Excerpt:
This where this gets really dangerous for everyone.
For the last 13 years since the Global Financial Crisis we’ve seen the most incredible transfer of wealth from the real economy into financial assets; stocks and shares. This has happened because of central banks propping up the real economy by bailing out bank, keeping interest rates low and buying bonds via QE. Meanwhile, voters have listened and watched as a strong financial asset markets are equated with economic success. They listened to Donald Trump equate the success of his presidency with a rising stock market, and many applauded as Trump bullied the Fed into easing to push up the index as his popularity wavered.
As I highlighted yesterday, most of the money the Fed and other central banks has barely touched the edges of the real economy. Most has gone straight into financial assets, driving up the price of stocks – which is why everyone who knows anything from experience about stock markets thinks they are in bubble territory.
Lots of Americans now equate success with a strong market, and wonder why it doesn’t percolate down to them in their rotting cities. They want a bit of it, which is why lockdown and bored young people with nothing else to do are now playing stocks like it’s a game. They’ve never heard my first rule of markets: “The market has but ambition: to inflict the maximum amount of pain on the maximum number of participants.”
It’s not just the Reddit mob who will likely be disappointed. We will all lose out due to distortion. It’s killing capitalism. 19% of US companies are now Zombies – companies that will die if rates normalise. We’re seeing similar numbers in Europe and the UK. As long as rates stay low these dinosaurs continue to dominate and stifle market innovation.
Such firms defeat the purpose of capitalism – distorting the cost of capital and favouring the growth of corporate bureaucracy and inertia. Large companies that are too-big-to-fail, survive on the back of subsidy and bailouts, or can continue to borrow on the argument debt is so cheap, levering themselves higher and higher while doing nothing to improve productivity or their product lines either become long-term economic bed-blockers, or, as is happening now, become blocks on innovation.
Tesla is a great example of how a disruptive new company that created a paradigm shift from the old Internal Combustion Engine, and replaced cars with connected software driven Electric Vehicles, at a stroke reinventing the whole basis of personal transport and allowing us to move towards driverless cars, and new ownership models where cars can become financial assets making a positive return.
Maybe. But for every Tesla that’s created expectations of extraordinary disruptive profits, the end of Schumpeter’s Creative Destruction as the driving force of capitalism has created firms like Boeing: using the same old 1960s format plane with minimal and dangerous modification to reap windfall profits from mass production, which they invested in stock-buybacks to push up the stock price so the executives could pay themselves more.
If I was to bring a new planemaker to the market, based around new clean carbon battery technology that forms the wing and fuselage, with a power density enough to power meaningful lift capacity via electric engines, I’ll struggle to find finance. I’ll be told it doesn’t work because its too frontier finance, it will be tech risk, it will be “too expensive to succeed in current market”, and how-much-can it attract in subsidy.
But the real reason will be that money management has become as distorted as capital flows. All these years of financial repression hasn’t just killed business, but has killed investment as well. Markets are following money and not real growth and the real economy.
Finally, it’s worth bearing in mind some fundamental numbers about how this market is distorted – I took this from a piece on Linkedin: "Total stock market capitalization vs GDP on inauguration day of a new president: Ford: 40% Carter: 47% Reagan: 43% Bush I: 53% Clinton: 64% Bush II: 117% Obama: 60% Trump: 125% Biden: 190%"
It’s not just me that thinks the market is a bubble that should burst. There isn’t a single reputable name out there saying anything except this is dangerous. I listen to these guys because they suffer from experience. I’ve seen this in 1987, 1992, 1998, 2000, 2008 and today. I’ve seen this before.