Ongoing government and central bank interventions has transitioned the economy and financial markets into zero sum games. It means that profits are private but losses and risks are transferred to the public. Profits are made at a high cost, by putting society in a position of disadvantage. These are no longer markets based on exchange where parties are benefitting or suffering from the possible negative consequences of the transaction. In normal situations, profits, as well as costs and risks are private, aka the responsibility of the parties who transacted and took risk to make a profit. That is the one and only the place is where risks and real costs need to be addressed.
A good example of the zero sum game is the stock market. The ongoing and increasing Fed interventions gives the big players and corporate insiders opportunity to exit the market by selling stocks at high prices to bag holders. Personally I think this is the most suitable perspective how profits are made private and the risks are transferred to the public, aka pensions and taxpayers.
However, there’s a dangerous belief nowadays that the Fed will be able to provide a floor under this market and that due ongoing interventions in the Treasuries, Repo and corporate bond market the stocks market will get even more higher. The big question is whether or not this assumption is true. Let me ask you a few questions: why would you think this time it’s different and the Fed will be successful? In the 2000 tech bubble, the 2007/08 housing bubble the Fed failed miserably to do so. Now we have a huge ‘almost everything bubble’ in real estate, stocks, government and corporate bonds, student debt, credit card and car loans. That are lot of balls that need to be held in the air.
You may think that the size of current Fed interventions is impressive. But another perspective to look at it is to question the increasing size and permanent nature of the Fed interventions. As the bad state of the real economy becomes clearer by the day helped by Corona policies, why would investors go on buying stocks that have been growing into a bubble since 2009? Why is Gold slowly moving higher in Dollar terms if stocks are still so attractive? Why have T Notes and T Bonds moved higher at a time that these aren’t the most active investments due their low yields? Why are oil and commodities moving up slowly while the real economy is in bad shape?
My take is because smart money understands the nature of zero sum games, and knows that the Fed interventions won’t end well. It’s like the chairs on the deck of the Titanic. Instead hoping to get a chair when the music stops and the ship sinks, they understand it is better to abandon the ship before the music stops and the ship sinks.
Printing money and debt creation is the same as taking drugs, some day you had too much of it as the drugs harmed your body too much that it can’t recover anymore. It’s the same with ongoing money printing and debt creation. There will be a moment that the devastating effects of money creation on the real economy can’t no longer be ignored as the growing debt bubble eats away the wealth that has been build up the last 70 – 80 years. If everything is turned into a debt burden that can’t be served anymore by positive cash flows, do you really think it will keep stocks sky high? By the way look at a chart of the S&P500 and look how it has been doing since early 2018. It made a measly new high!
If it’s hard if not impossible to build wealth in a zero sum world, we should also wonder if the preservation of wealth is secure. It’s wise to take a look at the state of pensions. Pension funds doing increasingly more business with all sorts of non-transparent Wall Street private equity firms that claim to offer high returns on investment in this zero sum world (pension funds need to make a 7% return per year). The reality of such practices are that pensions are being plundered by the high fees bills form those private equity firms and thus that pension funds can’t deliver the promised pensions to its participants, or worse, go bust due years of such corrupt malpractices. In case you don’t believe this, read: “Who stole my pension?”.
Last but not least what has been left over of the real economy has been devastated by the Corona policies during last 3 months. Politicians think they can micro manage society and control a virus by forcing businesses to close. Another zero sum game as big corporations are getting bail outs and small business must try to survive. Ask yourself the question who has to pay the bill for all this madness? It isn’t politicians who implement these polices. Don’t forget that.