FRA Co-founder Gordon T. Long discusses with John Rubino
Government Interference
"Governments are acting like they don't think they can handle a
garden variety equities bear market anymore."
You're seeing central banks all of a sudden become among the biggest
buyers of equities in the world. It's one thing to buy bonds and intervene in
the interest rate markets, but another to buy equity. This is governments
buying the industrial capacity of the world and from an Austrian Economics
point of view, this is catastrophically dangerous.
"If the central banks of the world own all the major equities,
then they get to direct investment by those corporations, and that's a recipe
for something that isn't capitalism anymore."
"Market based economies are the only method of organizing a
society that's been proven to work, to generate progress, and pull people out
of poverty, and we're actively doing away with that."
Hedge Fund Problems
If you look at the hedge funds, you get a sense of how distorted our
markets are. They've been under-performing, for example, the S&P 500. You
could buy an ETF that charges next to nothing, and do better than the average
hedge fund. You're seeing big institutions pull money out of hedge funds and start
buying ETFs and a lot of brand name hedge funds are folding or scaling back,
and this is a really difficult time in that market. It's not going to get
better any time soon because governments are distorting markets more and more
progressively by buying stocks indiscriminately, or forcing interest rates
down to artificially low levels, and generally messing around with the price
signalling of free markets.
A lot of the heavy hitters are shorting everything in sight and a big part
of the reason is that they don't trust the markets anymore. The people who
have been worried about the market for years now have some high powered money
on their side and assuming they're right again, things are going to get
interesting in the coming year.
Besides private placements, hedge fund money is also flowing into emerging
markets stocks and bonds, and that's a direct result of these developed
markets being distorted by government actions.
Changes in The Equity Market
Corporate share repurchases involve hundreds of billions of dollars, but
the flow into equities is slowing down dramatically. Corporations have hit
the point where they can't borrow anymore, and they're starting to be
punished for borrowing so much money to buy back their stocks. Buyback
announcements are going down at the same time that corporate equity issuance
is going up, for the first time since 2010 or so. At the same time, corporate
insiders are selling stock at a rapid pace. These are things that usually
precede bear markets or at least dramatic corrections in share prices.
"Somewhere in the US government there's an agency that's buying
stocks aggressively right now. They just don't tell us because they lie to us
in ways some other central banks don't lie to their people."
On the one hand you have everything that relates to market valuations and
rational behavior on the part of private sector actors pointing to a bear
market, but you also have governments and central banks with effectively
unlimited funds buying aggressively. That along with terrified foreign
capital flowing into the US are two things, that if you are shorting the US
market, you've got to be worried about. There are big forces contending, but
we've never been here so we can't say anything with certainty except that
chaos is the inevitable result.
This is an incredibly hard time to manage money because it's not about the
fundamentals anymore. If those are your only tools, then you've got a real
problem.
"I don't envy professional money managers and I think that for
most of them, this is going to end really badly... It's highly unlikely that
you're going to make a perfect set of decisions when you're still learning
about this new world."
The Market is No Longer a Market
"There's not a single financial market that isn't manipulated in
some way by someone."
There's no actual free market that you can point to and participate in.
This goes on until these guys run out of ammunition, when we don't accept
these fictitious fiat currencies as having some intrinsic value. As long as
we're willing to be fooled in that way, then governments have ammunition to
continue to manipulate the markets. This could go on for a while, or blow up
overnight; there's no way to tell the timing.
People are starting to pick up on the fact that governments are trying to
devalue their currencies, but it's making more and more sense for people to
move some of their fiat currencies into things that governments can't make
more of. That's been gold and silver, lately. The gold and silver miners have
been reporting phenomenally good numbers. You're seeing precious metal miners
report really low cost numbers and dramatically higher profit numbers, and
they are almost alone in having this kind of a trend. It doesn't mean they
won't have a big correction going forward, but it does mean that there are
suddenly healthy businesses, and that's a good place to be when you're
worried about the health of rest of the world.
We are now printing over $200B a month between the ECB, the Bank of Japan,
and the Bank of England lately. What they're doing is they're rotating it.
95% of the world's currencies are Bank of Japan, the Sterling, the Euro, and
the Dollar, and if you can rotate them around there's nowhere to run, other
than hard currencies and outside that gain. Its called the Bernanke Doctrine
of "Enrich-Thy-Neighbor".
Almost everything in Keynesian economics is short term with terrible long
term consequences. We're living in previous Keynesian economists' long term
now and we're suffering the consequences of previous policy mistakes. The
guys in charge now are making bigger and bigger policy mistakes that we a few
years from now, or our kids, will have to deal with.
"The idea that tweaking systems in the short run to keep it in a
fictional equilibrium is all you need to do if you're a government running an
economy, is profoundly mistaken."
Karan Singh karan1.singh@ryerson.ca
Sarah Tung sarah.tung@ryerson.ca
