During the week I spend a lot of time reading to keep up with the ins and outs of the markets and the macro-economic environment. I do so to try to assist me in planning my next move but as most macro-economic moves take time to develop I am not in a rush to change things. It has been my contention that the United States and the world are in a predicament that will lead to severe pain so for the past five years I have been slowly implementing an investment strategy that I believe will benefit from my macro-economic outlook. Most people do not want to hear my views as they are contrary to what the talking heads want you to believe and the results, if I am right, are painful but in this game you need to do your research and follow your findings in order to succeed.
This week I have been reviewing a number of articles associated with the idea of a free market. When I first started trading back in the early 80's the markets gave you ample opportunity to prosper from good solid research. Since then almost 40 years later those days are long gone. With the advent of the massive control that the Federal Reserve and other central bankers now have over the markets the game has changed. So the idea of a free market no longer exists. As the rules of the game have changed the investment strategies need to align themselves with the new playing field so let's look at the playing fields.
A free market as the definition above shows is one where there is no government intervention. Markets are left to their own devises. They will move to the beat of the economic environment and the perceived opportunities available to the companies that operate in their various sectors. When there are good times stock prices run higher as the outlook is solid and profits rise. During these times more and more companies enter the space eventually stealing market share from the incumbents and hurting the bottom line of all businesses in that space. The effect of this competition is lower prices to the consumer and expanding employment. Eventually though when the profits are too thin the weak are weeded out, layoffs and bankruptcies become the norm. Once these are cleared out the cycle repeats itself. Market forces take care of the good times and the bad times.
Fast forward to today where there is a shrinking pool of large companies that control larger and larger portions of the global market. Profits are spent not on research and development but on securing their position in the world by creating, as Warren Buffet terms, a "moat" around their business impregnable to others. The result is higher prices to consumers and lower employment opportunities. These companies can handle the down turns but due to the lack of competition during recoveries there is little in the way of employment growth. The only growth that is seen is profits.
In addition you have a Federal Reserve that is becoming more and more like the central planners of Russia and China. They are not content to let the market operate in a vacuum but tinker with its very existence by lowering rates to juice returns to investors and providing cheap capital to the too big to fail companies. The result is that the rich who benefit from these interventions get richer and the poor feel no effect of the "stimulus". At present there is an ever wider dispersion between the wealthy and the poor and this disparity is creating massive problems for growth and political stability.
This intervention is not limited to the United States but has expanded across the globe. In Japan the BOJ has not only issued debt but now owns around 40% of all the exchange traded funds on the Japanese stock markets. Furthermore they are demanding new funds be made up of socially responsible companies (read companies that benefit the Japanese people) so they are not only providing capital but are controlling the intricate workings of the stock market itself. China too has manipulated their markets more aggressively than the Federal Reserve but it is clear that they all have their arms firmly grasped around what used to be a free market.
In the volumes of historical documentation about the central planners of the world it is clear that any time a country pursues a path of central control, or control among the few, it never succeeds in the long run. There may be some short term gains but eventually it all craters. Russia blew apart, China is showing signs of instability and needs to open up to a freer market. Japan is still struggling to stimulate inflation. The issue is that the worse things get the tighter the central bankers' control over the market. I have written much since the 2008 crisis and a lot of what was written was the question why, after the crisis was averted, did the Federal Reserve not move to the side? Their job was done and it was now up to the markets to take over and sort the balance of the problems out themselves, freely; but they have continued to meddle and try to control the markets and their continued tinkering is creating the massive market instability that we face today.
The result is going to be a very bad market collapse. The issue is that this will stimulate them to try to control the market even tighter than before. At some point congress will have to step up and remove the ridiculous powers of the Federal Reserve and restore them to their previous mantra of fighting inflation and lowering unemployment, freeing the markets from their grasp. Until then my thought is that the global economy will continue to dribble forward on life support with longer recessions and little in the way of any economic recovery, forever.
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