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Change is Coming; A Perpetual Bull Market*

Change is Coming

Remember when successful people who became wealthy were treated as paradigms of the American Dream? The successful entrepreneurs of the very recent past, the Bezoses, Bloombergs, Schultzes, Sandbergs, Romneys and Zuckerbergs, are today’s Fat Cats. Bernie Sanders says that “We live in a nation owned and controlled by a small number of multibillionaires whose greed, incredible greed, insatiable greed, is having an unbelievably negative impact on the fabric of our entire country.” And, according to Alexandria Ocacio-Cortez’s (that’s AOC’s) policy advisor, “every billionaire is a policy failure.” So long as capitalism was raising the standard of living for everyone, it was a triumph. That uniform increase in the standard of living of workers and capitalists came to an end in 1971. Since then, the rate of return on capital has far exceeded that of labor:

Image result for u.s. productivity vs real hourly compensation

Although workers have significantly increased their productivity over the past 48 years – to the economic benefit of their employers and, many would argue, to the benefit of America and to the values that Americans have always cherished –, their wages, adjusted for inflation, have stagnated. For many, this has created the perception that the system is rigged, that the rich have received an unfair advantage in the American system, that the wealthy somehow have been cheating their fellow Americans. The proposed solutions therefore appeal to that perception, to the anger felt by many Americans. Those solutions are politically expedient – they’re being put forth by politicians rather than economists. They are the same ones advocated in other countries and in prior eras: Tax the rich. Punish the rich. Socialism will work better and for more people. Take away the ill-gotten gains of the capitalists undoubtedly earned on the backs of hard-working Americans. AOC advocates a marginal Federal income tax rate of 70{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} (instead of the current 37{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35}) on income over $10 million. “Americans are going to have to start paying their fair share of taxes,” she said on 60 Minutes. Elizabeth Warren would impose a wealth tax of 2{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} on Americans having a net worth of more than $50 million and 3{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} on billionaires. Bernie Sanders’ bill is called “For the 99.8{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} Act” and would tax estates of the 0.2{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} of Americans with a net worth of more than $3.5 million. Republicans, recognizing a hot issue when they see one, are jumping on what is fast becoming a tax-the-Fat-Cats bandwagon (especially since a great many billionaires are Democrats). It’s going to get worse. Change is coming. (At least no one is talking yet about dusting off the guillotines.)

A Perpetual Bull Market

Is it possible?

The U.S. stock market continues its winning run, albeit with brief intermissions, the most recent beginning in November when Fed Chairman Jay Powell signaled that the U.S. economy might be overheating and interest rates therefore might need to be raised several times in 2019. The stock market didn’t appreciate the possibility of higher interest rates. Higher rates would mean that (1) bonds offer an enhanced alternative to stocks, something that index funds and President Trump wouldn’t appreciate, and (2) the costs of borrowing to buy stocks would be higher, something that leveraged stock market investors wouldn’t appreciate. Ahhh, but Chairman Powell soon recognized that he’d been wrong. His thought of perhaps raising interest rates in 2019 had been a bad idea. The Fed, you see, had gotten it all wrong. All those highly-trained economists had been 180 degrees off. Haha. So sorry. The U.S. economy apparently had not been charging forward, on the verge of overheating. It actually had gotten a bit weaker. So much weaker, in fact, that it may be in need of additional stimulus. Chairman Powell therefore further corrected himself with a straight face last week as he doubled down on the Fed’s decision to withdraw from tightening by saying that the Fed would stop running off its almost $4 trillion balance later this year. If the Fed follows through, it will stop withdrawing liquidity from the economy in what would be, in effect, a further stimulus. That would mean that the monetary stimulus that’s boosted the stock market since 2009 would continue. That also presumably would mean that the success the Fed enjoyed in manipulating fine-tuning the economy will continue as the money floating around the economy at historically low interest rates will continue to slosh around. Where will that liquidity go? Since it hasn’t been going into new plant and equipment, it presumably will go to the same place it’s been going for the past 10 years – the stock market. Will that mean that the U.S. economy will “just keep rolling along” at the same modest growth rate? That appears to be the Fed’s goal. Is the U.S. economy therefore being managed by a carefully executed fiscal stimulus program overseen by the Fed? Or is the Fed managing fiscal stimulus simply in order to manage the stock market? Perhaps they’re one and the same?

Not surprisingly, the sharp stock market correction of December reversed in January and February.

Other central bankers apparently are also feeling the need for fiscal stimulus. Elsewise, why did the European Central Bank’s (ECB) chief economist indicate that the ECB is considering bringing back “targeted” longer-term refinancing operations? That’s an emergency lending measure that’s another term for quantitative easing. And why did the Bank of Japan say that it was ready to ramp up stimulus again (it never stopped its quantitative easing money printing program). And why did the People’s Bank of China massively hike its aggregate financing available in the first two months of the year (also causing Chinese margin debt to soar)? Oh, and China has decided to lower its tax rate by lowering its VAT tax. Fiscal stimulus wears many faces.

As long as the largest economies – the U.S., China, the EU, Japan and Great Britain – continue to act in concert coordinate their fiscal policies by stimulating their economies – in effect, printing money –, there is little danger of potentially lethal economic disconnects. But for how long can money printing, GDP growth, deflationary and inflationary risks be managed? And that management be coordinated? Just how good are the central bankers? And for how long can geo-political and domestic policy risks remain irrelevant?

Some economists, and several Democratic Presidential hopefuls, have argued that central bank policies have proven the case for money printing. Fiat currency is, after all, unlimited. Governments can print as much as they deem necessary. Why shouldn’t governments therefore print money to raise the living standards of their citizens and stimulate their economies, whether by quantitative easing or by a universal basic income, Medicare for all, etc., etc., etc.? A government’s printing press can do even more. It can create cash and distribute that cash to its people. What possible risk could that hold? After all, the Fat Cats have been getting wealthier by money printing flows into the stock market. Why shouldn’t that wealth increase be enjoyed by everyone? Give all citizens $10,000, $50,000 or $100,000! That would lift everyone out of poverty and, at the same time, stimulate growth since people will spend that money on outputs. Companies will manufacture more to meet the demand and will have to hire more employees to do so. Perhaps this is a policy whose time has come? At least, so say some adherents of Modern Monetary Theory.

The rebound from the Great Recession has been the slowest in history – an average of ~2{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35}/year. That doesn’t necessarily mean that the recovery has been weak. It just as easily may mean that the cycle will be longer, more muted, the rate of growth more gradual, and the eventual recession further off in the future and itself more muted. If so, the Fed’s money-printing will have been a wild success. What is clear is that governments – everywhere – are doing their very best to bring about that result by micromanaging their economies and delegating most of that task to their central bankers. The self-evident truth is that we have entered a period of economic micro-management by central bankers. While not the classical definition of socialism, it is nevertheless a species of central government management that differs materially from capitalism. A consequence of centrally managing an economy is that its stock market also becomes managed. A rising stock market raises all spirits. How long will this continue?

Finally (from a good friend)

┬® Copyright 2019 by William Natbony. All rights reserved.

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