Easy money is a curse for capitalism.
By Wolf Richter. This is the transcript of my podcast last Sunday, THE WOLF STREET REPORT. You can listen to it on YouTube, and you can find it on Apple Podcasts, Spotify, Stitcher, Google Podcasts, iHeart Radio, and others.
Through the first half of August – which is normally a quiet period for the bond market in the US – a total of $56 billion in junk bonds and leveraged loans were issued by junk-rated companies, according to S&P Global. That was nearly 50% higher than the prior records for the same period in 2012 and 2016, and more than double the amount issued in the entire month of August last year.
The Fed’s announcement on March 23rd that it would start buying corporate bonds and bond ETFs set off a huge rally in the bond market, including in the junk-bond market.
The rally started before the Fed ever actually bought the first bond. And then the Fed hardly bought anything by Fed standards. Through the end of July, it bought just $12 billion in corporate bonds and bond ETFs, including a minuscule $1.1 billion in junk bond ETFs. It’s not even a rounding error on its $7-trillion mountain of assets.
But the announcement was enough to trigger the biggest junk-debt chase in the shortest amount of time the world has likely ever seen. And it kept the zombies walking, and it generated a whole new generation of zombies too.
The junk-bond ETFs the Fed dabbled in hold junk-bonds issued by companies that have been taken over by Private Equity firms in leveraged buyouts, where the acquired company itself borrows the money to pay for its own acquisition. Leveraged buyouts produced the first big wave of bankruptcies among retailers that started years before the Pandemic, and included Toys R Us, now liquidated.
The junk bond ETFs that the Fed has bought hold these types of bonds, including bonds by PetSmart, which was taken over in a leveraged buyout by private-equity firm, BC Partners.
In the second quarter, companies that had been taken over by private-equity firms issued over $31 billion in junk-bonds, the highest level since 2014, according to Dealogic. The third quarter is on the same track: In July, companies owned by private-equity firms issued $10 billion in junk bonds.
And it goes far beyond private equity firms.
Carnival, the largest cruise-ship operator, with a deep-junk credit rating of triple-C, and whose revenues collapsed to near nothing as all its cruises have been canceled, while the restart of its cruises gets pushed out further and further, well, in early August, it sold its third bond issue since the Pandemic: $900 million in junk bonds, with a yield of nearly 10%.
Royal Caribbean, the second-largest cruise-ship operator, issued $3.3 billion in junk bonds in May.
The collateral for these cruise-line bonds? Cruise ships, among other things. But the value of these cruise ships today is very hard to ascertain, beyond scrap value, because until cruises are back in full swing, whenever that may be, if ever, cruise ships are just a huge expense.
Cruise lines are now burning cash day after day, and they’ll continue to burn cash for months if not years, even after they start operating again, and they’re piling on mountains of debt in order to raise cash that they’ll burn before they’ll ever start operating again.
If they weren’t zombies before the Pandemic, they’ll be zombies going forward.
This borrowed cash will be gone, and the debt will remain, and they won’t be able to get rid of this debt and trim it down unless they restructure it, either in bankruptcy court or outside of bankruptcy court, by transferring all or much of the equity to creditors, with shareholders getting wiped out, or mostly wiped out, and some creditors taking big losses too.
But instead, they got bailed out, and they were turned into zombies, and a whole new generation of zombies was born that will add to the number of existing zombies.
For investors, a restructuring would be ugly. But for the cruise lines, it would be a great thing. They’d be smaller and nimbler and they’d be more able to invest, and they could move forward. But no. Instead of allowing this to happen, they were turned into zombies.
With this strategy of bailing out and pumping up the corporate credit market, and particularly the junk-bond market and leveraged-loan market, the Fed made it possible for corporate zombies to raise new money from investors and become even bigger zombies, rather than being restructured and cleaned up. And it’s causing a whole new generation of zombies to be born.
And their over-indebted balance sheets are now clogging up the economy and productivity and future economic growth.
Even the Bank for International Settlements uses the term “zombie.” Zombie companies, as the BIS defines the term, are unable to cover debt servicing costs from current profits over an extended period, and they end up having to borrow money to pay interest on existing debts.
Zombies are over-leveraged very risky companies with a business model that is not self-sustaining – meaning it needs to constantly raise new money from new creditors to pay existing creditors.
That’s OK for young companies that may not have a product yet, and may not have sales yet, or are just starting to get sales and they’re ramping up – though generally, at that level, equity financing rather than debt financing is the choice here.
But once a company has been around for years, has thousands of employees, and billions of dollars in assets and liabilities, in theory, its business model should be such that its revenues should cover all operating expenses plus interest.
Back in the late 1980s, less than 3% of the companies listed on US stock exchanges were zombies, according to the BIS. By 2018, 19% were zombies, including just about the entire shale oil and gas sector, much of which is now in bankruptcy court or heading that way, or emerging from it.
This is the condition companies were in when they walked into the Pandemic.
The BIS found that the rise of the zombies is linked to reduced financial pressure, meaning easy money forever. The BIS study also found that zombie companies are less productive and crowd out investment in more productive firms.
Often, zombies are already marked by a junk-rating. Their operating cash flows are thin and insufficient to pay for interest expenses, and they have to borrow money to keep going. If they cannot get new funding, they’ll have to default on existing debts.
The hope for creditors is that these companies can always issue new junk bonds or leveraged loans to service existing debts, thus paying existing creditors with money raised from new creditors.
Some junk-rated companies have been able to issue bonds in the United States in recent weeks at yields below 3%. These companies have a relatively high probability of default, and they will need to borrow more money in the future, or else they will default, and investors are lending them money at record low yields that for now barely beat inflation, and leaves almost nothing to compensate them for credit risk.
S&P Global and Moody’s are forecasting that the default rate for junk-rated US companies will exceed 12% in early 2021. But the market doesn’t care. The market thinks these companies will never default.
And they won’t default if they keep getting new money to burn.
The whole fracking industry was founded on that principle: Increase oil production at astounding rates, burn cash forever, and borrow more and more money to fund the cash burn, and as long as markets kept funding the cash burn, it worked out.
But then, one day, the market opened its eyes and saw that the companies now had a huge amount of debt and not nearly enough cash flow to fund the interest payments or even operating expenses without more borrowing, and the market grew skittish, and when it grew skittish, funding dried up, and then these companies tumbled into bankruptcy one after the other, hundreds of them by now.
This was based on the time-honored principle that something works, until it doesn’t.
Short-term rescue interventions by governments or central banks during a sudden crisis, such as the Pandemic, are one thing, particularly if they support the unemployed, but also if they unfreeze credit that had frozen up even for healthy companies.
But when these rescue efforts become long-term conditions where zombies are being propped up, and where more and more zombies are being created, and where existing zombies become even bigger zombies – that’s quite another thing.
And that’s precisely what has happened after every bailout. It led to long-term easy money and constant stimulus, even during the Good Times, that kept the zombies walking and multiplying, no matter what.
This happened after the Financial Crisis too. Zombies were kept walking, and during the Good Times, they weren’t restructured as interest rates remained low, though the Fed raised them timidly starting in 2015, too little too late, and though the Fed began to unwind its QE holdings in 2017, too little, too late.
And as soon as the slightest quivers when through the credit markets in 2019, the Fed did a U-turn on interest rates and stopped its QE unwind and then rolled out the repo-market bailout.
So when the Pandemic came, there was a huge amount of risk already piled up, and an enormous record-breaking amount of corporate debt, and the economy was crowded with zombie companies running around.
And the Fed with its bailout programs made all of those problems worse. It tries to eliminate the risk of loss of investors, and it keeps bailing out the riskiest companies, instead of letting the companies restructure in bankruptcy court, shed their debts, make investors eat their losses, and move on in nimbler more productive form.
Without this self-cleansing process, capitalism can no longer function. Risky things need to be allowed to blow up, investors need to be allowed to take losses, and yeah, markets need to be allowed to go wild, which reminds investors in the future to be more prudent.
These processes see to it that capital is allocated based on risk and productivity, and that unproductive cash-burn machines are restructured or dismantled so that they don’t clog up the economy.
Without that function, the economic system bogs down, stuffed with zombies that are hobbling from bailout to bailout, never really restructuring their debts and making investors take the losses. Easy money is a curse for capitalism.
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One part of your post really struck a cord with me
“Zombies are over-leveraged very risky companies with a business model that is not self-sustaining – meaning it needs to constantly raise new money from new creditors to pay existing creditors.
Isn’t the last line of that quote an exact description of a Ponzi scheme?
It seems so to me and that is what most of the stock market also looks like to me with the new PE ratios that make little to no sense either being many multiples of what they used to be.
Personally I think we have got to the point where so much money has been created out of thin air backed up by nothing that the whole financial system is nothing more than a giant Ponzi. Constantly creating more money to pay what is already owed but backed up by no real wealth or assets just pure fantasy.
TSLA P/E ratio is over 1,100. People will pay $1,100 per each unit of ownership of TSLA that earns $1. That sounds pretty crazy. There is no objective formula that says what P/E ratios “should be” but 1,100 seems well beyond excessive.
Chinese EV car manufacturers are coming out of the woodwork in droves to IPO hoping to cash in on the hype.
This feels *exactly* like the internet bubble of the late 90’s. I expect the consequence will be the same — there will be a big crash. If I recall for the internet bubble, there was an unprofitable company who made a small amount of money on a low-growth sector of rack mount computers, VA Linux, and that company went public and shot up precipitously which then ushered in the crash which followed immediately after that. It was like the straw that finally broke the camel’s back. I feel like one of these Chinese EV IPOs is going to be the similar straw here.
I also feel like the internet bubble kind of broke the stock market for good. It got people used to the idea that they could and should make 40% returns annually on ‘sexy’ stocks with no realistic earning potential rather than focusing on actual reasonable evaluations of fundamentals.
There will be a big crash. Well that is the common sense approach but it is a little dated. Any bumps in the road, pardon the pun, will be smoothed over by the outright purchase of shares through funny money. They will keep this show on the road by any means now. There is not even any pretense at hiding it.
I think this is right. I gave up my short. I’m in the corporate-socialism-until-it-collapses camp now.
Americans don’t know what the Federal Reserve is, they don’t know what capitalism is, they don’t know what anti-trust means, they have no idea what money is. There is no resistance.
So, up, up and away…
The show goes on at least through Election Day. After that, toss a coin.
Agree there will be a big crash. I have a large short on the S&P. Have not tossed in the towel yet, but it is getting painful.
I think the EV analogy to the dot-com bust is spot on. This casino frenzy will go on for who knows how long, but eventually there will be a pin that busts this bubble and brings it crashing down. Central banks will probably start buying equity ETFs to save the market at that point!
As to the pin – who knows…maybe new tax policy after the election…or maybe chaos during the election itself. If it is close, neither will concede and Trump will surely wreak chaos on the results.
I used to think a massive second wave of Covid would do it, but I don’t think the markets care anymore how many people die.
Yes, I wouldn’t bet against the stock market between now and the election.
After the election? I think the Fed will be under a little bit less pressure to ease. I wouldn’t bet on that basis, though. I’d bet against the stock market if Biden is president but the Senate is held by the GOP.
The chairman of the Fed, the head of CDC, the head of FDA, and the Post Office General all have one thing in common.
‘There will be a big crash’
Cannot, will NOT happen and NOT allowed to happen, as long as Fed is involved actively as they have done it since March of ’09 with 4 QEs++, stimulus, twist and what NOT
The P/E of S&P was 12.3 on March March 23rd and THREE trillions later it is 23.2! Wow!
The Chinese companies that will succeed and prosper will be that large corporations that are already making hundreds of thousands of them, not the Johnny-come-lately IPO’s. SAIC, BAIC, Geely, FAW, and others are well-established state-owned companies that are making affordable cars that people are buying now.
Jay Powell and the Federal Reserve sure are tough on our young, to the point where their future has been robbed in play daylight.
First, they intervened in the financial markets to keep asset prices propped up to extraordinary heights, so the young have slim chance of earning enough stock/bond market return to retire, support children, or even buy a house.
Second, they kept interest rates suppressed and printed money, which encouraged our government to engage in deficit spending, creating unsustainable government debt levels that will lead to even more austerity and pain for our young people in the future.
Third, they have created a huge wealth gap, leading to discontent and societal strife, along with related blaming, shaming, and discrimination. Eventually, this will lead to disintegration of the United States as a country.
Watching the Republican and Democratic conventions recently, I felt embarrassed about the state of US politics, the blaming, the abdication of responsibility, and the pandering. Neither party recognizes the sacrifice that is required by the country to reform our financial system and create a sustainable system, one that is fair to people who simply want to work hard and save, and receive some reward for that. The government’s financial disorders are encouraged and facilitated by the Federal Reserve Board, with its mistaken belief that societal wealth can be created out of thin air via simple money printing.
Think where we’d be now if the Fed would have dealt fairly and responsibly with the debt problem back in 2009. There would have been a recession, with a one-year period of high employment. Private debts would have defaulted, causing many poorly run banks to declare Chptr 11. The shareholder pain brought about by this debacle would have completely revamped bank management and installed sustainable banking practices. There would be no moral hazards today. Banks would be very well capitalized now, and willing to lend at higher interest rates to consumers. The consumers would want loans now, because their old debts would have been largely written off by strong banks that bought them for pennies on the dollar. Savers and investors would be earning a decent return now, commensurate with a strong economy. They would be able to secure their financial future through prudent investing, and they’d have little or no desire to chase yield and speculate in a desperate attempt to secure some financial security. When the Fed is taking nearly everything from you, you are forced to gamble on what few prospects remain.
It’s very clear now. The Federal Reserve has done a grave disservice to our young people, foolishly searching for gold at the end of some rainbow, and they intend to keep it up based on today’s announcements to double down on the same bad policies.
Exactly. I saw somewhere describing Powell as an economic terrorist. I concur.
Absolutely true. Too bad there are so few of us who care about the future and integrity of the economy.
Powell isn’t an economic terrorist… he is a secret communist. Working to bring about revolution by the proletariat.
He appears to be your friend, but is secretly sharpening his knife behind his back while looking for the optimal place to stick that knife into. He is after all, the Chariman….
Bobber said: “The consumers would want loans now, because their old debts would have been largely written off by strong banks that bought them for pennies on the dollar.”
_______________________________________
More likely, the debts would have been pursued and collected to the extent possible. Banks don’t give away anything for free, at least not to outsiders.
“I also feel like the internet bubble kind of broke the stock market for good. It got people used to the idea that they could and should make 40% returns annually on ‘sexy’ stocks with no realistic earning potential rather than focusing on actual reasonable evaluations of fundamentals.”
If that’s the lesson morons learned from the end of 2000, then they deserve whatever they get. Because obviously they either forgot about the crash that followed which killed the likes of Pets.com and Webvan or they got lucky and moved out at the top.
But, whatever. The Fed is backing this… so we’re all good until we become Chavez/Maduro land.
@Marc60 – Ponzi scheme? Precisely. Cruise lines offer 10% in a 3% environment. They currently have no revenue stream. How can they pay the 10% without cash flow? Easy, find an additional group of suckers willing to buy another round of 10% bonds. Use the new money to pay the earlier investors coupon and the rest on corporate expenses. Instead of stealing the money the cruise lines spend the money on fixed costs. What could go wrong?
>Isn’t the last line of that quote an exact description of a Ponzi scheme?
It turns out that Bernie Madoff was a Prophet. His strategy of luring in new investors to pay off the old ones is being adopted by the entire economy.
Maybe Trump will give him a pardon?
Trailer Trash said:”Maybe Trump will give him a pardon?”
—————————————-
Why not? He gave Milken a pardon. Also, Trump likes guys like Mnuchin and other assorted Goldman Sachs types …………..
are they not all playing a similar parasitic, FED empowered game?
Bernie was a little short on mastering the Financial Bankster arts of lying truthfully and stealing legally …………
So where does it go in the longer term? Can the mess be propped up indefinitely or will there be a domino effect collapse that will lead to the biggest depression in history. Is it even possible to clean up. Maybe capitalism as we know it really does contain the seeds of it’s own demise. As long as humans continue in the way that humans do there is no such thing as real free markets,free enterprise or even real personal freedom. Only true spiritual growth and enlightenment will bring real prosperity in the long run
“Zombies are over-leveraged very risky companies with a business model that is not self-sustaining – meaning it needs to constantly raise new money from new creditors to pay existing creditors.”
If you replace the word “creditors” with “investors” in that definition, it would match the definition of a Ponzi scheme exactly.
It also matches the historical Minsky definition of Ponzi Finance.
From Kindleberger’s book “Manias, Panics and Crashes”:
Minsky distinguished between three types of finance—hedge finance, speculative finance, and Ponzi finance—on the basis of the relation between the operating income and the debt service payments of indi- vidual borrowers.
A firm is in the hedge finance group if its anticipated operating income is more than sufficient to pay both the interest and scheduled reduction in its indebtedness.
A firm is in the speculative finance group if its anticipated operating income is sufficient so it can pay the interest on its indebtedness; however the firm must use cash from new loans to repay part or all of the amounts due on maturing loans.
A firm is in the Ponzi group if its anticipated operating income is not likely to be sufficiently large to pay all of the interest on its indebtedness on the scheduled due dates; to get the cash the firm must either increase its indebtedness or sell some assets.”
(emphasis added)
P.S. PDFs of this classic econ book are now freely available online.
One can read long article ( opinion – Review section of WSJ JUly 23rd,’20) by Mr. Ruchir Sharma ( MS analyst) titled
” RESCUING RUINS CAPITALISM”
That said it ALL and MORE!
But no one cares either at Wall St or the Main street!
It takes an Ivy league CEO to ruin perfectly good zombie company.
the link at the top for youtube goes to the wrong video.
that video is also good, but I was confused why the text didn’t line up.
Thanks.
Hi Wolf: out of curiosity, do you still have short positions ? If so, you must have a cast-iron stomach….all the best to you.
Remember it depends on how many shares Wolf shorted. Size matters, Degree matters, Quantity matters, Bla… wait… wrong channel.
Anyway, Wolf can have shorted 10 shares of SPY, and the most he’d be down is $500 at this point.
Perhaps it’s finally a case of capitalism selling itself the rope with which it hangs itself???
May we all find a better day.
I would argue that what we have in the U.S. is closer to Soviet style communism than to Adam Smith’s idea of capitalism. As in the Soviet Union, power is being concentrated, more and more, into the hands of a handful of individuals that care only about their self interest.
Don-well said, and removing my tongue from my cheek, your comment has been my view of U.S. capitalism since the Ford administration…
May you, and we, all find a better day.
Sometime in the future, the central banks will have to choose between keeping their currency credible and keeping the stockmarket and junkbond market propped up.
Many here will disagree with me, but given that choice I think they will choose in favour of the currency. Why? Because a credible currency is ultimately the thing that gives the government power. None of the bailouts, furlough schemes, “stimulus” etc would be possible without it. (Ask those countries that cannot borrow in their own currency anymore).
The $100T question is when will it end? Possibly when the first of today’s still credible currencies starts collapsing. From that point onward, markets will focus on who is next and pick them off one at a time. Central banks will have to counter that by (for example) offering (more) interest on reserves (i.e. raising rates and shrinking balance sheets) to make sure they are not next. They will try to look more credible than their peers (the reverse of what we saw in recent years, when everybody deliberately tried to weaken their currency). This would be a perfect storm for the stockmarket.
Which is the first “credible” currency to go? Personally I I think the £ is very vulnerable. Like the USA, the UK has a massive trade- and budget deficit and lots of external debt, but without the reserve currency aura. I think the UK government realises this and that is possibly the reason that the UK seems to be the most eager to wind down the emergency schemes.
The JPY has looked bad for years with by far the highest debt/GDP, but it is actually a net creditor to the rest of the world, which makes it less vulnerable to external attacks. The euro is going to be very interesting with Italy probably getting to >170% debt/GDP by 2022. Not sure if that is survivable with the euro in one piece. Any solution will be a massive loss to the “frugal” north.
YuShan via Wolf,
Yes I’m waiting on the strength of the pound.
YS,
Agree with point about credible currency being only (non gun-in-face) source of gvt power.
Not so sure that DC has enough brains/spine to stop political pimping of printing press before dollar is destroyed as store of value.
Note – the SP 500 stock that has gained the most over the last year (including Covid) is…Nvidia, maker of “graphics” chips…up over 200% in era where GDP had catastrophic collapse.
Why Nvidia? Graphics chips?!?
Because those same math specialized chips are used as the heart of the dedicated, specialized computers that “mine” bitcoin and other non-dilutional currencies.
The stock mkt is saying that the Fed has succeeded in its multi decade dedication to murdering the dollar as a trustworthy currency.
I’d be careful about that conclusion, though Nvidia does indeed have a crypto mining business.
I would say that it’s the data center and various machine learning (mainly “deep learning”) fields that are driving Nvidia’s stock price and not so much crypto sales. The data center sales actually passed graphics sales for the first time this last quarter.
That was a big deal. The Mellanox acquisition helped but the two businesses had already been getting close.
By the way, Nvidia is an extremely well-run company. Really phenomenal.
But > $500 boggles the mind. The P/E is implying incredible growth off of what is not a small base.
Ed,
Thanks for the additional info.
I’m a little dubious about the “machine learning boom” explanation (reminds me of AI magic being invoked a million times, in a million BS ways) but I’ll check it out.
AMD is also way up during the plague year, Intel less so (although still an absurd amount during GDP collapse).
I’m still inclined towards the non-dilutional currency engine explanation given the relative areas of focus for those three chip companies in a time when the Fed is dedicated to turning the dollar into toilet paper.
In the service of converting DC’s hopelessly unpayable debt into citizens’ unjustifiable inflations.
Yushan
“central banks will have to choose between keeping their currency credible. . .”
Name one credible currency in use on earth today.
Personally I think the US dollar will be the first to go. It’s the most hated. We use our exorbitant privilege as a weapon. And the world is tired of it.
I hate fiat currency with a passion. It’s a Ponzi scheme. And all Ponzi schemes blow up. Oh I’m sure people will say it’s not a Ponzi scheme.
Excellent explanation Wolf. Are the airlines are selling more junk bonds as well? They certainly are lining up at the public trough looking for more taxpayer largess. The court jester mainstream financial media more than happy to plead their case.
We are in a new type of economy where deficits don’t matter and the printing press overheats from use. Usually this type of economy ends in hyperinflation if the country is small, but with the constant government intervention in all major countries’ economies (China, Japan, Europe, US) it’s really hard to say what the future will look like. Brave new economic world.
“Brave new economic world.
Well stated comment, michael. I agree. The fearsome part is that we don’t know how exactly this whole charade will play out.
Surreal.
The current state of things reminds me a lot of the Dot-Com Bust. I was much younger at the time and had little notion of the stock market or macroeconomics, but I did know that there were many smaller websites (offering games and such) that did not sell anything and were funded entirely by banner ad revenue. Yes, banner ads still exist today, but back then they paid several times more per view/click to the website owners.
Many of the websites incentivized clicking the banner ads by giving you a small virtual reward (costing them nothing), making it look like the ads were more popular than they actually were. People were clicking for the reward, not the actual thing being advertised.
Once the big companies started going bust, the advertisers realized that their banner ads were a huge cash burn for nothing. They all slashed their payouts to a fraction of what it was. The dozens or hundreds of websites entirely reliant on the inflated banner ad revenue could not afford to exist anymore and vanished in a puff of smoke.
These schemes only work until they don’t.
yes, but this one seems to be going on much, much longer – even with the destruction of gdp, jobs etc that has taken place. All I can imagine, that all is now a sick casino.
At least casino games have rules. With this market the tide randomly goes out one day, a tsunami follows, people waiting to assess the destruction when the water recedes back out to sea. The fed has all the water hoses turned on full blast to keep the water high though. This is a continuation of the rising tide lifts all boats philosophy, so they keep the water high even as many people are drowning. The view is nice for all the people in yachts though.
Nothing makes sense anymore. Stocks appear way overpriced and yet they’ve gamed it to make people feel like they have no other choice. The real economy is burdened by these cash burning zombies and all they can think to do is keep it going for as long as possible. I hope history definitively declares these people criminals. Enjoy your legacy swamp rats!
Indeed…the FED is channeling (has been channeling and will continue to channel to increasing levels) their “inner Nero” and fiddle while America burns. The FED then acts all innocent and denies any connection to the problems of Main Street. ONLY solution is BK for the zombies, will be painful for a few years, but won’t unjustly condemn the younger generations for decades to come.
That’s Facebook today :)
Remember the “Get paid to surf” companies like Alladvantage and GetPaid? They actually send you a cheque (real money) for clicking on a banner. I have received a total of about $500 worth of cheques from them back in the day! (1999). That was one of the most extreme examples of burning cash: just handing it out! All at the cost of their capital providers.
The CBs are actually trying to save the fiat and fractional reserve financial system in the only way they can, which is destroying it. The problem is that infinite growth is over, and fractional reserve cannot survive without it. The post industrial world is becoming the new Middle Ages of tech serfdom, until we shift into a new paradigm. That could take generations (centuries). Systems based on major power imbalance/inequality tend to be very stable (slavery, serfdom). Unfortunately, periods of stability only beget more inequality (rich get richer, because they control distribution of resources/wealth). The only 4 events historically shown to decrease inequality have been shocks to the system: plague, total war or revolution, and system collapse (see “The Great Leveler”, Scheidel). Academically, all of this was entirely predictable. The 20th Century was merely a fluke, due to world conflicts. It’s not coming back. Maybe the plague is this the hope of this Century? That’s why I don’t blame the rioters, I cheer them on. The faster the institutions collapse and get replaced, the better. That of course doesn’t preclude massive disruption to all people’s lives, there’s a price to pay.
If we don’t tear down and replace the system now, we are in for centuries of servitude.
Zombie countries forget about companies, top of the list the US. The last and final collapse, stocks. it’s on it’s way, lies die, only the truth lives in perpetuity :)
I appreciate any commentary about what is going on with Fed actions and the repercussions including the winners and losers. However, commentaries generally run short on the ‘why’ part of the discussion. Of course, it’s not because they all care for each other.
It’s hell when you own the money supply.
Wolf,
Trying to work my way through the morass of Fed bailout programs/”rules”.
I thought the 2020 bailout “rules” kept pre Covid junk rated companies from getting Fed assistance (no buying of their pre existing junk bonds).
Are you saying the Fed is using HY etf purchases to circumvent this rule?
It matters because I am trying to figure out if *actual* Fed support of pre C19 junk companies is propping up their doomed new bond offerings…or if it is just investor sloppiness/stupidity that is providing the financial support for the new issue junk bonds.
I tend to think the latter because…biggish companies *have* gone BK since March…more than a few.
If the Fed were in fact directly/indirectly buying everybody/anybody’s bonds…those companies could have avoided BK.
(In truth, it appears the Fed *could* have legally bought such companies *post* C19 junk bonds…so the BK’d company mystery actually runs deeper. In today’s bizarre world, the Fed “rules”/promises/head fakes are propping up the mkts in aggregate…but not in actual practice for individual companies (the BKs).
Any insight into this dynamic? (why/how are any public co BKs occurring given the Fed programs).
I think it may depend on who you play tennis and golf with, or who you went to school with or married. Note the difference in outcomes between Bear Stearns and Lehman Bros.
Welcome to the angst of being an idealist (Libertarian, Austrian School faithful, rational thinker, authentic conservative, etc.) in the age of command economies… We lament the lack of a good economic cleansing bankruptcy can bring, the discipline of a balanced budget, trade accounts balanced, natural selection in the world of business. We are obviously living in an age that seems to lack any semblance of self discipline. We moderns are the problem because we have mindlessly promoted and followed demagogue after demagogue and their disastrous policies time and time again. Trust me, I know: I’m a Californian! I suppose corporate zombieism, like MMT, will work till it doesn’t. In the meantime collecting shiny little gold and silver coins does bring some solace…
Harold/Wolf,
The interesting thing would be to see a post dedicated to post-USD alternatives.
Failure after failure, lie after lie has been the DC way for decades…DC possesses no magic that will cure the accumulated cancer of their profiteering incompetence…more and more people see this.
It really is past time for planning the future that will hold once their rotted out power passes from their hands.
The USD has been their only prop and faith in it is evaporating…perpetually temporizing bullsh*t does not do well in the era of the internet.
Old zombies compete with young zombies. YZs earn more revenue to debt. New revenue means more debt. More debt is how you grow production and market cap. Tesla is old zombie. Even if they manage to ramp up production, the ratio of debt to revenue does not improve. Young zombies use credit lines to cannibalize old zombies, and cut costs. There is no moat, you don’t build a hundred ships and compete with Carnival, you buy them out using debt. Debt is a buy me signal. Pay that debt down they take you out anyway if you have any debt sensitive businesses (IBM has AI, and they are toast). The M&A stage of this bull market is just beginning, and it will be glorious.
Howling into the wind, Wolf.
Jefferies upgraded Tesla to .5 Trillion valuation. It’s only logical.
Easy money is a curse for capitalism…
And what is easier than inherited wealth?
As for US-style banking, that’s just a cover for its source, Old Wealth, who wrote and write its “laws”, and decide with utter bias when and how its “laws” are applied.
…as those who inherit tell those less-fortunate to work harder and lift themselves by their (? computer) bootstraps…
Have never been able to figure out why we would want to extremely limit or do away completely with inheritance taxes if we’re a nation full of exceptional, rugged, individualists committed to the idea of meritocracy…
May we all stay well and find a better day. (Excuse me for overposting, Wolf-wind shifted last night and the smoke is currently too thick to be outside extending our defensible space…).
Success is highly dependent upon the proper selection of parents.
lisa-thanks for a rueful smile, as always!
y’all stay well and find that better day.
91B20 1stcav (AUS) said: “Have never been able to figure out why we would want to extremely limit or do away completely with inheritance taxes if we’re a nation full of exceptional, rugged, individualists committed to the idea of meritocracy…”
___________________________________________
because we are not
So the S&P is currently above 3,500. I remember having a fleeting thought in early April that the last thing anyone expects is a run to unch. I discarded the idea as crazy. Wow, did I miss the mark.
I don’t know what’s really happening with the economy because I’m not “out in the world.” I won’t until there’s more info on the disease. I read what I can from reliable sources and develop my own hypothesis. I think there already was a lot of pain in households before the pandemic, and some of the stimulus has helped enormously. I also know that there are roughly 25-30MM people that are on some form of unemployment assistance. You have to assume they are mostly paycheck to paycheck folks, so the benefits need to continue if they can’t find a job.
I also know the white collar households by and large have been better insulated from job loss as they can conduct business from home; and it looks like they bought a ton of stuff to stock up, not so much food but iPads and iPhones.
If the virus persists for years then I see the end of the middle class. You’re either going to be in or out. And paradoxically you have to buy stocks. You would think a bifurcated society would be bad for stocks given the social unrest it will unleash. But you can mitigate that by removing all pretense of wanting fair competition and promoting global monopolies (am I concerned about the concentration of FAANGs in my funds? I was, but then I figured out this is the endgame. The internet is too deflationary for capital).
I welcome any and all comments/criticisms.
Forgot to mention we’re all the poorer due to The Printing.
Sorry, but NOT the top 10% who own nearly 90% of Wall st wealth!
They love Mr. Powell!
What do you mean by “the internet is too deflationary for capital”, which in your view supports the FAANGS ?
Regarding the FAANGS, I worry about excessive optimism. How can they produce profit growth in the future when the rest of the economy is deflating and suffering? Eventually, all these businesses rely on a healthy economy and healthy consumer. This is going to hit home pretty soon if there is no sustainable V-shaped recovery.
Further, there is the law of large numbers to worry about.
These companies aren’t going away, but I seen them being dead money for decades. At some point in the not too distant future, I predict they will see a quick 10-20% stock price dip followed by a Long monotonous slide.
The internet makes immaterial a lot of “layers” that exist between the manufacturer and buyer, as well as costs of production. Sellers can cut prices and still maintain or improve margins.
precisely, Amazon isn’t a retailer they are a distributor. Amazon brought us drop shipping from China. I would put more of this on interest rates, rather than the internet. The biggest layer the internet adds is advertising. If they figured out the waste in that industry they could drop prices even more.
I would say the big tech companies are now in the process of wetting their own bed. The monopoly power and tech innovation is good for profits in the short term, but it increases the wealth divide, thereby reducing overall through time. At best, the tech companies will get a bigger piece of an ever-shrinking pie (i.e., go nowhere). At worst, a beleaguered society will force change and strip out future profits.
meant to say “reduces overall demand through time”
Mr. Bierce – sadly “fulfillment” does not include curating or even vetting inventory. :(
Bobber – if you look at the businesses of Alphabet or Facebook it’s about getting a cut of all advertising, content or commerce (both local and global). In the analog world there were a lot of systems and people required to generate those revenues. And it’s so easy to replicate cross-border. Outside of privacy concerns, it seems the world is OK with these firms operating without much competition.
There have been plenty of boom/bust/long slide stories in the stock mkt (Xerox…)…it would interesting to see a brief list/history of them.
Ditto a calculation of the unachievable growth rates implied by the insane PEs…
The stock market is betting that the peasants won’t revolt. The MSM, the FRB and the corporate G will give them more propaganda and anesthetic to shoot up and forget about their serfdom. Will it work? It’s debatable. Bread and circus are still plentiful, and will be for as long as the world buys $$.
Capitalism is about private ownership and profits.
Note that the Fed is basically government controlled and what Wolf is talking about with profits (lack thereof). This is obviously some kind of distortion of “capitalism”.
There are several institutions required for a successful “economy”: proper government (e.g. regulations), proper markets (e.g. with price discovery/transparency), proper civil society (e.g. minimum corruption), and others.
Clearly there is some work to do in these institutions. It’s not just “the capitalism”.
wk-damned human nature. Can’t live with it. Can’t live without it. Rarely does it take a seriously truthful view in its mirror, or long views of its possible futures…(Marx’s critiques not far off, but in questing after utopia, ignoring the selfsame human impulses inherent in his remedies. Smith’s prescription for the necessity of ‘well-regulated’ markets might be subject to the same criticism. Some chalk it all up as ‘the wheel of history’…).
May we all find a better day.
We either have true Democratic Capitalism in America or we have the Socialistic Government Run controlled economy through a controlled financial system that did not work for Lenin or Marx. That a bunch of never in the private sector academics know better than hundreds of thousands of small and large businessmen HOW TO ALLOCATE CAPITAL TO ITS BEST CURRENT USE and determine the price of same based upon risk to reward measures IS SHEER FOLLY and looks like Don Quixote chasing at windmills. The Fed will not exist in the next 10 years, I would bet money on it. They will not be able to get this doo-doo off their shoes fast enough to not to get hit with the Fatal Blame Bug.
‘The Fed will not exist in the next 10 years’
Very UNLIKELY! I would bet on it! The power brokers, deal makers (top 1%) like what Fed is doing including elites in both parties ( WELFARE & the WARFARE)!
Fed has carried the WATER for Congress with monetary expansion (INSANE CREDIT CREATION), where as Congress failed in their required FISCAL responsibilities over the last 2-3 decades!
Some comment on the durability of the FED and all the blame on them….
Though I have no use for the way the FED has manipulated (along with the politicians) the economy we must remember there were terrible depressions prior to the existence of the FED. Ridding the system of the FED will not eliminate degrading speculation or any other of the weaknesses of capitalism as we practice it.
Unbridled capitalism will eventually strangle society….I think somebody else in history said that…….
We haven’t seen unbridled capitalism in the US since 1911. Except perhaps Google and Amazon and Microsoft and Facebook, etc.
Sierra-double check.
May we all stay well and find a better day.
The answer to the crisis that we have been dragging on since 2018 is found in CFDs. Do you know for what purpose the CFDs were created? To avoid lasting market drops. Leveraged short positions fuel the stock market.
Great shorts only work when very few know. Thousands of investors know this is going to collapse, they decide to go short leveraged. All this does is feed purchases.