DUBLIN, IRELAND – A big day on Wall Street yesterday.
The Dow was up more than 500 points after Federal Reserve chairman Jerome Powell told investors they have nothing to fear. FXNews is on the case:
Here are the highlights from this morning’s “Conference On Monetary Strategy, Tools, And Communications Practices” in Chicago:
“We [FED] are closely monitoring the implications of recent developments [tariffs] on the U.S. economic outlook”
“We [FED] will act as appropriate to sustain the expansion”
“FED policy remains data dependent”
“Persistently low inflation could lead to downward drift in expectations”
Yes, the great wizards at Fed headquarters will heal every wound, soothe every heart, and make sure there is no pot without a chicken in it.
“Don’t fight the Fed” is one of the most sacred dicta on Wall Street. And usually one of the most profitable. So, if the Fed is pushing up stock prices, how could a stock buyer possibly go wrong?
Fantasy World
Herewith, we wonder… how does Fed policy really connect to the real world of time, money, work, profits, innovation, forbearance, and all the other things that produce real wealth?
Last week, we pointed to the good example of King Cnut. The medieval king stepped into the North Sea and commanded the tide; it paid no attention. “You see,” he said to his knights, “even the most powerful of men cannot stop the cycles of the natural world” (or words to that effect).
Governments can pass laws. They can force people to pay taxes. They can even tell the sun to rise in the morning, but not in the evening.
But if the feds were to tell everyone that henceforth, they should go about with pumpkins on their heads, full compliance may be difficult.
Likewise, the Fed can influence prices and alter the natural rhythm of the market, but only up to a point. If it had full control, all the time, we wouldn’t have recessions, bear markets, crashes, hyperinflation, or anything else we don’t want.
If the feds really could command an economy, the people of Venezuela wouldn’t be starving, for example. And Argentina wouldn’t have 40% (or 100%… if you believe some sources) inflation. And the poor American working stiff would have gotten a substantial raise some time in the last 45 years.
Data Dependent
The “data dependent” schtick is just another example of jackassery. You may use incoming data (light) to tell you when the sun is rising. But that doesn’t mean you can tell the sun to set before it is good and ready. Nature doesn’t like to be disrespected.
Nor is disrespecting Mr. Market a good idea. He puts up with a lot. But only so much. So, the real question is: How far can the feds go before Mr. Market gets fed up?
Mr. Powell says he will “sustain the expansion.” “Oh yeah?” says Mr. Market.
In the downturn of 2000, the Greenspan Fed cut the federal funds rate by 500 basis points. Still, in terms of gold, the Dow fell 82%. In 2008/2009, the Bernanke Fed again cut rates by 500 basis points. Once again, stocks nevertheless lost 68%.
And now, the expansion seems to be approaching its end (it has to end sometime!)… and the Fed only has 240 basis points to cut.
Besides, the Fed cannot really make companies more valuable. It can’t increase their sales; it can’t really increase their profits. It can’t improve their products or strengthen their marketing. It can’t create more time. Or more real money. Or make people smarter or more inventive.
All it can do is mislead you and misallocate resources with fake money and fake price signals.
Chocolate Profits
We recently looked at one company to see how this works. A friend mocked our Dow-to-Gold allocation strategy, which keeps us out of stocks for long and agonizing periods.
“You’ve been at an orgy for the last 10 years and you’ve been sitting on your hands. You won’t get much satisfaction that way,” he seemed to say.
He went on to explain that he had made good money by investing in one of the oldest, most reliable companies in the country – The Hershey Company.
The company provided real goods and services – at a profit, he pointed out. With a profit margin of about 15%, Hershey’s is a good business with a reliable stream of income.
But the gains didn’t come from selling chocolate. In 2010, the company sold $5.6 billion worth of chocolate. In 2018, it was up to $7.8 billion. A nice, 40% increase.
But the stock went from $27 to $133. That’s a 390% increase… almost 10 times as much. How come?
Generally, owning a profit-making business is the best way to make money. Because it’s part of the great win-win world – an investor deserves to be compensated for adding to the happiness and satisfaction (and probably the obesity and tooth decay, too!) of others. He deserves to participate in the earnings.
And Hershey investors did. The company paid an annual dividend of about 2.2% over the last 10 years – about the same as a 10-year T-bond.
But where did the rest of the gain come from? According to classic theory, an investor deserves the Treasury rate… plus a little more to compensate for the additional risk. But 350% more? How is that possible?
Mythical Capital
The answer, of course, is that it had nothing to do with the chocolate business or satisfying customers. Instead, investors were unwitting accomplices to an elaborate fraud… a major rip-off… and a Ponzi scheme.
This is the trend of “financialization” we have discussed in these pages. The win-win world of producing goods for consumers was upstaged by the win-lose world of financial wizardry and negative real interest rates.
And, according to our back-of-the-envelope calculations, the U.S. now has about $50 trillion worth of this empty, Ponzi wealth – in pumped-up stocks, bonds, and real estate valuations. Mythical capital.
Ponzi or pyramid schemes work by taking in fresh capital and pretending it is earnings. The problem is, when word gets out, the new capital disappears. So does the old capital. The whole thing collapses.
Likewise, from 2009 to 2019, the stock market took in fake capital… and pretended it was real money.
Wall Street doctored “earnings,” ballyhooed “better-than-expected” results, saluted share buybacks, mergers, and acquisitions, and rewarded goofy pie-in-the-sky IPOs with billion-dollar valuations.
And in this world, even good companies with real profits – like Hershey – were lifted up on the tide of EZ money.
In this New Age of ultra-low rates, explained the experts, a 2% yield was pretty good. Especially, when you get a 390% capital gain, too.
But, like any Ponzi scheme, the “profits” are easy-come, easy-go. Eventually, the tide turns. And neither King Cnut nor Chairman Powell can stop it.
Regards,
 |
Bill
TECHNOLOGY INSIGHT: ICOS ARE “DEAD”
By Jeff Brown, Editor, Exponential Tech Investor
Initial coin offerings (ICOs) were the blockchain industry’s means of raising capital in 2017 and 2018.
They are like initial public offerings (IPOs), except investors receive digital tokens instead of shares of stock (a security)… Therefore, investors in ICOs don’t receive any ownership in the company.
Most ICOs did not flow through investment banks or register with the U.S. Securities and Exchange Commission (SEC). The industry widely conducted ICOs in what it considered to be “utility” tokens, as opposed to “security” tokens. That made them easier and cheaper to launch.
But ICOs are now down 91% year over year. They raised nearly $3.9 billion during the first quarter of 2018… But just $337 million during Q1 2019.
As you can see, ICOs went straight up… and straight down. There are two reasons for this…
First, the bear market in digital assets caused investors to pause in investing in ICOs. Bitcoin fell nearly 85% from December 2017 to December 2018. And other digital assets fared even worse.
Second, the U.S. and China both saw regulatory clampdowns on ICOs last year. That made it nearly impossible to do ICOs in those countries… which happen to be two of the biggest markets in the world.
In the U.S. in particular, the SEC started to get aggressive by issuing subpoenas to blockchain-related projects it considered to be conducting the equivalent of a securities offering.
As the market for ICOs has slowed down, a new “fad” has taken its place… the initial exchange offering (IEO).
IEOs are not conducted by the token issuer. They are conducted by a digital exchange, with the promise to list the token for trading.
This is a bit more attractive than an ICO because it provides immediate liquidity for investors. They know they can sell the token any time after the IEO closes.
Compare that to ICOs, which often come with long lockup periods. In some cases, ICO investors cannot sell their tokens for several years.
In addition, IEOs are selling tokens at valuations that are much more investor friendly. Many ICOs sold at such high valuations, it was nearly impossible to imagine a positive investment return. That’s why most are now down 80% or more.
What’s more, investors get the benefit of at least some basic forms of due diligence on the IEO.
So IEOs are an interesting evolution. But I predict they won’t last long in their current form. Why not? Because what they are doing is still likely to be considered a securities offering by the SEC.
It’s no surprise that these IEOs are not available to U.S. or Chinese investors… because they do not meet regulatory requirements.
Ultimately, IEOs will give way to security token offerings (STOs). STOs combine the ownership rights of traditional IPOs with the liquidity of digital assets.
The infrastructure for STOs is being built right now. I talked about that last month in my Bleeding Edge e-letter. And once the infrastructure is ready, STOs will be fully compliant with existing securities regulations.
Simply put, security tokens are the future. And when ready, they will give normal investors access to deals that only institutions and high-net-worth investors could get before.
– Jeff Brown
P.S. Make sure you mark your calendar for next Wednesday, June 12.
I’m hosting a free tech-investing summit. I’ll reveal four of my biggest predictions in the world of technology. I’ll also talk about the specific companies behind these technologies that could make investors at least 10 times their money. And you’ll want to be there.
FEATURED READS
Japan Is Reluctant Poster Child for MMT
As Bill put it, Modern Monetary Theory (MMT) is a “substitute for common sense.” But its supporters say Japan is proof that it can work. The problem is, Japan doesn’t agree…
Prepare for Corporate Debt “Carnage”
Businesses are borrowing more and more. The banks are happy to lend to them. But there’s a reason to be worried. Leveraged loans – loans made to companies on shaky ground – are on the rise. When the economy turns, these leveraged loans will lead to “carnage.”
Your Car Is Spying on You
Your car knows more about you than you realize. It knows where you live… where you work… and how much you weigh. Tech companies are hungry to get that data. And they have figured out a way how…
MAILBAG
Today, readers object to your editor’s criticism of Trump… and accuse us of endorsing “win-win-lose” deals…
Bill’s globalist agenda is showing again. He prefers millions of illegal aliens entering the U.S. each year at an estimated cost of $80 billion per year to U.S. taxpayers. He calls this a win-win deal. Illegals win, unscrupulous U.S. businesses save costs on labor and win, and the U.S. citizen foots the bill for both and loses. What’s that, Bill? A win-win-lose deal? But U.S. citizens don’t concern you, unless you can claim you are championing them by saying they don’t pay higher costs for tariffed goods. Ever considered “made in America” so we can have jobs here again? Globalist!
– Bradley J.
Okay, I get it, you don’t like that Trump has threatened tariffs on Mexico. Neither do I. But let’s face it: The border is in chaos and the Democrats won’t do anything to help. Something has to be done or we are through as a nation. Sometimes, a threat is enough to get things moving. The tariffs would be harder on Mexico than any of us. Sure, the consumer in the U.S. will actually pay for it. Hell, we pay for everything and always have.
Every product and service, no matter what it is, ends up being paid for by the consumer. Governments do not create. They take what we create and redistribute it. We pay for every bullet, every aircraft carrier, every McDonald’s hamburger, and everything in between. We are the only source of revenue there is.
We better understand that freedom is not free and there is a price to pay to keep it. Illegals pouring over our borders, polluting our environment, putting our health industry and educational systems in a tailspin, and flooding our cities with drugs all should be unacceptable to every American. You want to go on a crusade? Take that one on. The economy, if we don’t fix this, will be academic at best.
I’m sick and tired of the do-nothings and know-nothings beating up on the president. You think he’s wrong. Okay, tell me what he could do to fix the border problems that would satisfy you? Because I’m telling you, it ain’t going to be fixed by naysayers sitting in a dark room holding hands and chanting, “Don’t make a wave!”
– Al P.
Meanwhile, one reader writes in with appreciation for when we call it like it is…
Hi Bill, I am a proud American of European descent, living both in Europe and the U.S. I just want to let you know how much I value your honesty, knowledge, insight, perspective, agility in the art of writing and expression, and courage to call “a spade a spade,” regardless of the criticism and consequences from those with views totally and radically (mostly blindly, undocumented, and unfounded) opposed to yours. Please, for the sake of those of us who follow your writings almost “faithfully and religiously,” keep the quality storytelling coming. Best regards, wishes, and a long, healthy life!
– Daniel H.
And more praise is rolling in for our specially made wine from our vineyard in Argentina…
I enjoy hearing about Bill’s wine adventure and would buy some if it weren’t for the fact that I’ve the palate of a warthog. Being barely able to tell the difference between beer and whiskey, I’ve no doubt the wine would be wasted on me. Hope it saves the ranch, the jobs, Bill’s adventure, and the stories that come from all of them. It would be a more boring world without them.
– Al R.
Hello Mr. Bonner. I hope I got in an order before the wine is all gone. I missed out last year and would love to have the wine in time to go to my annual gathering at my lake house in the Blue Ridge Mountains in late June. Friends, colleagues, and family would love to enjoy your wine as we grill whatever meat we are eating. Thank you for giving me the opportunity to enjoy the fruit of your labors, both literally and figuratively.
– Keith J.