Lux Lucet

Ever since the spring of 2009 when The-Powers-That-Be (TPTB) were out there claiming to see “green shoots” everywhere, the public has been treated to a non-stop propaganda campaign pushing the narrative of economic recovery.

President Obama himself proclaimed his belief in the strength of the American economy, stating for all the world to hear in his 2016 State of the Union Address that anyone who doubted everything was awesome in the main street economy was, to use his words, “peddling fiction.”

And surely Obama couldn’t be wrong. After all, good doctor Ben Bernanke spent several years injecting the US economy with his concoction of Zero Interest Rate Policy (ZIRP) and three rounds of Quantitative Easing (QE). How could anyone doubt but that the wise heads at the Fed have cured what ails us? The stock market just set a new record!

But if you dig down beneath the surface, you’ll find that everything is not awesome. Corporate earnings are down for the fifth quarter in a row. According to the report on Factset, “The second quarter [2016] marks the first time the index has recorded five consecutive quarters of year-over-year declines in earnings since Q3 2008 through Q3 2009.” In other words, corporate earnings haven’t had a losing streak this long since the height of the last financial crisis.

Or take worker productivity, a measure of hourly output per worker, which has declined now for three straight quarters. As the Reuters article pointed out, “U.S. nonfarm productivity unexpectedly fell in the second quarter, pointing to sustained weakness that could raise concerns about corporate profits and companies’ ability to maintain their recent robust pace of hiring.” No kidding.

But why is worker productivity in the US declining? The Reuters article fails to provide a reason. So let me suggest one possibility: businesses are no longer investing in property, plant and equipment, the very things that drive productivity. As Forbes reports, “Corporate executives now shy away from capital spending. Companies are spending money to cut costs – labor cost especially, and also electricity – but few companies are increasing productive capacity.”

So what have executive been spending on if not new productive capacity? Stock buybacks that serve to boost earnings per share and increase bonuses. “Stock buybacks by big American companies are near a historical peak [as of May 2014], but the practice appears to do little to improve their underlying operations and robs them of money for research and future growth. USA Today’s John Waggoner calls stock buybacks a ‘sugar high’,” as John Morgan reports.

Morgan goes on to cite a 1999 quote from Warren Buffett, who said, “Repurchases are all the rage, but are all too often made for an unstated and, in our view, an ignoble reason: to pump or support the stock price.”

Let’s see then, we have stock markets at near record levels, while at the same time corporate earnings are on the decline as worker productivity erodes, which very likely is a consequence of businesses showing greater interest in engineering stock buy-backs rather than in capital spending. Sure sounds like a plan for long-term economic success to me.

I’ve mentioned only a few data points to illustrate that the economy, far from being robust, is in reality quite weak. But for more of the same, consider the following nine ugly charts. Obama’s term in office is highlighted in red.

Things that should be going up in a healthy economy – Labor Force Participation Rate, Median Family Income, Home Ownership – are all going dramatically down. Those items that one would expect to see going down if the economy really were as good as The-Powers-That-Be tell us – Food Stamps, Federal Debt, Money Printing, Healthcare Costs – are going straight up.

These charts tell a very different story from what Obama’s putting out. Maybe he’s the one peddling fiction.

It’s the Manipulation

We’ve already looked at one reason for record stock prices in the face of declining productivity: corporate stock buybacks. But there’s more to it than that.

Following the financial crisis of 2008-2009, investors soured on equities and have never fully returned. But while US equities have experienced cash net outflows from hedge funds, institutions and private investors alike, the stock market continues to rise.

The biggest reason for the soaring equity valuation, in my opinion, is that central banks are out there supporting the stock market. They do this in several ways, some overt and others covert.

The ongoing Zero Interest Rate (ZIRP) and now Negative Interest Rate (NIRP) policies of the world’s central banks are an example of the former. These policies are designed to boost stock prices by artificially affecting the single most important price in the economy: the price of money.

We don’t often think of money has having a price, but interest rates really function that way. The higher the interest rate, the more you have to pay to borrow.

And just as a lower interest rate makes it purchasing a home or a car more attractive, so too is this the case for stocks. And this has to do with the valuation models used by Wall Street stock analysts.

If you go to business school, you’ll learn that the price of a stock is determined by the present value of all future cash flows. So what does this mean? Simply this, that when valuing a stock, analysts will first project a company’s revenue for, say, a period of five years in the future, and then enter those cash flows into a formula by putting the cash flows in the numerator and some interest rate in the denominator. A simplified version of the formula looks like this: Stock Price = Sum of all Future Cash Flows / 1 + Interest Rate.

If interest rates are high, this makes the denominator larger, meaning that the final number representing the stock price is lower. On the other hand, if interest rate are small, this makes the denominator smaller, with the result that the value of the stock is estimated to be higher.

The Fed has been engaged in ZIRP now for the better part of the last decade, with the result that US interest rates are now at a 5,000-year low. Yes, you read that right, a 5,000-year low. Here’s a chart produced by Andy Haldane, Chief Economist of the Bank of England showing the current remarkable state of affairs:

Imagine that, Abraham, Isaac and Jacob experienced higher rates of interest than we have today. Who knew?

But back to my main point, when central banks artificially hold interest rates below market levels – and make no mistake about it, were the Fed or any of the other central banks to take their foot off the interest rate manipulation gas for even a moment, interest rates would spike and the stock market would crash – they are, at the same time, artificially boosting stock prices.

But while ZIRP, NIRP are great for boosting asset prices, which disproportionately benefit the very wealthy who hold the majority of equity assets, they do nothing to boost the fortunes of ordinary Americans. In fact, these unnatural policies – I say unnatural in the sense that they could not exist apart from their being imposed on the market by powerful central planners, ZIRP and NIRP are the financial equivalent of gay marriage – are quite destructive to main street.

Take your savings account, for example. Have you ever noticed that it’s been eight years since your last interest payment? The Fed, through its policy of ZIRP, has been robbing savers and giving that money to the banks.

But what is just as bad, and perhaps even worse, is that ZIRP is killing the pensions people count on for their retirement. Pensions depend on the availability of low-risk, interest bearing bond investments to provide the cash flows to meet their obligations to their retirees. But now that interest rates are at 5,000 year lows, these investment are no longer available. The result is that pension all over the US are in serious trouble. If a pension cannot meet its return assumptions, it either has to cut benefits to retired workers, increase contributions by current workers, or both. Or, if it is a pension for public workers, increase the burden on the taxpayers.

Consider this headline, “Illinois Governor Furious After Pension Fund Cuts Returns Forecast, Sticking Taxpayers With “Crippling” Tax Hike.” According to the article, the Illinois Teachers Retirement System just cut its assumed rate of investment return from 7.5% per year to 7.0% per year, which implies that the state of Illinois – i.e. the taxpayers – must come up with an extra $200 million dollars per year to cover the shortfall. Realistically, 7.0% is probably just as much a fantasy number as 7.5.%. In my opinion, more tax hikes are on the way.

And the issue of pension shortfalls is not limited to Illinois. almost certainly this is coming to a government pension fund near you. And when it does, the results won’t be pretty.

Interest rate manipulation isn’t the only overt tool in the world’s central banks use to manipulate stock markets. One of the latest inventions of the central bankers is asset purchases using newly printed money.

As mentioned above, private investors have been bailing on stocks since 2007, but the stock market keeps on going up. And much of this gain, as we now know, is due to central banks taking over as purchasers of last resort. As Zero Hedge reports,

In the second quarter [2016], the Swiss National Bank added $7.3 billion to its US equity portfolio, and according to its just filed 13-F, is now long a record $61.8 billion in US stocks, up from $54.5 billion a month ago. In fact, rising from $41.3 billion in total US stock holdings as of December 2015, this means that the Swiss central bank increased its total US holding by a record 50% in the first half of 2016.

So we have a collapsing economy in which businesses are decreasing capital expenditures and increasing their commitment to financial engineered stock buybacks, while investors continue to flee the stock market in droves, but the Swiss National Bank (SNB) says jump on in, the water’s fine.

The Bank of Japan (BOJ) is doing the same thing with its own stock market. So aggressive has been the BOJ with its asset purchases that as of April 2016 it was a top 10 holder in 90% of Japanese stocks.

Not to be left out in the cold, the People’s Bank of China (PBOC) has been aggressively support the Chinese stock market and has become a top 10 shareholder of several major corporations.

We’ve talked about several of the world’s major central banks buying stocks, but what about the granddaddy central bank of them all, the Fed?

Officially speaking, the Fed would never be so gauche as to intervene in the US stock market, or at least that’s what they would have you believe. But the behavior of the stock market ever since the 2008 crisis would suggest otherwise.

Many observers have noted over the past several years that something seems strange about the way the stock market always seems to find a buyer when it needs one. As Zero Hedge reports, “Throughout the last week, anytime stocks have begun to correct or drop, “someone” has bought S&P futures to prop the market up.”

The manipulation has become so blatant that commentator Andy Hoffman has coined the term “dead ringer algorithm” to describe the pattern of stocks ramping up into the close of the market, regardless of how much bad economic news makes the headlines.

Since the Fed is so secretive about what it does, it is difficult to know precisely what process it uses to goose flagging markets, but a big cog in the manipulation scheme almost certainly is the Plunge Protection Team (PPT). Officially known as the President’s Working Group on Financial Markets, the PPT was established in 1988 by then President Reagan in response to the October 1987 stock market crash, which saw the Dow Jones Industrial Average plunge by 25% in a single day.

The roster of the PPT is a Who’s Who list of government big shots. It consists of

• The Secretary of the Treasury
  
• The Chairman of the Federal Reserve System
  
• The Chairman of the Securities and Exchange Commission
  
• The Chairman of the Commodity Futures Trading Commission
  

According to Executive Order 12631, the order that created the PPT, the first purpose of the organization is consists of, “Recognizing the goals of enhancing the integrity, efficiency, orderliness, and competitiveness of our Nation’s financial markets and maintaining investor confidence.” True, it doesn’t say anything about rigging financial markets. But 1) given how the federal government ignores the Constitution, why would we expect it to adhere to the language of a mere Executive Order, and 2) one could so interpret this language to allow the PPT to engage in market rigging anyway. After all, in the event their scheme is ever exposed, they could always claim their rigging was just a case of their, “maintaining investor confidence,” and “enhancing…orderliness” in the financial markets.

The activities of the PPT, as is the case with nearly everything about today’s central bank dominated financial universe, are difficult to pin down precisely. But the consensus of those who believe in PPT market rigging – I am one of them – is that the group accomplishes this in the futures markets and perhaps even by secretly buying stocks directly.

Since many Americans take their cues on the state of the economy from the performance of the stock market, the efforts of the PPT can be seen as a form of propaganda, sending out the “all’s clear” signal while at the same time the real economy is breaking down. According to one former member of the PPT, “there’s no price discovery anymore by the market…governments impose prices on the market.”

Why All This Should Matter To You

In the first place anyone who has any regard for basic honesty should be concerned when someone, particularly those in authority, lie to them. Our financial system, our government, our entire society have less and less integrity by the day. If The-Powers-That-Be are lying to you about the true state of our economy, that should be cause for serious concern.

The civil magistrate is just as much under the authority of the ninth commandment “You shall not bear false witness as any private citizen. There is no exception for rulers that allows them to lie. If the government and its agents are deliberately misleading people about the economy, and in my opinion there is no doubt that this is the case, then they are guilty of breaking the law of God.

Secondly, misrepresenting the state of the economy can affect the decisions voters make on election day. With US presidential elections a little over two months off, one should be very suspicious of the motives of those in power. They want to remain in power and if deliberate market distortions make things appear better than they are and result in election outcomes favorable to them, it would be proper to accuse the market riggers of election theft (see the Eighth Commandment).

If it seems a bit paranoid to suggest that those in positions of power would conspire to hide the true state of the economy from the American people for political purposes, consider that on April, 11 2016 Fed Chairman Janet Yellen held a closed door meeting with President Obama and Vice-President Biden immediately following one emergency Fed meeting. After the White House conference, the Fed held another emergency meeting that same day. Curiously, the stock market, which had been struggling for most of the year, that same day reached new highs for 2016. And a strong stock market is helpful to Hillary Clinton’s election chances and also to Janet Yellen’s odds of being reappointed as Fed Chairman.

Now it’s possible that strong performance of the market since that time was a coincidence. One could argue that the market had been going up anyway. But since the meeting was held in secret behind closed doors, no one can know what was discussed.

And this brings me to a third reason why you should care about manipulated markets, namely that shadowy market rigging and secret meetings of public officials is antithetical to republican government. Limited, Biblical, constitutional government is all about openness. But tyrants operate under the cloak of secrecy.

Fourth, rigged markets, artificially low interest rates, and government propaganda are intended to mislead people, causing them to make decisions they might not otherwise have made. But market manipulation is unstable. Governments and central banks cannot forever suspend the laws of economics. And when reality hits home, as it surely will, a lot of people will suffer far more than they would have had they been given the truth about the state of the economy rather than a heaping helping of propaganda.

Fifth, we need to know whom to blame for our current and future economic troubles. When the going gets bad, you can count on The-Powers-That-Be to blame everyone and everything but themselves. Usually the scapegoats are capitalism and liberty. “If only we’d had more/better regulations and laws, why this whole thing could have been avoided,” is the typical line of the central planners and their apologists in the press. Don’t listen to them.

Sixth, if we don’t know the truth about the economy, we can’t do what is needed to fix things. We need less debt, less government and honest money. But if we don’t realize the source of our problems and instead think that their solution lies in bigger government, more debt and more money printing, well, I’m reminded of the Proverb that reads, “There is a way that seems right to a man, but its end is the way of death.”

Seventh and finally, economics, finance and politics are not foreign to the Scriptures. As odd as it may seem to some people, the Bible has a lot to say about these fields, and there is most certainly a unique Christian understanding of all these areas. In short, the Bible is for free men, free markets and honest money. Not only may Christians speak on these matters, but if we are to be good witnesses for Christ, it is imperative that we do so.

Summary and Conclusion

The economy, contrary to what government officials and the mainstream press are telling you, is really quite weak. Not only that, but the trends that are in place are very likely to get much worse.

Government officials and other mainstream institutions have a vested interest in maintaining the status quo, and as such constantly mislead people with propaganda. But a even a cursory analysis of our current economy shows that things are far from well.

Some people may find that a discussion about financial markets really isn’t all that spiritual. But as the Bible tells us, Scripture thoroughly equips a man for every good work, and this includes the good work of speaking the truth about that state of the nation’s finances.

With our economy deteriorating day by day, it is imperative that Americans see through the smoke and mirrors put out by the government and its agents in the mainstream press. Their policies of deficit spending, money printing and restrictions on personal liberty, far from being solutions to our problems, are in reality the cause of them.

If the American people are to have any chance of regaining their lost prosperity and liberty, it will come only by doing away with the current lies about that state of our economy and embracing the truth, even if it means facing some hard truths.