Category: zerohedge

Authored by Michael Anton via American Greatness,

If the Democrats just ram these election results through without explaining, then the legitimacy not just of our electoral system but of our entire government may suffer a fatal blow…

The 2020 election in particular, and our electoral process in general, have been badly compromised.

First there have been the successful efforts by Democrats to loosen electoral administration standards and practices by legalizing ballot harvesting (where partisan “volunteers” go out and collect ballots as well as “assist” voters in filling out their ballots), allowing same-day voter registration, mass mail-in voting, and the like. On the flipside we have Democrats tenaciously fighting any efforts to shore up the integrity of the system, such as requiring ID and proof of citizenship to vote. 

Couple all of this with unprecedented last minute rule changes on the eve of what was sure to be the most contested election in generations, if not in American history: all changes designed to favor one side over the other.

Theoretically, none of these measures guaranteed a compromised vote. Theoretically, it’s possible that a system designed to be gamed and abused won’t be. But a party concerned about the integrity of the system wouldn’t expend so much effort making it easier to rig elections; it would do the opposite. The other party, the one trying to do exactly that (if all too often in a desultory, half-hearted way) nevertheless gets attacked as the enemy of “democracy.”

Second were all the ways the media, legacy and social, engaged in saturation broadcast of only one side of the story and deliberately suppressed any mention of the other. These enormous in-kind contributions massively outweighed the paltry $10 million Russians allegedly spent on pro-Trump Facebook ads in 2016. Yet we are insistently told that Trump’s 2016 victory was illegitimate owing to “the Russians” while everything Google, Twitter, Facebook, the New York Times, Washington Post, ABC, CBS, NBC, CNN, and the Associated Press (to name a few) did for Biden either had no effect at all or was totally aboveboard.

Third are the hundreds of lawsuits filed throughout the land by the president’s enemies, all geared toward benefitting Democrats and harming Republicans.

Fourth are the irregularities in the voting and counting that began in the wee hours on November 4 and continue to this minute, including but not limited to: inexplicably halting the counts in five states late on election night; the continuing, and mysterious “finding” of huge tranches of ballots overwhelmingly—and in some cases exclusively—for Biden; computer “glitches” that flipped Republican votes into the Democrats’ column; people showing up to vote in person only to be told that they had already voted absentee when they had never request an absentee ballot; Democratic-controlled states limiting access to Republican observers even in defiance of court orders; etc.

Now, it’s possible that each of these, and many other, shady-looking events has an innocent and plausible explanation. If so, we should be told what they are.

But mostly we’re not being told. Instead anyone who asks is either ignored or, more likely, told to shut up and called a conspiracy theorist and an enemy of democracy.

You’d think that if state and local election officials had innocent explanations for all these instances of alleged irregularity, they’d offer them. You’d think further that it would be in their interest to explain. Does Joe Biden really want to take office with half the country thinking he stole it? They can shout in our faces all they want—and they will—but shouting will not convince. They need to persuade. They need to explain. And their explanations need to be true.

Far from seeing any effort to explain, all I see is an enlivened and merciless push to ram through the results while censoring and slandering anyone who asks questions or points out irregularities. Either they don’t have explanations, or they don’t care what we think. Or both.

There is something to be said—from the point of view of the powerful—for just ramming things through and explaining nothing. It’s a clear demonstration of who’s boss. It demoralizes the other side. And it’s nearly certain to change the system permanently in ways that benefit the ruling class for as long as they can keep it going.

I have no special insight into what the president may or may not do. Based on his remarks Thursday night and the actions so far by his campaign, he clearly doesn’t believe the election was clean. He may nevertheless at some point conclude that he has no viable way to get to the bottom of what happened—especially with unfriendly state officials, agencies, and courts in charge of most of the processes. 

Were the president eventually to concede, that will be trumpeted as “proof” that all doubts about the integrity of the election have been laid to rest, and all questions are illegitimate. It will, of course, prove no such thing.

Richard Nixon believed he won the 1960 election but had it stolen from him in Illinois and Texas. (There is evidence, but no conclusive proof, that he was right.) Seeing no clear way to establish the truth, and wishing to avert a crisis, he declined to challenge the results. This episode, ever since, has been “explained” to the American people in two ways: there was no cheating, and Nixon was statesmanlike to concede. But if there was no cheating, conceding was simply a matter of acknowledging reality. Nixon’s action was “statesmanlike” only if he sacrificed something for the (supposed) good of the country—i.e., if cheating denied him the presidency he legitimately won.

No matter what he does, President Trump will get no credit from his enemies, who are already demanding that he concede before the counting is even over—to say nothing of the lawsuits and potential recounts. If he does, a new standard will have been set, or an old one reaffirmed: in any close election, if the Democrat appears to be ahead, and irregularities appear to be present, they are to be dismissed as nonexistent and the Republican must go gentle into that good night.

That may well work in securing the White House this time. But if they just ram this through without explaining what really happened, then the legitimacy not just of our electoral system but of our entire government will have suffered an extreme, and possibly fatal, blow. 

No one will really know who won. Partisans on both sides will insist they do, but they won’t—not really. Unless all the anomalies are explained, every count and recount conducted in a fair and transparent manner, the occupant of the White House on January 20, 2021—whoever he is—will sit under a cloud. If he’s Joe Biden, that cloud will be entirely of his party’s own making.

But far more ominously, one half the country—or to be more precise, the class that rules in the interests of (at most) half the country—will surmise that it can rule by fiat. The other half will conclude that they are subjects.

Whether that conclusion resigns the latter to apathy or stirs them to rebellion is the question that will determine the course of our politics going forward.

Successful ballot measures in the 2020 U.S. election legalized recreational marijuana in Arizona, New Jersey, South Dakota and Montana, bringing the tally of legal weed states to 15 (along with D.C.).

As Statista’s Niall McCarthy notes, the new developments cement the American West as a stronghold of legal weed. Colorado and Washington were the first states to legalize the drug in 2012.

You will find more infographics at Statista

South Dakota actually gave recreational and medical use of cannabis the green light at the same time, meaning that there are now 36 states and the nation’s capital with medical marijuana laws in place.

In terms of consumption, California has a massive market for recreational marijuana, larger than Colorado, Washington, Oregon and Alaska combined.

Authored by Lance Roberts via RealInvestmentAdvice.com,

After reducing equity risk in portfolios over the last few weeks, we suggested last week the “selling” was likely overdone.

“All of our “sell signals” have been intact for the last few weeks suggesting more downside risk near term. Those signals have now reversed to the point where we are likely to see a decent reflex rally starting as early as Monday. As noted in the year-to-date performance chart below, the market is 2-standard deviations below its 50-dma and is close to the September low support.”

Just for comparison purposes, here is the chart from last week.

And it is updated through Friday’s close.

It was quite the reversal. The rally pushed the market back above the 50-dma and lower highs’ previous downtrend. Such sets the market up for a retest of all-time highs next week.

Not Out Of The Woods

However, before you get all excited and go throwing your money into the market, you may want to step back and re-evaluate your risk. If you haven’t liked the ups and downs in the market over the last couple of months, you have too much “risk” in your portfolio. 

The volatility isn’t over. Particularly as we head into 2021.

Furthermore, while we did expect this rally and added exposure in our portfolios, the previous “oversold” condition has now been largely reversed. As shown below, the market is now back to more “overbought” conditions, which suggests limited upside from current levels. Also, the deviation from the 200-dma is now back to levels that have previously led to mild, short-term corrections.

Still A Sellable Rally

“Such a rally will provide an opportunity to rebalance portfolio risks accordingly. As we will discuss momentarily, the markets will begin to process the election’s impact on various sectors and the market itself.

However, the economy’s disconnect remains longer-term, which can not last as earnings come from economic activity. While the very short-term trading environment is conducive for a rally, the longer-term ‘investing’ environment is still problematic with weakening relative strength, participation, and fundamental issues.

Keep a watch on the Advance-Decline line. Over the last few trading days, the rapid surge in prices pushed that indicator back to more extreme overbought conditions, typically denote short- to intermediate-term tops.

For all of these reasons, aggressively positioned investors can use any rally to adjust portfolio volatility and risk.

Remember, investing isn’t a competition for who can say they “beat the market.” There are no “trophies.” However, there is a heavy penalty to your retirement goals if you are wrong.

Gridlock Is Best For Markets

On Thursday, in our daily “3-Minutes” video, I discussed why the markets were rallying despite a hotly contested election.

As noted, it doesn’t matter who the President is. With the GOP potentially maintaining control of the Senate and narrowing the majority in the House, such vastly reduces significant policy changes such as:

• Higher taxes

• Massive stimulus packages

• Extreme regulation on the oil and gas industry

• Large spending packages on “green energy.” 

• Major reform or socialization of health care.

• An inflationary spike.

Such bodes well for the markets as noted by MarketWatch: 

“The likely reason that Wall Street likes gridlock is that it reduces the possibility that any major policy changes will take effect. Sam Stovall, chief investment strategist at CFRA, noted in an email to clients that the increasingly likely gridlock ‘lessens the prospects for an increase in regulations and taxes.’ In addition, he added, the gridlock reduces the likelihood of ‘additional fiscal stimulus’ — and that reduced likelihood in turn eases potential inflationary pressures down the road.”

As noted last week, such also aligns with historical Presidential election years. The weakness in September and October turns to strength in November and December.

A Continuation Of The Rally Into Year-End

My colleague Doug Kass confirms our view of a rally into year-end.

“With the perception, in part, of election uncertainty and the quicker spread of Covid-19, market participants have been positioned defensively and cautiously. We have exited the weakest period of the calendar (August to October) and are entering a two-month period where stocks are seasonally strong.

The evolving market structure change, in which the market is dominated by products and strategies chasing price and momentum, could catapult the markets higher rather swiftly. In ‘risk parity’ and other quant strategies, ‘buyers live higher and sellers live lower.’ They are and might continue to buy high.”

He is correct.

Combine his thesis with a lack of significant policy changes from Washington, and it is likely money will continue to chase “risk assets” given no other alternative currently.  With yield spreads compressed, interest rates at zero, the “T.I.N.A” (There Is No Alternative) narrative continues to reign.

However, as noted, beware 2021.

The Focus Turns Back To The Fed

Once we start to analyze what “Gridlock” will mean for policy, it should become apparent what the “risks” are.

As we have noted previously, earnings growth rates continue to drop as we head into next year. With stock prices back near all-time highs, this continues to be a market that is driven solely by valuation expansion.

The majority of that “price chase” has been based solely on the premise of more liquidity coming from the Federal Reserve. The hope, of course, is that eventually, earnings will play “catchup” with valuations. Historically, such has never been the case.

As we head into 2021, a “gridlocked” Congress potentially means less stimulus, less infrastructure spending, and more battles over the debt and deficit. The regular “debt ceiling” fights will return, and smaller stimulus packages will compound time delays.

Such translates into three critical factors for the financial markets:

1. Less direct stimulus to households means reduced spending and lower rates of economic growth. 

2. Less stimulus means there is less debt issued, which keeps the Federal Reserve trapped with interest rates at zero.

3. The combination of less stimulus and Fed monetization will lead to increased deflationary pressures. 

In 2021, the odds of another recessionary bought will increase, putting downward pressure on stocks. The only question will be if the Federal Reserve can bail it out again as the “effective benefit” continues to decline.

The Fed Remains Stuck At Zero

This past week, the Federal Open Market Committee (FOMC) concluded their meeting. Not surprisingly, given the embattled election and lack of stimulus, they provided “happy talk” to the markets.

In other words, they said “nothing.”  As Mish Shedlock noted in his post:

“The Fed is stuck in glue. It did not change interest rates. Nor did it change much of its announcement.”

However, it is more important to understand their dilemma.

“The Fed is stuck and will not lower rates below zero nor can it raise them without killing housing. Meanwhile, the bubbles keep getting bigger increasing the odds of a deflationary collapse.”

Such is indeed the most significant risk to both the economy and the markets. As we noted in yesterday’s “Rescues Are Ruining Capitalism.”

“The rest of the world followed the Fed. As interest rates fell toward zero, the world’s debts—including households, governments and nonfinancial companies—more than tripled between 1980 and 2007 to more than three times the size of the global economy.

It was taking more debt to fuel the same amount of growth, because more debt was going to unproductive borrowers. Capitalism was bogging down.” – Sharma

Each successive round of stimulus pulls forward future consumption, which leaves a void. That void then has to be filled with more stimulus, which leaves a larger void in the future.

Eventually, the void will become too large to fill.

“The continuous bailouts continue to distort the market’s price signals, which makes the markets less efficient in allocating capital. Such has led to the rising number of “zombies” and monopolies, the widening of wealth inequality, and lower productivity and growth.

The deformation of capitalism will be an economic plague that continues to lead to further dysfunction alienating younger generations. Social unrest and revolt will be the eventual result.”

Portfolio Positioning Update

Over the last few weeks, we discussed that we had gradually raised cash and rebalanced portfolio risks ahead of the Presidential election. After the election passed, and we could see where the markets were positioning themselves, we reallocated that cash and took our equity exposure back to target weightings.

There were two primary reasons for the reversal. The first was that the sell-off had removed short-term risk over the last few weeks. The second was the outcome of the election perceived as favorable to the markets, as discussed above. There are still risks to that view until the election is officially over. Therefore, we will keep a close watch on holdings and tighten up our stops. 

As we discussed recently in “Policies Over Politics,” what matters most long-term are taxes, debt, and deficits. Unfortunately, we will probably head the wrong way on all three.

Last week, I stated that we would “not buy the market’s low.” We did wait for the market to “tell us,” what it was going to do, and then we acted quickly to put capital to work. We are currently near full exposure to equities, are slightly underweight in bonds with a shortened-duration, and have tightened current stop-losses.

While the next two months tend to be positively biased, there is still a considerable risk to the markets. Markets remain deviated from long-term means, economic growth remains weak, and further stimulus will remain elusive.

As such, it is worth remaining vigilant over portfolios and using rallies to rebalance portfolio risks as needed.

To win the “investing war,” it is essential to pick and choose our “battles” wisely. If you aren’t sure about the battleground, it is always better to retreat and “live to fight another day.” 

Liberals are furious at  the ‘never-Trump’ super PAC, the Lincoln Project, which essentially bait-n-switched Democrats into giving them money to defeat Republicans, who then watched their party lose several House seats and fail to wrestle back control of the Senate.

The Lincoln Project, co-founded by former McCain 2008 campaign manager Steve Schmidt, promised to win over “independent-leaning men, those college-educated Republicans, the suburban Republican women.” They went on to raise at least $67 million, much of that from liberals. Yet, Trump went on to win more GOP votes in 2020 than he did in 2016.

As former Bernie Sanders speechwriter and Jacobin editor-at-large David Sirota and Andrew Perez write in the Daily Poster:

A group of longtime Republican operatives depicting themselves as anti-Trump stalwarts convinced liberals to give them more money for ineffective television ads and stunts than was raised by the Democratic Party’s national campaign to win state legislatures. 

The result: Donald Trump won more Republican votes than he did in 2016 as Democrats again lost state legislatures in advance of redistricting that could determine control of Congress for the next decade. 

Meanwhile, the GOP operatives are reportedly positioned to go from lighting liberals’ money on fire during the 2020 election to now using liberals’ money to launch a media empire that could push a new Biden administration to the right.

Sirota told The Hill‘s “Rising” that the Lincoln Project was actually trying to secure a Biden presidency with a GOP-controlled Senate – as opposed to shifting GOP voters towards Democrats.

“In a sense, they went to liberals and said ‘give us money to help us defeat Republicans, that’s our job,” Sirota said. “So, when Donald Trump actually increases his share of the Republican vote in 2020 versus 2016 when there wasn’t the Lincoln Project, that’s just statistically an epic failure.”

“So imagine if that $67 million had gone into winning state legislatures, it could be a totally different ball game for the next ten years,” Sirota added. “But, instead it went to Republican operatives at the Lincoln Project, to produce YouTube videos that made MSNBC-watching liberals feel smug, but didn’t actually move any voters.”

Authored by Michael Snyder via The Economic Collapse blog,

Whether you are a Republican, a Democrat or an Independent, everyone should be able to agree that this election has exposed some very serious flaws in the way that we are currently doing things.  Over the past 24 hours, I have been posting example after example of voting irregularities on The Most Important News, and this is probably the number one topic on social media right now.  When this election is finally over, there are going to be tens of millions of voters that feel like this election has been stolen from them and that will have completely lost faith in the system. 

As much as some of the talking heads on television would like to believe that everything will be okay if they simply ignore the irregularities that are happening, the truth is that the vast majority of Americans can clearly see what is taking place.  It has never been more obvious that our system is deeply broken and desperately in need of major reform.

For this election, problems with our elections will need to be resolved in court, and that is extremely unfortunate.

But we definitely do not want to find ourselves in the same situation four years from now, if there is actually an election four years from now.

So with that in mind, I would like to submit my humble plan to fix our elections…

#1 In order to register to vote, citizens must be required to show up in person and show identification proving that they are who they say they are to a duly appointed government official.

#2 Citizens should be required to show up in person to vote to the greatest degree possible.  And when they show up in person to vote, they must be required to show identification proving that they are who they say they are.

#3 All political parties must be allowed to have numerous poll watchers in all polling locations.

#4 Once you have voted, citizens should be given a receipt that shows that their votes were recorded and that shows exactly who they voted for.

#5 All political parties must be allowed to have numerous observers in all locations where ballots are counted, and they must be allowed to be close enough to be able to clearly see what is happening.

#6 All votes should be made public.  I know that many would mourn the loss of the “secret ballot”, but I believe the need for transparency should take priority.  Every vote from every citizen should be posted publicly, along with verification that each of those citizens was officially registered to vote.

#7 For national elections, results for each state should only be made public once the counting is entirely completed.  I know that having the vote totals come in a little at a time is a lot more dramatic, but it also opens up opportunities for malfeasance.  In the 2020 election, there have been allegations that some counties have delayed reporting their results until they could see how other areas have voted.  It is very important that we eliminate that.

As it stands, our elections are more broken than ever.  Ballot harvesting is rampant all over the country, lots of dead people are voting, in some areas the number of people that are voting greatly exceeds the number of registered voters, and having tens of millions of ballots go through the mail has caused all sorts of problems.

Of course I don’t anticipate that the recommendations that I have made will ever be instituted.  In particular, Democrats would fight tooth and nail against many of my proposals, and that is because the flaws in the current system tend to benefit their party greatly.

But if we don’t fix our system, an increasing number of Americans will lose faith in it with each passing election, and it will be just a matter of time until it completely collapses.

In addition to everything else, I believe that paper ballots should be required everywhere in the whole country.  I would like to see the U.S. go to a system of 100 percent paper ballots and 100 percent manual counting, but that will never happen either.

If we can’t have faith in the integrity of our elections, what options do we have left?

We have reached such a critical time in our history, and our nation is now more divided than it has ever been in my entire lifetime.

I honestly do now know how the U.S. is ever going to recover from this chaotic election.  There is no way that any politician is going to be able to bring the country together when close to half the population believes that the election was stolen.

Whoever becomes president, nearly half the nation is not going to accept that individual as legitimate, and at this point the U.S. is getting dangerously close to being ungovernable.

As I have discussed previously, for the losing side this election is going to be the greatest emotional blow in decades.  Everything has changed, and the days ahead are likely to be very dark for the United States of America.

*  *  *

Michael’s new book entitled “Lost Prophecies Of The Future Of America” is now available in paperback and for the Kindle on Amazon.

As of the 1000 ET advisory from the National Hurricane Center (NHC), Tropical Storm Eta “regained strength” as it traverses the northwestern Caribbean Sea and will pass over or near Cuba, the Bahamas, and South Florida this weekend into early next week, bringing torrential rains, high winds, and potentially dangerous storm surge. 

Tropical Storm #Eta Advisory 28: Eta Regains Tropical Storm Strength as the Center Reforms To The Northeast. Tropical Storm Warning Issued For South Florida and the Florida Keys. https://t.co/VqHn0u1vgc

— National Hurricane Center (@NHC_Atlantic) November 7, 2020

Eta has 40 mph maximum sustained winds and is moving northeast at 17 mph. The storm’s location is about 45 miles west-northwest of Grand Cayman.

Tropical storm warnings have been issued for Cayman Islands, Cuba, and the northwestern Bahamas islands, including Abacos, Grand Bahama Island, and Nassau. NHC expects tropical storm conditions in those areas this weekend. 

After Cuba, the storm is expected to curve towards the Gulf of Mexico, potentially passing over or near South Florida. Tropical storm warnings have been issued for much of South Florida. 

“Gradual strengthening is expected over the Caribbean Sea before Tropical Storm Eta reaches Cuba, but some vertical wind shear and dry air may limit its intensification,” said The Weather Channel. 

The Miami office of the National Weather Service forecasts rainfall totals for South Florida could range between 10 to 15 inches through Wednesday. 

South Florida will start to experience Eta’s tropical-storm-force winds as early as Sunday evening.  

As readers may recall, Eta has ravaged Central America, triggering deadly flooding and landslides. Here’s our past coverage on Eta over the last week: 

• “Devastating” Hurricane Eta To Strike Nicaragua Early Tuesday
• Nicaragua Braces For Arrival Of Powerful Hurricane Eta
• South Florida Prepares For Eta As It Could Reenergize Into Hurricane

Authored by Bryce Coward via Knowledge Leaders Capital blog,

As election results continue to trickle in suggesting Joe Biden will be the next president, there still remains a bit of uncertainty with respect the final electoral vote tally as well as any legal challenges that will emerge in the coming days.

Even still, the tail risk scenarios of a constitutional crisis or the US Supreme Court casting the deciding vote seem to have been significantly mitigated… at least that is what the market is pricing.

We know this because expected volatility across asset classes is plunging as demand for tail risk hedges is dissipating.

In the charts below we show stock market volatility…

…stock market volatility of volatility…

…bond market volatility…

…and foreign exchange volatility…

In each case, the market’s pricing of volatility has plunged from pre-election levels back into the lower-middle part of the range over the last six months.

This has implications for positioning moving into year end. As expected volatility comes down, value at risk (VaR) – the projected loss of a portfolio – is reduced, which allows institutional investors to add to risky positions. This somewhat technical feature of the market is one significant reason for the melt-up we’ve seen over the last few days.

Should election results become more clear, we’d expect volatility to come down even further, potentially somewhat counterbalancing other significant risks like COVID lockdowns, lack of fiscal stimulus, etc.

Just a few short years ago, Warren Buffett would not even think of repurchasing Berskhire stock, instead building up a cash war chest which he would deploy to purchase “cheap” companies (although he certainly was a fan of others buying back their stock, such as Apple and – for a while – IBM). However, all that changed in July 2018 when Berkshire’s board announced a policy change that allowed Buffett to buy back stock whenever the price is below whatever they consider Berkshire’s intrinsic value. Previously, they couldn’t make repurchases if the price was more than 20% above current book value.

Since then two things happened: i) the stock market soared so high even Buffett admitted he couldn’t find attractive deals any more, and ii) other investors showed a fond desire to reward companies that repurchased their stock. Which is why, starting about two years ago, Buffett started repurchasing Berkshire stock.

Yet what at first was a slow, methodical process, has since escalated into a full blown sprint to the point where Buffett has become one of the world’s biggest repurchasers of his own stock.

In Q3, Berkshire Hathaway spent a record $9 billion of its own stock according to the company’s just filed earnings release, which as the Bloomberg chart below shows, is more than it had repurchased in any full year in its history.

The record buyback meant that Berkshire’s massive cash pile declined slightly in the third quarter, from $146.6 billion to $145.7 billion. The funds, as Bloomberg notes, “have recently been accumulating faster than Buffett can put them to work in higher-returning assets”; they leave Buffett with plenty of capital to deploy into acquisitions, stock purchases or buybacks, if and when there is a market correction. 

Lacking external investments, the acceleration in buybacks confirm Buffett’s faith in the conglomerate’s prospects, just months after telling Berkshire shareholders at the annual meeting in May that repurchasing shares wasn’t more compelling than when the stock was much higher before the pandemic.

With the help of the buybacks, Berkshire stock soared 20% in the third quarter, surpassing the 8.5% gain in the S&P 500 Index during the same period.

Looking at the rest of the company’s Q3 results, we find that the conglomerate’s businesses bounced back modestly from the depths of the slump in the second quarter. Profit at the railroad was higher than the three months ended June 30 if still down from a year ago, while Berkshire’s utilities posted its highest quarterly profit in more than a decade. Still, operating profit dropped by 32% to $5.5BN from $16.5BN a year ago, hurt by the insurance unit’s first underwriting loss since the end of 2019.

And in another stark reversal, after selling the most stocks on a net basis in more than a decade during the second quarter, Berkshire reversed course in the following months, purchasing $4.79 billion of stocks on a net basis during the third quarter, as he gobbled up shares, not just his own. As shown in the chart above, the company’s investments delivered almost $25 billion in investment gains amid the market rally, helping net income almost double despite the drop in operating profit.

Authored by Lance Roberts via RealInvestmentAdvice.com,

I want to discuss a recent WallStreet Journal article by Ruchir Sharma entitled “The Rescues Ruining Capitalism.”

We talk much about the bailouts and stimulus programs related to the economic shutdown and pandemic. However, the bailouts began back in 2008 when the Federal Reserve intervened with the insolvency of Bear Stearns.

To date, the Federal Reserve, and the Government, have pumped more than $36 Trillion into the economy to keep it “afloat.”

I say “afloat” rather than “growing” because, during the last decade, economic “growth” was a function of population growth. Monetary interventions were successful in creating inflation in financial assets. However, during the same period, the economy grew by only $2.92 Trillion.

In other words, for each dollar of economic growth since 2008, it required $12.67 of monetary stimulus. Such sounds okay until you realize it came solely from debt issuance.

Bailouts Ruining Capitalism

We need that bit of history to understand why “bailouts are ruining capitalism.” 

“Modern society looks increasingly to government for protection from major crises. Whether recessions, public-health disasters or, as today, a painful combination of both. Such rescues have their place. Few would deny that the Covid-19 pandemic called for dramatic intervention. But there is a downside to this reflex to intervene, which has become more automatic over the past four decades. Our growing intolerance for economic risk and loss is undermining the natural resilience of capitalism and now threatens its very survival.” – Sharma

Sharma is correct.

Such was a point I recently discussed in “Recessions Are A Good Thing.” To wit:

“Just as poor forest management leads to more wildfires, not allowing ‘creative destruction’ to occur in the economy leads to a financial system that is more prone to crises.

Given the structural fragility of the global economic and financial system, policymakers remain trapped in the process of trying to prevent recessions from occurring due to the extreme debt levels. Unfortunately, such one-sided thinking ultimately leads to skewed preferences and policymaking.

As such, the “boom and bust” cycles will continue to occur more frequently at the cost of increasing debt, more money printing, and increasing financial market instability.”

The Fed’s foray into “policy flexibility” did extend the business cycle longer than normal. However, those extensions led to higher structural budget deficits. The byproduct was increased private and public debt, artificially low interest rates, negative real yields, and inflated financial asset valuations.

Specifically to Sharma’s point:

“However, these policies have all but failed to this point. From ‘cash for clunkers’  to  ‘Quantitative Easing,’ economic prosperity worsened. Pulling forward future consumption, or inflating asset markets, exacerbated an artificial wealth effect. Such led to decreased savings rather than productive investments.”

The Fed’s “Moral Hazard”

“This is a dangerous form of denial. A growing body of research shows that constant government stimulus has been a major contributor to many of modern capitalism’s most glaring ills. Easy money fuels the rise of giant firms and, along with crisis bailouts, keeps alive heavily indebted “zombie” firms at the expense of startups, which typically drive innovation. All of this leads to low productivity—the prime contributor to the slowdown in economic growth and a shrinking of the pie for everyone.” – Sharma

By not allowing “recessions” to perform their natural “Darwinian” function of “weeding out the weak,” to Sharma’s point:

“Zombies’ are firms whose debt servicing costs are higher than their profits but are kept alive by relentless borrowing. 

Such is a macroeconomic problem. Zombie firms are less productive, and their existence lowers investment in, and employment at, more productive firms. In short, a side effect of central banks keeping rates low for a long time is it keeps unproductive firms alive. Ultimately, that lowers the long-run growth rate of the economy.” – Axios

If capitalism were allowed to function, the weak players would fail. Stronger market players would acquire failed company assets. Bond-holders would receive some compensation for their debt holdings. Shareholders, the ones who accepted the most risk, would get wiped out.

Furthermore, assuming capitalism was allowed to function, investors would require appropriate compensation for the risk when loaning money to companies. Such would provide higher returns to credit-related investors rather than the current state of abnormally low yields for junk-rated debt.

Why is this currently the case? It is the direct result of the Fed’s creation of “moral hazard.” The definition of which is:

“A lack of incentive to guard against risk as investors believe the Fed is protecting them from the consequences of it.”

The Stock Market Is Not The Economy

“At the same time, easy money has juiced up the value of stocks, bonds and other financial assets, which benefits mainly the rich, inflaming social resentment over growing inequalities in income and wealth. It should not be surprising that millennials and Gen Z are growing disillusioned with this distorted form of capitalism and say that they prefer socialism. The irony is that the rising culture of government dependence is, in fact, a form of socialism—for the rich and powerful.” – Sharma

Sharma’s statement is incredibly important. If you are a Millenial or Gen Z’er and are voting for more socialistic policies, you are doing economic harm to yourself. A commonality of all socialistic countries is a very significant division between the top 10% and the bottom 90%. Under socialism, wealth and opportunity get concentrated at the top, with little remaining for everyone else.

In America, if you make $30,000/year, you are in the lower-income levels of the economy and barely above poverty levels. However, compared to the rest of the world, you are in the top 1% of income earners. 

Capitalism creates opportunities. Socialism destroys it by removing the incentives to innovate and produce. Throughout history, the correlation between the economy, earnings, and asset prices over time are high.

Since 1947, earnings per share have grown at 6.21% annually, while the economy expanded by 6.47% annually. That close relationship in growth rates should be logical, particularly given the significant role consumer spending has in the GDP equation. 

The current “negative correlation” is quite an anomaly given that corporate earnings are the result of economic activity. However, that relationship broke due to the massive amount of Federal Reserve interventions in the financial markets. That distortion masks the economy’s underlying weakness and the “moral hazard” created by the Fed.

Bigger Debts Aren’t The Solution.

“The rest of the world followed the Fed. As interest rates fell toward zero, the world’s debts—including households, governments and nonfinancial companies—more than tripled between 1980 and 2007 to more than three times the size of the global economy.

It was taking more debt to fuel the same amount of growth, because more debt was going to unproductive borrowers. Capitalism was bogging down.” – Sharma

The statement of unproductive debt is critical to understanding why policies fail to achieve their economic growth goals and inflation.

Unproductive debt retards economic growth over time as it diverts revenue into debt service rather than productive investments. While the Federal Reserve fails to recognize the impact of their policies, we have a decade of experience showing that surging debt and deficits inhibit organic growth.

Keeping the economy on perpetual life support shows too clearly that the economy will fail unless fiscal and monetary stimulus continues.

However, by bailing out failed enterprises to avoid short-term economic pain, the consequence of not allowing the system to “clear itself” creates further distortions in the economy.

As President Kennedy once said:

“The time to repair the roof is when the sun is shining.” 

Instead, we seem to have just removed the roof altogether. 

The fact that debt and deficits rose under full employment conditions suggests a more profound underlying fiscal problem previously existed and has now worsened.

We Need A Better Solution

“What capitalism urgently needs is a new, more focused approach to government intervention—one that will ease the pain of disasters but leave economies free to grow on their own after the crises pass.” – Sharma

He is correct. The CBO’s budget projections are a harsh reminder of the consequences of debt and deficits.

“The longer policymakers wait to fix the debt, the harder and costlier it will get. Delaying action means the necessary changes will be spread among fewer people. Policymakers will have less ability to carefully target adjustments. And ultimately, it will be harder to phase in new policies or give families and businesses time to prepare and adjust for them.” –  CFRB

There is no “pain-free” escape from the “debt hole” into which we have dug ourselves. Sharma is correct in his statement:

“When the pandemic passes, authorities need to shift out of rescue mode and start weaning capitalism off easy money and bailouts.”

However, even the “weaning process” will be painful. Stock markets will decline, the economy will weaken, and bankruptcies will rise. But such are the choices policymakers will have to make.

The continuous bailouts continue to distort the market’s price signals, which makes the markets less efficient in allocating capital. Such has led to the rising number of “zombies” and monopolies, the widening of wealth inequality, and lower productivity and growth.

The deformation of capitalism will be an economic plague the continues to lead to further dysfunction alienating younger generations. Social unrest and revolt will be the eventual result.

We can make choices today, which will be unpopular. Individuals will have to endure the short-term “pain.” However, it will be well worth the more robust economy tomorrow.

Or, you can wait until our creditors make those choices for us all at once.

Paper-thin margins and still a considerable number of outstanding votes to count are what is making the Pennsylvania race between President Trump and Democratic presidential nominee Joe Biden too early to call, even on Saturday morning, four days after the Nov. 03 election. 

AP notes Biden holds a small lead over Trump of around 28,800 votes at 0930 ET Saturday, out of more than 6.5 million counted, a margin of about .43%, which is less than .5%, and under state law, this would indicate a mandatory recount must be held. 

Pennsylvania is one of the battleground states Trump and Biden are neck and neck in as each seeks to reach 270 electoral votes to win. 

Days ago, Trump prematurely declared victory in the state, saying: 

“We’re winning Pennsylvania by a tremendous amount. We’re up 690,000 votes in Pennsylvania. These aren’t even close. It’s not like, ‘Oh, it’s close.” 

On Friday, the Pennsylvania secretary of state’s website said tens of thousands of mail-in votes still needed to be counted, many from Democratic stronghold areas such as Pittsburgh and Philadelphia.

And this morning President Trump made it clear how he feels…

Maybe this is what has triggered the Trump campaign to announce a news conference in Philadelphia at 1130 ET.

Big press conference today in Philadelphia at Four Seasons Total Landscaping — 11:30am!

— Donald J. Trump (@realDonaldTrump) November 7, 2020

Not quite the “Four Seasons” some were expecting…

And for those who think this could be leading to a concession speech, you haven’t been paying attention the last few years…

pic.twitter.com/hbSaIbRt5y

— Michael Berry (@MichaelBerrySho) November 6, 2020

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