The Fed Is Bluffing... Interest Rates Won't Rise in 2015

BY BILL BONNER
POSTED 
AUGUST 20, 2015

BALTIMORE, Maryland – What did we tell you…

The Janet Yellen Fed will not raise interest rates in any meaningful way anytime soon. Instead, she will announce new QE programs.

Yesterday, red was showing up just about everywhere – U.S. stocks, European stocks, Asian stocks, emerging markets stocks, crude oil…

But it could have been worse…

U.S. stocks recovered some of their losses for the day, after the minutes of the most recent Fed meeting showed Yellen and team still won’t pull the trigger on a rate hike until certain unspecified conditions are met.

According to the Fed, the conditions for a rate increase are “approaching” but haven’t been met yet.

Well, guess what… Conditions will never be met.

It doesn’t work that way. This economy will never recover – not as long as it is under the current Keynesian management. It is like a patient attended by quack doctors – doomed to get sicker from their quack “cures.”

Market Morphine

Today’s economy depends on large doses of cheap credit…

And like morphine, you have to up the dosage just to stay in the same place. Take away the drugs, and the pain rises.

The pain caused by falling stock prices, for example.

Take away the cheap credit… and the buybacks on Wall Street dry up. That means earnings per share – the ultimate driver of stock prices – fall, too.

With falling corporate earnings and stagnant household incomes, the inevitable direction for stock prices is also down.

As we discussed in last Friday’s Diary, we’ve already seen that today’s stock prices are not the result of sober reflection on the part of investors.

They do not sit down with a yellow pad and a No. 2 pencil and calculate streams of income over the next 10 years. Instead, they count on the cronies to rig the market for their benefit.

As regular readers know, corporate execs have been borrowing at ultra-low rates and using the money to buy and cancel shares in their own companies. This clever piece of financial engineering reduces the count of outstanding shares and pushes up their value.

The insiders get bonuses… by looting the company’s capital and replacing it with debt. And shareholders get a nice bump in their portfolios.

Since 2009, the market cap of the S&P 500 has risen by almost $11.7 trillion.

And according to a new report from Aranca Investment Research, S&P 500 companies have spent almost $2.3 trillion on buybacks over the same period.

So about one-fifth of the increase in market cap is due to buybacks.

Cheap credit is essential to the looting process. Take it away and the flimflam falls apart. So do stock prices.

The “Recovery” Illusion

But the Fed can’t allow a real crash in the stock market. The “recovery” illusion is based on rising prices for equities.

Supposedly, this leads to a “wealth effect.” According to Fed doctrine, as investors see the values of their investment portfolios rise, they start to spend like drunken capitalists.

The economy is then supposed to explode with growth as “animal spirits” return to shoppers… leaving shiny coins all over the street for the poor to pick up.

Of course, it doesn’t happen…

Instead, the real spoils of cheap credit go to the C-suite cronies, who manipulate the stock market by pumping borrowed funds into buybacks. Stocks go up. But the real economy goes nowhere.

At the Sprott-Stansberry Natural Resource Symposium in Vancouver last month, our friend and Stansberry Research analyst Dr. Steve Sjuggerud debunked the idea that a rising interest rate cycle always coincides with falling stock prices. He pointed out that stocks have tended to rise in value during periods of rising rates.

Don’t worry about the Fed tightening, he told the audience. It doesn’t have to mean lower stock prices.

We don’t doubt that Steve is right. Typically, when the economy heats up due to organic growth, interest rates rise… and so do stocks.

But this is no typical bull market… and no typical economy.

The stock market is being driven higher by ultra-low rates, QE, and clever financial engineering. And the economy is not in the kind of healthy expansion mode that pushes up stock prices and interest rates at the same time.

Instead, much of today’s economy is as cold and lifeless as a corpse.

Commodities are plumbing record lows – most notably oil and “Dr. Copper,” widely seen to signal a deteriorating economy worldwide.

Shipping and freight prices reveal a slowdown in trade. (See today’s Market Insight below for more on that…)

A strong dollar, slowing exports, and falling commodities prices are hammering many of the emerging markets.

And China is struggling to avoid its own Great Depression.

That’s why Ms. Yellen is reluctant to raise rates. She knows it will be painful when she does.

Instead, she’ll administer another dose of morphine…

Bill Bonner

Source: Daily Reckoning

Follow us on Twitter: @blacklioncm

Caution! Corporate Cronies At Work...

TIVOLI, New York – U.S. stocks flat. A bump in Tokyo. A bump up in Shanghai. Gold registered a $7 loss in New York trading.

Noise, in other words. Nothing to worry about. So let us remind readers, and ourselves, of what is really going on.

This is a Great Zombie War. The fight is between zombies and their crony allies and the rest of the world.

That is the real struggle in Greece, for example.

The insiders – taking advantage of the Greek government’s ability to borrow at low interest rates – enjoy benefits that would otherwise be unavailable.

Now, Athens is deeply in debt… and the insiders are desperate to keep the credit flowing (to them!).

Jackass Codes

You’ll recall that zombies are people who live at others’ expense. They are not bad people, but the system either allows them… or condemns them… to take advantage of others.

Some of the ways the zombies do this are obvious. They get subsidies, guarantees, and direct payments from the feds (who claim to be providing an essential service).

Other ways are less visible. Extensive regulations, for example, keep out competitors, raise profit margins, and provide zombie jobs for inspectors, regulators, and assorted hacks.

Charles Hugh Smith, the chief writer at the Of Two Minds blog, gives a good illustration, relaying the experience of one of his correspondents:

For many years, many of my friends and family who have come to my home and experienced my cooking, have told me that I should ‘open a restaurant’… 

About five years ago, there was a restaurant for sale, not too far from my home and business. I thought about buying the restaurant, but at that time, the economy was not doing well, and I wanted to take a wait-and-see attitude before I committed to anything. 

Eventually, the restaurant closed down and a different type of business opened up in the space that had been a restaurant. That business went under in the middle of 2014, and I decided it might be time to open a retail food establishment in the space that used to be a restaurant. How hard could it be?

How hard?

Too hard…

The story is too long for us to repeat here. One permit led to the need for another. Then he needed an inspection. The inspection led to further requirements – enlarge this, replace that, put in this system, take out that… one after another… month after month… paper after paper.

Pettifogging standards… jackass codes… pointless rules… every one of them expensive and time-consuming. Finally, even a seasoned entrepreneur was forced to give up:

Essentially, I spent seven months trying to not only figure out what I needed to do, while I was paying rent and utilities, but I also spent many hours trying to figure out the complexities of what the state required. 

The law in Nevada is called the Nevada Revised Statutes, or NRS. The statutes for retail food are about 500 pages thick. That’s just the codes that cover food. This does not cover the building, electrical, plumbing, and service codes (such as ADA compliance, handicap parking, etc.). 

So, I quit. They beat me. 

It always amazes me when politicians use the sound bite of how they will ‘create jobs.’ Well, I am an entrepreneur and have created thousands of jobs over the past 25 years… 

But here are at least six jobs that I won’t be creating.

Profits Without Prosperity

Meanwhile, the Harvard Business Review reports a shocking figure: Between 2003 and 2012, companies listed on the S&P 500 spent 54% of their profits buying back their shares (reducing the number – and raising the price – of outstanding shares).

These companies devoted another 37% of their earnings to dividends. That means 91% of profits of America’s top corporations went to shareholders. Just 9% went into capital investment, research and development, expansions, and wage increases.

When we first saw that number we thought it must be a mistake. In our business, we have reinvested about 90% of our profits over the past 20 years – the opposite of the 449 S&P 500 companies in question.

What kind of business would be so shortsighted as to give up so much of its capital?

What kind of corporation would spend so little on R&D… business development… and capital investment?

Ah… then we realized: It’s the cronies at work!

Cronies in the C-Suite

First, as to why a company would do such a foolish thing, the Harvard Business Review gives us the answer:

In 2012, the 500 highest-paid executives named in proxy statements of U.S. public companies received, on average, $30.3 million each; 42% of their compensation came from stock options and 41% from stock awards.

By increasing the demand for a company’s shares, open-market buybacks automatically lift its stock price, even if only temporarily, and can enable the company to hit quarterly earnings-per-share targets.

The cronies are paid to do it.

You’re probably wondering how this fits into the Great Zombie War. Isn’t this just capitalism at work? Isn’t this their own money… and they can do with it what they choose?

We answer these questions with questions of our own: How is it possible for them to do this? In the normal course of business you’d think they would need to hold on to more of their money. They are capitalists, aren’t they? They must need capital, don’t they?

Well, you are underestimating the subtlety of the zombies’ war plan.

It is fueled almost entirely with credit… provided at ultra-low cost by their cronies at the Fed. The cheap credit permits corporate America to borrow heavily at little cost and distribute this cash to shareholders… and, more importantly, to corporate insiders.

C-suite cronies are looting America’s top corporations of their capital and replacing it with debt. The public will shoulder the cost of so much cheap credit in the form of future inflation. Meantime, corporate insiders enjoy the spoils in the form of blowout bonuses.

That is why the zombies are fighting so hard to keep the credit bubble inflated – not, as commonly advertised, because it stimulates a recovery.

Cheap credit gives them a way to take what isn’t theirs.

And the war goes on…

Regards,

Bill Bonner

Source: Daily Reckoning

Follow us on Twitter: @blacklioncm

Are You Ready for the Coming Debt Revolution?

Bill BonnerMay 15, 2015

There is a spectre haunting America…and all the developed nations of the world.

It is the spectre of a debt revolution.

We left off yesterday talking about how the economy of the last 30 years — and especially that of the last six years — has favoured the old over the young.

‘Rise up, ye young’uns,’ we as much as said, ‘you have nothing to lose but your parents’ debts.’

We showed how the value of US corporate equity, mainly held by older people, had multiplied by 28 times since 1981.

That was no honest bull market in stocks; it was a market sent soaring by an explosion of credit.

But what did it do for young people whose only assets are their time and their youthful energy?

Alas, the real economy has increased by only five times over the same period.

A grim and menacing spectre

And when you look more closely at work and wages, the spectre grows grimmer and more menacing.

Average hourly wages have barely budged in the last 30 years. And average household incomes have fallen — from $57,000 to $52,000 — in the 21st century.

But as our fingers came to rest yesterday, there was one question hanging in the air, like the smoke from an exploded hand grenade: Why?

Was this huge shift — of trillions of dollars of wealth from young working people to old asset holders — an accident?

Was it just the maturing of a market economy in the electronic age?

Was it because China took the capitalist road in 1979?

Or because robots were competing with young people for jobs?

Nope…on all three counts.

First, old people, not young people, control government.

Ultra-wealthy campaign funders like Sheldon Adelman and the Koch brothers were all born in the 1930s. The big money comes from wealthy geezers like these, eager to buy candidates early in the season when they are still relatively cheap.

Old companies fund most Washington lobbyists, too.

And old people decide elections: There are a lot of them…and they vote. They know where the money is.

Second, the government — doing the bidding of old people — restricts competition, subsidises well-entrenched industries, raises the cost of employing young people, and directs its bailouts, cheap credit, and contracts to the greybeards.

Third, the credit-based money system increases the profits and prices of existing capital. It encourages borrowing and spending. This rewards the current generation while pushing the costs into the future.

Grandparents prey on grandchildren

None of this was an accident. None of it would have happened without the active intervention of the old folks, using the government to get what they could never have gotten honestly.

This is not the same as saying they were completely aware of what they were doing and what consequences their actions would have.

We doubt the Nixon administration had any idea what would happen after it tore up the Bretton Woods monetary system in 1971.

It was behind the eight ball, fearing foreign governments would call away America’s gold.

Few in the White House realised they had made such a calamitous mistake when the president ended the convertibility of the dollar into gold.

And yet it created a world in which parents and grandparents could prey on their grandchildren…for the next 44 years.

And it’s still not over.

The new credit money — which could be borrowed into existence with no need for any savings or gold backing — was just what old people needed.

We have estimated that it increased spending by about $33 trillion over and above what the old, gold-backed system would have allowed.

That spending lifted the value of the geezers’ assets and increased their living standards.

Meanwhile, the average 25-year-old reporting for work in 2015 can’t expect a single dollar more in real hourly wages than his father did in 1980.

The total value of outstanding US corporate bonds was 17% of GDP in 1981. Now, it’s $11.6 trillion — or 65% of GDP.

What did corporations use that money for?

Some of it went into capital investment that made companies more productive and more profitable. But much of it went where you would expect it to go: to buy back shares…to acquire other companies at inflated prices…and to pay off executives as the value of their share options went up!

Who did this benefit?

Mostly people over 50.

Government debt is even worse. Unlike most personal debt, it doesn’t go to the grave with the person who borrowed it. It sticks around to burden the next generation — who got nothing from it.

Federal debt in 1980 was less than $1 trillion. Today, it is $18 trillion. That money was used to fund federal programs — few of which provided any benefit to young people.

An accident? A mistake?

Partly. But old people must have known what they were doing.

Their lobbyists asked for the spending. Their politicians voted for it. Their companies enjoyed the revenues. And they pocketed much of the money.

When the economy threatened a correction, they demanded more credit on easier terms to keep the money flowing. And when their credit balloon popped in 2008, they whined to the feds to protect their ill-gotten gains.

Honest capitalism? Not if they could prevent it.

Creative destruction? Not on their watch.

Pay for what you get? Not if they could put the bills on the next generation.

Young people of the world, unite!

Regards,

Bill Bonner

Source: Daily Reckoning

Follow us on Twitter: @blacklioncm

A Secret Only a Tiny Number of Investors Understand

A Secret Only a Tiny Number of Investors Understand 

by Bill Bonner, Chairman, Bonner & Partners
At 7 a.m. on Saturday morning we were in our room at the China World Hotel, looking down on eight lanes of traffic that had come to a dead stop in the Beijing traffic. 

“The last century was America’s century,” says our Chinese colleague. “This is China’s century.” 

“You know why America was such a success,” he continued. “Because it was a fairly free market with massive domestic demand. Companies could scale up in the highly competitive US market. That would make them larger and more advanced than their foreign competitors. They could then enter foreign markets and easily beat the locals. 

“Now, the US is gummed up by taxes, debt and regulation. Outside of Silicon Valley most of the companies are old. There are few new businesses and not much new technology. 

“I think you wrote something about the declining number of start-ups in the US. It’s a big deal that few people recognize. I think you said it was a result of crony capitalism. The feds subsidize and protect the big boys… and bail them out when they get into trouble. That’s why GM and Fannie Mae are still in business. But the little guys can’t even get credit. 

“China, meanwhile, is full of new companies. Everything is new. And the internal market is fairly free compared to America. Talk about scale. These companies have massive domestic growth and learning capacity before they have to compete on the world markets.
The Largest IPO Ever
“Take Alibaba, for example. It’s a huge company already. It recently introduced a new kind of bank account, where you earn interest daily… at a much higher rate than banks in the US. Within a week, it was the third biggest, in terms of deposits, in the world. 

“Alibaba is going public soon. It will be the largest IPO ever.” 

More evidence of the liberty with which Chinese firms operate comes from a dear reader: 

Bill, I probably shouldn’t bother you, but this one (about China) is right on and close to my heart. My wife has been a naturalized US citizen for 3 years, an LPR for 3 years before that. For the year before that (2007), we were waiting for the I-190 immigration processing. We were married in 2007 in Nanchang, Jiangxi province, her family hometown. She had been running a business in Guangzhou. At start-up, she went to ONE place for a license. She started to tell the guy she planned to deal in Suzhou silk embroideries, calligraphies, and paintings. He cut her off with, “You want to buy and sell things. Okay.” She paid nominal taxes. In the US there is Schedule C, state B&O tax, county property tax, city license and taxes, and aaaarrrgggghhh… We own a small “fangzi” in Nanchang and visit China every few years (her daughter is our partner and manages the property). For some time I have felt that China is MUCH more truly “free market” than we are. How tragic!

Can the Market Be Beaten?
But let us leave China and return to the subject of these last few Diary entries: how to invest intelligently in a world where real knowledge is scarce. 

This is the third in our series. We have one or two more coming. So keep an eye out for those… 

We grew up with the Efficient Market Hypothesis – which was popularized by economist Burton Malkiel in his 1973 book, A Random Walk Down Wall Street. 

The hypothesis is that stock market prices reflect the sum of all publicly available knowledge about a company. Because no one could know more than everyone could know collectively, an individual would be unable to “beat the market” over the long term. 

Of course, many investors did outperform the market. But efficient market proponents believed this to be a matter of luck, not skill. 

Academics and investors attacked EMH from several directions. Some, such as a well-known investor from Omaha, pointed out he and others schooled in Graham-and-Dodd-style value investing had been able to earn the consistent above-market gains EMH theory said was impossible. 

How did they do it? 

We recently put the question to colleague Porter Stansberry. His reply: 

I’ve nearly doubled the S&P 500 over the past 10 years, beating the market in both bull and bear markets... despite the significant handicap of having to do something on a monthly basis. How could I do that if the market was efficient...? And I’m far from the only investor who has proven able to beat the market consistently, over long periods of time. These investors aren’t lucky monkeys. They all tend to follow the same types of strategies – strategies that exploit proven anomalies in the market. The Efficient Market Hypothesis, on the other hand, is the creation of academics who have never been tasked with making a living by their investments. This is second-hand knowledge of the worst kind. The EMH logic you’re aping is precisely the kind of “phony” knowledge you’ve written books about. But let’s just give you a few simple examples that make a mockery of the EMH. Right now two of the smartest investors in America – Carl Icahn and Bill Ackerman can’t agree on whether or not Herbalife is a fraud. Herbalife, as you probably know has been a public company with audited financial statements for the past 20 years. One extremely knowledgeable investor says it’s a Ponzi scheme. The other says it’s a great business. How could all of the available information about this business be accurately priced into the stock market? The answer, of course, is that it can’t be. Nor could it ever be. Bill, as you know better than anyone else that I know, human beings aren’t driven by logic or facts. They’re driven by the delusions of their hearts. These delusions are reflected in the price of stocks. That creates frequent opportunities to buy stocks at prices that are attractive. Off the top of my head, I can list at least a dozen “delusions” that are almost always available in the stock market. For the sake of brevity here are four that I’ve used in my career to trounce the market over the past 10 years... 1. The most important quality of any insurance company is the ability to profitably underwrite across the insurance cycle. But there is zero correlation between insurance company stock prices and underwriting track record. Instead, Wall Street values all insurance stocks based on return on equity alone – even though all professional investors “know” that insurance company earnings are merely estimates that future losses will actually determine. Betting on the insurance companies with good underwriting culture is nearly a free bet that shouldn’t exist in an efficient market. This opportunity has existed for as long as there is good data on underwriting and shows no signs of disappearing due to investor “knowledge.” 2. Certain homebuilders – NVR for example – have an enormous advantage by not owning any land. Rather than tying capital up in landholding, they merely option the land they need, at the time they need it. These facts were clear for all investors to “know” and have been for at least the last 25 years. And yet... the human bias to desire land is so strong that not only do these firms rarely trade at a premium to other large homebuilders, they frequently will trade at a discount. Meanwhile, the performance of the “landless” homebuilders dwarfs all of the “landed” homebuilders, both on annual measures (like returns on assets and equity) and in terms of stock performance over the long term. No one on Wall Street has ever mentioned this advantage… and in fact, Wall Street and most professional investors continue to publish research professing a desire to own the land banks inside most homebuilders. 3. Investors favor buying puts rather than calls. Investors irrationally fear losses far more than they desire gains, leading to a permanent imbalance in the demand for put options as opposed to call options. This imbalance makes it easy for investors to invest in put options (by selling them) and immediately gain an advantage over other investors who are unwilling or unable to sell puts. We’ve used this advantage to produce market-beating average returns in stocks while taking much less risk in my Stansberry Alpha product. 4. Credit investors are far better informed and far more rational than equity investors. Frequently, credit investors will price a firm’s debt at a price that indicates bankruptcy is an inevitability. In nearly every case, these firms do in fact go bankrupt. Meanwhile, equity investors will value the attached common stock as being worth hundreds of millions of dollars, when, in fact, there is no possibility of even making the bond investors whole. Shorting these stocks is sometimes even possible after bankruptcy has been announced and after the company has publicly advised its shareholders that no recovery is possible. 5. Okay... one more... frequently there are opportunities to profit from publicly announced mergers, acquisitions, spin-offs, and special dividends. Warren Buffett claims that with relatively small amounts of capital, investors can routinely earn 50% annually exploiting these anomalies. I can recall buying shares of Anheuser Busch in the fall of 2008 for less than $56 per share within weeks of a fully funded, all-cash offer of $70 per share. Although this is, admittedly, a dramatic example, you couldn’t argue that all of the information about this deal wasn’t “known” to the market participants. 6. Just one more... The entire stock market continues to be priced according to “earnings” – which are derived from FASB accounting. These accounting methods were developed by the PA Railroad more than 100 years ago. They are nearly useless for evaluating companies that have low capital investment requirements. This continuing anomaly is largely responsible for Buffett’s success... and mine. It’s easy to build a model that will always outperform the S&P over any reasonable period of time (five years) by simply focusing on companies with good margins and low capital costs. These firms will produce higher cash returns for investors per dollar of sales. Again, this information is available to all investors... And yet most investors continue to believe what they “know” about earnings – much of which isn’t so.

How the “Smart Money” Invests
And not only are individual stocks and groups of stocks often mispriced, but also sometimes the whole stock market wanders far from the path predicted for it by EMH. 

Yale’s Robert Shiller, among others, looked back at what investors actually did, as opposed to what EMH said they should have done. This “behavioral finance” approach demonstrated a wide gulf between EMH theory and real-world investor activity. 

According to Shiller, “As tests were developed, they tended to confirm the overall hypothesis that stock market volatility was far greater than the Efficient Market Hypothesis could explain.” 

As any old-timer could tell you, investors are moved by greed and fear… often becoming too bullish… and sometimes too bearish. 

This, of course, was obvious. Shiller went on to explain what Buffett, Stansberry and other market beaters were really doing. The “smart money” takes advantage of the irrational behavior of other investors. 

When investors misprice a stock – which Shiller refers to as an “innovation” – a smart investor with a sharp pencil and a clear mind buys the stock. The stock then returns to a more reasonable price. And the smart investor makes more than the great mass of greedy and fearful investors. 

Readers will recognize our own Simplified Trading Strategy (STS) as a way to “time” the market at these extremes of greed and fear. 

According to the EMH theorists – as well as many Graham-and-Dodd value investors – timing the market is impossible. But just as a single stock is sometimes extremely mispriced, so is the entire stock market. 

Our system – of buying stocks when P/Es are 10 or below and selling when they are 20 or above – is just a blunt, and rather stupid, way to take advantage of the same anomaly. 

Shiller describes the difference between the “smart money” and other investors in a way that makes most investors seem innumerate. Rather than do the numbers, they read the paper… react to the news and opinions… and are greatly influenced by recent history. 

They are “feedback investors,” he says. 

As stocks move higher and higher, more and more people come into the market hoping for quick and easy profits. These unsophisticated investors are particularly “feedback” sensitive. 

They have not done the math. They don’t know the real value of the shares they buy. They bid them up. And seeing the stock market rise, they become convinced that it is going higher still. 

The smart money sees this as irrational behavior… 

“Find the trend whose premise is false,” says George Soros, “and bet against it.” 

As we have seen in our discussion of the asymmetry of knowledge, it is easier to know what is false than what is true. 

The STS gives us a way to profit from it. 

More tomorrow – including how much you could have made with STS had you lived as long as 108-year-old value investor Irving Kahn… 

Regards, 



Bill
Source: Bonner and Partners

Follow us on Twitter: @blacklioncm

What You NEED to Know about the Wealth Inequality Debate

What You NEED to Know about the Wealth Inequality Debate 

by Bill Bonner, Chairman, Bonner & Partners

Gualfin, Argentina 

Wednesday, 30 April 2014 

Dow up another 86 points. Can anything stop it? 

Yes. We're just waiting to find out what. 

We began this series with a question: Isn't it possible the same savants who now presume to address the problem of wealth inequality were those most responsible for causing it? 

The question arose as we discussed a publishing sensation: Thomas Piketty's Capital in the Twenty-First Century. As you will recall, the book – all 700 pages – was recently number one on the Amazon.com bestseller list. 

Whoever heard of an economics tome that sold so well? The reason, we suspect, is that the book tells us something that a lot of people were waiting to hear. 

Criminals, Chiselers and Con Artists
Piketty's gripe, as near as we can determine, is that the rich get richer – especially when economic growth rates are low. And that capitalism can lead to extreme wealth inequality. 

Economic growth rates have been trending downwards for the last 40 years or so. And the average annual wage, adjusted for inflation, has stagnated. But Piketty claims the average annual rate of return on capital (from profits, rents, dividends, interest, royalties, etc.) has remained robust. As a result, private capital has grown as a percentage of national income. And, the rich have gotten richer. Of course, there are many reasons for this – some innocent, others corrupt. 

We will not bother with the innocent ones. Criminals, chiselers and con artists are more revealing and entertaining. And just to make it more interesting, we will name names. In the 1970s – after President Nixon moved the world onto a purely fiat-based money system – the US economy was kissed by the magic of easy credit. 

Poof! 

It was transformed from a handsome prince... into a toad. It used to be an economy where people earned money by making things for people who could afford to buy them. It became an economy of people who lent money to people so they could buy things they didn't need with money they didn't have. 

Piketty thinks he is criticizing capitalism. But after the 1970s, real capital played a smaller and smaller role. It was replaced by credit and its sinister twin: debt. 

The r in Piketty's now famous annotation r > g (where r stands for the average annual rate of return on capital and g stands for the rate of economic growth) is supposed to represent the return on capital investment. 

But where did the wad come from? 

Savings rates went down. Real earnings went down. Growth rates went down. So how could there be more capital available and how could it produce higher rates of return (compared to economic growth)? 

Distortions and Delusions
The whole thing is a headache for a thoughtful man. Capital investments with no real capital behind them. Profits that outstrip the economic growth from which they must come. 

What to make of it? 

We don't dispute the basic fact: that the rich are getting richer. And that they are doing so by getting their hands on capital (something we believe is a damn good idea, especially for anyone hoping to build serious wealth). 

For years, we've been complaining about the distortions caused by central banks. Rewarding the asset-owning classes (the rich) is just one of them. You could add: creating market bubbles, depressing middle-class incomes, increasing debt levels, misallocating resources to worthless, wealth-destroying activities, allowing government to avoid serious budget control, financing monster houses coast to coast... and our own personal favorite – putting dorky economists in positions of immense power and status. 

And now we even have dorky economists with No. 1 bestselling books. What next? 

Revolution! At least, that is what you might think if you listen to Piketty. He thinks r will continue to outpace g. And the natives will get restless. 

The "market economy, if left to itself, contains powerful forces of convergence in the distribution of wealth," he explains. But "it also contains powerful forces of divergence, which are potentially threatening to democratic societies and to the values of social justice on which they are based." 

A State Based on Fraud
Once again, Piketty misunderstands the modern, democratic state. It is not based on real social justice. It is based on fraud. 

The masses are told they control the government. And although the masses busy themselves with reading the newspapers, arguing about Obamacare and voting, the elites profit from bailouts, zero-interest-rate policies, subsidies, tariffs, sweetheart loans – you name it. 

That is how the rich really got so rich... with the eager connivance of the authorities. 

And now Piketty concludes that the forces of "divergence" (of wealth) are likely to be much more powerful in the 21st century and that someone needs to do something about it. 

Who? The same authorities who distracted the public while the elites picked their pockets! 

Until 1968, the Fed was required to maintain 25 cents worth of gold for every dollar in circulation. Then in 1968, under President Johnson, that requirement was scrapped. Thenceforth, there was no limit to the amount of cash and credit in the system. 

In 1971, under President Nixon, the US reneged on its commitment to pay off foreign-held debt in gold. Now, there was no limit to the amount of debt Americans could run up abroad. Instead of paying their bills in gold, they could just pay in dollars, which are essentially more debt instruments (although with zero maturity). 

In 1987... and again in 2000... Alan Greenspan showed that the Fed would not permit a serious correction. When a credit contraction threatened, the Fed came up with more credit on easier terms. 

By 2007, under the leadership of Ben Bernanke, the Fed was fully committed to credit expansion forever. Milton Friedman had convinced Bernanke that the Great Depression was caused by a shrinking supply of money and credit. Bernanke saluted Friedman with: "We won't do it again." Thanks to these numbskulls – and many others – real capital disappeared from the capitalist system. It was replaced by what Sisson called "a fictitious money" causing a "monstrous aberration." 

That is what we live with today. It was caused by the feds. They will continue making it worse... until the whole dreadful system blows up. 

Regards,



Bill

Source: Bonner and Partners

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