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August
21
2020

Dishonest Money Is Buying Real Goods, Services
Bill Bonner

SAN MARTIN, ARGENTINA – A dear reader, Mario P., challenged us…

Bill, I think you are full of it. “Money stolen from the public…” Give me a break! Yes, there are people who are making a lot of money illegally or unscrupulously, but not all rich people are thieves. Get a grip.

Okay. We are on the case. Rich people have gotten a lot richer. We want to know where the money came from.

But before we begin our investigation, let’s clarify the charge. We didn’t accuse rich people of stealing the money… We said they were the “recipients” of the loot. There’s a big difference.

We may enjoy watching a murder mystery; that doesn’t mean we want to kill anyone.

Two Choices

And here, we’re rubbing up against an important question. Reducing the issue to its bare essentials, there are only two choices. Money is either gotten honestly… or dishonestly. Which is it?

And framing the discussion further, we’ve seen that the Federal Reserve can successfully inflate Wall Street prices at will.

We calculated that, over the past 30 years, Fed intervention in the stock market has given the average family of four in the richest 10% of the population an extra million dollars.

That family did nothing wrong. But the money it got was fundamentally dishonest. It came from the Fed’s counterfeiting program, not from honest work.

Long Wait

Let’s look at one example to see if this makes sense.

Yesterday, tech giant Apple’s market cap cruised over the $2 trillion mark. Here’s Reuters:

Apple became the first publicly listed U.S. company with a $2 trillion stock market value on Wednesday, as Wall Street investors put aside challenges to its iPhone ecosystem in favor of bets it will only prosper more in the post-coronavirus world.

That makes Apple’s market cap higher than the GDP of 178 foreign countries. Even Canada – in an entire year – doesn’t turn over that kind of money.

It also puts the company’s P/E ratio at 35. So based on current earnings, if you bought the whole company, and put every dollar of earnings into your pocket, you’d have to wait until 2055 to get your money back.

Real Wealth

The problem with technology is that it doesn’t stand still for that long. Apple is a great company today. Tomorrow, who knows?

Thirty years from now, will people still be using Apple phones and tablets? Or, like Digital Equipment, Kodak, Wang, Sperry, Control Data… the list goes on and on… will it be forgotten?

You can’t blame investors for buying Apple. But the company is now worth $1 trillion more than it was five months ago. Where did the money come from?

The answer given by Wall Street is that sales are “surging,” thanks to the tech bonanza during the COVID shutdown. This would allow investors to anticipate a more ample stream of future earnings.

These earnings, of course, are real wealth… honest money! In other words, they say the company is actually worth more.

But Apple’s current price does not plausibly reflect expected earnings discounted to present value. The company’s revenue has been growing at less than 3% per year, on average, for the last four years. Even the “surge” of the last quarter left its profits lower than they were for the same quarter two years ago.

We suspect most investors are not doing a careful analysis. Instead, it is more likely that a lot of the 10 million investors who opened accounts at stock trading app Robinhood are admirers of Apple products… and don’t know any better.

And we also suspect the levitation of the stock market in general, and Apple specifically, is the work of the magicians at the Fed…

They’ve been at it for 30 years – cautiously, at first… and now, they’ve gone Full Weimar.

Very Effective

This monetary “inflation” by the Fed seems to be very effective in the stock market. The Fed puts money into Wall Street – lent at rates below the level of consumer price inflation. Prices rise.

Had not the Fed backed up the bond market in September… and even more in the COVID-19 Lockdown… Apple stock would probably be less than half what it is today. The extra $1 trillion would vanish.

That may lead you to say that today’s stock prices are “fake”… that they are not real… or that they could be cut in half tomorrow.

You would be right.

But as long as the Fed continues to interfere, an investor can sell his stocks at their “fake” prices… and use the money to buy real things.

That is, he can buy the plumber’s time… or his 1967 Corvette… or the bread the baker just brought out of the oven.

Rotten System

Has he “stolen” these things? Of course not.

But the whole system is rotten.

The stock market investor ends up in possession of wealth that somebody else earned. In effect, it is property stolen away from the public with fake money.

The seller may feel he’s gotten a good deal. The buyer may be happy, too. No charges will be filed. No one will go to jail.

But ultimately, trillions of dollars’ worth of real wealth is changing hands – bought with unearned, counterfeit money.

Somebody’s getting ripped off, in other words…

…though he may never understand how.

Stay tuned…

Regards,

Bill

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Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter publishing companies, and the author of the free daily e-mail The Daily Reckoning. Bill's passion for international travel and big ideas are reflected in the company he's successfully built. In 1979, he began publishing International Living and Hulbert's Financial Digest. Since then, Agora has grown to include dozens of newsletters focusing on finance, health and travel. Since the early '90s Bill has vigorously expanded from Agora's home base in Baltimore, opening offices in London, Paris, Bonn, Waterford, Ireland and Johannesburg, South Africa.

 

 

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