People’s Economics – Investment

After World War II, America settled down to a comfortable life and much of the world started to rebuild. Using the industrial models that defined the times, including the war, the entire process was described in terms of developing a “consumer economy.” The main economic function of people was to consume what industry produced, guaranteeing profit and growth. It was dynamic in that money changed hands rapidly, yet static in the view of where capital comes from and how it was used.

As more nations developed the process was expected to continue. But it did not. Societies, particularly in Asia, found many reasons to save money and develop themselves and their families for the long haul. This has been a critical change which, when applied properly, makes market based systems work even better.

This is also why a true market based system focused on people has to emphasize investment over consumption.  It is a big part of the definition of People’s Economics, as this continues.

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Forcing Investment

The dust is settling. After the various panics that rocked the early part of the year, mainly due to a slow-down in China and the developing world as a whole, Brexit put another shock to the system. Markets panicked and everyone became even more risk averse. But with just a little bit of time we can see that even more than we predicted at the start of the 2016 one thing has become obvious by mid-year – the United States is the only solid place for any kind of investment in the world.

It’s still a tough fight to get the money to where it does the most good, at the risky start-up end of the economy. And there are plenty of signs of fear running amok more generally, expressed in the price of gold. But there is little doubt that the US is the place to be – all the moreso with Brexit.

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Spatters of Dragon Blood

The “Panama Papers” were a delight for conspiracy theorists, who have long contended that the global monetary system is fundamentally corrupt and that world leaders are skimming huge amounts of money off the top of it. They are, of course, correct.

But lost in the salacious details of the story has been the real business of Mossack Fonseca, which is moving money out of China. We’ve covered this story before when the official estimates were that half a trillion left China last year alone. That number, it turns out, was off by at least as much again – and possibly much more.

At least a trillion dollars left China last year through a wide variety of creative means. Mossack Fonseca’s offices in Hong Kong handle a third of their total business, moving money around the globe through over 60k shell companies at an incredible pace. How much? That’s the multi-trillion dollar question.

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Drama Over Yet?

The stock market has rallied for two days, with the S&P500 back at 1987 from its low of 1869. It’s still down 6.8% from its peak of 2130, set in May, (and nearly matched just a month ago) and down 3.5% for the year. It’s almost like the crash never happened, right?

Well, no. But there is a lot of good news for the underlying economy, some of which came in this week. The really good news is still out into next year, which is essentially forever to this market. We have to get over an interest rate hike, which will definitely come this year no matter what you read elsewhere, and a lot of jitters.

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Fear Doesn’t Glitter

“All money is a matter of belief.”
– Adam Smith

Gold is taking a solid beating these days. It’s been slipping for a while, but when China revealed that it’s reserves were less than believed it really fell – quickly slipping below $1,100 per ounce when one mysterious trader dumped everything. It’s now more than a third off its 2010 peak and nearly everyone believes that it’s doomed to slip below $1,000 per ounce by the end of the year.

What happened? Isn’t gold the ultimate money in an unstable world? The short answer is no, and this has as much to do with the rise of the US Dollar as anything. But in the end gold is not as much a form of money as it is a barometer of fear – a commodity that appears to be in much shorter supply today than it was just a few years ago.

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A Tale of Two Classes

The stock market is tanking. It has to bode poorly for the economy, yes?

If we’ve learned one thing over the past six years, it’s that what is good for investors is not necessarily good for workers – and vice versa. As Herman Miller, an accountant friend of the family told me as a child, “Never forget that the stock market is only a market for stocks.”

So what is the future for stocks? In the short term, not good. For workers? That may be a better story. And if the fortunes of these two classes cross each other it’ll be the story of this year as the ups and downs and devilish details read something like a novel.

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One Last Bubble?

Is the stock market nothing but a bubble waiting to burst? There are many reasons to believe that there is one last downturn at the exit of this Managed Depression, which may indeed be slowly forming. The risk comes in the nature of how the economy is so carefully managed through monetary policy directed by the Federal Reserve. Years of zero interest and $3.7T in quantitative easing have produced a situation that’s hard to pull out of without a lot of collateral damage.

The problem is that a lot of money is chasing an awful lot of risk these days. Junk Bonds (aka “speculative grade investments”) are making a strong run, selling a record $265B through May 2014. The reason? Interest rates stuck near zero mean no return for investors, and as things turn around they have an appetite for risk. A rise in interest rates would slaughter this market and cause losses that will reverberate through equity markets before things really have a chance to turn around.

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