A Financial Crisis that Repels Private Capital

“Capital & Crisis”… Those are the words our colleague, Chris Mayer, selected several years ago to launch the investment letter that still bears this same name. But Chris did not merely choose these two words, he bound them together into a masthead that defines the essence of capitalism (and therefore of his newsletter).

In other words, capitalism relies on both capital and crisis. It relies on a continuous cycle of capital destruction and formation. In fact, in the exact same moment that crisis destroys the capital of one party, it attracts the capital of a new party. As such, the dumb money perishes and the “smart money” multiplies.

During the last five years, a lot of dumb money has perished. A lot more of it would have perished were it not for the aggressive market manipulations by “even dumber” politicians and central bankers.

Thanks to their multi-trillion-dollar meddling, the Western World sits atop a crisis that is incapable of attracting fresh capital. Thanks to the “successes” of the Federal Reserve, US Treasury and European Central Bank, numerous financial firms that deserved to fail continue to operate and numerous governments that deserved to go bankrupt continue to hobble along.

By propping up failure, these professional meddlers also repel the fresh capital that would begin to heal what is broken. In other words, by propping up failure, the professional meddlers are preventing this particular crisis from producing the crisis-type pricing of assets that would attract a new generation of private capital.

At the same time, the meddlers have also “succeeded” in obliterating many of the laws and legal precedents that had guided the bankruptcy process in the US for more than 200 years.

The consequences aren’t very pretty…as the chart below illustrates:

A Bull Market in Unemployment

In terms of employment, the current US growth trajectory is the most pathetic “recovery” of the post-WWII era. The reasons are obvious (except to the meddlers):

1) A crisis that does not permit crisis-pricing of assets will not attract new capital.

2) A crisis that discards the rule of law will not enable new capital to invest with confidence.

No new capital, no new employment.

Despite these stark realities, the meddlers seem to have no “Plan B,” other than to continue implementing the same old “Plan A” that has failed repeatedly. Plan A, as we know, consists of three principal tactics: suppress interest rates, print money, provide bailouts to incompetent bankers and bloated governments.

Thus, last Friday’s grim employment report goaded the Wall Street “sheeple” to resume their incessant bleating for “Mor-or-or-ore stimulus!…Mor-or-or-ore quantitative easing!”

No doubt, that’s exactly what’s coming our way…as gold’s $65 bounce to the upside suggests. More stimulus, more QE, more ad hoc rule-changing, more bailouts, more of everything that forestalls crisis pricing and terrifies private capital.


Eric Fry
for Markets and Money

From the Archives…

When Capital Comes A Knocking
2012-06-01 – Greg Canavan

When the Pain From Spain Moves Across the Plain
2012-05-31 – Greg Canavan

Greek Game Theory: Default, Devaluation, Austerity, Deliverance?
2012-05-30 – Nick Hubble

Desperate Stock Market Traders Waiting To Be Made Whole
2012-05-29 – Murray Dawes

Greek Elections: The Fear of Uncertainty
2012-04-28 – Dan Denning

Eric J. Fry
Eric J. Fry has been a specialist in international equities since the early 1980s. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short- selling. Mr. Fry launched the sometimes-abrasive, mostly entertaining and always insightful Rude Awakening.
Eric J. Fry

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