In traditional crime noir fashion, Van Heflin says in the 1942 film, Johnny Eager: “You knew when a woman loves you like that, she can love you with every card in the deck and then pull a knife across your throat the next morning.” This is how the stock market behaves – at least in today’s arena. One session, euphoria rushes over you, and your pockets are full of profits. The next day, the dignified decorum has vanished, and there is blood on the streets. The lord of stocks can giveth and taketh away. But the best of times and the worst of times on stock exchanges everywhere are being managed by the most powerful institutions in the world: the Federal Reserve and its partners in distortion, manipulation, and moral hazard.
Mad As Hell
One king of Wall Street is mad as hell and not going to take it anymore.
Ray Dalio, the billionaire hedge fund manager, has been burning the system to the ground in recent months, even before the Coronavirus dismantled the decade-long bull market. From newspaper op-eds to rants on business networks, the head of Bridgewater Associates has been blunt in his assessments of everything wrong with financial markets.
His latest spot-on analysis targets capital markets and central banks. Speaking at the Bloomberg Global Asset Owners Forum, Dalio averred that the central banks’ interventions had forced capital markets to no longer be free since they stopped “allocating resources in traditional ways.”
Dalio warned that the Federal Reserve and its counterparts would continue to pump money into the system and expand their balance sheets. The only other choice, he says, “is the sinking ship.”
But this is where he ventures off course. He proposed reforming capitalism so that it benefits everyone, suggesting that the free-market capitalist model has only helped the few at the top. How can you want to change a system when it no longer exists?
Central Banks and Capitalism
Capitalism and central banks go together like oil and water, pineapple and pizza, and deodorant and Antifa basement-dwellers. Central banking is the antithesis of capitalism, especially today’s aggressive neo-Keynesian institution that has expanded its mandate from full employment and managing inflation to distorting the economy and bailing out Wall Street. Even with the best of intentions, the central banks’ interventions manipulated markets, spawned a moral hazard, and blew bubbles that will ignite mass devastation when they pop (see: dot-com and housing bubbles).
The bull market since the end of the Great Recession produced overvaluation that had been ubiquitous throughout the equities market. When the coronacrisis slaughtered the New York Stock Exchange, it trimmed about 30% of share prices. Did the public health crisis wipe out all the impressive gains since 2009? Hardly. The liquidity crunch only eliminated most of the appreciation of the last two to three years, proving the immense and unjustified asset inflation of the last decade and change.
Capitalism is meant to extend you the freedom to try, the freedom to succeed, and the freedom to fail. The Fed gives the nod to the first two, but its policies over the decades have insured against the final freedom as its efforts essentially privatize profits and socialize losses. This is not capitalism.
As Dalio notes, central banks all over the world have gotten rid of the “free” aspect of capital markets. By flooding the economy with an astronomical amount of liquidity, and the promise of even more injections has endangered the foundation of financial markets. The investment community has carte blanche to make unwise decisions since they are shielded from risk by the Fed. The Eccles Building has said that it is ready and willing to purchase everything without a limit during the pandemic and in the recovery phase. What kind of message does that send to the pillars of Wall Street?
The Fed can conduct all the stress tests, deliver semi-annual testimony to Congress, and try to be woke as much as it wants. Its actions do not take away from the fact that capitalism has endured a severe beating at the hands of the central planners. Indeed, the U.S. and many economies across the globe are primarily capitalistic. But it is a system that is under constant fire and has been bastardized by the prominent government acolytes who wish to manipulate the outcomes of a free-market infrastructure.
So far, capitalism has withstood the onslaught of punishment, like the young upstart pugilist who has something to prove to his naysayers.
The Reality of Capitalism
Any time even a modicum of capitalism is instituted, prosperity is achieved. If Venezuela were to, for example, ease up on price controls, you could solve part of the food crisis. If Zimbabwe respected private property and the human capital of many segments of society, it could once again become the breadbasket of Africa. If the U.S. refrained from repeatedly bailing out the titans of finance, taxpayers would not be forced to subsidize – directly and indirectly – their reckless behavior. There is nothing inherently wrong with capitalism. Like baseball and Rita Hayworth, it is the most exceptional system ever devised by God or man. It is the central planners’ interventionist fetishes that produce these aberrations and then pin the blame on private markets. To sound like a Raymond Chandler or Dashiell Hammett novel, the Abercrombie central bankers are all wet in the notion that printing sourdough Lincolns and sawbucks is the panacea to eternal prosperity. It is time the Ben Bernankes, the Janet Yellens, and the Jerome Powells of the world take a powder and have one final kiss-off.
Read more from Andrew Moran.