Why is it that the US stock market has been soaring while US economic growth, productivity, and wages have been sinking to all-time lows?
- In the last 10 years, our GDP growth has sunk to 1.33%, the same number seen during the Depression years of 1930-1939.
- Productivity growth from 2011-2015 shows a 4% annual growth per hourly output, a far shot from the 2.3% average the nation had seen from the 1950’s up until the present time.
- Nominal wage growth is at 2.4%, far below the recovery target of 3.5 to 4%.
- The average US household, as recently as the last two years, had a debt-to-income ratio of 370%!
- And to top things off, the US debt to GDP ratio is at 104.5%
So while Americans are poorer, and while the US spends and owes more than it can pay, why are US stocks still soaring? Is it just an insane measure of confidence that is compelling individual Americans to continue buying stocks to such an excessive degree? No, not really.
Across the globe, Governments and Central Banks are buying and holding record levels of stocks to create the illusion that all is well in the global economy.
Irrational exuberance? No, it’s a blatant and morally bereft act of manipulation; a way for governments and central banks to create an illusion of economic well-being at a time of extreme fragility...and at the expense of the people.
Conspiracy theory...or fake news? Although a number of experts and financial media outlets have been warning us about this for years, the WSJ addressed this reality just last January in an article titled Central Banks Embrace Risk in an Era of Low Rates. They write:
"by keeping interest rates low and in some cases negative, central banks have prompted some of the most conservative investors to join the hunt for higher returns: Other central banks."
You see, unlike the average investor who can lose money, central banks have the capacity to print money. WIth risk barrier being less of an issue, central banks have been ramping up stock and bond purchases since 2008, purchases that continue to this day. According to Business Insider, central banks are planning to load up on 3.6 trillion dollars worth of stocks and bonds in this year alone.
Take the Swiss National Bank. They own more shares of Facebook than even Mark Zuckerberg. In fact, they hold more than $80 billion worth of US stocks in total! Another example: according to Bloomberg, the Bank of Japan--now one of the top 5 owners of 81 companies in the Nikkei 225 Stock Average--is well on its way to becoming the No. 1 shareholder in 55 of those companies by the end of 2018.
Central Banks are currently on a buying spree, pumping up stock markets worldwide. But should they decide to reduce and sell their holdings, global markets and economies will collapse at a scale never seen before.
And what institutions are supposed to protect the economy from such a plunge? The answer is frighteningly comical: the central banks--the very ones who are creating the preconditions for the kind of catastrophe they are supposed to prevent!
Goodbye free markets!
Free-market capitalism entails the freedom to compete in an environment where transactional values--of goods, services, investments and debts--are transparent and free from contractual deception, manipulation, and fraud.
If that is the case, the notion of a free market (at least in the realm of equities) is gone, as central banks are actively obfuscating the values of equities and other assets. And without knowing the true value of an asset, transactional activities occur in a virtually blind state, as the basic premise of almost any valuation is flawed from the start!
Would foreign central banks holding US equities use the power of its holdings to crush our economy? QUITE POSSIBLY! And here are a few potential triggers...
Strategic maneuvering to deliberately weaken the US position in the global economy is always a potential risk. For instance, just look at the efforts currently undertaken by China and its SCO partners. Generally speaking, geopolitical risk is always a potential trigger point, particularly with President Trump’s highly competitive and abrasive approach to international politics.
But on a more likely front, the US economy overall is at a weak point; a potential breaking point. WIth Depression-era growth, and with an Everything Bubble looming [LINK to last week’s article], a massive sell-off in US equities seems a reasonable expectation, if only as a purely defensive measure, albeit one that will crash (or crush) the US market.
Are you prepared for this massive plunge, or will you be one of its casualties?
Now that you are aware of the colossal damage that governments and central banks can do by simply rebalancing or eliminating parts of their portfolio, what will you be holding when it happens? Will you be holding on to assets whose values will disintegrate before your very eyes? Or will you be holding assets whose values remain intrinsically sound as their prices soar?