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Because of the secular headwinds, currently labeled as the “New Normal” or “Secular Stagnation”, investors have resorted to making money with money as opposed to old-fashioned capitalism when money was made with capital investment in the real economy
Making money with money: think of it simply as an extension of maturity and risk
All beginning with bills in your purse or stashed in the cookie jar
Since cash yields nothing (in fact, depreciates in value given even low 1-2% inflation), savers/investors exchange cash for alternative choices involving less liquid, longer maturity, and in some cases more risky assets
Start with bank deposit that earns no interest but offers ATM accessibility, then a 6-month CD or a 90-day Treasury bill where yields approach 1%, then further out the risk/liquidity/maturity spectrum – corporate bonds, stocks, private equity
Savers/investors make money with their money as long as economies grow and inflation stays reasonably conservative. Nothing new here but it helps outline why today’s economy is so different from that of decades ago and why it induces risks that were not present before
“New Normal” high debt, aging demographics, and deglobalization along with technological displacement of labor are the primary culprits
Excessive debt/aging populations/trade-restrictive government policies and increasing use of machines create a counterforce to creative capitalism, which worked well until the beginning of 21st century
Investors sense future headwinds that will thwart historic consumer demand and therefore slow down investment; productivity then slows down (productivity in the US and almost everywhere in the developed world has flat-lined for nearly 5 years now and has increased by only 1% annually since 2000 and the aftermath of dot-com recession)
So instead of making money by investing in economy, savers/investors increasingly steered toward making money in the financial economy – thanks to nearly $8 trillion of QE assets purchases from major central banks and holding of short-term borrowing rates near 0 or even negative, this shift was extremely profitable
Zombie corporations are being kept alive as opposed to destroyed as with the Darwinian “survival of the fittest” capitalism of the 20th century
Standard business models forming capitalism’s foundation such as insurance companies, pension funds, and banking are threatened by the low yields that have in turn, produced high asset prices
These sectors have long-term maturities and durations of their liabilities and their assets have not risen enough to cover prior guarantees – so we see Puerto Rico, Detroit, and perhaps Illinois in future years defaulting in one way or the other on their promises
Faulty finance-based capitalism supported by destructive monetary policy begins to erode, not support the real economy
Making money with money is an inherently acceptable ingredient in historical capitalistic models but ultimately must then be channeled into the real economy to keep the cycle going
You have the potential for low asset returns in which the now successful strategy of “making money with money” is seriously threatened – how soon this takes place is of course the investor’s dilemma and the policymakers’ conundrum
But don’t be mesmerized by the blue skies created by central bank QE and near perpetually low interest rates. All markets are increasingly at risk
It’s the real economy that counts and global real economic growth is and should continue to be below par
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