- By Bill Bonner
It's hot here in the Hudson River valley. People are taking it easy...sitting on benches in the shade. We had to put in a window air-conditioner to take some of the heat out. Still, we sweat...we wilt...and we wait for the cool of the evening.
The markets are lackluster too. A little up. A little down. Languid. Summertime slow.
We have been focusing on technology - sometimes directly, often obliquely. It is the subject of our Bill Bonner letter this month, requiring us to do some homework.
Today, let's look at how the stock market reacts to new technology. Investors are supposed to look ahead. They are expected to dope out the future earnings of technology stocks and figure out their present value. Not that they know immediately and to-the-penny what "Whatsapp" or Tesla should be worth...but the markets are always discovering prices, based on information flowing to investors.
But this information has been distorted...twisted...and outright counterfeited by the feds. It has been falsified for the benefit of the people the feds were supposed to be protecting us against - the insiders. The whole edifice of federal regulation and policing is a scam - at least when it comes to the stock market.
First, the feds claimed to be creating a 'level playing field' by prohibiting 'insider trading.' If you had privileged information - say, as the accountant for a Fortune 500 m company...or the lawyer for an upcoming merger - you were supposed to play dead. Front-running (buying or selling in advance of the public release of information) was made unlawful. And a whole bureaucracy - the SEC - was set up to enforce it.
But the playing field was never leveled. Instead, it was tilted even further in the insiders' direction. Those who knew something were not supposed to take advantage of it. So real "inside information" - that you could use -- became even more valuable. That is why so many savvy investors turned to "private equity." Insiders at private companies - held close to the vest by the investment firms that owned them - could trade on all the inside information they wanted.
The law prohibits insiders from manipulating a publically traded stock to benefit themselves. But there's an exemption for the people who control a public company. GM announced a buyback plan, for example. It will spend $5 billion of shareholders' money to buy back its own shares. Why would an auto company - recently back from the dead, thanks to a handout from the feds - take its precious capital and give it to management (in the form of incentive bonuses) and shareholders (in the form of higher stock prices)? There you have your answer: because the managers and the insider shareholders (hedge funds) joined forces to manipulate the stock upwards and give themselves a big payday. Says Harvard Business Review:
"Taxpayers and workers should demand that open-market repurchases by all companies be banned. Stock buybacks manipulate the stock market and leave most Americans worse off."
The government lent GM $50 billion. The automaker says it repaid the loan. How? It borrowed the money...at rates pushed down by the Fed!
Yes, this is another part of the scam. The feds fiddled the available stream of credit...distorting prices in a huge way. Just look at current valuations of today's 'tech' companies. They're 'over the top.' Just like they were at the top of the dot.com bubble in 2000. They are driven to extraordinary levels, not by a prudent calculation of anticipated earnings but by the feds' easy credit.
This conclusion, by the way, was buttressed by our look at the automakers of 100 years ago. Now, there was a game-changing industry! It was so promising and so crowded with new entrants that you could barely walk down Shelby Street in Detroit without getting run over by an automobile you never heard of. Most of those companies went broke within a few years. A few, however, prospered.
GM's share price barely budged between 1915 and 1925 - when the company was the greatest single success story of the greatest new tech industry the world had ever seen. Then, after Fed Chairman Armstrong gave the market a little "coup de whiskey," by cutting the key lending rate, it was off to the races! GM rose 2,200%.
In other words, tech stock prices were manipulated then - as now - by the feds. Cheap credit - not an honest calculation of anticipated earnings - is what sent GM soaring in the late '20s. And it is why our Billion Dollar Tech Babies are flying so high today.
Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.