would be even more than the last point of peak buybacks – at the previous market top in 2007, just before the last crash. Put simply, companies are spending record amounts of cash on buybacks at precisely the wrong time (as usual): when stocks are extremely expensive.”
Corporate buybacks vs. other fund flows – corporations are the market’s main remaining prop, by buying back their own stock on credit at insane prices. They are doing this in order to flatter earnings per share amid a complete lack of top-line growth and declining profits. What’s the point? The stock options managers pay themselves, which are only worth something if stock prices hold up. If that requires destroying balance sheets and shareholder value, so be it – click to enlarge.
It’s an Alice in Wonderland world. Everything is nonsense. Stocks are going up. That should mean things are looking up for business. Which should mean that companies have plenty of worthwhile new capital investments to make – new machinery, new factories, new products, and more distribution.
And if things are looking up for business, it should mean things are looking up for their employees. More jobs. Higher wages. And since stock prices are not far from record highs – after clawing their way back up the mountain over the last five weeks – it must mean that things are looking up all over, right? Rats!
We’re All Mad Here…
Time is the ultimate unyielding human resource. And the ultimate measure of how wealthy a society is how much you can get paid per hour. Cometh another depressing report for millennials from conservative website Red Alert Politics:
“Compared to the national average, you are poorer than most people of your age in the past. The youngest millennials are the worst off. In 1979, the average American 20 to 24 years old had average incomes 10.1% below the national average. Today, it’s 31.5% below the average.”
The chart shows the income situation of the 20-24 and 25-29 age brackets relative to the national average across the world as of 2013. Although slightly dated, we assure you the situation hasn’t gotten any better since then. It is by far worst in the US, which partly explains why Mr. Sanders is so appealing to youngsters – click to enlarge.
Not that we’re going to whine on behalf of the young. They’re doing their own whining at the ballot box. The youngest voters are going for the oldest candidate: democratic socialist Bernie Sanders. But what entertains us today is the nonsense of the entire system.
“We’re all mad here,” says Wonderland’s Cheshire Cat… perhaps anticipating Janet Yellen’s Fed. Actually, the whole system is not just mad. It is also corrupt and phony.
A Phony System
It begins with phony money. Dollars are supposed to represent wealth. How do you get wealth? By working, investing, and saving, right? But after 1971 – when President Nixon ended the direct convertibility of dollars to gold – the Fed created new dollars with no wealth backing them. Post-1971 dollars are IOUs from Uncle Sam, nothing more. The Fed carries them on its books as a liability.
Then there is the problem of phony savings. In a healthy economy, you earn money, and you save part of it. This can be lent out, as credit, to fund new projects and earn interest. Savings – and credit – are limited. They are based on real surplus wealth.
But in today’s mad system, central banks and banks create credit out of thin air… using nothing but keystrokes on a computer. No savings are needed. Savers might as well not bother. Thanks to the Fed’s regime of ultra-low interest rates, over the past 10 years, Bloomberg estimates that about $8 trillion has been confiscated from savers – money they should have earned in interest.
On top of this, the government has a phony fiscal policy. It borrows phony money from banks in return for Treasury bonds. Under QE, the Fed then buys these bonds from the banks. The Treasury then pays the Fed interest on these bonds… the Fed then gives this interest back to the Treasury.
Neat, huh? It’s free money for the feds. They borrow nothing for nothing… and everyone pretends it’s real.
This is all made possible by phony monetary policy. The Fed sets interest rates at the lowest levels in history. So borrowers – especially the largest borrower in history, the U.S. government – can get funds cheaply. This is done to strengthen the economy, but the economy grows weaker under the burden of so much more debt.
Corrupt and Fraudulent
This all leads to a phony stock market, in which corporate bosses use the cheap money to loot their own businesses. Companies borrow heavily to buy back their own shares and cancel them. This increases the earnings per share of the outstanding shares, boosting their value.
Top execs then collect fat bonuses based on rising share prices. Shareholders get a temporary boost as their stocks go up, but their businesses are weakened by the additional debt.
And the entire system creates phony wealth. This is not capitalism. It’s phony, crony capitalism. Its phony money leads to phony investments – short-term speculations… scams… and rent seeking. These do not build real wealth; they extract real wealth from the rest of the economy and shift it to the well-connected sectors.
Here’s how it works in housing, for example. The banks get the phony money and lend it to house buyers. They collect interest on “money” that cost them next to nothing. Naturally, they lend more and more… in order to maximize their own income. This leads to rising house prices… and eventually, a bust, when too many people own too much money on houses they can’t really afford.
This is what happened in 2007. Home buyers couldn’t make their payments. Home prices fell. Families lost their homes. And then, even the banks were in trouble. So, the Fed came and bailed out the banks, so the extraction could continue.
And today, almost every one of America’s taxpayers continues to make payments to the credit industry – for student loans, housing loans, auto loans, credit cards – transferring more and more real wealth from the people who earned it to the privileged elite.
But it is not just Wall Street that comes out ahead. The entire Deep State complex is at the heart of the nonsensical, corrupt, and fraudulent system… Expecting the Mad Hatter to protect you? Or the Cheshire Cat?
Good luck with that!
Charts by: Bloomberg, Euromonitor, St. Louis Federal Reserve Research, StockCharts
Chart and image captions by PT
The above article originally appeared as “Why the Rally in Stocks Can’t Be Trusted” at the Diary of a Rogue Economist, written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.
You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
2 Responses to “Alice in Wonderland”
Most read in the last 20 days:
- Gold Sector Update – What Stance is Appropriate?
The Technical Picture - a Comparison of Antecedents We wanted to post an update to our late December post on the gold sector for some time now (see “Gold – Ready to Spring Another Surprise?” for the details). Perhaps it was a good thing that some time has passed, as the current juncture seems particularly interesting. We received quite a few mails from friends and readers recently, expressing concern about the inability of gold stocks to lead, or even confirm strength in gold of...
- Don’t Blame Trump When the World Ends
Alien Economics There was, indeed, a time when clear thinking and lucid communication via the written word were held in high regard. As far as we can tell, this wonderful epoch concluded in 1936. Everything since has been tortured with varying degrees of gobbledygook. One should probably not be overly surprised that the abominable statist rag Time Magazine is fulsomely praising Keynes' nigh unreadable tome. We too suspect that this book has actually lowered the planet-wide IQ –...
- Incrementum Advisory Board Meeting, Q1 2017 and Some Additional Reflections
Looming Currency and Liquidity Problems The quarterly meeting of the Incrementum Advisory Board was held on January 11, approximately one month ago. A download link to a PDF document containing the full transcript including charts an be found at the end of this post. As always, a broad range of topics was discussed; although some time has passed since the meeting, all these issues remain relevant. Our comments below are taking developments that have taken place since then into...
- What is the Best Time to Buy Stocks?
Chasing Entry Points Something similar to the following has probably happened to you at some point: you want to buy a stock on a certain day and in order to time your entry, you start watching how it trades. Alas, the price rises and rises, and your patience begins to wear thin. Shouldn't a correction set in soon and provide you with a more favorable buying opportunity? Apple-Spotting – a five minute intraday chart showing the action in AAPL on February 1, 2017 - an...
- Trump and the Draining of the Swamp
Swamp Critters BALTIMORE – The Dow is back above the 20,000-point mark. Federal debt, as officially tallied, is up to nearly $20 trillion. The two go together, egging each other on. The Dow is up 20 times since 1980. So is the U.S. national debt. Debt feeds the stock market and the swamp. What’s not up so much is real output, as measured by GDP. It’s up only 6.4 times over the same period. Debt and asset prices have been rising three times as fast as GDP for 36 years! Best...
- Gold and Silver Divergence – Precious Metals Supply and Demand
Gold and Silver Divergence – Precious Metals Supply and Demand Last week, the prices of the metals went up, with the gold price rising every day and the silver price stalling out after rising 42 cents on Tuesday. The gold-silver ratio went up a bit this week, an unusual occurrence when prices are rising. Everyone knows that the price of silver is supposed to outperform — the way Pavlov’s Dogs know that food comes after the bell. Speculators usually make it...
- When Trumponomics Meets Abenomics
Thirty Year Retread What will President Trump and Japanese Prime Minister Shinzo Abe talk about when they meet later today? Will they gab about what fishing holes the big belly bass are biting at? Will they share insider secrets on what watering holes are serving up the stiffest drinks? [ed. note: when we edited this article for Acting Man, the meeting was already underway] Japan's prime minister Shinzo Abe, a dyed-in-the-wool Keynesian and militarist, meets America's...
- The Great Wailing
Regret and Suffering BALTIMORE – Victoribus spolia... So far, the most satisfying thing about the Trump win has been the howls and whines coming from the establishment. Each appointment – some good, some bad from our perspective – has brought forth such heavy lamentations. Oh no! Alaric the Visigoth is here! Hide the women and children! And don't forget the vestal virgins, if you can find any... You’d think Washington had been invaded by Goths, now...
- Receive a One Percent Gift When Buying or Selling a Home
How to Save Money When Buying or Make More When Selling a Home In your professional capacity and perhaps also in your private life, you may be closely involved with financial and commodity markets. Trading in stocks, bonds or futures is part of your daily routine. Occasionally you probably have to deal with real estate as well though – if you e.g. want to purchase an apartment or a house, or if own a home you wish to sell. The people who took this photograph probably want to...
- Silver Futures Market Assistance – Precious Metals Supply and Demand
Silver Is Pushed Up Again This week, the prices of the metals moved up on Monday. Then the gold price went sideways for the rest of the week, but the silver price jumped on Friday. Taking off for real or not? Photo credit: NASA Is this the rocket ship to $50? Will Trump’s stimulus plan push up the price of silver? Or just push silver speculators to push up the price, at their own expense, again? This will again be a brief Report this week, as we are busy...
- Unleashing Wall Street
To Unleash or Not to Unleash, That is the Question... LOVINGSTON, VIRGINIA – Corporate earnings have been going down for nearly three years. They are now about 10% below the level set in the late summer of 2014. Why should stocks be so expensive? Example of something that one should better not unleash. The probability that a win-lose proposition will develop upon meeting it seems high. It wins, because it gets to eat... Image credit: Urs Hagen Oh,...
- Boondoggles for the Swamp Critters
Monster or Mozart? BALTIMORE – Investors seem to be holding their breath, like a man hiding a cigarette from his wife. It’s just a feeling, and it’s not the first time we’ve had it... but it feels as though it wouldn’t take much to send them all running. Actually, they're not going anywhere yet... but there is a lot of overconfidence by those who were very worried when prices were a lot better - click to enlarge. Meanwhile... we’re coming to a deep...