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.
It is that time of the year again – our semi-annual funding drive begins today. Give us a little hand in offsetting the costs of running this blog, as advertising revenue alone is insufficient. You can help us reach our modest funding goal by donating either via paypal or bitcoin. Those of you who have made a ton of money based on some of the things we have said in these pages (we actually made a few good calls lately!), please feel free to up your donations accordingly (we are sorry if you have followed one of our bad calls. This is of course your own fault). Other than that, we can only repeat that donations to this site are apt to secure many benefits. These range from sound sleep, to children including you in their songs, to the potential of obtaining privileges in the afterlife (the latter cannot be guaranteed, but it seems highly likely). As always, we are greatly honored by your readership and hope that our special mixture of entertainment and education is adding a little value to your life!
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
2 Responses to “Alice in Wonderland”
Most read in the last 20 days:
- A Date Which Will Live in Infamy
President Nixon’s Decision to Abandon the Gold Standard Franklin Delano Roosevelt called the Japanese “surprise” attack on the U.S. occupied territory of Hawaii and its naval base Pearl Harbor, “A Date Which Will Live in Infamy.” Similar words should be used for President Nixon’s draconian decision 45 years ago this month that removed America from the last vestiges of the gold standard. Nixon points out where numerous evil speculators were suspected to be...
- Insanity, Oddities and Dark Clouds in Credit-Land
Insanity Rules Bond markets are certainly displaying a lot of enthusiasm at the moment – and it doesn't matter which bonds one looks at, as the famous “hunt for yield” continues to obliterate interest returns across the board like a steamroller. Corporate and government debt have been soaring for years, but investor appetite for such debt has evidently grown even more. The perfect investment for modern times: interest-free risk! Illuustration by Howard...
- US Economy – Something is not Right
Another Strong Payrolls Report – is it Meaningful? This morning the punters in the casino were cheered up by yet another strong payrolls report, the second in a row. Leaving aside the fact that it will be revised out of all recognition when all is said and done, does it actually mean the economy is strong? Quo vadis, economy? Image credit: Paul Raphaelson As we usually point out at this juncture: apart from the problem that US labor force participation has...
- Trump's Tax Plan, Clinton Corruption and Mainstream Media Propaganda
Fake Money, Fake Capital OUZILLY, France – Little change in the markets on Monday. We are in the middle of vacation season. Who wants to think too much about the stock market? Not us! Yesterday, Republican presidential candidate Donald Trump promised to reform the U.S. tax system. This should actually even appeal to supporters of Bernie Sanders: the lowest income groups will be completely exempt from income and capital gains taxes under Trump's plan. We expect to hear...
- The Great Stock Market Swindle
Short Circuited Feedback Loops Finding and filling gaps in the market is one avenue for entrepreneurial success. Obviously, the first to tap into an unmet consumer demand can unlock massive profits. But unless there’s some comparative advantage, competition will quickly commoditize the market and profit margins will decline to just above breakeven. Example of a “commoditized” market – hard-drive storage costs per GB. This is actually the essence of economic...
- Bank of England QE and the Imaginary “Brexit Shock”
Mark Carney, Wrecking Ball For reasons we cannot even begin to fathom, Mark Carney is considered a “superstar” among central bankers. Presumably this was one of the reasons why the British government helped him to execute a well-timed exit from the Bank of Canada by hiring him to head the Bank of England (well-timed because he disappeared from Canada with its bubble economy seemingly still intact, leaving his successor to take the blame). This is how Mark Carney is seen by...
- News from TINA Land
Distortions and Crazy Ideas We have come across a few articles recently that discuss some of the strategies investors are using or contemplating to use as a result of the market distortions caused by current central bank policies. Readers have no doubt noticed that numerous inter-market correlations seem to have been suspended lately, and that many things are happening that superficially seem to make little sense (e.g. falling junk bond yields while defaults are surging; the yen rising...
- An Old Friend Returns
A Rare Apparition An old friend suddenly showed up out of the blue yesterday and I’m not talking about a contributor who had washed out and, after years of ‘working for the man’, decided to return for another whack at beating the market. Instead I am delighted to report that I am looking at a bona fide confirmed VIX sell signal which we haven’t seen for ages here. Hello, old friend. Professor X and Magneto staring each other down in the plastic...
- The Fabian Society and the Gradual Rise of Statist Socialism
The “Third Way” “Stealth, intrigue, subversion, and the deception of never calling socialism by its right name” – George Bernard Shaw An emblem of the Fabian Society: a wolf in sheep's clothing The Brexit referendum has revealed the existence of a deep polarization in British politics. Apart from the public faces of the opposing campaigns, there were however also undisclosed parties with a vested interest which few people have heard about. And...
- Silver is in a Different World
The Lighthouse Problem Measured in gold, the price of the dollar hardly budged this week. It fell less than one tenth of a milligram, from 23.29 to 23.20mg. However, in silver terms, it’s a different story. The dollar became more valuable, rising from 1.58 to 1.61 grams. Who put that bobbing lighthouse there? Image credit: John Lund / Corbis Most people would say that gold went up $6 and silver went down 43 cents. We wonder, if they were on a sinking boat,...
- Retail Snails
Second Half Recovery Dented by “Resurgent Consumer” We normally don't comment in real time on individual economic data releases. Generally we believe it makes more sense to occasionally look at a bigger picture overview, once at least some of the inevitable revisions have been made. The update we posted last week (“US Economy, Something is Not Right”) is an example. Eager consumers storming a store Photo credit: Daniel Acker / Bloomberg We'll make an...
- The Fed’s “Waterloo” Moment
Corrupt and Unsustainable James has been a big help. Trying to get him to sleep at night, we have been telling him fantastic and unbelievable bedtime stories – full of grotesque monsters... evil maniacs... and events that couldn’t possibly be true (catch up here and here). He turned his head until his gaze came to rest on the barred windows of the main building. Finally, he spoke; as far as I was aware these were the first words he had uttered in more than five years....