- - Thursday, August 14, 2014

Third in a series.

New York-The United States will soon tighten the process by which American capital markets are regulated, and do so significantly.

If tighter regulations and stricter penalties do not emerge before the next crash — one I believe will dwarf what happened in 1929 and even what occurred in 1873 — they certainly will operate immediately afterward.  

And rest assured, politically connected cronies of all persuasions will be punished hard for getting us into the mess too many still pretend was “fixed” starting in September 2008.

Investors in American securities do not appreciate mounting risks

The market for U.S. government debt securities is among the largest and most liquid in the world; yet, disclosures are woefully inadequate.

Since 2008, our the Federal Reserve System has been intervening in capital markets to push interest rates on U.S. government debt securities down artificially, well below rates of consumer price inflation experienced here since 1945. In consequence, long-term investors are punished while some savvy traders reap speculative, though highly risky rewards.

Suppressed interest rates on “safe” government securities lead investors in riskier common shares to bid prices up well above levels that can be defended using traditional valuation techniques.

Moreover, consolidated financial results obscure important underlying trends in the geographic breakdown of corporate revenues, profits, and cash flow. So investors who purchase common shares in what they believe are American focused companies may actually own interests in U.S. based companies whose true growth potential lies in riskier foreign markets.

As explained previously, the Fed and the American government will not be able to suppress key interest rates while also running mammoth spending deficits interminably.

After six years, we must approach a point where new, more attractive  alternatives will emerge to concentrating wealth inside the United States. When this happens, U.S. dollar interest rates will increase, and the values of American debt and equity securities will fall, perhaps precipitously.

Investors will not always be trapped inside America

The overarching reason that asset prices remain high inside the United States is that American and other investors do not yet have other geographic alternatives they find hospitable.

According to a report issued by Credit Suisse, global household wealth of an estimated $241 trillion in 2013 remains concentrated in certain nations that, for the moment, have long histories of treating investors in compliance with established laws.

The United States, with just 5 percent of the world’s population held 30 of the world’s household wealth.

Other westernized nations that had more than $5 trillion in household wealth identified by Credit Suisse were: Japan with $22.6 trillion; France with $14.2 trillion; the United Kingdom with $11.7 trillion; Canada with $10.7 trillion; and Australia with $10.2 trillion.

Together with the United States, these six nations held 56 percent of the household wealth in the world ($134 trillion) though they comprised just 9 percent of the world’s population (639 million persons).

In contrast, rising and rival nations, including China, India, Indonesia, Brazil, Russia and South Africa held only 14 percent of global household wealth ($33 trillion) though they comprised 46 percent of the world’s population (3.3 billion persons).

As risks rise at home, American and western investors will chase growth and higher “real” returns outside our borders.

No defense against pitchforks after the next crash

In the spring of 2009, when the financial outlook looked especially bleak to most informed observers, President Obama noted that only he stood between America’s bankers and angry American mobs holding pitchforks.

Who will stop the crowds following the next crash?

Even though stock prices are much higher now in August 2014, most Americans share a view that U.S. capital markets are either broken, rigged or a mixture of both.

Six years’ following the last flirtation with financial disaster, many experienced investors view developments in global capital markets with a deep sense of foreboding — a correction seems overdue, on a scale potentially far more damaging than in recent history.

What has happened thanks to government intervention in our capital markets since August 2008, when the first phase of the ongoing and unresolved financial crisis hit, does not work permanently. Asset prices currently trade far above intrinsic value — held up primarily by artificial means.

Before the coming crash, gridlock in Washington will obstruct required reform — after the crash politicians will unite in competition to outdo one another in tightening American regulations so they truly are “investor-friendly.”

Mark these words.

Next: A Fair Deal on Taxes

Copyright © 2022 The Washington Times, LLC. Click here for reprint permission.

Please read our comment policy before commenting.

Click to Read More and View Comments

Click to Hide