TIVOLI, New York – U.S. stocks flat. A bump in Tokyo. A bump up in Shanghai. Gold registered a $7 loss in New York trading.
Noise, in other words. Nothing to worry about. So let us remind readers, and ourselves, of what is really going on.
This is a Great Zombie War. The fight is between zombies and their crony allies and the rest of the world.
That is the real struggle in Greece, for example.
The insiders – taking advantage of the Greek government’s ability to borrow at low interest rates – enjoy benefits that would otherwise be unavailable.
Now, Athens is deeply in debt… and the insiders are desperate to keep the credit flowing (to them!).
You’ll recall that zombies are people who live at others’ expense. They are not bad people, but the system either allows them… or condemns them… to take advantage of others.
Some of the ways the zombies do this are obvious. They get subsidies, guarantees, and direct payments from the feds (who claim to be providing an essential service).
Other ways are less visible. Extensive regulations, for example, keep out competitors, raise profit margins, and provide zombie jobs for inspectors, regulators, and assorted hacks.
Charles Hugh Smith, the chief writer at the Of Two Minds blog, gives a good illustration, relaying the experience of one of his correspondents:
The story is too long for us to repeat here. One permit led to the need for another. Then he needed an inspection. The inspection led to further requirements – enlarge this, replace that, put in this system, take out that… one after another… month after month… paper after paper.
Pettifogging standards… jackass codes… pointless rules… every one of them expensive and time-consuming. Finally, even a seasoned entrepreneur was forced to give up:
Profits Without Prosperity
Meanwhile, the Harvard Business Review reports a shocking figure: Between 2003 and 2012, companies listed on the S&P 500 spent 54% of their profits buying back their shares (reducing the number – and raising the price – of outstanding shares).
These companies devoted another 37% of their earnings to dividends. That means 91% of profits of America’s top corporations went to shareholders. Just 9% went into capital investment, research and development, expansions, and wage increases.
When we first saw that number we thought it must be a mistake. In our business, we have reinvested about 90% of our profits over the past 20 years – the opposite of the 449 S&P 500 companies in question.
What kind of business would be so shortsighted as to give up so much of its capital?
What kind of corporation would spend so little on R&D… business development… and capital investment?
Ah… then we realized: It’s the cronies at work!
Cronies in the C-Suite
First, as to why a company would do such a foolish thing, the Harvard Business Review gives us the answer:
The cronies are paid to do it.
You’re probably wondering how this fits into the Great Zombie War. Isn’t this just capitalism at work? Isn’t this their own money… and they can do with it what they choose?
We answer these questions with questions of our own: How is it possible for them to do this? In the normal course of business you’d think they would need to hold on to more of their money. They are capitalists, aren’t they? They must need capital, don’t they?
Well, you are underestimating the subtlety of the zombies’ war plan.
It is fueled almost entirely with credit… provided at ultra-low cost by their cronies at the Fed. The cheap credit permits corporate America to borrow heavily at little cost and distribute this cash to shareholders… and, more importantly, to corporate insiders.
C-suite cronies are looting America’s top corporations of their capital and replacing it with debt. The public will shoulder the cost of so much cheap credit in the form of future inflation. Meantime, corporate insiders enjoy the spoils in the form of blowout bonuses.
That is why the zombies are fighting so hard to keep the credit bubble inflated – not, as commonly advertised, because it stimulates a recovery.
Cheap credit gives them a way to take what isn’t theirs.
And the war goes on…
Further Reading: Bill’s friend and Oxford-trained economist James Dale Davidson says corporate grifters have been so successful at picking your pocket that, as of 2011, it’s cost you as much as $133,000 in lost income – each year. It’s all detailed in Jim’s essay “Crony Capitalists Cost You a Fortune.”
Today’s chart, originally from Carpe Diem, puts that 4% move in context.
As you can see, the Mexican peso is down a stunning 24% against the dollar over the last year. The Japanese yen is down 21%. The Canadian dollar is down 20%. The euro is down 18%. And the British pound is down 7%.
The yuan still has a long way to go to catch up with its rivals in the race to the bottom.
SEC: We’re Not Watching Buybacks to Prevent Manipulation
Executives used to avoid buybacks for fear of prosecution for manipulation. But after 1982, new rules came in that allowed buybacks under strict rules… rules the SEC isn’t monitoring.
Should Buybacks Be Illegal?
Since 2004, U.S. companies have spent $7 trillion on buybacks. But there’s growing concern on Capitol Hill over whether the practice is ethical… and some lawmakers are calling for an outright ban.
Six Real-World Effects of a Cheaper Yuan
Look out for more cheap Chinese smartphones… fewer Chinese tourists abroad… and more expensive bananas in China. But Chinese exports may still struggle to compete with rivals.
We’ve received a number of questions about the cryptocurrency Bitcoin.
But before we get to that… some encouraging words from an Australian reader…
I’m an Australian and have had no issues with what you write about Bill, or what Bill wishes to shed light on. I say, go for it!
People need a slap in the face to wake them up from their slumber.
I enjoy the daily newsletter from Bill. Keep up the good work.
– Gordon H.
Now back to Bitcoin…
I have a Bitcoin account but have never used it. I own my own business (gravel) and would like to offer my customers the ability to pay using Bitcoin. How would that be done, explaining both ends of the transaction?
– Dean C.
Chris Comment: Bill dedicated the June issue of The Bill Bonner Letter to examining the role of Bitcoin as an alternative to government-backed fiat money.
Bill also recorded a video of himself creating a Bitcoin wallet and attempting to purchase his first Bitcoin. And he included a special report, “Cryptocurrencies 101,” that answers many of the common questions folks have about Bitcoin.
If you’re not already a subscriber, you can sign up for a risk-free trial membership here and access that research.
Bill reckons Bitcoin may be even more useful than gold in the monetary disaster he sees coming. As he put it:
The Bitcoin network is a safe, secure, and highly functional means to transfer and exchange money irrespective of capital controls
But not everyone agrees…
First, Bitcoin cannot exist without the Internet. A new block must be built and added to the blockchain every few minutes, and this requires the Internet.
If a crisis brings down the Internet, that will also be the end of Bitcoin.
Second, Bitcoin will not continue to exist unless it becomes used in far more transactions. The cost of electricity for the required computations to maintain the blockchain exceeds the reward for creating the next new block.
This will get worse, unless more is collected in small fees from many more transactions.
In addition, regulation, taxation, and reporting requirements in many jurisdictions are having a stifling effect on Bitcoin. I like the idea of Bitcoin, but I don’t see it as having much of a future.
– Bruce P.
Chris Comment: These are great points to raise, Bruce.
But presuming the Internet is still with us – and that’s a fairly safe assumption given that it was designed to survive a nuclear war – in the event of a banking crisis, your Bitcoins will be safe.
So, if Bank of America or Citigroup go bankrupt, your Bitcoins are safe. As Bill’s chief technology analyst, Jeffrey Brown, told Bill Bonner Letter readers:
Bitcoins are outside of the banking system. In the event that you want to convert your Bitcoins back into dollars, or euros, or yen, or another fiat currency, you would simply use an account at a different bank.
Do you have experience using Bitcoins in a business?
If so, Bill and the team would love to hear from you. Write to us at[email protected]
In Case You Missed It…
Tuesday’s note from Tim Mittelstaedt, one of our friends at Palm Beach Research Group, has generated a lot of interest among your fellow readers. Tim has discovered a way to shelter substantial amounts of cash from a market collapse – without sacrificing income.