This article was sponsored by Miles Franklin and written by Gary Christenson. The opinions are his.
Entropy is a thermodynamic concept that describes disorder in a system. A system naturally trends toward increasing disorder or increasing entropy. Energy inputs offset increasing entropy and create structure.
Example: A high-rise office building requires energy for construction. It needs energy to create the foundation, concrete, steel and plastics. Construction requires more energy for labor, electrical installation, plumbing, painting and more.
We must expend energy for maintenance after completion or the building will deteriorate and lose its usefulness.
Like Markets…
The FAANG (Facebook, Apple, Amazon, Netflix and Google) stocks have risen from low levels six years ago to their recent lofty heights. This levitation required considerable energy—buying power—to force the markets higher. Examples:
Stock Price Date Price Date
Facebook Sept. 2012 $17.55 July 2018 $218
Netflix Sept. 2012 $7.58 July 2018 $419
Apple July 2013 $51.89 Aug. 2018 $213
WHY?
The Federal Reserve lowered interest rates. The yield from bonds decreased to a few percent per year and to zero or below in some European and Japanese markets. Investors pushed capital—input energy—into the FAANG stocks because in a low interest rate world they were good alternatives to bonds.
The Swiss Central Banks created billions of Swiss Francs and purchased dollars. With those dollars they bought stock in many American companies including Apple, Amazon and Facebook. The latest report from NASDAQ shows the Swiss Central Bank owns $2.5 billion in Amazon stock. Remember—the Swiss Central Bank created the francs from nothing and bought assets—American stocks. That and other buying pushed the prices of FAANG stocks higher.
Yes, the game is rigged in favor of the central banks and commercial banks.
Summary: We inject energy and money into systems, buildings, bridges and stocks. More energy is needed for larger and higher structures. A booming stock market requires considerable energy – new buying – to push prices to the sky.
Facebook stock rose on aggressive buying for years. Netflix did the same.
The same occurred with Bitcoin in 2017, silver in 2008-2011, the NASDAQ 100 in 1999-2000, and crude oil in 2008. But these markets crashed after their huge gains. Facebook, Amazon and Apple stocks are not exempt from crashes.
The levitation process also works in reverse. Selling can crash a market, which is easy with paper markets fed by “funny money.” Silver in 2011 is an example.
As I write, silver is down over $0.60 on August 15, 2018. This drop reminds me of the 2008 crash in silver and gold when the stock markets collapsed. Margin calls on stocks were blamed in 2008. Institutions sold good assets (silver and gold) to raise cash to meet margin calls on other speculations. Silver and gold bottomed soon thereafter and rose into 2011. Read Dave Kranzler and David Schectman in the Miles Franklin Newsletter.
Silver and gold are real money. But “funny money” created by the banking cartel is less real. Unreal money creates unsustainable pension promises, excessive debt, unreal stock prices, dodgy paper contracts that masquerade as precious metals, defaults and market crashes. Beware!
Central banks create tons of “funny money,” use it to purchase stocks, collect the dividends, levitate stock markets and appear wealthy. We shall see how long funny money keeps its value and purchasing power.
Entropy in a system increases. If central banks and institutions reduce their frantic buying – reduce their energy injections – into the stock market systems, a collapse is possible.
History has shown, regardless of intrusions by bankers and politicians, gold and silver retain their value. History has shown “funny money” does not.
Miles Franklin will recycle excess dollars from over-valued stocks into real money. Call them at 1-800-822-8080.