RANCHO SANTANA, NICARAGUA – Poor Mike Bloomberg.
First, he is excruciatingly dull. (If he wins, it will be good news to Mike Pence… possibly the only human being more boring than Mike Bloomberg.) And even with $60 billion, he can’t get much respect.
The Democratic candidates are lining up to take a whack at him. His crime? He’s a rich SOB. USA Today:
Candidates piled on former New York City Mayor Mike Bloomberg… From the first minute of the debate, Bloomberg was the main target of all of his Democratic counterparts.
A billionaire who has been self-funding his campaign, Bloomberg was repeatedly hit…
The Democrats were okay with Hillary Clinton’s net worth ($45 million). And okay with Barack Obama’s $40 million pile. Even Bernie Sanders’ $2.5 million, while not much in Bloomberg-Trump circles, is not bad for a socialist.
They’re all rich… but at least they got their money fair-and-square, by leveraging “public service” careers with books, speeches… and pay-to-play “access.”
But Bloomberg? He did the unpardonable. He earned his money honestly…
Luck and Pluck
In our office sits one of Bloomberg’s ubiquitous terminals. It connects our researchers with the big, wide world of finance.
Want to know the discount rate on 2027 Argentine bonds? Want to compare the return from Korean coal to Chilean wine? What to check out the trading history of Australian dollar futures?
It’s all there… and much, much more.
Most successful businesses are products of luck and pluck. The exact combination is hard to pin down. As for Bloomberg, we don’t know.
But what we do know is that once underway, the New Yorker’s business benefited hugely from something he probably didn’t fully understand. Few people did.
Why would so many people be so interested in trading housing debt or sovereign bonds? Why would so many people want to buy stocks? Why would anyone pay Mike Bloomberg $25,000 a year to rent his terminal?
Pulling Out Aces
Bloomberg started his business in 1981. Six years later, the fix was in.
Then-Federal Reserve chair Alan Greenspan stacked the deck in Bloomberg’s favor. After 1987, the entire financial industry was pulling out aces. The world’s central bankers were spending trillions of dollars – in cheap credit and quantitative easing – to get people to buy stocks and bonds.
In an honest world, most people would have better things to do. Stocks? Bonds? Bloomberg terminals? They were for the pros. Stocks were risky; they were correctly seen as an insider’s game. And bonds were for institutions – pension funds, insurance companies, and endowments.
Thirty years ago, the financial industry accounted for only 10% of total U.S. corporate profits. Normal people put their money into savings accounts. And a properly functioning financial system guaranteed that they got what was coming to them.
Entrepreneurs needed savings to launch their businesses. Corporations needed savings to expand. People needed to borrow real money, and they were willing to pay for it. In 1985, for example, savers could earn almost 11% annually on a 5-year certificate of deposit (CD).
But then, along came the central banks with their ersatz savings. Suddenly, people no longer needed to save. The Fed would lend out money that no one ever earned, let alone saved. And then, the interest you could earn from savings went down, too – as the Fed pushed it down. Today’s average 5-year CD pays less than 2%.
By the 21st century, Wall Street was making 40% of all U.S. corporate profits… and Mike Bloomberg was in high clover. But as recently as 2006, Bloomberg’s fortune was “only” about $5 billion. Then, after the crisis of ’08-’09, central banks pumped trillions more into the financial markets. Stocks rose more than three times. Bonds soared, too.
Financial assets became more and more important… and Bloomberg terminals were more and more in demand. Wall Street (financial assets) had averaged about two times GDP throughout the ’50s, ’60s, ’70s, and ’80s. Suddenly, with the Fed dealing the cards, it shot up to more than five times GDP.
Who wouldn’t want a piece of that action? How to get in on it? Lease a Bloomberg terminal… Now, you can research and invest along with the pros!
Bloomberg wasn’t alone, of course. Even your editor drew some high cards, thanks to the Fed’s focus on financial assets. And, of course, the rich generally did well. After all, they owned the stocks and bonds that the Fed was bidding up.
Naturally, the savings rate went down. In the ’60s, when America really was great, the net national savings rate was 10% of GDP. Today, it is less than 2%.
The markets are flooded with the Fed’s phony liquidity but parched for real savings… real capital investment… and real productivity growth.
The result, of course, is just what you might expect. Mike Bloomberg got richer and richer. But the economy weakened. And the 90% of the population that wasn’t already rich in 1990 got relatively poorer.
If they wanted to buy a share of the S&P 500, it would have taken 15 hours of work when Michael Bloomberg started his business. Now, it will take over 100 hours.
“Don’t fight the Fed,” is the sage advice on Wall Street. It paid off big time for Mike Bloomberg. And now, everyone thinks the way to wealth is easy: Just “buy the dip,” and count on the Fed to add more liquidity.
Stock market crash? More liquidity! Recession? More liquidity. Plague, pestilence, the Four Horsemen of the Apocalypse… Armageddon? More liquidity!
But Fed policy is shifting into its third phase. Here’s a report – from Bloomberg, of course – on where it is headed:
Federal Reserve Governor Lael Brainard on Friday called for the adoption of new strategies by the central bank to achieve its 2% inflation goal and fight off future recessions.
The Fed should seek above-target price gains to make up for past inflation shortfalls and should cap Treasury debt yields if it’s forced to lower short-term rates as far as they can go in a downturn, she said in a speech in New York.
“Today’s low-inflation, low interest-rate environment requires not only new recession-fighting tools but also a new strategy to address the persistent undershooting of the inflation target… and the risk to inflation expectations … well before a downturn,” she said.
Even more liquidity, in other words!
But more liquidity may not do for young Bloombergs what it did for the old one. Stay tuned.
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