It Pays to Get Out Early!

Oct 19, 2015

- By Bill Bonner

Bill Bonner
Normandy, France

Dear Diary,

Life in the countryside has changed. It used to be hard, rude, and isolated. Now, with a little bit of money, the internet, and a combination of ancient and modern technology, it can be much more amusing...

We came out to Normandy on Saturday to help renovate an old farmhouse and spent much of the weekend cutting firewood. Normandy can be wet, dark and cold in the autumn. It helps to have an open fire - especially when you are working on a grim project.

Today, small, lightweight chainsaws make it easy to cut wood. Of course, you still have to split it and stack it up. But even that is made easier with a hydraulic splitter and the hydraulic bucket on the tractor, which lifts the wood to a comfortable height. And at the end of the day, tired but satisfied, you can sit in front of a warm fire with a little Calvados (a local, apple-based liquor) and enjoy your labor.

Last week, Wall Street needed no open fires to cheer it up. Prices rose. The people who own stocks were a tiny bit richer at the end of the week than they were when it began.

Of course, the nation's real wealth grew very little too. So if stockholders became noticeably wealthier, they must have done so at someone else's expense.

The phenomenon is clearer when viewed over the last 7 years. Measured by the Dow, stocks went from a low near 7,000 to a high on Friday over 17,000. This represents an increase in the wealth of shareholders of some $11 trillion.

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During that same time US GDP has gone from $15 trillion to $16.3 trillion. In other words, wealth as suggested by the stock market has gone up nearly 10x faster than the real output of the economy.

How could that be? Stockholders are a lot richer. But where does all that money come from?

Rising output should signal rising wealth for everybody - both labor and capital. Yet, studies shows that almost all the increase in wealth since '07 has gone to capital (to owners and managers), and none to labor. That's why so many commentators are whining about "inequality" and the need to "do something" to help "America's hardworking, middle-class families."

But there are several moving parts to this fraud. As you can see, output has not significantly increased. GDP has barely gone up at all. What bothers us is not that people didn't share the new wealth more fairly, but that there wasn't really any new wealth to share in the first place.

In the absence of increases in real output, those few who have gotten richer did not do so by taking a bigger share of the new wealth. They took a bigger share of the old wealth. Larceny, in other word. And now they have a larger claim on existing US wealth - resources, labor and output. If they could sell their stocks and convert their claims to actual assets - houses, cars, land etc - they would come out way ahead. They would have more; others would have less.

Of course, it's not that easy. Because they don't have real wealth. They only have wealth on paper. Their new wealth is real; but fleeting. They can exchange it for other goods and services. But they mustn't wait too long. Any individual investor can sell his shares and convert the money to other forms of wealth. But if they all tried to sell, who would they sell to? The market would collapse and all the fantasy wealth would disappear in a matter of hours.

That's why it pays to get out early!

In the meantime, some win. Some lose. The winners are shrewd. They work in finance. They own stocks. They manage money. They know the score. But what about the others? What about the people from whom they take the money (they must take it from someone, right?)

Who are these people? What do they think? What do they do? How do they live?

Here is a bit of information from our old friend Jim Davidson. His new as-yet-unreleased new book, which he sent us for review, helps locate the losers:

    ...a 2014 demographic analysis in the Washington Post... showed that in 210 counties of the US income peaked over 45 years ago. In another 572 counties income peaked 35 years ago. In only 380 counties...did income peak in the decade of the 2010's.
We don't know where all these forlorn counties are, but some of them must be in Western Pennsylvania. We visited the area south of Pittsburgh when we went to an aunt's funeral a couple of years ago. Donora, Charleroi, Monessen - they must have been once among the richest counties in the country. People worked in the steel mills along the Monongahela River and earned union wages. Then, the steel mills grew cold and 'financialization' heated up.

More to come...

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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2 Responses to "It Pays to Get Out Early!"

Shiv Pandey

Oct 20, 2015

Your article is very educative and informative. I feel that what ever say applies to investors like me in India. The factors like greed, fear, and uncertainties of future add to the tendency of waiting to sell. Every investor should follow you for real benefits. Thanks.

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Ramarao

Oct 19, 2015

Your article are informative as well as indicative of direction in a macro vision scenario...Keep it up

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