Sunday, July 05, 2020

What Makes You Think the Stock Market Will Even Exist in 2024?

Given the extremes of the stock market's frauds and even greater extremes of wealth/income inequality it has created, tell me again why the stock market will still exist in 2024?
When I read a financial pundit predicting a bull market in stocks through 2024, blah-blah-blah, I wonder: what makes you think the stock market will even exist in 2024, at least in its current form?
Given the current trajectory of the real economy into the Greatest Depression while the Federal Reserve's entire raison d'etre is to send stocks soaring to the moon forever and ever, what are the odds that this disconnect leads to a political rebellion against the Fed and its wealth inequality machine, the stock market?
Just as Communism was a god that failed, finance capitalism is also a god that failed, an extreme version of crony-capitalism that is nothing more than a mechanism for concentrating wealth and power at the expense of everyone toiling in the real-world economy.
And if we understand this, then we also understand that with its stock buybacks, high-frequency trading and after-hours manipulation, the stock market is nothing more than finance capitalism's mechanism for increasing the concentration of wealth.
Should this awareness move from the few who currently understand the depravity and unsustainability of finance capitalism to the general public, why would they allow the skimming machine of the stock market to continue pillaging the nation?
(The appeal of the stock market as a casino game amateurs can easily win is part of its marketing, but like the casinos in Las Vegas, the number of punters who reap consistent gains and hold onto their newfound wealth for five years or longer is near-zero. That's the plan, of course; win a few bucks today and lose everything over time.)
Once the novelty of toppling symbols of oppression (statues, etc.) wears thin, people might start showing some interest in the actual sources of real-world oppression, which will lead them to the Federal Reserve and finance capitalism's primary skimming machine, the stock market.
Recall that when a corporation spends $10 billion on stock buybacks, it creates zero jobs, zero productive capacity, zero goods and zero services: all it does is supercharge the wealth of those who already own most of the corporation's stock.
This is why stock buybacks were illegal until finance capitalism conquered the political machinery of governance.
People who look into this fraud will discover the $10 billion was printed up by the Federal Reserve and made available to an elite of financiers and corporations. You might have noticed that your share of the $6.2 trillion the Fed has printed and given away as free money for financiers since 2008 is, well, zero. This was not an oversight; this asymmetry is the core feature of American central banking and finance: 100% for us, none for you.
High-frequency trading is another massive crony-capitalist fraud in which financiers, hedge funds and other pay-to-play nabobs of finance capitalism skim billions of dollars by manipulating the flow of stock market trade orders. Since they own the regulators and political class (and paid good money for them, too), this fraud is of course entirely legal.
Should the Fed's baby, the stock market, ever experience a flutter, the Fed's proxy manipulators goose the market higher in after-hours or pre-market trading, where the low volume is tailor-made for manipulation.
All this fraud and manipulation has given the Fed's skimming machine a veneer of omnipotence, as if the Fed is eternal. It isn't. Like the Bastille, the Fed can be torn down once the populace traces their impoverishment and powerlessness to the Fed and its wealth-concentrating skimming mechanisms, starting with the stock market.
While the take-home earnings of the bottom 90% have stagnated for two decades, the wealth and income of the top 0.1% has skyrocketed. The top 5% of speculators, technocrats and insiders have done very well, and the next 5%--the apparatchik/professional class--have been thrown enough crumbs that they labor under the illusion that they're "sharing the wealth"--a very convenient delusion for the top 0.1%.
Given the extremes of the stock market's frauds and even greater extremes of wealth/income inequality this skimming operation has created, tell me again why the stock market will still exist in 2024? The aristocrats in France reckoned the Bastille was eternal as well. It wasn't, and neither is the looting machine known as the stock market.
Recent Podcasts:
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


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Posted by Charles Hugh Smith at 4:35 PM

Friday, July 03, 2020

How We Got Here: the Global Economy's 75-Year Stumble to the Precipice

Not only will there not be a recovery, but there can't be a recovery, as those brittle extremes have been lost for good.
How did the global economy end up teetering on a precarious financial precipice? To formulate a cogent answer, let's take a whirlwind tour of the history of the global economy 1946-2020.
Before we start the tour, I want to return briefly to my first Musings of the year, which was posted on January 4, 2020, before Covid-19 was officially announced on January 23, 2020. (The Musings Reports are sent weekly to patrons and subscribers at the $5/month or higher level.)
Instability Rising: Why 2020 Will Be Different:
"Economically, the 11 years since the Global Financial Crisis of 2008-09 have been one relatively coherent era of modest growth, rising wealth/income inequality and coordinated central bank stimulus every time a crisis threatened to disrupt the domestic or global economy.
This era will draw to a close in 2020 and a new era of destabilization and uncertainty begins."
The long-term trends set up a row of dominoes that the pandemic has toppled. But any puff of air that toppled the first domino would have toppled all the dominoes of fragility, instability and unsustainable extremes that characterize the global economy.
The whirlwind tour of the global economy's history must include these essential dynamics: energy, currencies, globalization, debt and financialization, which broadly speaking refers to everything that renders finance (borrowing, leverage, speculation) more profitable than actually generating goods and services.
The "glorious thirty" (Les Trente Glorieuses) years from 1946 to 1975 were decades of rising prosperity in the developed world (Europe, Japan, North America) and rapid development in the first tier of developing countries in Southeast Asia and elsewhere. (Decolonized nations and China struggled with political, social and economic turmoil.)
Costs were low for fuel, housing, food, healthcare, education, etc. as rebuilt industrial bases produced lower cost goods and oil/natural gas were cheap. The global currency market was stable as the U.S. dollar was pre-eminent, enabling Japan and Western Europe to sell their goods to America at discounted prices due to the strong dollar. This policy was explicitly designed to strengthen the economies of allies faced with the threat of the Soviet Union's global ambitions.
The "glorious thirty" were also decades of rising wages and affordable, modestly growing credit and low inflation as the money supply expanded more or less in tandem with the expansion of goods and services and credit.
The wheels fell off in the 1970s as the oil-exporting nations muscled energy prices higher to gain a share of the profits, the gold-backed US dollar regime fell to pieces and inflation skyrocketed, generating a previously unknown economic malaise known as stagflation: high inflation plus stagnant growth.
At this same juncture, the external costs of industrial pollution finally came due, and global competition from lower-cost nations (helped by currencies that traded at deep discounts to the US dollar) crushed inefficient industries in the U.S. and Europe.
The 1980s saw a resurgence of growth, but with a different mix of sources. Demographically, the global postwar Baby Boom generation entered their highest productivity and spending years, boosting global demand, the supermassive new oil fields discovered in the early 1970s finally came online (Alaska, North Sea, West Africa), dramatically lowered the price of oil while soaring interest rates crushed inflation and wrung bad debt out of the developed economies, Developing nations that had struggled in the 1970s finally found their footing (India, China, South America, etc.)
The steep investment in reducing pollution began paying off and the first wave of financialization boosted mergers, buyouts and asset prices.
The 1980s was capped by the decline and fall of the Soviet Union, eliminating the costly military rivalry of the Cold War, and the collapse of Japan's massive credit/asset bubble in 1989-90--a warning sign that was ignored as a one-off.
The 1990s continued the trend of global growth, aided by low inflation, cheap energy, expanding globalization and the mass commercialization of the Internet and computing, as technologies that were once expensive and difficult to use became affordable and accessible.
The Neoliberal ideology --that the way to solve virtually any problem, from poverty on up, is to turn everything into a global market of freely traded labor, capital, goods and services-- became the default global economic faith, with some variations (a market economy with Chinese characteristics, etc.)
The 1990s was capped by the emergence of China as the manufacturing hub of the global economy, a role that was institutionalized by China's acceptance into the WTO, and the bursting of the Dot-Com bubble in March 2000.
As globalization and financialization became dominant forces (the natural result of Neoliberalism), instabilities appeared in currency markets (the Thai baht / Asian contagion of the late 1990s) and asset markets (the Dot-Com stock market bubble). Japan's recovery from the credit bubble collapse faltered, ushering in 30+ years of stagnation, leading to an overlooked social decay with extraordinary demographic and economic consequences that are still playing out.
As the global economy reeled from these instabilities in 1998-2000, central banks flooded asset markets with newly created currency, the goal being to stave off a recession, which burns off bad debt, marginal investments and companies, reducing credit expansion and consumption.
Rather than accept the risks of a conventional business-cycle recession, central banks pushed financialization to new heights--heights which quickly distorted markets.
As a result, the growth of the 2000s was different: in effect, central banks had created a credit/asset-bubble dependent economy, with growth coming not from lowering costs, improving productivity and rising wages, but from speculations in financialized markets.
This was simply the logical extension of Neoliberalism: if existing markets weren't profitable enough, then create new markets for new exotic financial instruments and lower the cost of borrowing to spur consumption and investment.
The benefits of these financial instruments were asymmetric: those originating these instruments made billions, while the borrowers taking on the subprime mortgages, etc. were accepting risks they didn't understand. This dynamic fueled soaring wealth/income inequality.
Apparently unbeknownst to central bankers, super-low interest rates and abundant liquidity didn't spur investments in increasing productivity, it incentivized highly leveraged speculative bets. This manifested in subprime mortgages funding house-flipping by the masses and the origination of exotic financial instruments such as CDOs and CLOs.
Ultimately, the central banks' no-holds-barred Neoliberalism led to the Global Financial Crisis (GFC) of 2008-09, as the risks that were supposedly hedged blew up and the markets froze up (i.e. markets became illiquid as buyers vanished).
As former Fed Chair Alan Greenspan admitted, the central banks failed to see that markets are not as self-regulating as the Neoliberal faithful believed: when bubbles pop, buyers vanish and markets go bidless/illiquid: sellers are desperate to sell but there are no buyers at any price.
This was the inevitable end-game of financialized, globalized Neoliberalism, and rather than face that reality, central banks and policy-makers double-downed on the same policies that created the 2008 bubble that was destined to pop with horrific consequences to everyone who had a stake in any of the casino's games.
We now come to the 2010s, in which financialization and globalization essentially conquered the global economy, leading to the brittle fragilities that are now unraveling.
With the cost of living rising and wages stagnating, the "solution" was to borrow $10 to get $1 of growth. Since global markets were saturated with debt and risk, lenders cannibalized domestic markets, loading college students with $2 trillion in student loans and enabling a fracking "miracle" that was less an energy miracle and more a financial miracle as companies that lost billions continued to get cheap loans and sell bonds.
The global economy is now teetering on a precipice in every sector: energy extraction costs have risen, requiring higher prices for oil, but consumers whose wages have stagnated for 20 years can no longer afford higher prices for oil or anything else.
Globalization has optimized profits at the expense of everything else: ecological sustainability, the security of food and energy sources, etc., while financialization has gutted the real economy in an extraction process that concentrates all the gains into the hands of the few at the top of the financialization/globalization pyramid: a winners-take-most economy that has corrupted and distorted the political and social orders.
All the critical dynamics--energy, currencies, globalization, debt and financialization--have reached extremes that made destabilization--i.e. a tumble into collapse--inevitable.
What happens when the naive hope that the brittle, fragile extremes of the global economy could be completely restored to mid-2019 levels dissipates and is replaced by the sober realization there not only will there not be a recovery, but there can't be a recovery, as those brittle extremes have been lost for good?
Since the authorities have no Plan B, uncertainty, risk and volatility could reach extremes few anticipate as Plan A--push extremes to even riskier extremes--generates increasingly consequential unintended consequences.
The unstable, brittle edge of the precipice is giving way, and there is nothing but air below.
Recent Podcasts:
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


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Posted by Charles Hugh Smith at 3:24 PM

Thursday, July 02, 2020

Dancing Through the Geopolitical Minefield

The elites dancing through the minefield all have plans, but how many are prepared for the punch in the mouth?
Open any newspaper from the past 100 years and you will soon find a newsworthy geopolitical hotspot or conflict. Geopolitical conflict is the default setting for humanity, it seems, but it does feel as if the minefield of geopolitical rivalries and flashpoints has been thickly sown and many of the players are dancing through the minefield with a worrisomely cavalier confidence that they won't step on mine, i.e. bad stuff only happens to the other players.
The global minefield includes these dynamics:
1. The grinding collision of geopolitical tectonic plates: spheres of influence, soft and hard power projection, border conflicts, etc.
2. The urgency sparked by the pandemic to take advantage of rival's vulnerabilities and the countering urgency to defend one's key borders/interests.
3. The destabilizing forces of elite dominance and wealth inequality within nation-states encourage elites to seek external distractions.
In this context, it's interesting to review Edward Luttwak's three stages of Empire. Luttwak's The Grand Strategy of the Roman Empire sketches out three stages of Empire that apply equally well to elites within nation-states. In other words, elites can be said to have conquered their domestic masses politically, socially and economically, much as imperial elites conquer other nation-states.
Luttwak describes the first stage of expansion thusly:
"With brutal simplicity, it might be said that with the first system the Romans of the republic conquered much to serve the interests of the few, those living in the city--and in fact still fewer, those best placed to control policy."
The second stage spread the benefits of Empire much more broadly:
"During the first century A.D., Roman ideas evolved toward a much broader and altogether more benevolent conception of empire... men born in lands far from Rome could call themselves Roman and have their claim fully allowed, and the frontiers were efficiently defended to defend the growing prosperity of all, and not merely the privileged."
The third stage is one of rising inequality:
"In the wake of the great crisis of the third century, the provision of security became an increasingly heavy charge on society, a charge unevenly distributed, which could enrich the wealthy and ruin the poor. The machinery of empire now became increasingly self-serving, with its tax collectors, administrators and soldiers of much greater use to one another than to society at large."
That line describes the global situation rather neatly. Geopolitical blocs, alliances, nation-states with imperial pretensions and nation-states with regional power ambitions are all in a land-rush frenzy to extend and consolidate their influence and power by any means available: financial, trade, diplomatic, soft power (cultural imperialism, etc.) and hard power (military forces) before the inherent internal instability of their elites' dominance catches up with them.
Understood in this way, we can understand the geopolitical minefield as the conflict ground of various national and regional elites. What better way to distract restive, exploited and increasingly impoverished home populaces than to whip up a conflict with neighboring rivals / "enemies"?
In the run-up to events that unexpectedly spiral out of control, elites are over-confident about their ability to control the situation and "naturally" come out on top of any conflict. Hence they are dancing through the minefield, confident that they will magically miss all the mines, even the ones that cannot be detected.
Recall that the elites at the outbreak of the American Civil War and World War I were confident the war would be over in a few months. An overweening confidence in one's ability to manage fast-moving crises is the ultimate hubris, and elites are prone to this hubris due to the apparent ease of extending their power and wealth in their domestic economies and political orders.
The odds of miscalculation increase exponentially as the number of players dancing through the minefield increases. As Mike Tyson so sagely observed, "Everyone has a plan until they get punched in the mouth." The elites dancing through the minefield all have plans, but how many are prepared for the punch in the mouth?
Recent Podcasts:
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.
NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.
Thank you, William R. ($20), for your most generous contribution to this site -- I am greatly honored by your support and readership.
 
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Posted by Charles Hugh Smith at 12:25 PM
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