The Phony Boom in Stocks

The Wall Street Journal reports that the rally in stocks is turning into a real bull market.

Why? Because there’s so much money around.

There’s a ‘superabundance of capital’ in the world, says Bain & Co. It’s in banks, investment funds, corporate treasuries – everywhere, except where it is needed. Households are tight. But the financial and business sectors are flush.

Bain said that the world will be ‘awash in capital’ until 2020, when financial assets are expected to be ten times the size of the world economy, $900trn compared to a world GDP of $90trn.


Who do we thank for all this money, money, money? Central banks!

The US has a QE Forever programme. Japan has announced it will do whatever it takes to get its own markets pumped up. Mario Draghi, head of the European Central Bank, said last week that he will do more to provide liquidity to Europe; the euro sold-off on the news.

And Britain’s central bank has a new head – a Canadian – who is scheduled to make a policy statement this week. Odds are, he’ll join the crowd – proposing easier money policies. As head of the Bank of Canada he presided over a system with even more debt than the US. While private debt to disposable incomes has come down in the US, it continues to go up in hockey country.

Today, debt to disposable income is at 108% in the US, after peaking out at 130% in ’07. In Canada, the ratio is 166%.

So what happens to all this new cash and credit?

Well, somebody is putting up $24bn to take Dell private. Virgin Media got a bid for $23bn. And the US stock market is near an all-time high.

Big time investors are buying thousands of single family homes – for cash.

Apple has $137bn of cash…David Einhorn is trying to get it to share with stockholders. And oh yes…US corporations have about $5trn in cash, including some $2trn said to be overseas.

But there are many who still want the feds to do more. Professor Justin Wolfers:

‘By their own framework, they’re not doing enough.’

But it’s their own framework we’re worried about. It’s bent. Twisted. Corrupt even.

Let’s see, what is really going on? What kind of game are central bankers playing?

Central banks give their friends and favourites access to almost unlimited amounts of money at nearly zero rate of interest. What do they do with the money? They buy valuable assets – houses, office buildings, companies, gold and silver.

Ordinary households aren’t getting the money; it’s locked up in the hands of the 1%… or even the one tenth of 1%. And there aren’t enough of these rich insiders to move consumer markets. Toilet paper and gasoline move up slowly. But prices for stocks, bonds, Manhattan real estate and expensive works of art go up fast.

Meanwhile, home ownership, by the people who live in them, is going down.

Stock ownership, by the middle class, is also on the decline.

Powerful, well-financed groups are buying. Middle America – short of funds – is not.

The elegance of this scam is breathtaking. Central banks print money to ‘stimulate the economy’. It doesn’t stimulate the real economy. It just makes it look as though there is real growth. Asset prices go up… just as they would in a real boom.

But in a real boom, most people would become wealthier and better off. In a phoney boom, only a few become wealthier. A phoney boom does not create wealth, it just transfers existing wealth. Central bankers give new money to their friends. The friends use it to capture a larger share of the real wealth in the nation.


Bill Bonner
for Markets and Money

From the Archives…

Money in the Time of Financial Cholera
8-02-13 – Satyajit Das

Dishonest Leaders and Delusional Voters
7-02-13 – Bill Bonner

Uranium: The Commodity Like Gold Ten Years Ago
6-02-13 – Byron King

How Australia-China Relations Are Caught in the Monetary Battle Space
5-02-13 – Dan Denning

The Great Rotation Into Stocks
4-02-13 – Dan Denning

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.

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