Salient to Investors:

David Stockman writes:

  • The ratio of finance to GDP has risen to 540% vs. the historic norm of 200%. Central bank driven bubble finance since the late 1980s has resulted in the GDP deflator-adjusted value of corporate equities and credit market debt outstanding rising 8 times, while real median household income has not gained at all.
  • Warren Buffett’s real net worth rose 19 times in the same period, not by value investing – he is not a genius, nor invented anything – but by buying consumer names of the baby boom demographic wave, buying what he believed slower footed investors would be buying later, and by buying the banks and other companies that fed from the public purse. Under a regime of honest money and free market finance, no insurance company portfolio manager could make 19 times in real terms in 27 years.
  • The financial busts since 1987 were caused by the Fed, not by investor exuberance, deregulation, Wall Street greed and corruption, or Chinese workers saving too much money and causing low mortgage rates and a runaway housing boom in America.
  • Market capitalism is not chronically unstable, and the business cycle does not needs constant management and stimulus by the state. Every economic setback of modern times, including the Great Depression, was caused by either inflationary war finance or central bank fueled credit expansion.
  • The rationale for monetary central planning and state intervention – the Keynesian model – is completely wrong. Keynesian aggregate demand management tools seemed to work for three decades only due to a one-time monetary parlor trick – households, etc were repeatedly encouraged to “lever up” via periodic cycles of cheap money stimulus, and so did not generate new, sustainable wealth but borrowed economic activity from the future.
  • The potential GDP and full employment story is a crock and consists of made-up benchmarks that are absolutely meaningless in today’s global and tech economy.
  • Monetary central planning has been practiced on a global basis for most of this century and is causing enormous over-investment in industrial capacity owing to the repression of capital costs. For example, China has more excess steel capacity than the entire steel industry of the US and Europe combined.

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