Not much market action on Friday. With a VIX reading of just under 11, a remarkable tranquility has settled over the markets – like the calm seas in the North Atlantic when the Titanic set sail.
“Not even God Himself can sink this ship,” said its architect.
In the event, it was sunk by an iceberg. God claimed no credit nor took any blame.
We humans can never hope to know the truth. Even in science we never know whether something is true or not. All we know is when something isn’t true.
We test it. If it doesn’t work, we know the premise was false. We mock it and ridicule it. We tell the poor sap who believes it: Good luck with that! We know it won’t work.
Even when something does work, we still don’t know the premise behind it is true.
“Here… I’ll prove that I can control the dice,” says a lunatic.
“I’ll throw them four times… and each time I’ll get snake eyes.”
He rolls the dice. If he fails to get snake eyes each time you know the premise was false. But what if he succeeds? Is it true that he can control the dice? Or is he just lucky?
You don’t know.
A Keen Eye for Claptrap
We only mention this to warm you up to today’s message…
We are not earnestly trying to pick apart and carefully analyze Fed policies. We’ll never know the truth of them. We are just cynically pointing a finger and laughing.
We may not know the truth… but we have a keen eye for claptrap. And in Fed policy, we see a lot of it.
We began this series by observing that economists are no better than fortunetellers and palm readers at predicting the future. Apologies to the fortunetellers; for all we know, their forecasts occasionally pan out. Those of economists, on the other hand, we know are nonsense.
But investors seem convinced that not even God Himself could sink this market. They believe the Fed won’t let it happen.
As we have shown, the Fed never knows what will happen and what won’t. So, the odds of an intervention before something happens, specifically to prevent it, are remote.
Although it does appear that central bankers can raise asset prices (manipulate markets) if they put their backs into it. Give the economy enough easy credit, and stocks and real estate usually go up.
A Bum Deal
In other words, central planning and activism can be effective… but only in a limited sense.
The Pentagon has made a major mess of practically every war it has entered since World War II. Still, it can obliterate a city, if it sets its mind to it.
Likewise, the Fed has made a terrific mess out of the US economy… but it can still raise stock prices.
Most investors haven’t noticed the dangers facing them. Few economists want to think about it. But we sound the alarm nonetheless.
The real problem is revealed in the income figures: Average hourly wages have gone nowhere in 46 years. Piketty, Krugman, et al, see it as a problem of “inequality,” as though the economy produced a lot of new wealth, but it wasn’t distributed properly.
Republicans reply that the alleged inequality is fake. If you add in health care and other benefits, the working guy is much better off than he was before we landed on the moon.
Both are wrong. We don’t know what the full truth is, but we know a bum economy when we see one.
And we know – by observation and simple, logical canoodling – that central planning always produces a bum economy. We know of no counterexample. The more the government meddles in the economy, the worse the economy does.
The most important price in economy – the cost of credit – is no longer discovered, as it would be in a free market. Instead, it is found right where the authorities put it. And for the past six years, they’ve hidden it in the basement.
This has coincided not with a boon to the average working American, but with stagnation. Hourly wages are at their lowest levels since 1968. As for household income, all progress since 1987 has been erased.
Regards,
Bill
Market Insight:
Capital Spending Shrinks
From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners
As Bill told members of our top-tier wealth advisory, Bonner & Partners Family Office, at a closed-door meeting in France earlier this month, we have entered a “Neverland economy.”
The inspiration is Michael Jackson’s Neverland Ranch in Santa Barbara, California.
As Bill put it, “It’s a place where anything can happen… and something bad always does.”
The most obvious Neverland distortion is the fixing of the price of credit by the Fed and other central banks. But there are more subtle distortions, too…
One is found in the lack of capital spending by US corporations. As New York Fed president William Dudley put it in a speech in May:
… the absolute level of capital outlays is so low that the capital stock is expanding only slowly. [R]eal business spending on equipment and software has risen only 3.2% over the past four quarters and contracted in the first quarter.
What are CEOs spending retained earnings on instead? Share buybacks and dividend boosts.
This certainly helps boost stock market returns over the short run. But unless businesses invest in their capital stock, the long-term result will be lower profit margins… which are already 50% above their long-term average and liable to mean revert sooner or later.
Unless this trend reverses, this is bad news for anyone investing in US stocks with a long-term view. Caution is warranted, even though the crowd is stampeding…