BALTIMORE – Who’s the biggest winner so far? “Government Sachs!” Fortune magazine reports that the winningest person since Trump’s election is Goldman Sachs CEO Lloyd Blankfein. Goldman’s stock price is back to where it was just before the last crash in 2008. And Blankfein is back in high cotton, too; his holdings in the firm have gained $140 million in the last four weeks.
GS actually trades at a new all time high. It is really difficult to find pictures of Lloyd Blankfein in which he is not laughing or at least grinning, but his perpetual good mood is certainly understandable. People like him are often said to be “laughing all the way to the bank”. The saying would have to be slightly modified in his case, since he basically is the bank – click to enlarge.
Donald Trump pledged to take the elite down a notch. So far, they’re going in the opposite direction. Worldwide, they’re up about $4.4 trillion, as their stocks have soared in the “Trump Bump.”
Many of America’s best investors – including Carl Icahn and Ray Dalio – think this is just the beginning. And with some of the nation’s most successful moneymen at his side, including a former Goldman guy in the Treasury, many people are betting that Trump will bring a sustained boom.
We’ve been looking at crony capitalism. Our hypothesis is that it is funded by the feds’ fake money and enabled by their regulations. So far, we’ve looked at ex-Goldman banker Steven Mnuchin, Trump’s pick for secretary of the Treasury.
While he was making a fortune at Goldman, a major Main Street company, Sears was turned into a Wall Street victim. Its stock is down quite a bit. And it is expected to declare bankruptcy in a few months. Wilbur Ross, Trump’s new man for the Department of Commerce, used federal regulation of imports to make a billion dollars in the steel industry.
Jack Welch, a member of Trump’s financial advisory team, used the credit-fueled boom of the 1980s and 1990s to turn Main Street manufacturer General Electric into a leveraged, go-go finance company. Its stock has gone nowhere in the last 15 years.
Today, we look at two more of Trump’s advisers, Blackstone Group CEO Stephen Schwarzman and BlackRock CEO Larry Fink. If nothing else can be said about these two, they have stones! Schwarzman and Fink are two of Wall Street’s most powerful CEOs. Both know how to play the game. But what sort of game is this? Who wrote the rules? Who wins and how?
BlackRock bigwigs Schwarzman & Fink – not exactly wallowing in misery either…
Illustration by Edward Kinsella
Regulations generally give an advantage to one or more cronies. One industry is favored. Another is punished. Costs, delays, and burdens are imposed. Often, there is little analysis or public discussion. And then, the regulations grow like poison ivy, choking startup competitors and wasting time and money; soon, people all over the country are itching for a change.
Several of Trump’s cabinet picks say they are determined to trim these vines. And “The Donald” has proposed a new rule – cutting rules:
“I will formulate a rule which says that for every one new regulation, two old regulations must be eliminated. So important.”
Fewer rules would be good for the public – improving efficiency and competition. But cronies would suffer. Which makes us wonder…
The Reagan administration managed to spray some Roundup around the D.C. swamp. Regulatory growth slowed. Temporarily. But the evil weeds were soon growing again, faster than ever.
Only the public has an interest in cutting back the rules and keeping the system honest. And the public doesn’t control the process – the swamp critters do.
In the first six years of the Reagan administration the number of federal regulations actually declined noticeably. Not surprisingly, it is a time period fondly remembered for its optimism and strong economic growth. It didn’t last – Leviathan soon reasserted itself in its full splendor. The official objective of regulations is always “protection of the public”. In reality, most of them impoverish the public and restrict liberty (in particular economic freedom), while expanding the power of the State and enriching assorted crony interests – click to enlarge.
How the Rich Got Richer
News comes that investment management behemoth BlackRock is moving into new digs in Hudson Yards, in Lower Manhattan. The company has some $5 trillion in assets, making it perhaps the most successful capitalist business in history.
The feds’ cheap financing caused a bubble in the housing, mortgage, and finance sectors. In our daily e-letters, we tracked that bubble, day by day, from around 2004 until it blew up in 2008.
BlackRock’s role was significant. It created $5.5 trillion in mortgage-backed derivatives, which blew up in 2008. Housing prices crashed, leaving 20 million Americans underwater and 4 million in foreclosure.
BlackRock had its fingers in the housing pie both on the way down and during the subsequent recovery. That was certainly a case of rather fortuitous timing, for which the group can’t be faulted per se – it is hard to say how losing money would have improved the situation. The problem with the bubble and its aftermath is that it left a great many innocent bystanders holding the bag. Moreover, the root cause has never been identified in the official narrative, and hence has never been addressed. On the contrary – today the Fed and all the TBTF banks are bigger and more powerful than ever, while the GSEs have been fully nationalized.
Photo via occupy.com
Meanwhile, up on Park Avenue, Stephen Schwarzman was taking the other side of the trade. His private equity outfit, the Blackstone Group, bet against subprime mortgages and sold off most of its real estate in 2006 and 2007, getting rid of about $60 billion worth of property investments.
Then, after the crash, Blackstone made another sharp move. It bought up houses at bargain prices. It spent $10 billion and acquired 50,000 homes.
Fake Money, Fake System
The elegance and chutzpah of it were breathtaking. The financial industry created the bubble, lending the feds’ fake money – money that no one ever earned or saved – to people who had no business borrowing it, so they could buy overpriced houses they couldn’t afford.
Then, after the inevitable blow-up, Blackstone bought houses that had been heavily discounted by the accident its dark, lithic brethren had helped to cause. A bold move by Blackstone? Yes. Risky? Maybe not. The fix was in. The Fed brought forth another big round of financing. This time, interest rates went into the cellar and stayed there until the sector was fully reflated.
The Case-Shiller Home Price Indices show house prices up about 30% over the last six years. Assuming the boys at Blackstone operated efficiently – covering their costs with rents – they would have about a $3 billion unrealized capital gain.
Case-Shiller indexes: bust and “reflation”. It took a 135% increase in the US true money supply to achieve the “miracle recovery”. Unfortunately, inflating prices is not the same as creating wealth. It merely redistributes wealth, while damaging the economy structurally – click to enlarge.
And now, they are taking the whole kit and caboodle public, selling their real estate investment trusts to mom-and-pop investors who have been forced into stocks by the Fed’s ultra-low interest rate policy.
Thus did the financial industry use its preferential access to the Fed’s EZ credit to create the housing bubble and then use it to convert private property – people’s homes – into a tradable asset owned by Wall Street.
Left-wingers will say Fink and Schwarzman are “greedy capitalists.” But money makes people in its own image. Fake money has created a false financial system and turned capitalists into cronies.
Charts by: StockCharts, Competitive Enterprise Institute, S&P
Chart and image captions by PT
The above article originally appeared 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
One Response to “How You Become a Crony”
Most read in the last 20 days:
- Speculative Blow-Offs in Stock Markets – Part 1
Defying Expectations Why is the stock market seemingly so utterly oblivious to the potential dangers and in some respects quite obvious fundamental problems the global economy faces? Why in particular does this happen at a time when valuations are already extremely stretched? Questions along these lines are raised increasingly often by our correspondents lately. One could be smug about it and say “it's all technical”, but there is more to it than that. It may not be rocket science, but...
- Speculative Blow-Offs in Stock Markets – Part 2
Blow-Off Pattern Recognition As noted in Part 1, historically, blow-patterns in stock markets share many characteristics. One of them is a shifting monetary backdrop, which becomes more hostile just as prices begin to rise at an accelerated pace, the other is the psychological backdrop to the move, which entails growing pressure on the remaining skeptics and helps investors to rationalize their exposure to overvalued markets. In addition to this, the chart patterns of stock indexes...
- India: Still the Fastest Growing Large Economy?
India’s Currency Ban - Part X It has now been four months since Narendra Modi declared about 86% of monetary value of currency illegal. Linked here is the last in my series of updates, which was written soon after the deadline to deposit the demonetized currency. Most of the banned currency was eventually deposited, making a mockery of Modi, who had claimed that unaccounted money would not reach the banks. Perhaps 3% of the cash never reached the banks. A cunning plan...
- Gold Sector: Positioning and Sentiment
A Case of Botched Timing, But... When last we wrote about the gold sector in mid February, we discussed historical patterns in the HUI following breaches of its 200-day moving average from below. Given that we expected such a breach to occur relatively soon, the post turned out to be rather ill-timed. Luckily we always advise readers that we are not exactly Nostradamus (occasionally our timing is a bit better). Below is a chart of the HUI Index depicting the action since the January...
- They're Worried You Might Buy Bitcoin or Gold - Precious Metals Supply and Demand
Bitcoin Mania The price of gold has been rising, but perhaps not enough to suit the hot money. Meanwhile, the price of Bitcoin has shot up even faster. From $412, one year ago, to $1290 on Friday, it has gained over 200% (and, unlike gold, we can say that Bitcoin went up — it’s a speculative asset that goes up and down with no particular limit). Bitcoins are a lot less tangible than this picture implies, but they are getting a lot of love recently...
- Welcome to Totalitarian America, President Trump!
Trump vs. the Deep State If there had been any doubt that the land of the free and home of the brave is now a totalitarian society, the revelations that its Chief Executive Officer has been spied upon while campaigning for that office and during his brief tenure as president should now be allayed. Image adapted from the cover of “Deep State #5” - depicting an assassin from the future President Trump joins the very crowded list of opponents of the American...
- Boosting Stock Market Returns With A Simple Trick
Systematic Trading Based on Statistics Trading methods based on statistics represent an unusual approach for many investors. Evaluation of a security's fundamental merits is not of concern, even though it can of course be done additionally. Rather, the only important criterion consists of typical price patterns determined by statistical examination of past trends. Fundamental considerations such as the valuation of stocks are not really relevant to the statistics-based trading...
- The Long Run Economics of Debt Based Stimulus
Onward vs. Upward Something both unwanted and unexpected has tormented western economies in the 21st century. Gross domestic product (GDP) has moderated onward while government debt has spiked upward. Orthodox economists continue to be flummoxed by what has transpired. What happened to the miracle? The Keynesian wet dream of an unfettered fiat debt money system has been realized, and debt has been duly expanded at every opportunity. Although the fat lady has so far only...
- Why the 21st Century Sucks - Turtles All the Way Down
A Truly Sucky Century BALTIMORE – What an awful century! Worst we’ve ever seen. Household incomes are down. Employment is down, with 7 million people in the U.S. of working age without jobs. Productivity growth is down. GDP growth is down – to only about 0.5% per capita last year. Even life expectancies are down. Drug overdoses are up. Suicides are up. One out of every eight children lives in a family getting food stamps. One of out every eight adults takes psychoactive drugs...
- Searching for Truth
Heresy or Truth? RANCHO SANTANA, NICARAGUA – In the fifth century, Christian scholars counted 88 different heresies. Arianism. Eutychianism. Nestorianism. If there was a way to “offend” God, they had a name for it. One group of “heretics” argued that there was no such thing as “original sin.” Another denied the trinity. And another claimed Jesus was not divine. Which one had the truth? Depiction of the first Council of Ephesus in 431 AD, convened by Emperor...
- Gold and the Fed's Looming Rate Hike in March
Long Term Technical Backdrop Constructive After a challenging Q4 in 2016 in the context of rising bond yields and a stronger US dollar, gold seems to be getting its shine back in Q1. The technical picture is beginning to look a little more constructive and the “reflation trade”, spurred on further by expectations of higher infrastructure spending and tax cuts in the US, has thus far also benefited gold. From a technical perspective, there are indications that the low at $1045.40,...
- Off the Beaten Path in Mesoamerica
Greeted by Rooster There’s an endearing quality to a steadfast rooster call at the crack of dawn when overheard from a warm country farmhouse. There’s a reassuring charm that comes with the committed gallinaceous greeting of daybreak that’s particularly suited to a rural ambiance. The allure of a morning cock-a-doodle-doo somehow falls flat in all other settings. Good morning everyone! Before meteorological forecasts were available on TV and smart phones, people...