The British composer and conductor H. T. Leslie (1822 – 1896) wrote that, “The game of life is not so much in holding a good hand as playing a poor hand well.” This is how investors in financial assets should feel about the current market conditions. At present, most assets are relatively expensive. With a few exceptions (gold miners, oil stocks and Hong Kong property stocks), we are all investing our funds in inflated asset markets, which in my opinion will provide investors with poor returns in future.
When I grew up in the 1960s and when I started to work in 1970, asset prices including equities were relatively low whereas young people currently entering the labor force, are faced with relatively high asset prices. I was well-aware of this fact but it became even more evident to me when I read an article about the sale of a painting by René Magritte. According to the Independent, “A major work by surrealist painter René Magritte that hasn’t been shown in public for a quarter century could fetch 50 million pounds ($64 million) at auction next month.”
According to Christie’s, “L’ami Intime (The Intimate Friend), 1958, depicts Magritte’s iconic bowler-hatted figure looking onto mountainous scenery and a blue sky from what appears to be a stone balcony. A baguette and glass of wine float behind him.
The painting was owned by collector Gilbert Kaplan.” Kaplan, who died in 2016, bought it in 1980, not long after it was sold at a Sotheby’s auction in London for a hammer price of £90,000.
Just to illustrate the colossal asset inflation we experienced over the last 40 years or so, in 1980, I could have bought the Magritte painting for about three years of my salary. Now, it would take with my salary many more years to buy it, which would extend even far beyond my life expectation. Similarly, I could have bought the Dow Jones in the 1970s at a relatively low price. Inflation adjusted, the cost of buying a Dow Jones is now far higher. This doesn’t however imply that consumer good and service prices did not go up. From the 1960s on, consumer prices began to rise (especially after the US closed the gold window in 1971), but they went up less than asset prices after 1982.
Just remember, we had relative price stability until 1913 (when the Fed was founded) and rising prices thereafter and especially after 1971.
In this context, I need to briefly discuss the Cantillon Effect, which Jonathan Newman, an economist explains in an article for www.mises.org entitled Four Charts That Show Cantillon Effects (see February 1, 2024).
Newman writes: “Murray Rothbard called Richard Cantillon (1680 – 1734) the ‘father of modern economics.’ While that title is often given to Adam Smith, Rothbard suggested that all the good things in Smith were first discovered by Cantillon or other pre-Smithian economists and that virtually all of Smith’s original ideas were ‘a significant deterioration of economic thought.’
One of Cantillon’s greatest insights involved the uneven effects of monetary expansion. New money enters the economy at a particular point - the first spender of new money acquires goods from the market, and those sellers may now use the money to increase their demands for goods, and so on. The money ripples out from its origin, providing real benefits to those closest to the center. As the new money is spent, prices rise, meaning those whose incomes rise later in this spending chain (or never) are the ‘losers’ in this process.
In our modern world with fiat money and central banking, the government, banks, and privileged financial institutions are at the center. Those on fixed incomes and those who don’t have assets to sell to those earlier in the spending chain are on the outskirts. Money printing creates winners and losers, and perpetual money printing creates big winners and big losers” (emphasis added in each instance).
For now, I want my readers to briefly reflect on the following. Since 2009, Blackstone’s stock is up approximately 40-times. Also consider the performance fees Mr. Schwarzman receives from his shareholding in the Blackstone investment company. Do you really think that Mr. Schwarzman or for that matter any fund manager and financial sector executive would ever advocate tighter monetary policies? Not a chance in a million years! As Cantillon remarked, “The money ripples out from its origin, providing real benefits to those closest to the center,” and we know that “the center” is the financial sector.
As Newman noted, “money printing creates big winners (the asset holders) and big losers” (typical wage earner).
It is unlikely that the Fed or the wealthy people would want to deflate these inflated assets voluntarily. Remember the words of economist John Kenneth Galbraith: “People of privilege will always risk their complete destruction rather than surrender any material part of their advantage. Intellectual myopia, often called stupidity, is no doubt a reason. But the privileged also feel that their privileges, however egregious they may seem to others, are a solemn, basic, God-given right. The sensitivity of the poor to injustice is a trivial thing compared with that of the rich.”
My regular readers would know that I believe that the US and Europe are in a Silent Depression during which the standard of living of ordinary people declines, although this contraction does not show up in nominal terms. But let us assume the following. Monetary conditions are currently not tight. Otherwise, US stocks would not sell close to all time highs and Bitcoins wouldn’t have soared.
Assuming that the Fed suddenly wakes up to the fact that the ‘real’ economy is weak, it would without hesitation cut interest rates in the hope to support not only economic activity but also the inflated asset markets. After all, about the last thing the Fed would want, is to hurt its Wall Street buddies through a massive decline in asset prices, which would exacerbate the decline in economic activity because of the wealth effect going in reverse.
Above, I quoted John Kenneth Galbraith extensively who was not only an economist but a true and sarcastic scholar. Let me leave two quotes with my readers that resonate with me: “The problem of the modern economy is not a failure of knowledge of economics; it’s a failure of a knowledge of history,” and “If you feed enough oats to the horse, some will pass through to feed the sparrows” (referring totrickle-down economics).
With kind regards
Yours sincerely
Marc Faber
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