Investopedia defines financial markets as: “any marketplace where buyers and sellers participate in the trade of assets such as equities, bonds, currencies and derivatives. Financial markets are typically defined by having transparent pricing, basic regulations on trading, costs and fees and market forces determining the prices of securities that trade.
Most financial markets have periods of heavy trading and demand for securities; in these periods, prices may rise above historical norms. The converse is also true – downturns may cause prices to fall past levels of intrinsic value, based on low levels of demand or other macroeconomic forces like tax rates, national production or employment levels.
Information transparency is important to increase the confidence of participants and therefore foster an efficient financial marketplace.”
According to this definition, tax rates, national production, employment levels and information and pricing transparency are indicators we can use to determine the soundness of financial markets, what we can call market fundamentals.
The three major U.S. financial market indices (Dow Jones, S&P 500 and NASDAQ) have hit milestones that imply the U.S. economy is back on track and gaining strength. Accordingly, the underlying fundamentals should show that this is, in fact, the case. Yet, when we look at the fundamental indicators, they actually tell quite a different story.
Unemployment in the U.S. is still very high, certainly much higher than the official 5.5% announced in May 2015, since this does not take into account those who have stopped looking for jobs altogether, not to mention the fact that for the past several years, the government has apparently been faking the numbers. Working for many corporations, such as Wal-Mart or McDonalds, often means you must actually take on debt just to make ends meet, or at the very least, you will require government assistance (i.e. food stamps) to make it from paycheck to paycheck.
Job creation is closely connected to corporate investment. Companies invest to expand their business, or in R&D, for example, as an initial ramp up phase ahead of new production. Typically, this involves the construction or purchase of new facilities and the hiring of additional labor to build and operate those facilities or expand their sales force to promote new products and services.
U.S. corporations have been off-shoring jobs since the 1980s, and today most everything we buy is manufactured in China, Bangladesh or some other country where virtual slave labor is possible. The U.S. doesn’t produce much of anything anymore. Look at the two most high-profile IPOs in recent years: Facebook and Twitter. Neither of these companies makes anything, nor charges its customers for the services they offer. How can we evaluate a share price when the basic elements of fundamental analysis are wholly absent from the picture? Maybe this is why both stocks broke price on or shortly after their listings.
A closer look at U.S. companies will reveal that most are recording profits that are not the result of selling products or services. In fact, despite the irrational exuberance of the stock market, companies are actually losing profits. They are sitting on piles of cash that they are not investing in R&D or job creation. Instead, they are using it to pay down debt and provide senior management with bonuses.
Rather than using excess profit to buy back shares, they are instead borrowing money a nearly no cost (ZIRP) to boost share prices. Regardless, when companies start buying back shares, it is an indication that they expect little activity from the production (value creation) side of their business. Share buybacks drive up share prices, making the company more “valuable,” even as their core business is imploding.
When I was born, the richest Americans paid a tax rate of 70%, today they pay 39.5%. Of course, they pay far less than that, thanks to loopholes exploited by high-priced tax accountants, the offshore banking industry and plain old tax avoidance (i.e. claiming a vacation to Hawaii as a business expense). And while most Americans in the lowest tax brackets also pay roughly half as much in taxes today as they did when I was born, almost none of them has access to nor can afford the advantages of wily tax accountants or offshore bank accounts. Remember, Mitt Romney, who earned $13.69 million in 2011, was taxed at a rate of 14.1% (less than the income tax rate of someone who earns less than $47,000), and Warren Buffet says he pays a lower tax rate than his secretary.
Not only do poor Americans hand over a higher proportion of their income in the form of taxes, they are also disproportionately impacted, for example, when states offer tax breaks to corporations as part of a deal to entice them to set up corporate head offices in that state. States depend on tax revenue as one way to finance their budgets, and large corporations operating in their state should be paying a proportional (large) amount of taxes. The reality is that tax subsidies and exemptions for large corporations means taxes will need to be collected some other way, since state budgets need funding regardless. Typically, this means higher state income taxes, higher taxes on food, fuel and energy and higher property taxes—all of which inordinately impact the poor. Essentially, the poor are paying the taxes the large corporations should be paying. Of course, those in middle-income jobs also pay more in taxes, but if you earn a living wage, the impact is less severe compared to those working low-wage jobs or the unemployed.
The inherent unfairness of this system means that wealthy individuals, the investor class and large corporations are actually getting the very subsidies and benefits the corporate media claims are going to the poor. A bailout for a too-big-too-fail bank is corporate welfare, as are deferred and subsidized taxes. The largest, most profitable corporations in America, companies like Apple and GE, pay almost no taxes at all. Even rock band U2 moved its accounts offshore to avoid taxation by the Irish government. Yet the outrage manufactured by the corporate media is directed at the poorest and most vulnerable Americans. 22% of children in the United States live below the poverty line. Children comprise the largest segment of poor people in the U.S. One in five children in American doesn’t have enough food to eat on a daily basis. If we believe that children are the future, what kind of future do these numbers imply?
Given high unemployment, low national production and taxation that favors the rich and punishes the poor, can we characterize the current U.S. economy as recovering? Gaining strength? Or does this sound more like a downturn? Remember our explanation of financial markets, which says that downturns cause prices to fall past levels of intrinsic value, based on low levels of demand or other macroeconomic forces like tax rates, national production or employment levels. How can we account for record bank profits and soaring market indices if the economy is actually getting worse, not better?
One explanation might be due to what is called monetizing debt. Traditionally, the U.S. Treasury sold marketable securities such as T-bills (short-term debt), notes and bonds (long-term debt) to investors, including the governments of other nations such as China, to raise money used to run the federal government and pay down maturing debt. In today’s economy, the vast majority of the bond purchases are made by the Federal Reserve Bank. The Fed is printing hundreds of billions of dollars out of thin air that it uses to purchase U.S government debt and mortgage backed securities (MBS), which you may recall, was one of the toxic “assets” that blew up the global financial system back in 2008.
This process of monetizing debt is also known as quantitative easing (QE) and the logic of it (or lack thereof) is mind-blowing. The government needs money to operate, so it sells T-bills, notes and bonds which are debt—essentially an IOU for the money it is borrowing. Again, in the past investors bought this debt, since confidence in the U.S. government’s ability to pay its debt was high. Now, the Fed is the main purchaser of government bonds, simply printing money to purchase this debt from the U.S. government. This creates two kinds of debt, since the U.S. government must pay an interest rate on all money printed by the Fed, and it must also pay interest on the debt it has issued in the form of bonds, etc. The U.S. government is paying its debt by borrowing money at interest that it uses for that selfsame payment. Imagine if you paid most of your monthly expenses by borrowing money at interest. Or paying interest on a loan by borrowing money at interest to do so? How long can such a scheme possibly last?
In addition to the bond-buying program run by the Fed, interest rates are at nearly zero, meaning the cost of borrowing is very cheap—but not for us. No, only the big banks and corporations can take advantage of these low rates. If you have a savings account, you know that putting your money in the bank is like burying it in a hole in the backyard. Both offer about the same amount of interest, but the backyard is safer. Yet when you go to take out a loan, the bank charges you interest rates far above Fed rates. Bankers follow the 3-6-3 rule: Borrow money at 3%, lend it at 6% and hit the golf course by 3:00. Except under QE, the borrowing cost for banks is now nearly zero.
QE also helps pump up the stock market. This is easily observable, since every time the Fed indicates it might taper or end QE altogether, the expectation of future short-term interest rate hikes causes the market to tank. As long as the Fed continues to buy bonds and keep interest rates near zero, stocks offer a more attractive investment to the investor than bonds (i.e. financing government debt). As we have seen, even though companies are losing profits and not investing, stocks are one of very few options given the dearth of solid investment opportunities at present. This explains the appeal of the Facebook and Twitter IPOs.
Another curious example is the price of gold. Despite historic demand, the price of gold has, comparatively speaking, never been softer. Usually, when something is in demand, the price goes up. Again, recall the explanation at the beginning of this article: Most financial markets have periods of heavy trading and demand for securities; in these periods, prices may rise above historical norms. Underlying fundamentals do not account for the gold market, which is seriously undervalued. What is going on here?
This year, there have been several “stop logic” events that halted gold trading on the Chicago Mercantile Exchange (CME). A stop logic event occurs when a sell order takes out the complete stack of bids, tripping the circuits on the computers that facilitate trading and causing the market to pause until there is no liquidity left in the market. This opens the door for exaggerated price movement in the temporarily illiquid market. When trading recommences, the price of gold is significantly lower than it had been before the system shut down. A stop logic event in October 2013 not only halted gold trading, it broke the entire market. This happened again twice in November 2013, once before the Federal Open Market Committee (FOMC) minutes were released, and once after. The intentional timing and regularity of these slamdowns is blatantly obvious, even to a novice like myself.
In other articles, I have discussed the rigging of LIBOR and the FOREX market. These stop logic events are a clear indication that the the gold market is also rigged. The price of gold is being kept artificially low, but to what end?
According to Alasdair Macleod, LIBOR and FOREX rigging requires gold market manipulation and collusion with central banks, who keep interest rates near zero. The central banks (i.e. the Federal Reserve) are the biggest culprits, since their rate “policies” actually set rates across all financial markets. Mr. Macleod believes “unsound monetary policies are the most destructive weapon governments use against the common man.” Put another way: weapons of mass financial destruction wielded by financial terrorists.
This is not something you will see on CNBC, or read in the Wall Street Journal. Once more, remember the beginning of this article, which stated: information transparency is important to increase the confidence of participants and therefore foster an efficient financial marketplace. If this is true, how much more effective propaganda, misinformation and bold-faced lies when it comes to increasing the confidence of market participants. Despite the lack of fundamentals, contrary to everything we see around us and experience in our daily lives, we are supposed to believe that the light at the end of this tunnel is anything other than a train rushing towards us. Stop logic, indeed.