Nomi’s Note: I’m doing something a little different in Inside Wall Street this week. I’m sharing a sneak peek of my newest book, Permanent Distortion. It’s hitting shelves on October 11. But as an Inside Wall Street reader, I wanted you to be among the first to see it.

So I’m sharing some of my favorite sections from the book. I hope they’ll help you make sense of the wild distortions we’re seeing in the markets today – and their root cause of greed, easy money, and the Fed’s stupidity.

If you missed yesterday’s excerpt, catch up here. Then read on… And let me know what you think at [email protected].

Central banks’ extreme reaction to the 2008 financial crisis and what’s unfolded since then never had an exit plan.

Injecting money into the markets whenever a pick-me-up is needed became the norm, not an emergency response.

In the wake of the 2008 financial crisis, the goal of QE [quantitative easing] was to lift the money supply within the financial system and reduce medium- and long-term interest rates.

The policy boosted the value of QE-targeted securities and similar ones due to this artificial stimulus.

Various versions of QE were implemented before 2008 (the Fed experimented with it during the Great Depression, and the Bank of Japan was a QE fanatic in the late 1990s and early 2000s), but past applications were more modest.

The big lie was that this money would somehow trickle into the real economy.

Whether it was done to soothe a stock market crash, a ruptured subprime housing market bubble, or a pandemic…

The Fed’s response to the financial crisis of 2008 and later crises has confirmed that it will always seek a way to grease the wheels of capitalism for its wealthiest participants and private banks.

The results speak for themselves. According to a 2022 Oxfam International report:

The world’s ten richest men more than doubled their fortunes from $700 billion to $1.5 trillion – at a rate of $15,000 per second or $1.3 billion a day – during the first two years of a pandemic that has seen the incomes of 99 percent of humanity fall and over 160 million more people forced into poverty.

To translate that into even more sobering numbers:

“If these ten men were to lose 99.999 percent of their wealth tomorrow, they would still be richer than 99 percent of all the people on this planet,” said Oxfam International’s Executive Director Gabriela Bucher. “They now have six times more wealth than the poorest 3.1 billion people.”

Oxfam laid much of the blame for this wealth gap on government policies and tax structures. Yet this was only part of the story.

Central banks, by virtue of creating an artificial money supply, widened the inequality gap by pouring money disproportionately into the top levels of the financial system.

This money gushed into the markets rather than the foundations of economies throughout the world.

For major central banks, governments, and financial markets, there will always be a Peter to rob to pay Paul, even if it’s concocted from thin air. Not so for ordinary people.

The stock, or equity, market reflects an inflow of money from a more varied set of sources.

That money seeks one thing – a return that’s greater than the interest any government or corporate security can provide, and far more than it can earn stowed under a mattress.

The sheer force of money’s presence in the stock market (whether buying or selling stocks) is enough to move the market. Certain large players carry more weight than others, and much more than the everyday retail investor.

There’s a thin line between what constitutes an investment and a gamble in the financial markets. This mostly comes down to the amount of time money sticks around.

In the real economy, money must hang around for longer than it does in the markets to make a difference.

That’s because long-lasting infrastructure projects rely on a mix of public and private funds, like the Hoover Dam, the Roman aqueducts, or the Itaipu hydroelectric plant in Brazil, which are real, lasting assets.

They require time, planning, and complicated execution to convert invested capital into lasting returns. They can also provide jobs in the process.

Unfortunately, bankers and major financial institutions value the quick profits that market bets can provide over this more tangible result.

If money is cheap to borrow, then investment and speculative money will seek an easier, faster way to reproduce. Companies often can, and do, use that extra money to buy back their own shares, which collectively lifts the stock market even if foundational economies are ignored.

By operating as a speculative transfer machine, the stock market has relatively little to do with productive investment. Day trading or even short-term investing has almost nothing to do with a company raising money to fund research and development.

The ability of speculators to drive the markets up, and to cause certain companies to be valued higher than the state of their balance sheets should otherwise dictate, has driven a wedge between the fundamental value of companies (as represented by information such as cash flow and debt load) and their share prices.

Some companies saw their shares prices blossom in quick spurts. Others were more strategic about establishing relationships with the establishment monetary authorities for the long haul.

For instance, during the financial crisis the mega asset management company BlackRock emerged as the lead financial firm advising and supporting the Federal Reserve on its bond-buying operations.

Though its stock slumped 24% between May 2008 and June 2012, the firm was sowing seeds for the future. It was firmly on the path to becoming the Goldman Sachs of the permanent-distortion era in terms of influence, money, and power.

Since the Fed began buying huge amounts of US government and mortgage debt in 2009, the annualized growth of the stock market has far outpaced that of the economy.

The annualized growth of the stock market from its 21st-century low point in March 2009 through March 2020, the onset of the COVID-19 pandemic, was on average 12% per year. The average annual growth in US GDP over that same timeframe was about 2%.

The pattern of escalating markets and lackluster economic growth had some historical precedent, but not to the extent that we saw following the financial crisis.

As cited in an Economic Policy Institute report titled “The Increasingly Unequal States of America,” University of California at Berkeley economist Emmanuel Saez estimated that “between 2009 and 2012, the top 1 percent captured 95 percent of total income growth.”

The report found that despite the overall increase in inequality since 1979, “wealth concentration at the top moved even more quickly after the financial crisis.” From 2009 to 2011, the “top 1 percent incomes in most states once again grew faster than the incomes of the bottom 99 percent.”

This meant that although the growing inequality of income wasn’t new, the wealth gap had accelerated to new levels. Money flowed into the stock market quicker than into the real economy.

People who struggled with bills to pay, mouths to feed, and accumulating medical expenses weren’t even close to being at the center of monetary policy response.

George Orwell’s Animal Farm was written just after World War II as a warning about the dangers of accepting one form of autocratic rule over another.

Its timeless message is that power corrupts no matter which version of extremism takes control.

The gradual change from populism to despotism is marked by the change from the belief “All animals are equal” to the more sinister “All animals are equal, but some are more equal than others.”

If there was a stock market analogue to Animal Farm, Napoleon would represent Wall Street, amassing financial and power gains, and Squealer would be the central banks, snorting that the subsidies to Wall Street and the markets are for people’s own good.

Adapted from Permanent Distortion: How the Financial Markets Abandoned the Real Economy Forever. Copyright © 2022 by Nomi Prins with permission from PublicAffairs, an imprint of Perseus Books.

Nomi’s Note: Nomi here again. I hope you enjoyed this sneak peek from my upcoming book, Permanent Distortion. Unfortunately, since I first started writing that book, the distortions in the markets have gotten even more extreme.

That’s why last week, I put on an emergency briefing to tell you about what is hands down the biggest distortion today. Thousands of your fellow readers tuned in – and I even showed you how, if you play your cards right, you could turn this historic market disruption into a profit opportunity.

If you missed it, you can still catch the replay while it’s online. Watch it right here.