Let’s begin with a quote in Latin. That will put us in the right mood — reaching for the eternal verities: ‘Fere libenter homines id quod volunt credunt.’
That was penned by Julius Caesar in De Bello Gallico, his account of the Roman conquest of Gaul.
We didn’t know what it meant either, until last night. In case your Latin is a little rusty, we will give you a little WD-40. It means ‘Men willingly believe what they wish to be true.’
At least, they believe it as long as they can…
As long as stocks rise, for example, they believe the economy is recovering nicely…and that they will get richer and richer just by owning little pieces of someone else’s business.
The problem with ‘investing’
They call it ‘investing’. But that is mere flattery. Someone else already did the investing when they built the factories and developed the business.
‘Investing’ means you are doing something that will result in more or better products and services in the future…something that improves productivity and makes us better off.
When someone buys shares in a company in an IPO, he is investing his capital to help that company create future production. But when you buy someone else’s shares in the secondary market (on an exchange) all you’re doing is buying out someone else’s position and allocating your savings to some financial instrument.
Will the price of your shares go up? Or down? Who knows?
One business grows. Another shrinks. You cannot consistently know, in advance, which will be which.
And taken together, the shares in a nation’s businesses are unlikely to consistently grow at a faster pace than the economy.
In the US, for example, over the last six years, real GDP growth has averaged 0.9% a year. But stocks have gone up more than 130% in the US.
How is that possible?
Well, first, earnings rose. Businesses ditched expensive labour…halted new projects…trimmed down…and boosted profit margins. They also benefitted from low-cost financing, which reduced their interest expenses.
Then the liquidity produced by QE and ZIRP needed a place to go. It could not get to the consumer, because households were still cutting back on debt and wages were actually going down. So, it stayed in the financial sector, pushing up asset prices.
Result: stock prices far in excess of GDP growth.
Perverting the system
But you were probably concerned about our garden party here in France, weren’t you?
Well, despite the drippy forecasts, the rain held off. What a lucky break! The guests could spread out on the lawn. Otherwise, they would have had to squeeze into the house.
Among the guests was an attractive French woman in her 70s, an economist…
‘I am so annoyed by Monsieur Piketty. He has become famous. The rest of the world must think we French economists are a bunch of idiots. Imagine…Keynesianism…the class struggle…the envy of the rich…it’s as though these were new ideas that hadn’t been thoroughly discredited.
‘I don’t know why they take Piketty seriously in the US. I thought American economists were smarter than that…’
We rose to defend our countrymen:
‘Oh…no. American economists are as dumb as the rest of them. They all seem to believe capitalism needs to be carefully controlled. By them, of course.
‘Then they control and pervert the system…it blows up…and they blame it on capitalism. I think there is a catastrophic episode of that coming down the pike.
‘They distort asset prices with QE and ZIRP. Then people invest their money foolishly — because they are reacting to the distorted asset prices.
‘Just look at the US stock market. It is near an all-time high…even though the economy is barely growing. The prices are based on two things that can’t possibly continue: cost cutting and zero-interest-rate policies. Stock prices could easily be cut in half.
‘But this time, it’s not just a few foolish investors who will lose money. It will be millions of ordinary investors and business people…and households…and governments that depend on tax revenues.
‘We could be looking at a major problem. And it will be blamed on capitalism…’
‘Fere libenter homines id quod volunt credunt,’ our guest concluded.
‘Yes, madam, the canapés are very nice,’ we replied.
For Markets and Money
From the Archives…
The Murdoch Indicator
6-8-2014 by Dan Denning