The market is down today, probably because investors have had a chance to look at the supposedly good employment report released Friday and discovered some shocking bad news: “full-time jobs declined by 523,000 and part-time jobs surged 840,000.” It’s widely believed employers continue to replace full-time workers with part-time workers to avoid increased benefits expenses, notably the Obamacare mandates-to-come on over-30-hours-a-week employees. The widely-cited unemployment rate is declining because discouraged workers have simply dropped out of the labor force or work off the books in the growing underground economy. A move toward European-style micromanagement of employment means a move toward European-style underemployment and corruption….
For those of you who don’t accept ZeroHedge (with its tendency to sensationalize) as a source of investment thinking, we have this recommended New York Times piece saying the same thing: probabilities favor very low or no returns on almost all categories of investment for the near and medium term. This situation has been engineered by the world’s central banks, who decided to suppress interest rates and savers’ incomes to lower long-term rates on riskier investments, which supposedly would bring back the growth economy and full employment. It hasn’t worked, and the recovery from this recession has been slower and weaker than the historical norm, but it did boost bank profits and bail them out at taxpayers’ and savers’ expense. Diversion of investment funds to politically-connected firms and interests has led to massive losses (Solyndra et al) and misinvestment: what capital is being invested is misallocated because the central banks have put a thumb on the risk scale, so risky projects that would not make sense at free market interest rates are getting funds while more valuable projects without political sponsorship go unfunded.
In Spain, where there was a debt crisis just two years ago, investors are so eager to buy the government’s bonds that they recently accepted the lowest interest rates since 1789.
In New York, the Art Deco office tower at One Wall Street sold in May for $585 million, only three months after the going wisdom in the real estate industry was that it would sell for more like $466 million, the estimate in one industry tip sheet.
In France, a cable-television company called Numericable was recently able to borrow $11 billion, the largest junk bond deal on record — and despite the risk usually associated with junk bonds, the interest rate was a low 4.875 percent.
Welcome to the Everything Boom — and, quite possibly, the Everything Bubble. Around the world, nearly every asset class is expensive by historical standards. Stocks and bonds; emerging markets and advanced economies; urban office towers and Iowa farmland; you name it, and it is trading at prices that are high by historical standards relative to fundamentals. The inverse of that is relatively low returns for investors.
The phenomenon is rooted in two interrelated forces. Worldwide, more money is piling into savings than businesses believe they can use to make productive investments. At the same time, the world’s major central banks have been on a six-year campaign of holding down interest rates and creating more money from thin air to try to stimulate stronger growth in the wake of the financial crisis.
“We’re in a world where there are very few unambiguously cheap assets,” said Russ Koesterich, chief investment strategist at BlackRock, one of the world’s biggest asset managers, who spends his days scouring the earth for potential opportunities for investors to get a better return relative to the risks they are taking on. “If you ask me to give you the one big bargain out there, I’m not sure there is one.”
But frustrating as the situation can be for investors hoping for better returns, the bigger question for the global economy is what happens next. How long will this low-return environment last? And what risks are being created that might be realized only if and when the Everything Boom ends?
In my personal investments, I’ve reduced exposure to stocks and bonds, raised cash, taken a small position (15%) in precious metal miners, and done what I could to reduce risk since this environment will probably either result in another decade of stagnation a la Japan, or crash in some unforeseeable way when the imbalances prevent any central bank response. As I said a few years ago, the Fed has bailed out all the banks, but who bails out the Fed if their newly risky balance sheet assets go south? The Paul Krugman answer (print money as needed!) will not stop the collapse. If things muddle along and resolve without a crisis, my investments will return a bit less, and I will be happy if that happens!
In the normal operation of a capitalist economy, high profit margins in some products would make it very profitable to invest capital in increasing supply of those products, reducing their price, the margins of production, and eventually the returns on investment in that product; this increases everyone’s standard of living as capital is allocated to the projects that best serve consumers.
But if you look at the products that have gone up most in price without any improvement in quality, you find sectors that are heavily regulated and bureaucratized, where barriers to entry from political management are so high it is not worth investing until profits are enormous and some can be kicked back to the politicians. Health care: supply constrained by government regulation of supplies of doctors, nurses, and treatments. Education: K-12 innovation squelched by union contracts, local monopoly, and federal oversight; post-secondary, half government run and 100% regulated, with increasing salaries to ballooning numbers of administrators, subsidized student loans, and dumbed-down programs suited for the dumbed-down graduates of modern public high schools. Rents: in highly-regulated coastal cities like San Francisco and New York, where local governments already have rent-controlled or mismanaged their way into housing shortages, even stratospheric rents call forth little new supply because the process for obtaining permission to build new housing is so slow and politicized. It takes a huge premium to induce builders to even try where their projects can be made worthless by lawsuits and local vetoes. Newcomers seeking an apartment to rent find themselves in a scrum of 20 or more people at open houses and are sometimes asked to offer more than the asking price along with their life history, credit report, and occasionally bribes. $5,000-a-month one bedrooms are starting to appear in good locations. Meanwhile, transit service is poor and subject to whimsical strikes and slowdowns by the overpaid union workers who might as well own the systems, so transit to lower-cost areas is slow and inconvenient. This is not normal!
Cable TV: has increased in price much faster than inflation as Congress encouraged local monopolies and local governments resist new services (unless bribed.) People are voting with their feet: they already left their landlines, and soon the cable companies will only be rescued by their monopolies on broadband access.
All of these regulations and restrictions on new entrants keep profits high for incumbents and are supported by their political donations, but at some point the losses to consumers add up and they revolt — by not buying, or working off book, or not getting married, or not buying a house. The younger generation is slowly realizing that they’re being bled dry by old people and politicians who lie to them without consequence and promise free or low-cost routes to a better life that turn out to be crap, while the politicians enjoy golf, jet about at public expense for their party fundraisers, and pile up magically-increasing net worth. The economy is stagnant and rigged in favor of the donors to the political parties, and the future has already been mortgaged and sold.
How can we break the cycle of donors financing politicians who, in turn, increase the profits of their donors?
One intriguing idea is to allow completely free donations to candidate’s campaigns with the condition that they must be anonymous — the conduit would remove all information about who gave what so neither the candidate nor the public could know where the money came from. This would tend to remove any chance of quid pro quo donations.
Since there’s a big free speech issue in restricting contributions, second-best is disclosure — allow any amount from any (domestic) source, but fully disclosed.
A raft of other reforms — end the revolving door which allows government officials to cash in as lobbyists or influence-peddlers after they leave government; stop funding the travel expenses of President and Congressmen for fundraising and make all communications of officeholders public; end the micromanagement of taxes and business affairs, the corporate welfare schemes, the agribusiness subsidies. This would starve the machine of its power to extort money from business in return for favorable legislation.