Opinion

Free Money Socialism

In lieu of my weekly technical update this opinion piece instead: The free money whores are back again. Harsh? Perhaps. Untrue? Not really. As I’ve stated before our market system is broken, central banks, originally created to save economies from disasters have now become the prime movers in preventing so much as a cold propagating free money socialism for the top 1%. Indeed after a series of financial panics (particularly the panic of 1907) the Fed was created in 1913 for central control of the monetary system in order to alleviate financial crises. Now they are in the business of managing markets full time, all the time and have become the primary focal point of price discovery.

It is self evident:

According to Jay Powell the Fed’s primary mission is now to “sustain the economic expansion.” I’ve never used the term “manipulation” before, but let’s just be clear what “sustain the economic expansion” really means: To prevent natural market forces from taking hold. That’s manipulation.

Business cycles are natural. They serve a purpose, they lay the foundation for new growth, they weed out the excess, they permit for a reset of an aging expansion, for a renewed flourishing of innovation, new solutions, creativity, and yes growth.

Of course because of all this recessions bring about temporary pain, but nobody wants pain anymore, and hence central bankers with hero magazine covers have now taken on a new role, that of preventing a recession altogether. Yes, that is the message that continuously being sent:

No more cleansing, no more resets, but only ever more excess and propagating the notion that they alone can prevent the cleansing process from taking place with their favorite and only method: Free Money.

Of yes, here we go again:

Oh yes, the free money whores are here again. Hurry back into stocks:

“Now, interest rates are coming down en masse. Investors who adjusted their portfolios for a high-rate environment must readjust. That means leaning into growth stocks again, scouring Asia for opportunities, and earning income from investments that won’t succumb to the low-rate trend and will also hold up in a shaky economy”.

Barron’s calls the Fed flip flop “graceful”. I call it disgraceful.

Just stop. It’s 2019, wealth inequality is higher than ever, corporate debt is higher than ever, and growth is slowing. Innovation is hampered by a system that has benefitted the few which have grown into bloated monopolies, and the entire system itself remains held afloat by massive and ever more expending debt.

After all there is zero intellectual integrity to anything that is being propagated. In recent times Fed chairs have bemoaned rising wealth inequality, oh how un-American it all is, and rising corporate debt being a threat to the economy, but then they proceed to again exacerbate both by promising more easy money, their default solution in the misguided attempt to bail investors out from all pain and any bad decisions.

And that is the beauty of being a bull in these times of permanent easy money: Live off the central bank bailouts. So what if you’re wrong on fundamentals? Central bank daddy is always there to bail out the narrative.

Q2 earnings will be worse than Q1 earnings and they are worse than earnings last year:

It matters not because free money is back and hence $SPX made new all time highs last week in spite of the data.

Again, it’s self evident, the month of June, seeing one of the biggest June rallies in history, was a central bank affair of promising more free money:

Yes, thank you central banks. But facts don’t stop some people from congratulating themselves:

Oh yes, intellectual integrity is hard to come by in this day and age.

Yes, we were oversold and a rally was technically setting up as I outlined on May 30th in “The Bull Case“. Yes technicals work, and they work nicely, but in no way can one ignore the extremes that are bestowed on these markets by central bank manipulation. Yes I now have to call it that as it is self evident.

And so we are jumping from one vertical rally to the next. During the past year and a half markets have been subject to wild and massive swings, a battle zone between deteriorating fundamentals in context of an aging business cycle, and desperate attempts to levitate markets with tax cuts, buybacks and central banks promising ever more free money, hence we get charts like these:

Will the free money gang succeed again? Will they trump the reality of what the banking sector and yields are signaling (Watch This Space)?

Will they be able to ignore the reality that the constant interventions with free money have made things much worse in this cycle?

And that is the question investors have to ask themselves as they are asked to jump in on the new free money train at all time highs. All time highs accomplished via central bank speeches, a free money train that promises more wealth inequality, more corporate debt, more government debt, but no solutions other than free money.

Capitalism’s success was predicated on rewarding risk taken with the knowledge that failure was possible, it was based on the competition of ideas, free flow of markets and capital in search for rewarding successful business models and innovation.

This system here does not punish failure, it rewards failure, it rewards slow growth by offering more free money in response, it subsidizes non performance with a constant safety net, and yes, it is the antithesis of free flow of markets as it forces capital into specific asset classes because there is no alternative. And a result it not only produces capital inefficiencies, it promotes them, the extends them, it creates a circular reference error that stifles growth. What? You think $13 trillion in negative yielding debt is a sign of efficient allocation of capital? A sign of free market capitalism?

I humbly submit this has nothing to do with capitalism, but it is socialism with a specific audience in mind:

A system that has produced and continues to produce what Janet Yellen once called un-American: Ever more wealth inequality. If you truly want capitalism and a road to eventual higher growth, reject this form of socialism, let the world cleanse itself and, from the pain, let free market economics do what its best at: Produce real growth. Stop with the constant daddy bail-outs. It is unbecoming of capitalism.

So go ahead celebrate new market highs. Just don’t call it free market economics, call it what it is: Free money socialism:

Central banks are not saving capitalism. They’re ruining it.


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30 replies »

  1. Nixon’s abolishment of the Gold standard in 1971 was the start of central bank domination…then after 2008 the printing press made it even worse. Now we are in some sort of “communist system”.

    • If it was socialism the poor would be getting richer, but exactly the opposite is happening.
      It’s copybook capitalism, with the end goal being every single cent of worth being owned by the capital in capitalism, the banks.

      • well in a communist system, it was the nomenclatura (the communist party leaders) who got all the wealth. Now, the wealth concentration is among the 1% …or 0.1%. Basically the same outcome. One thing is sure, we have not lived in a capitalistic system for a long time…if we were banks would not have been saved in 2008 by the tax payer.

  2. Thank you, Sven. Great write-up. Hard to not feel angry and sad as the vitality and intelligence of markets is further squeezed into phoniness and slack-jawed unresponsiveness to risk. It seems likely that a major failure of the simplistic idiocy of market-propping you describe is moving closer. As always, the gap between appearance and reality is going to be filled one way or another. If market values don’t warn of it and close it for themselves pre-emptively, events will probably soon break through the central bank drug stupor soon and do it for them.

  3. So what is the point in extending the SP500 “expansion”, by say another 20% to 3540…when it is inevitable we will have a 50% correction to 1475 at some point in the future. Simply dimes and nickels in front of a steam roller until the fed starts buying stock index exchange traded funds outright, and dropping red rates to -0.75% with a nice fat $4-$5 trillion QE party to re-fill the punch bowls on Wall Street. And that can not happen until they allow the next financial crisis to unfold, which I suspect they are simply delaying until the timing fits their narrative.

    Central banks are not “ruining” capitalism, they are controlling it to their narrative. Capitalism was “ruined” when it turned into “profits at all costs”, and that is on all of us…

  4. Sven – Thanks for another intelligently crafted article. Yet, I think it’s best to stop agonizing over what ‘should markets be like’ and focus of the opportunities for profits are to your readers and followers. Taking what IS into account, it would make sense to encourage your readers to step in and be Invested on the long side.
    And.. rate cutting by the FED is actually a strong driving force under the right conditions as described in this thorough analysis: http://www.youtube.com/watch?v=PfN4RXCE414

  5. Great essay Sven. Maybe history will look back at Lehman as the turning point. Fed let market forces take their course without intervention, and the pain became too great — From then on it was “Let’s never do that again.”

  6. Sven, I think you’re right about the Fed getting too involved and causing inflation in stocks, while the rest of the financial world is reversing.

    However, unlike the past 10 years, I don’t think they’re going to get away with it. They HAD to save the big banks in 2008-2009, because there was an actual risk of systemic collapse. But they didn’t need to keep the same rotten system festering indefinitely, as they have.

    As you’ve suggested often, the markets already see the current economic conditions as shaky, and so stock trading volumes are low, bond yields are falling, there are major equity topping patterns, etc. History has seen these government attempts at last minute intervention before. It just leads to false hopes and big pain when it the market rolls downhill.

  7. Plain truth is, given their fragmentation due to multicultural fascists and mass immigration from the Third World, Western countries cannot survive another Great Depression. There is no social cohesion left, and governments know this. An economic crash would mean violence and more, meaning The Purge.

  8. Stock buybacks for is socialism for the rich. Bank bailouts are for rich. Now what is for the poor that comes close to the money level each of these received? That’s right nothing, nothing at all. MMT is a way of trying to balance a financial inequality equation that is hopelessly unbalanced.

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