Today, we are looking more deeply at how the Federal Reserve’s fake money — approximately US$8 trillion of it since 1999 — has fouled the economy and corrupted its major industries.
And none has been more corrupted than the one that got most of the money — Wall Street.
We are in a privileged position. In our own business, we see financial excesses backing up like a clogged toilet.
We see the rush of enthusiasm…the gush of new money…and the market flush with optimism, fantasy, and fraud.
And if we pay attention, we may know when to expect it all to go down the drain.
That’s right. We’re in the financial industry too. And just looking at what investors want to learn about is a good indicator of what’s ahead.
When they are most athirst for a sector…a technology…or a market — it is ready for a correction.
Next big score
For example, for many years now, we’ve seen a decline in interest in our Diary.
We don’t take it personally. Here at the Diary, we aim to connect the dots and figure out what is actually going on. But when the money is flying fast and furious, people only want to know how to get some of it.
Old-fashioned, long-term value investing falls from favour. Experience and reason give way to trading tricks…and technical jargon (even when nobody understands what the hell it means) is the lime-coloured leisure suit of the day:
‘You want to buy into the metaverse, with a disruptive new blockchain technology, bigger than 7G…bigger than the internet…more important than the wheel?
‘How about an EV with a trillion-mile battery…the next hot crypto…and a $5 gazillion new market? It’s going to the moooon! And Elon Musk is already on board. But be sure to act before midnight tonight!’
Buy and hold is out of style. Now, everyone is looking for the big score on new technology. The next Tesla!
No real investment
But even fast-moving blockchain start-ups aren’t racy enough for today’s players. They want to trade options on rocketing stocks. The Wall Street Journal reports:
‘So far this month, single-stock options with a notional value of roughly $6.9 trillion have changed hands, well above the $5.8 trillion in stocks that traded, according to Cboe data through Sept. 22. […]
‘By one measure, options activity is on track to surpass activity in the stock market for the first time ever. In 2021, the daily average notional value of traded single-stock options has exceeded $432 billion, compared with $404 billion of stocks, according to calculations by Cboe’s Henry Schwartz. This would be the first year on record that the value of options changing hands surpassed that of stocks, according to Cboe data going back to 2008.’
Trading options is not ‘investing’ in the classic sense. You’re not counting on earnings to payoff, neither in the form of dividends nor in capital gains. Instead, you’re just betting that you’re on the right side of the trade.
There’s no real ‘investment’, in other words. No new factories. No new employees. No new product lines or improved service — nothing that will increase the world’s wealth and payoff for investors.
It’s not win-win…it’s win-lose. For every winner, there’s a loser. Overall, the sum is theoretically zero.
In practice though, the sum is sub-zero. Remember, you either make it — by offering wealth-increasing goods or services. Or you take it — by robbing a liquor store…going into politics…or gambling.
But when making goes down and taking goes up…the world is a poorer place. Precious capital is misallocated…squandered on buybacks and pointless ‘wars’.
What really counts in an economy is net investment — how much money is being saved and used to build more wealth? And last year, that number was little changed from 22 years ago, even though the economy is now more than twice as large.
Even the nation’s most prestigious and wealthiest universities have gotten the get-rich-quick bug. As colleague Byron King puts it, their endowments have become ‘hedge funds with universities attached.’
Again, the WSJ is on the case, ‘University Endowments Mint Billions in Golden Era of Venture Capital’:
‘Large college endowments have notched their biggest investment gains in decades, thanks to portfolios boosted by huge venture-capital returns and soaring stock markets.
‘The University of Minnesota’s endowment gained 49.2% for the year ending June 30, while Brown University’s endowment notched a return of more than 50%, said people familiar with their returns, which aren’t yet public.
‘Meanwhile, Duke University over the weekend said its endowment had gained 55.9%. Washington University in St. Louis last week reported a 65% return, the school’s biggest gain ever, swelling the size of its managed endowment pool to $15.3 billion. The University of Virginia’s endowment reported a 49% gain. Universities’ returns may include portions of endowments, plus other long-term investments.’
You’d think such august institutions of higher learning would be asking some questions. How come our investments increase at a 50% rate…even when the economy only struggles along, gaining less than 5% a year?
How is that possible?
Tune in tomorrow…
For The Rum Rebellion
PS: The Rum Rebellion is a fantastic place to start your investment journey. We talk about the big trends driving the Australian Economy. Learn all about it here.