Chief Investment Strategist, The Freeport Society
Hello, Fellow Navigator.
In last Friday’s note here, my friend and fellow Freeport Society member Justice Litle, shared these unsettling statistics…
Seventy percent of Millennials and 64% of Gen Z are either “somewhat” or “extremely” likely to vote for a socialist candidate… while only about half have a favorable opinion of capitalism.
You were probably as depressed as I was to read those numbers.
I don’t need to tell you why socialism is a phenomenally bad idea. If you’re reading The Freeport Navigatoron a regular basis, I think it’s safe to assume you’re not a committed socialist. We believe in free speech and in the free exchange of ideas around here.
And let’s face it… some ideas are really stupid… and robbing Peter to pay Paul is one of them.
But in defense of those Millennials and Gen Z-ers embracing socialism over capitalism, consider this: Most of them have never actually experienced true capitalism, real economic freedom, and the wisdom of the “invisible hand.”
Instead, they’ve grown up with a distorted version of it – the palm-greased, government-managed variety, with all of its misplaced incentives, leading to one disaster after another for substantially their entire lifetimes.
Let’s start with the Millennials…
How Capitalism Got Its Bad Rep
Millennials were just starting their careers when the 2008 meltdown happened. They witnessed an epic bubble in real estate prices that was made possible, first and foremost, by government meddling in the mortgage market.
Now, Wall Street takes most of the blame for the orgy of subprime lending. After all, they were the ones making the loans, but they never actually planned to hold the mortgages once they made them. The business model was to bundle them in mortgage-backed securities (MBS), collateralized mortgage obligations (CMOs), and a whole list of alphabet soup abbreviations for mortgage “investments” that they dumped on any chump willing to buy them.
However, Wall Street learned this model from the government-sponsored entities Fannie Mae and Freddie Mac. And naturally, they financed it with cheap money from the Federal Reserve.
We all know how that story ended. The bubble burst, over 6 million Americans ended up losing their homes in the crisis that followed, and the banks got bailed out by Uncle Sam.
Not only did none of the executives responsible for the biggest financial crisis in 100 years serve prison time… but most were able to keep the exorbitant bonuses they earned during the boom. They got all the upside… but you and me, the taxpayers, took the downside.
If you associate that crooked mess with “capitalism”… well, I might not have a great opinion of it either.
Fast forward a few years to 2020, as Gen Z was starting to leave the nest.
Following the shutdown of the economy due to the pandemic, we witnessed the biggest case of crony capitalism in history.
I’m talking $54 billion in direct payments and another $25 billion in subsidized loans to major U.S.-based airlines.
Of course, none of that would have been necessary had the airlines not blown tens of billions on stock buybacks in the years immediately preceding the pandemic. The four biggest carriers – Delta Air Lines Inc. (DAL), United Airlines Holdings Inc. (UAL), American Airlines Group Inc. (AAL), and Southwest Airlines Co. (LUV) – spent a combined $40 billion on stock buybacks between 2015 and early 2020, according to estimates by S&P Global.
Again, a perverse incentive structure. The airlines knew they could juice their earnings with buybacks when times were good because they could always run to Uncle Sam as soon as the going got rough.
It wasn’t just the airlines, of course. The government showered hundreds and hundreds of billions of dollars on recipients worthy and unworthy alike, creating the mother of all bad precedents. But if we’re talking about perverse incentive structures, we really need to talk about the Federal Reserve….
Real Capitalism Versus Crony Capitalism
The Fed dropped interest rates to zero and initiated a massive $120 billion per month bond-buying program to unfreeze the capital markets. While I’m not one to readily commend the Fed, that was probably the right move, at least in those early months. There was no liquidity in the bond market, and the Fed’s intervention helped return the market to something resembling normal.
But once normalcy was achieved, they should have eased off gradually and taken their foot off the gas, reducing their bond buying a little each month with a goal of exiting that business within six months.
They didn’t do that. Instead, they kept it up for two full years, creating a bubble in the stock market, giving us meme-stock mania, and contributing to a house-price bubble that has priced out most Americans under 40.
Oh, it also contributed to the most severe inflation in four decades… in case you needed a reminder.
So, really, can you blame Millennials and Gen Z for having their doubts about capitalism? They’ve never seen its true essence.
In real capitalism, risk takers reap rewards… and if things go south, they take the hit. What we have in practice today – crony capitalism – involves the elite and well connected reaping all the rewards while leaving poor schmucks like you and me to absorb all the costs.
Don’t expect improvement any time soon. Neither of the men running for president in November believes in true capitalism, unless selling gaudy shoes, $60 Bibles, or a money-losing Twitter competitor count.
I’m not sure either of them even understands what honest capitalism is. Joe Biden has spent most of his term fomenting union activism, while Donald Trump’s idea of “capitalism” always seems to end with him in court, either suing or being sued.
Of course, my Freeport Society friend Louis Navellier has made it clear that he doesn’t expect either of these men to be the next president… and what’s coming is so much worse.
Over the last year, Louis has spent considerable resources, and hundreds of hours, to game out what the targeting of Trump could mean for November.
The good news, Louis says, is that Biden won’t be reelected.
The bad news: His replacement will be even worse.
In fact, long before this verdict, Louis went on record to warn people, saying:
The odds are becoming higher by the day that Donald Trump will land in jail… Not because I think he deserves to be there. I don’t. But because the left is hell-bent on sending him there.
Now his prediction is playing out before our eyes… and a “Shadow Candidate” is quietly positioning himself to edge out not just Biden, but also Kamala Harris.
To see Louis’ full warning, click here.
To life, liberty, and the pursuit of wealth,