GUALFIN, ARGENTINA – We continue our exploration…
…of why the stock market is a fraud…
…why investors’ savings are not really funding U.S. business…
… why instead, they are aiding and abetting a multitrillion-dollar rip-off…
…and how the ripper-offers are going to get what’s coming to them, good and hard.
But first, we answer our (many) critics. Feedback in the Diary mailbag (see below) is running 5-to-1 against us.
Good! We get worried when too many people agree with us.
In the present controversy, dear readers seem sure that the new trade barriers will make them better off.
Maybe they know something we don’t. Maybe Adam Smith and David Ricardo were idiots. Maybe there is some theory… or some experience… that proves trade barriers will work.
We know of none. As far as we know, there is no plausible reason to think that you can make an economic gain by preventing people from doing win-win deals.
“But wait,” say our critics. “The foreigners have been taking advantage of us for too long.”
Colleague David Stockman, who served in President Reagan’s cabinet as budget advisor, calculates that we have run trade deficits for the last 55 years… totaling about $19 trillion in today’s money.
Foreigners send us refrigerators, autos, games, clothes. We send them… pieces of paper with green ink on them. Who’s taking advantage of whom?
“Wait…” Our critics don’t give up. “It’s the principle of the thing. The foreign devils cheat. They subsidize their industries. They impose tariffs. They block our exports.”
But what principle is this? If the foreigner shoots himself in the foot by queering the win-win deals that would help him, it is not a good reason for us to get out a pistol.
Free trade benefits the free trader; it doesn’t matter what the other side does.
But let’s step back… and continue our peregrination from yesterday’s Diary… so we can sneak up on the subject from a different direction.
Investors have been trained to believe that buying publicly listed stocks is a way for them to participate in the growth of commerce and industry… and that by buying stocks, they are “funding” U.S. enterprise.
They think they are rewarded with what Wall Street calls a “risk premium” for supporting American industry rather than investing in supposedly “risk-free” Treasuries. As the economy grows, they are told, they get richer.
This pretends to explain what is otherwise a near-miracle.
How could some yahoo who doesn’t know a put option from a call option make money in the stock market?
And why would a company – with deep contacts in the professional financial community – need the meager savings of some bumpkin? Wouldn’t the pros be happy to pony up the money if it were a good deal?
In the old days, normal people put their money in banks, not stocks. The banks paid interest. They – and professional investors – did the lending to business. Typically, they lent to local projects they could understand and to people they trusted.
Then, in the 1960s, arose the idea of the Everyman Capitalist. No longer were the profits of Wall Street limited to the pros. Car salesmen and retired dental hygienists could get in on the action, too.
“One up on Wall Street,” promised legendary stock market investor Peter Lynch. All you had to do was buy companies that you knew and liked. If your burger tasted good, buy the company stock.
And if you didn’t want to bother picking stocks, there were mutual funds and, later, exchange-traded funds (ETFs) to help you “get in the market.”
But why would the pros on Wall Street leave money on the table for the lumpen moms-and-pops?
Our explanation: The market was counterfeit, financed with counterfeit money lent at counterfeit rates to counterfeit investors.
When you buy a stock, unless it is at the IPO stage or an already publicly listed company issuing new stock, none of the money goes to the company.
You’re simply taking an already existing share certificate off another investor’s hands. None of it builds a factory or hires an employee.
Which is why colleague Chris Mayer likes to call the stock market a “market for secondhand goods.”
This raises a question: Why did the person who knew the company better than you decide to sell his shares?
If the owner was another retail speculator, perhaps he didn’t know it well at all. But how did he get the stock in the first place?
Banks… hedge funds… pension funds… Wall Street investment banks… and professional investors must have passed on it. In other words, people with much more expertise, training, and time to study the company and its business must have decided not to buy it at the offered price.
Whenever you buy or sell a stock, you are trading against a vast industry of insiders, analysts, brokers, fund managers, and other financial pros. You are betting that your guess will be better than theirs.
And it is (almost) a zero-sum game. In order for you to win, they must lose. How likely is that?
If you buy a private business, you are in a win-win transaction… and a win-win world. You only make money if the business provides goods or services that others willingly consume. Consumers win. You win, too.
Public businesses are supposed to work the same way. The stockholder believes he owns a piece of a business – which is legally true.
But since the 1980s, the character of the stock market has changed. Most investors no longer buy stocks for the dividends alone. They want their stocks to go up.
And since 1987, they’ve been richly rewarded. But not for financing America’s productive, win-win industry. They’ve been rewarded for participating in the Fed’s massive scam.
After the “Black Monday” Crash in 1987 – the worst single-day percentage fall for U.S. stocks in history – the Alan Greenspan Fed slashed rates to backstop the market. And since then, the Fed has never stopped protecting speculators… and boosting stock prices.
Since then, the rate of growth of U.S. industry has declined. But the gains from owning stocks have increased. How is that possible? How could an economy slow… as the price of its businesses rises?
And yet, that’s what happened. Today’s growth rates are barely half of those recorded in the 1950s, 1960s, and 1970s. But stocks are 25 times higher than they were in 1980. And today’s working man earns scarcely a penny more. (Depending on how you adjust for inflation, he may actually earn less.)
We mentioned General Electric yesterday. Once one of America’s stalwart manufacturers, it floated high on the Fed’s tide of cheap money.
Celebrity CEO Jack Welch turned the business from Main Street manufacturing to Wall Street finance.
GE had no special expertise in the finance business. But that hardly mattered. Mr. Welch borrowed money. He bought up companies – at the rate of one every five business days. Earnings rose. And the company’s stock went up.
The celebrity CEO was using debt to buy earnings. Investors saw earnings rise and thought he was a genius.
They didn’t notice that: (1) no collection of mortals could understand, let alone assimilate, new businesses at that rate, and (2) GE’s debt made it extremely fragile and vulnerable to a correction and/or business mistakes.
In the event, it ran into both.
In 2008, the company was so stretched on the rack of the financial crisis, it practically had to beg for a financial infusion from super investor Warren Buffett.
He put in $3 billion, but at a heavy price to GE – including a 10% preferred dividend and warrants priced at less than half GE’s 2000 peak.
[Editor’s Note: If a company is unable to pay all dividends, preferred dividends take precedence over regular dividends. A warrant allows you to buy stock at a pre-agreed price before a certain date.]
But even that price turned out to be too high. Shares in GE are down 70% from their high when Mr. Welch took his $416 million retirement bonus in 2001.
And the trouble continues…
In January, GE announced a $15 billion hit.
How did a problem of that magnitude appear so suddenly? What caused it?
GE executives explained that the losses were in their long-term-care insurance business. Apparently, they were surprised that people were living longer and filing more claims.
But what would you expect from a group that also makes jet engines for airplanes and nuclear reactors for power plants?
The people buying GE stock were not old-fashioned, careful investors. They were speculators gambling on a higher stock price.
And the money for GE’s buying spree didn’t come from careful savers. It came from the Fed, which has been pumping cheap credit into the system for the last 30 years.
And that is where we find the explanation for so many curious trends and grotesque developments.
In 1971, the feds introduced a new dollar. It looked just like the old dollar. People thought it was exactly the same as the old one.
But there was a big difference: This buck could fly.
By Chris Lowe, Editor at Large, Bonner & Partners
The bulls are running for cover…
Today’s chart tracks bullish investor sentiment among mom-and-pop investors, as measured by the American Association of Individual Investors (AAII).
Since 1987, AAII members have been answering a simple question each week: Are you bullish, bearish, or neutral on the direction of the U.S. stock market over the next six months?
As you can see, bullish investor sentiment just saw its largest two-week drop since 2013.
– Chris Lowe
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Bill’s take that Trump will lose his trade war continues to divide opinion among readers…
What a crock. We have been in a lose-win situation for too long. Do you think we went to an $800 billion annual deficit and $20 trillion in debt by winning? Bill, get real!
– Erich K.
When are you going to address our financing the rebuilding of the industries in Asia and Europe after WWII and the Korean “action” (never called a war by the government)? Likewise, what about the methods used – especially by the Japanese – to reverse engineer our technology?
We’ve been losing the “trade war” for more than 60 years. The people worried about the change in attitude are all globalists that care not about the USA. Does that include you?
– Mark C.
Bonner, you need to rethink how Trump negotiates.
– Earl E.
On “trade war,” oh, so well said, Mr. Bonner. You are bang on.
– Ian P.
If we have never had a “purple” president, I think we have one now. Unfortunately, the Carnival Barker seems to be doing it the opposite of the way it could be acceptable: by taking the worst ideas from both sides rather than the best.
– Pat I.
The trade war is already lost. There are two ways to fight a trade war: Retreat behind tariff walls, or use policy to crank capacity/flood global markets while buttressing with value-added taxes. Retreating behind walls is for cowards. Throw in bad tax policy, and it’s like tossing ammo into a bonfire.
– Karel N.
Trump is doing the right thing. The U.S. has been giving money away and adding to the debt for a long time now, something you yap about all the time. Free trade isn’t free when they charge and we don’t.
– Clark M.
Foreign countries and foreign companies do not pay high tariffs on goods imported from them; American customers pay those tariffs, and they are passed on as higher prices to American consumers.
– Chuck B.
Bill, you missed this one. If I remember correctly, Harley-Davidson is only still around because of crippling tariffs placed on Honda motorcycles in the 1980s (give or take a decade, I’ll let your research department find the exact date).
– Stu C.
Bitcoin has taken the spotlight in the financial world. But while most investors are focused on the cryptocurrency itself, the companies that use its technology will also be big winners in the years ahead.
To learn more about these companies – and how you can invest in them today from an ordinary brokerage account – click here.