For bull, no death throes … On Feb. 11, the day that the S&P 500 hit its correction low point, the financial press was filled with commentary from Federal Reserve Chairwoman Janet Yellen backing away from the possibility of four rate hikes in 2016 . The stock market has recovered nicely from the paroxysm of selling that occurred earlier this year, and in 10 days this will become the second longest-running bull market in U.S. history. –Dallas News
A little more than a week ago, we asked, “Could the stock market move up hard in these upcoming months?”
Well, we seem to have part of our answer, as seen by this mainstream editorial in the Dallas News (see above). Here’s more:
So what bolstered investor psychology and brought the market back from the dead? It was mostly the jawboning coming from the Federal Reserve about interest rates, according to James Stack of InvesTech Research.
“The reason investor psychology turned around so quickly were new comments from the Federal Reserve that it would scale back projections from four rate hikes in 2016 to maybe two or maybe none at all,” Stack said.
Like Stack, we don’t believe this seven-year old bull market is the product of marketplace fundamentals. We believe that absent the printing of literally hundreds of trillions by central banks around the world since 2008, the current investment environment would not exist.
And this brings us to the larger question of economic manipulation generally.
Shouldn’t equity markets be value-driven? Isn’t the idea of investing to find an asset that might appreciate faster than others (or at least not decline) and hold onto it in order to make a profit?
If we can understand these factors and how they interact, then we can make better choices about the market and investing in general.
First, central banking. One can make an argument that US markets have been driven by monopoly monetization since 1913, when the Fed was first created, and even longer-ago than that.
Ideally, market forces would determine the price and value of money. When bankers make monetary decisions, they are inevitably engaged in what is called price-fixing. And price-fixing in the long term creates terrible and impoverishing monetary distortions.
Central banks usually ensure that currency loses value by printing too much of it. It is this price-inflation that often drives people to try to leverage their funds in order not to lose money on a regular basis. To some degree, central banks make “investing” a necessary part of modern existence.
Let’s examine the second pillar of the modern society, which is the corporation. Like central banks, corporations are not the outcome of marketplace competition. Instead, they are the result of a series of judicial decisions enforced by the state.
Without the judiciary and government enforcement, intellectual property rights and corporate personhood, corporations would not be nearly the size they are today.
Bluntly, the West’s industrial sector is partially the product of judicial force not market evolution. Judicial decisions created modern corporate “industry,”
Corporations are driven to invent items that support “consumer” whether they are necessary or not. Individuals “invest” in modern corporations because they may seem to offer the best opportunity for capital appreciation.
A third dominant aspect of modern society is government. Government and those who stand behind government use regulatory and legal force to create and sustain the structure of society.
Presumably, government could impel people to adopt a broad panorama of social structures. The one that people operate under today presumably benefits most those who have created it. In other words it is the product of authoritarian choices rather than competition.
Monetization, corporatism and bureaucratic governance – these are three basic elements of modern society and their interaction creates our livelihood and lifestyles. But we can see that free-market forces do not operate freely within by any means.
Using the three levers of the modern economy – central banks, corporations and government – those guiding the system have created intractable problems.
In fact, sovereign, corporate and consumer debt are all said to be entirely unmanageable. And markets like the thousand trillion dollar notional derivatives markets are basically unsalvageable.
Professional investors and consumers alike are loath to make investments because it’s not clear which corporations were solvent and which are not.
Because of lack of demand, money is not circulating aggressively. Price inflation is being generated but not so powerfully as it might. Inevitably, this gives rise to stagflation, rising prices without additional employment.
The current economic environment is an increasingly artificial one that long ago departed from a free-market reality. Like other such systems, it is breaking down. Command-and-control systems are always effective to begin with but then, eventually, they self destruct.
If markets continue to rise, there will be a good deal of mainstream commentary about the resilience of capitalism and the miracle of modern economic performance. But don’t be fooled. The combination of monopoly central banking, corporatism and authoritarian governance is a toxic and increasingly dysfunctional combination.
Conclusion: Exercise caution. Diversify as feasible. Pursue independence. The current system is not the produce of market competition or even communal decision-making. It is an increasingly fragile and authoritarian system that will continue to become more unresponsive until broad elements of it collapse altogether.