Dow 36,000 and Policy Mistakes

Doug Nolan


More evidence this week of a historic mania running unchecked. 

1999 was crazy, but at least that mania was relatively contained within Internet and technology stocks. 

It wasn’t fueled by Trillions of central bank monetary inflation. 

These days, manias are everywhere – at home and abroad, stocks, bonds, derivatives, crypto, houses, etc. 

The small cap Russell 2000 jumped 6.1% this week, with the Semiconductors (SOX) up 8.8%. 

The Goldman Sachs Most Short Index surged 11.7%. 

The Dow powered past 36,000 – and it was Deja Vu All Over Again.

Bloomberg Television’s Romaine Bostick (November 1, 2021): 

“When you talk about buying and holding, are you doing it within the context of the risk/reward that stocks on their own offer… or are you also looking at it with respect to the type of support – whether implicit or explicit – by monetary policymakers, by fiscal policymakers that has led us to where we are today - where a lot of folks feel like we can’t really go down as long as the Fed is there.”

James A. Glassman, co-author “Dow 36,000…”: 

“Well, certainly I couldn’t have predicted zero interest rates… 

My feeling, certainly in the short term and maybe even the medium term, that we ought to pay attention to Fed policy. 

But if you look at the whole scope of American history, the fact is that the U.S. economy has done consistently well – over and over again. 

And we make policy mistakes all the time. 

But markets react, businesses react, and we do really well. 

And, essentially, an investment in stocks is a bet on the U.S. economy and that has turned out to be a really good bet - no matter who’s in charge – whether it’s Democrats or Republicans. 

I hate to say, as someone who has devoted his life to policy issues, that policy doesn’t matter. 

And I think it does. But there’s a certain equilibrium that we come back to. 

And for investors – long-term investors if you’re thinking about retirement – for you to worry about what Fed policy is today or tomorrow – or what Congress is going to do passing this or that bill – I think that’s a mistake. 

I really do. 

Just putting money in on a regular basis and keeping it there makes a whole lot sense… 

I would have to tell you that I would push for high proportions of stocks in a portfolio… 

In general, if you’re a long-term investor – and I mean by that ten years or more – I would be as aggressive as possible with owning stocks in a diversified portfolio.” 

As Glassman and Kevin Hassett were (in the thick of 1999’s mania) about to publish “Dow 36,000: The New Strategy for Profiting From the Coming Rise in the Stock Market,” I began posting the Credit Bubble Bulletin. 

I was convinced a major Bubble had overtaken U.S. finance and securities markets – a Bubble fueled by a precarious shift to market-based “Wall Street Finance,” including the GSEs, MBS, ABS, derivatives, the brokers and hedge funds. 

Moreover, the Fed failed to respond to a momentous loosening of finance and proliferation of leveraged speculation. 

Indeed, Greenspan’s shift in monetary policy doctrine toward underpinning market-based finance was integral to Bubble development.

From Dow 36,000 introduction: “Single most important fact about stocks at the dawn of the twenty-first century: They are cheap... 

If you are worried about missing the market's big move upward, you will discover that it is not too late. 

Stocks are now in the midst of a one-time-only rise to much higher ground – to the neighborhood of 36,000 on the Dow Jones industrial average.”

I viewed “Dow 36,000” in 1999 as emblematic of the period - a testament to the euphoria of the times and reminiscent of Irving Fisher’s “stock prices have reached what looks like a permanently high plateau” (just weeks ahead of the 1929 Crash). 

With parallels to the “Roaring Twenties”, the technology revolution had nurtured a powerfully captivating bullish narrative. 

Along with the marketplace and Federal Reserve policymakers, Glassman and Hassett ignored mounting risks associated with Credit and speculative excess. 

My interest was piqued when informed Glassman was to be interviewed Monday in commemoration of the Dow’s ascent to 36,000. 

After publishing a hyper-bullish book at a major market Bubble peak, would he convey a more cautious approach in today’s manic market backdrop? 

Definitely not. 

In a sign of these manic times, Glassman has become only more confident in equities and the buy and hold mantra.

I am fascinated by Glassman’s dismissiveness of Policy Mistakes. 

“We make policy mistakes all the time. 

But markets react, businesses react, and we do really well.” 

Glassman believes it’s a mistake to worry about Fed policy. 

He admits being surprised by zero rates. 

Curiously, no mention of QE. Federal Reserve Assets were $669 billion when “Dow 36,000” was published. 

Assets have reached $8.575 TN, having ballooned almost 12-fold (1,200%). 

I wouldn’t extrapolate.

They aren’t and won’t, but investors should be keenly focused on Policy Mistakes. 

Granted, open-ended QE to this point has ensured that every Mistake is followed by greater Mistakes – only more aggressive monetary stimulus ensuring a Fed balance sheet that will approach $9 TN over the coming months. 

With the Federal Reserve as vanguard, global central bankers are in the throes of a monumental Policy Mistake.

As expected, the Fed Wednesday announced details of its taper strategy, which is essentially starting with a $15 billion reduction. 

They will take a flexible approach with tapering, while penciling in this pace monthly. 

Meanwhile, Powell and the FOMC believe it’s much too early to discuss raising rates from zero.

It was the Fed’s big, much anticipated week. 

And it was overshadowed by a bigger story. 

A Bloomberg host asked a guest why U.S. yields were more impacted by Thursday’s Bank of England (BOE) policy announcement than by the Fed. 

He didn’t get a satisfactory answer.

Ten-year UK yields sank 19 bps this week to 0.85%, with yields dropping a notable 35 bps in 12 sessions (from October 21st highs). 

Australian yields sank 28 bps this week to 1.81%. 

German yields dropped 17 bps (negative 0.28%), with French yields down 21 bps (0.06%), Spain 21 bps (0.40%), and Portugal 21 bps (0.31%).

Italian yields sank 29 bps (0.88%) and Greek yields fell 24 bps (1.07%). 

Ten-year Treasury yields dropped 10 bps this week to 1.46%, with a two-week drop of 18 bps. 

Two-year and five-year Treasury yields fell 10 bps (0.40%) and 13 bps (1.06%). 

It was a huge week for the major global central banks. 

Clearly not ready to take a backseat following last week’s ECB meeting, Christine Lagarde “doubled down” in a speech ahead of the Fed announcement, saying the ECB was “very unlikely” to raise rates next year – a 2022 hike being “off the charts.”

“Despite the current inflation surge, the outlook for inflation over the medium term remains subdued, and thus these three conditions are very unlikely to be satisfied next year.” 

Calling her “Madam Inflation,” “Germany's best-selling tabloid Bild scathingly criticised European Central Bank (ECB) President Christine Lagarde…, accusing her of destroying the earnings and savings of ordinary people…” (from Reuters). 

Little wonder Jens Weidmann threw in the towel.

Tuesday had the Reserve Bank of Australia (RBA) also downplaying inflation risk, shelving yield curve control measures, but sticking with its monthly QE program. 

RBA Governor Philip Lowe: “The latest data and forecasts do not warrant an increase in the cash rate in 2022. 

The Board is prepared to be patient."

Following Thursday’s Bank of England meeting, Bloomberg went with the headline “BOE Shocks Markets by Keeping Rates on Hold.” 

Recent hawkish comments from BOE officials had markets anticipating an imminent shift in rate policy. 

Why did Treasury and global yields notably respond to the BOE? 

Because the Bank of England caving on inflation risks signaled a unified central bank front in pushing back against market expectations for rising rates and higher market yields.

November 4 – Financial Times (Chris Giles and Delphine Strauss): 

“Bank of England governor Andrew Bailey had a Herculean three-card trick to pull off on Thursday when presenting the central bank’s new inflation forecast and decision to hold back on immediately raising interest rates. 

Bailey, who fuelled expectations of a rate rise last month by saying the BoE ‘will have to act’ to tackle surging inflation, wanted those listening to accept three different messages — which to many in the audience may have appeared contradictory. 

First, that the BoE Monetary Policy Committee is much more concerned about inflation than it was previously and interest rates really are going to rise ‘over coming months’. 

Second, that it was good to wait and see before taking action because the outlook for economic growth had darkened and the overall picture was terribly uncertain. 

And third that people should continue to heed his words even though he acknowledged that his comments last month about taming inflation had been ‘truisms’ and therefore empty of meaning.”

A plethora of rationalization and justification from the global central bank community – much stretching credulity. 

And it’s difficult not to see this week’s developments as important confirmation of a concerted strategy from key global central banks. 

They’re in this mess together; created it together; and are now trapped together. 

As a group, they will dismiss rapidly mounting inflationary risks, choosing to remain locked in ultra-stimulative monetary policies. 

As a group, they will disregard manic markets and precarious financial imbalances. 

It’s not difficult to discern why they would adopt such an approach. 

Global fragilities have turned acute. 

China’s Bubble is faltering, with contagion spreading to key EM markets. 

And last week, we observed acute instability afflict developed bond markets, including the UK, Australia, New Zealand, Canada and even U.S. Treasuries. 

They’re petrified of bursting Bubbles. 

It’s like the stock market. 

If you’re going to be wrong, much better to be wrong with the group. 

And I could only chuckle. 

It’s virtually become a ritual. 

In analysis prior to Wednesday’s release of the Fed’s policy statement, commentators on Bloomberg Television again recalled the infamous Policy Mistake committed by the ECB when they raised the deposit rate 25 bps to 3.25% on July 3, 2008. 

According to Wall Street, they perpetrated the cardinal sin of contemporary central banks: they parted company with the Fed (that commenced rate cuts in Sept. ‘07) and tightened policy only weeks before the start of the “great financial crisis.” 

Listening to the pundits, one is left with the impression that the ECB’s hike actually contributed to the mayhem.

For starters, it’s silly to assert that a small 25 bps rate increase is such a big deal. 

If it causes significant market reaction, odds are that rates were held too low for too long. 

And indeed, that is the story of the mortgage finance Bubble period. 

Despite double-digit mortgage Credit growth, Fed funds ended 2002 at 1.25%. 

After averaging $268 billion annually during the nineties, mortgage Credit expanded an unprecedented $1.001 TN in 2003. 

The Fed funds rate was reduced 25 bps in 2003 to end the year at 1.00%. 

Mortgage Credit was up to $1.466 TN in 2005, yet rates had only been increased to 4.25%. 

2006 saw growth of another $1.4 TN, along with $1 TN of subprime derivatives.

Financial conditions remained ultra-loose until the subprime eruption in the summer of 2007.

The Fed’s failure to tighten policy and rein in mortgage-related excess was a monumental Policy Mistake – one that led directly to the post-Bubble introduction of QE. 

And then the Fed stuck with zero rates until the end of 2015. 

Rather than “exiting” its bloated post-crisis balance sheet, the Fed had doubled holdings again by 2014 to $4.5 TN. 

And despite booming markets and a recharged economic expansion, Fed funds didn’t return to 1% until mid-2017. 

By September 2019, with record stock prices and multi-decade low unemployment, the Fed reinstituted QE. 

The epitome of a Policy Mistake begetting only greater Policy Mistakes.

It’s easy to brush off this week. 

Contemporary central bankers simply partaking in contemporary central banking. 

No harm, no foul. 

But I see it much differently, with central bankers out this week with the huge backhoe digging a hole so deep we’ll never find our way out. 

I was reminded of Bernanke back in 2013 “pushing back against a tightening of financial conditions” – signaling to markets that the Federal Reserve would not tolerate weakness or corrections.

The big central banks this week signaled they will push back again rising rate expectations and market yields – essentially intervening in the markets to quash market adjustment to surging inflation risk. 

I have major issues with this. 

For one, market discipline is today all we have between reckless fiscal and monetary policies and any hope for a future without financial and economic chaos. 

Financial conditions must tighten, or inflation will run wild. 

Second, today’s artificially low rates and manipulated market yields are fueling precarious Bubbles and market manias. 

There is no justification for continuing with zero rates and huge monthly QE liquidity injections.

It’s tiring to hear chair Powell repeatedly fall back on the Fed’s “dual mandate of stable prices and full employment”. 

Give us a break. 

“In 1977, Congress amended the Federal Reserve Act, directing the Board of Governors of the Federal Reserve System and the Federal Open Market Committee to ‘maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.’”

In no way did this amendment grant the Fed carte blanch to print Trillions. 

The crafter of this legislation had in mind the Fed restraining money and Credit growth to ensure monetary and price stability. 

And for the Fed to use its full-employment mandate these days as justification for zero rates, and QE is also making a mockery out of that mandate.

The economy created 843,000 new jobs over the past two months. 

October’s 4.6% Unemployment Rate is down from June’s 5.9% and the year ago 6.9%. 

Average hourly earnings were up 4.9% y-o-y. 

The September trade deficit surged to a record $80.9 billion. 

And for the services-dominated U.S. economic structure, this week’s ISM data confirmed an overheated economy. 

Exceeding estimates by almost five points, the ISM Services Index surged to an all-time high 66.7 (data back to 1997). 

New Orders and Business Activity components also jumped to record highs. 

Backlogs and Export Orders jumped. 

Prices Paid rose to the high since 2005. 

“Demand shows no signs of slowing.”

Powell: 

“We have not focused on whether we need to [discuss the] liftoff test, because we don’t meet the liftoff test now because we’re not at maximum employment. 

What I’m saying is, when – given where inflation is and where it's projected to be, let’s say we do meet the maximum employment test, then the question for the committee at that time will be “has the inflation test been met”, and I don’t want to get ahead of the committee on that.”

Bloomberg’s Matthew Boesler: 

“So, when you’re looking at this question of assessing whether or not the U.S. economy is at maximum employment, do you have a framework for making that judgment that is independent of what inflation is doing? 

And if not, does it complicate that assessment given all of the uncertainty about inflation right now and the inclination to believe that the high inflation we’re seeing is not related to capacity utilization in the labor market?”

Powell: 

“So, we don’t actually define maximum employment in terms of inflation. 

Of course, there’s a connection there. 

Maximum employment has to be a level that is consistent with stable prices. 

But that’s not really how we think about it. 

We think about maximum employment as looking at a broad range of things. 

You can’t just look at, unlike inflation where you can have a number, but with maximum employment you could be in a situation hypothetically where the unemployment rate is low, but there are many people who are out of the labor force, and will come back in. 

And so, you wouldn’t really be at maximum employment because there’s this group that isn’t counted as unemployed. 

So, we look at a range of things, and by many measures we are at a very tight labor market.”

I’m not sure why Powell used “hypothetically.” 

The Fed today disregards its stable prices mandate in favor of some nebulous full employment concept, specifically focused on the unusually large number of workers who left the workforce during the pandemic. 

Powell: 

“They’re holding themselves out of the labor market because of caretaking needs or because of fear of COVID or for whatever reason.” 

That’s an issue, of course. 

And how many millions are enjoying working from home at their new careers as online traders of meme stocks, ETFs, options and cryptocurrencies? 

How many have retired early after seeing their investment and trading accounts inflate spectacularly? 

It is a grievous Policy Mistake to disregard inflation while focusing on labor market holdouts.

I was again this week reminded of Adam Fergusson’s masterpiece, “When Money Dies: The Nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar Germany.” 

On my initial reading, I was struck by how Reichsbank officials held to the belief that they were responding to outside forces and were not responsible for surging prices. 

The Fed blames COVID, global supply shocks and other factors beyond its control for temporarily elevated inflation. 

Do they honestly believe they can print $4.8 TN in 112 weeks without unleashing powerful inflationary dynamics?

Matthew Boesler: 

“And if I could just follow-up briefly… 

You talked a little bit about this possibility that the two goals might be in tension and how you would have to balance those two things. 

Could you talk a little bit about what the Fed’s process for balancing those two goals would be in an event that, say come next year you decide there’s a serious risk of persistent inflationary pressures…?” 

Powell: 

“It’s a risk management thing. 

I can’t reduce it an equation. 

But, ultimately, it’s about risk management. 

So, you want to be in a position to act to cover the full range of plausible outcomes, not just the base case. 

And in this case, the risk is skewed for now; it appears to be skewed toward higher inflation. 

So, we need to be in a position to act in case it becomes necessary to do so or appropriate to do so. 

And we think we will be. 

So that’s how we’re thinking about it, and I think through that, judgmentally too, it’s appropriately to be patient. 

It’s appropriate for us to see what the labor market and what the economy look like when they heal further.”

Euro zone CPI hit 4.1% (y-o-y) back in July 2008, boosted by crude that had skyrocketed to $140. 

The ECB in July 2008 couldn’t anticipate Lehman, and crude would soon commence epic collapses. 

They adopted a risk management approach, moving incrementally to tighten policy – to push back against elevated inflation - and then reversed course with rates down to 2.0% by December. 

The profound impact monetary stability has on all aspects of financial, economic, social and political wellbeing demands conservative central banking doctrine and cautious policymaking. 

Do no harm. 

Above all, no big Mistakes. 

The Fed and the global central banking community today inflict great harm as they proceed on the greatest monetary policy blunder the world has ever experienced.

The Wall Street Journal’s Michael Derby: 

“I wonder if the Fed has given any thought yet to the end game for the balance sheet, in terms of once you get the taper process complete. 

Will you hold the balance sheet steady or will you allow it to start passively winding down? 

And then in a related question, do you have any greater insight into what Fed bond buying actually does for the economy in terms of its economic impact?”

Powell: 

“So in terms of the balance sheet, those questions that you mentioned. 

We haven’t gone back to them… 

In terms of the effect of asset purchases on the economy, so there’s a tremendous amount of research and scholarship on this and… you can find different people coming out with different views. 

But I would say the most mainstream view would be that you’re at the effective lower bound, so how do you affect longer-term rates. 

There are two ways, one – so… let’s say you can’t lower rates any further hypothetically. 

So, you can give forward guidance, you can say we’re going to keep rates low for a period of time… 

The other thing you can do is just go buy those securities, buy longer-term securities. 

That will drive down longer-term rates and hold them lower, and rates right across the rates spectrum matter for borrowers. 

So lower rates encourage more borrowing, encourage more economic activity…”

It’s readily apparent what Trillions of monetary inflation do for securities, crypto, and asset prices – for speculation and feeding a mania. 

The euphoria of a record equities market run and Dow 36,000. 

It’s easy. 

Buy and hold. 

Never get shaken out. 

Don’t worry about Mistakes. 

Don’t worry about anything. 

And by the end of the week, market pundits celebrated how adeptly Powell had orchestrated a taper without even a whiff of tantrum. 

As the arbiter of Fed policies, markets exclaimed, “no Mistake here!” 

I would worry about the dynamics fueling this market Bubble. 

Below the surface, it’s turning messy. 

Another big short squeeze melt-up in equities, along with another painful bond market squeeze. 

Scores of levered trades and strategies in mayhem. 

Dangerous market dysfunction. 

And there’ll be a huge price to pay for ongoing aggressive Fed support for manic markets. 

Perhaps even a larger cost to a bond market that cannot adjust to surging inflation because central banks believe it’s within their mandate to manipulate markets. 

This week’s market action only solidifies my view that when markets eventually do adjust, it’s bound to be violent. 

November 5 – Financial Times (Laurence Fletcher, Tommy Stubbington and Kate Duguid): 

“The era of unlimited central bank largesse is drawing to a close, injecting intense volatility in to government bonds and inflicting heavy damage on a clutch of high-profile hedge funds. 

Superstars of the industry have been left nursing billions of dollars in losses after an abrupt rethink on how and when central banks will reverse the huge wave of support they provided to markets when the pandemic hit last year. Initially, central banks said that process would be very slow, despite soaring inflation, and hedge funds believed them. 

But markets began to fret last month that the US Federal Reserve and other central banks would have to raise interest rates more quickly, wrongfooting high-profile traders including Chris Rokos and Crispin Odey. 

An intense sell-off in short-term government debt upended some of these funds’ biggest bets…”

Markets and inflation

Revolt of the bond traders

The message from unruly fixed-income markets


Global bond markets are wakening from a long slumber. 

The Federal Reserve this week said it will wind down its vast bond-buying programme. 

At the same time, bond investors are reacting to higher inflation: across a group of 35 economies, five-year bond yields have risen by an average of 0.65 percentage points in the past three months. 

A shakeout is taking place not only in emerging markets but also in rich countries such as Australia and Britain. 

Sudden moves inevitably spark fears of market turmoil, along the lines of the “taper tantrum” in 2013. 

However, the bond shift taking place today is actually very different.

Before the pandemic interest rates across the world were low, reflecting dormant inflation. 

When the coronavirus struck almost two years ago, most central banks promised to keep their policy rates lower for longer to help the recovery. 

Many also agreed to buy bonds, reducing their yields.

The main reason for the sudden shift today is rising inflation. 

Among the 38 economies that are members of the oecd, a club of rich countries, inflation rose to an uncomfortable 4.6% year on year in September. 

Soaring energy and food prices are only part of the story: even if you strip those out, the figure was 3.2%, the highest in almost two decades.

For months central banks have said that high inflation is a blip caused by temporary constraints in supply. 

But the action in bond markets shows that investors reckon central banks are acting too slowly. 

Some monetary authorities have already tightened policy. 

Brazil announced a 1.5-percentage-point rate rise last week. 

Central banks in Canada and Australia have abandoned forecasts that said rates would stay low. 

As we write, the Bank of England is due to decide whether to raise rates. 

Some policymakers are standing firm: Christine Lagarde, the boss of the European Central Bank, has insisted that it is “very unlikely” to raise interest rates next year.


The spectre of central banks diverging from markets, and of consequent swings in market interest rates, will unsettle those with memories of 2013, when the Fed clumsily revealed its unexpected intention to begin scaling back its programme of bond purchases. 

The resulting global mini-panic dented growth and clobbered some emerging economies, particularly those with big dollar debts.

Yet this is not 2013. One difference is that the shift in bond markets is more nuanced. 

The increase so far in nominal five-year government-bond yields in America, for example, is less than half what it was eight years ago. 

Real bond yields, after accounting for expected inflation, are minus 1%, still within spitting distance of record lows. 

That will support easy conditions in the real economy. 

And even as shorter-term government-bond yields rise, there has been much less of a move in longer-term bonds.

The other difference today is the absence of financial panic. 

A rising cost of debt can cause defaults and capital flight. 

But many emerging economies have healthy foreign-exchange reserves, making them resilient. 

Equity markets show no sign of distress—share prices hit a record high this week. 

Shares in banks are up by 28% this year, because gradually rising interest rates can boost their profits. And bond markets remain open for business. 

In October emerging markets outside China issued near-record levels of corporate and sovereign debt.

No cause for alarm, then. 

Markets are betting that central banks need to bring interest-rate rises forward, not that they will lose control of inflation. 

Still, it is worth bearing in mind the extraordinarily difficult task that central banks face. 

During the unpredictable tail end of a pandemic, they must try to normalise ultra-loose monetary policy amid sky-high asset prices, heavy debt levels and above-target inflation. 

Taper tantrum 2.0 is not yet under way. 

But don’t rule out a bigger bond brawl. 

How private equity came to resemble the sprawling empires it once broke up

As the surviving founders at KKR step down, some experts warn the industry could exhaust its capacity to maintain high returns

Mark Vandevelde in New York 

© FT Montage


From the top floors of a skyscraper that crowns the biggest New York office development since Rockefeller Center, a few hundred highly paid executives oversee one of the most pervasive enterprises that American capitalists have ever built.

Less than half a century after it was started as a boutique investment vehicle run by two wealthy cousins, KKR has become a corporate behemoth. 

The firm’s $170bn lending arm manages as many assets as some regional banks, and that is just the start.

If the mosaic of assets managed by the firm’s private markets division were folded into one entity and listed on the stock market, its market capitalisation could exceed $100bn — comparable to industrial giants such as General Electric, Lockheed Martin or 3M.

Imposing a conventional corporate hierarchy on this multi-headed enterprise would be an unenviable task. 

With 800,000 workers, it would be one of the five biggest private sector employers in the US, with more than double the employees of Warren Buffett’s Berkshire Hathaway conglomerate.

From an office in Manhattan’s Hudson Yards development, its chief executive would preside over the mother of all annual budgeting cycles. 

He or she would have to wrestle reporting lines encompassing a bewildering array of 200 subsidiaries, including a shampoo brand in Switzerland, a garage door factory in Illinois, and an animal feed producer in Vietnam.

Henry Kravis and George Roberts, the surviving founders of KKR, are stepping down from the corporate behemoth © KKR


In other words, it would resemble in many ways an old-fashioned conglomerate, the discredited empire-building projects of mid-century corporate America that KKR did more than most to demolish.

The question the large PE firms are starting to face is whether this growing similarity to the sprawling conglomerates of old is becoming a liability — for them and for a US economy trying to recover from the pandemic.

By the 1980s, when KKR and the modern private equity industry began to take shape, conglomerates were losing their lustre. 

RCA’s scattershot acquisition spree had earned it the derisive nickname “Rugs, Chickens and Automobiles”. 

KKR’s infamous 1989 takeover of RJR Nabisco, a food and tobacco group that was later broken up, symbolised the end of an era.

Henry Kravis and George Roberts, the surviving members of KKR’s founding trio, stepped down as the firm’s co-chief executives this week.

During their 45-year tenure they perfected techniques of financial engineering that enabled a new type of enterprise to function more efficiently, with sharper incentives, than a conglomerate comprising the same businesses ever could.

Kravis “successfully scaled the firm to reach a level of investment activity few would have imagined possible, and built a very successful institution with a distinct culture and world view,” says Josh Lerner, an economist who studies private equity at Harvard Business School.

His techniques have been widely copied. 

There were nearly 7,000 private equity firms in the US in 2019, according to data from Preqin, including several that are even larger than KKR.


Robert Schaeberle, left, chair of Nabisco, with Ross Johnson, president of Standard Brands, after the companies merged in 1982. KKR’s 1989 takeover of RJR Nabisco symbolised the end of an era © Don Hogan Charles/New York Times / Redux / eyevine


Wall Street investment groups have recorded unprecedented growth during the pandemic. 

Private equity firms struck more than $500bn worth of deals in the first half of this year, their busiest six months in four decades.

Those investments have yielded fat profits, delivering windfalls to the pension funds and other investors that ultimately own them, and helping lift private capital firms’ shares. 

The five biggest listed groups — Blackstone, KKR, Carlyle, Apollo and Ares — are now worth more than three times what they were during the depths of last year’s sell-off, soaring from a March 2020 low of $80bn to more than $250bn this year.

Yet as a pandemic-hit US economy struggles to regain its stride, these vast enterprises are playing an increasingly important role.

Some experts warn that private capital firms, like the traditional conglomerates they have largely supplanted, could soon exhaust their capacity to grow while still earning high returns.

“A Blackstone or a KKR is a huge conglomeration of companies,” says Steven Kaplan, an expert on private equity who teaches at the University of Chicago Booth School of Business. 

“[The private capital industry is] probably 10-15 per cent of the economy would be my guess, and there’s a limit to how much of the economy the model makes sense for.

“At some point,” he warns, “it could stop earning a good return.”

Critics say private equity firms extract wealth from companies while piling large amounts of debt on to them. The collapse of Debenhams last year was partly the result of debts it took on during a period of private equity ownership © Paul Ellis/AFP via Getty Images

Targeting complacency

KKR’s public fight with RJR Nabisco chief executive Ross Johnson, chronicled in the book Barbarians at the Gate, cemented the firm’s reputation as a Wall Street wrecking ball. 

Yet Kravis himself has suggested his firm has more in common with capitalism’s master builders.

“Where have the Carnegies and the Mellons and the Rockefellers gone?” he mused in the early 1990s, mentally sizing up his adversaries. 

“A lot of them are gone. And our concept is to bring that back, to bring back that ownership.”

What drove Kravis to break up conglomerates such as Nabisco was not so much the organisations’ inherent complexity as what he considered to be the professional casualness of the C-suite old guard.

Johnson was a case in point. 

Here was a boss who could sincerely applaud a protégé for his capacity to “take an unlimited budget and exceed it”. 

By the time the RJR Nabisco boss was forced out by KKR’s record-breaking 1989 takeover of his company, Johnson had personally supervised the construction of a $12m hangar housing at least half a dozen jets that shuttled his sports star friends to expenses-paid junkets.

“Many managers and corporate America [are] the renters of the corporate assets, not the owners,” Kravis said in 1991, comparing their behaviour to a careless driver in a hire car. 

“If you have something at risk, you think differently.”

For John D Rockefeller, ownership of Standard Oil was an automatic consequence of entrepreneurial hard graft. 

But KKR was putting a new generation of corporate leaders in charge of companies that were already so valuable that few of the executives had anything like enough wealth to buy a meaningful stake.

The solution pioneered by Kravis and Roberts has since been adopted across an entire investment industry now valued at $4tn. 

It was for insiders to put a sliver of their own money into the giant investment vehicles that pension funds and other investors paid into to fund leveraged buyouts, while receiving a generous share of the profits when investments went well.

KKR says the firm and its executives have $30bn invested in or committed to our funds and portfolio companies. 

Their share of the profits could be far higher.

Investment groups and their executives typically receive 20 per cent of the profits on their investments once annual returns hit a certain threshold, despite putting up a smaller portion of the capital. 

On top of that, cheap equity is often doled out to senior executives at the companies that private equity firms buy.

These are “high-power incentives to [private equity] deal teams and the chief executives of the companies”, says Kaplan, who believes the economic interests given to insiders explains why the disparate collections of companies assembled by private equity have flourished even as conglomerates died. 

“There is a temptation inside conglomerates to have the cash cows feeding the stars. And it is very demotivating to the cash cows.”

KKR has bought hundreds of companies worth more than $650bn since 1976, when it began assembling a new kind of corporate empire, and it has turned the $122bn of capital that it has invested for clients since then into assets worth $240bn.

Yet as company valuations hit historic highs, and the private capital industry struggles to find uses for its $2.5tn war chest of unspent capital, the approach to corporate ownership pioneered by Kravis and Roberts is now being tested on an unprecedented scale.

Coty sold a 60% stake in its Professional and Retail Hair business — including the Wella, Clairol, OPI and ghd brands — to KKR last year © Rosdiana Ciaravolo/Getty Images


More is riding on the outcome than the financial health of private equity firms and their investors. 

The US economy is struggling to meet surging demand while also adjusting to a global supply crunch and a pandemic-induced scattering of the labour force. 

Perhaps more than at any other moment in peacetime, the way that companies are run may shape not only private fortunes but also national destinies.

Wall Street is confident it has the superior model. 

“In private equity we don’t tell chief executives what to do very often,” says a senior dealmaker at one of the biggest US listed firms. 

“We give people the power to make their own decisions and then hold them accountable for the results.”

Defenders of the industry argue that this laissez-faire approach, made possible by a financial structure that exposes top executives only to the profits they control, has created a hyper-rational form of corporate superstructure that is less given to excesses of egotism or vanity. 

Some academics, including Kaplan, believe that private equity has contributed to the large gains in the profitability of the US corporate sector over the past 40 years.

But those gains have been accompanied by a sharp decline in the share of economic output received by workers — an uncomfortable mix for an industry that has been uncompromising in its search for search for efficiencies at businesses such as supermarkets, manufacturers and other large employers.

Earlier this year, an academic study of 30 years’ worth of private equity buyouts found that private equity-backed acquisitions of publicly listed companies were followed by a 13 per cent contraction in payrolls, although employment actually went up when investment firms bought from other private owners.

A new kind of jet-set

For the executives brought in to run the companies they have bought, private equity ownership brings a different kind of stricture. 

Like the best-organised conglomerates, big private equity firms have set up internal consulting arms to look for ways to iron out inefficiencies in their companies, and purchasing teams that harness their companies’ collective clout to drive a hard bargain with suppliers. 

The huge debts that firms load on to their portfolio companies can magnify the eventual returns to shareholders, but also force executives to walk a tightrope between huge financial rewards and potential bankruptcy.

Private equity has also changed American business in symbolic ways, perhaps best appreciated in the private jet hangars in warm winter destinations that lie within a few hours’ flying time of New York.


Long after it eclipsed RJR Nabisco, KKR still does not own any private jets for the use of its executives. 

But some KKR executives own their own aircraft, including Kravis and Roberts, who pay out of their own pockets for the pilots and maintenance.

Set against that are the enormous transfers of wealth from investors to managers that have minted nearly two dozen multibillionaires among private equity executives since 2005, according to a University of Oxford study published last year.

KKR still does not own any private jets for the use of its executives. But some KKR executives own their own aircraft © Ghislain & Marie David de Lossy/Alamy


Yet some believe the 1980s chief executives who spent company money on lavish perks are ultimately not so different from the private equity executives who have amassed so much money that they can afford to become leading patrons of cultural institutions, donors to political causes — and pay for private jets themselves.

“What did Kravis produce to get that money?” asks Eileen Appelbaum, who is co-director of the Center for Economic and Policy Research, and a vocal critic of private equity. 

“What private equity firms do is extract wealth from companies.”

Even KKR picks up a tab when its billionaire founders and other top executives use their planes for work. 

There were fewer such trips than usual last year, as a global pandemic halted most business travel. 

Yet the cost still ran to $1.7m. 

TRANSITORY PERMANENCE

By: Peter Schiff


The inflation that we were emphatically told would be transitory and unmoored continues to persist and entrench. 

As the troubles gather momentum Washington is doing its best to ignore the problem or actively make it worse.

The latest batch of data shows that the Consumer Price Index rose 5.4% in September, the 5th consecutive month that year over year inflation came in at more than 5%. 

The figure rises to 6.5% if we project the inflation levels of the first 9 months of 2021 to the entire calendar year. 

The last time we had to contend with numbers like these, Jimmy Carter was telling us all to put on our sweaters.

Recent developments should be sounding the alarms. 

Whereas, earlier in the year inflation was largely driven by supercharged price increases in narrow sectors, such as used cars and hotel rooms, it’s now occurring in a much wider spectrum of goods and services.

In September, the cost of used autos fell month over month (but are still up 24% year over year), but that didn’t help the overall CPI, which saw increases just about everywhere else. 

Over the past 12 months: beef prices are up 17.6%, seafood prices up 10.6%, home appliances up 10.5%, furniture and bedding up 11.2%, and new cars up 8.7%.

Even more alarming is that oil is up over $80 per barrel for the first time in almost 10 years and many analysts see $100 in the near future. 

That has translated to more than a $1 increase in per gallon gasoline prices, a 50% increase in a year. 

Home heating oil prices are already up 42% year over year and are expected to spike up again when winter demand peaks.  

For many low-income residents of the North and Upper Midwest, these types of increases could be very hard to bear, particularly if we have a cold winter.

As I have said many times before, the biggest flaw in the way we measure inflation (and there are many of them) is how the government deals with housing. 

While the Case Shiller Home Price Index is up more than 20% year over year, and national rents are up more than 12% over the same time frame, the CPI has largely ignored these increases in housing costs. 

Instead, the government relies on the dubious and amorphous concept of “Owners Equivalent Rent” which asks homeowners to guess how much they would have to pay to rent a house of similar quality to the one they to the one they own. 

Conveniently, that meaningless figure, which constitutes almost 30% of the total CPI, is only up 3% year over year. 

If actual rent increases were used instead, the CPI would be almost three full percentage points higher.

In fact, relying on the government to tell us the truth about inflation is a bit like asking high school students to grade their own report cards. 

There are countless incentives that exist institutionally for the government to under report inflation. 

It allows them to make stealth cuts to Social Security, to create higher nominal incomes and capital “gains” to tax, and to minimize the interest rates it pays on over $28 trillion in debt as inflation. 

But since GDP is adjusted for inflation, it also makes economic growth appear higher than it really is.  

The methodology for computing the CPI index was specifically designed to minimize the impact of rising prices. 

But I don’t believe that this is a conspiracy. 

Once you understand how institutional bias works, how careers are made by finding new plausible ways to underreport inflation, and how they are ruined by claiming the opposite, you can see how the numbers get farther away from reality with each passing year.

But the disconnect has become so obvious that top officials at the Federal Reserve and the Treasury Department have begun warning the public to prepare for higher prices. 

In her latest exercise of goal post moving, Treasury Secretary Janet Yellen said, “I believe that price increases are transitory, but that doesn’t mean they’ll go away over the next several months.”

We can expect that months will soon turn into years, as the definition of “transitory,” gets ever more elastic.

This week the government announced that the inflation-adjusted cost of living increases for Social Security payments in 2022 will be 5.9%, the highest such increase since 1982. 

In addition to throwing yet another log on the government deficit fire, the increase is a direct admission that inflation is not going away.

Despite the marginal increase in wages that the Biden Administration likes to talk about, or the cost of living increases for our seniors, the average American makes less money. 

After adjusting for inflation real hourly earnings in the United States have dropped 1.9% so far this year. 

This is the stagflation that I have been warning about. 

Welcome back to the Carter Administration. 

We can expect Joe Biden to break out our sweaters if home heating bills get too high this winter.

Team Biden has been working overtime to suggest that the price increases and supply shortages are resulting from temporary bottle necks at port facilities. 

Imports are particularly sensitive as our trade deficit has widened to record levels in recent months, making Americans ever more reliant on overseas goods. 

To combat the problem the Administration has ordered that some ports begin to operate 24 hours a day. 

(Left unsaid was the very fact that American ports – due to the strength of the Longshoreman’s Union – operate at very spare schedules versus foreign counterparts).

But the effect of this order will be far milder than the Administration hopes. 

Firstly, it is unclear how many port facilities will comply. 

Some have noted for instance that the Port of Los Angeles agreed to go 24 hours at only one of its six docks. 

(Currently the wait time to enter that port is approaching three weeks). 

And secondly, most industry analysts note that the problem is not the hours of the dock facilities themselves but the shortfalls of the domestic trucking industry to move the goods once they arrive. 

Not only are we struggling with a lack of drivers, who struggle with government regulations that sharply limit the number of hours they are allowed to drive, but a lack of shipping containers to put back on the ships. 

Since many ships refuse to leave unloaded, which greatly reduces their profitability, America needs to first solve a host of problems to get the ports in better order.

But what we are seeing in a larger sense are the fruits of 15 years of bad investments in things that we don’t need and very little investment in the things we do. 

The ultra-low interest rates that have become the bedrock of our bubble economy have channeled investment capital into the wrong places. 

These low rates have encouraged corporations to borrow recklessly to buy back shares and inflate stock prices. 

Such moves have enriched shareholders but have done little to expand productive capacity.

Low rates have also led to runaway speculation in untested and unneeded industries. We have seen massive investments in social media, e-commerce, entertainment, crypto currencies, financial technology, and most recently Non-Fungible Tokens (NFT’s). 

As a result, we have really built out our capacity to post videos, buy things online, and pay for them in new ways. 

But we have invested comparatively little in the boring industries like manufacturing, energy, transportation, and agriculture. 

As a result, we have all sorts of ways to buy stuff, and gimmicks for how to pay for it later, but we lack the capacity to produce and distribute all the goods we want to buy in the first place.

What’s worse is that given the current policies of the Biden Administration, none of that is going to change anytime soon. 

His expanded social safety net programs, overly generous unemployment benefits, higher taxes and regulation, and unneeded vaccine mandates are discouraging workers from working and employers from hiring. 

The American workforce is more than five million workers smaller than it was before the pandemic. 

That is not an accident. 

If the Democrats get their caucus together long enough to pass even a slimmed down version of Biden’s Build Back Better plan look for all these problems to get worse.

With fewer workers working, supplies of goods and services have diminished. 

Government will look to replace the lost production with even more monetary and fiscal stimulus, which just leads to more inflation, financial speculation, and rising asset prices, largely benefiting the wealthy, and falling the hardest on the poor who have no appreciating assets to compensate for the rising cost of living.

But rather than fixing the problem, our current leaders are mostly worried about equity and diversity. 

The five leading candidates to replace Jerome Powell, if he is not renominated, all are either female or African American. 

Now I have no problems with hiring women or minorities in key positions. 

But if all your candidates come exclusively from those groups, then it’s a clear that identity is more important than competency at this moment in time. 

But if there was ever a time that we needed competence, it’s now. 

Biden's Trap

With razor-thin margins of Democratic control in Congress, US President Joe Biden came to the White House with an unenviable task. His administration must deliver on its promise of introducing sweeping new federal programs while at the same time placating moderates who, by definition, oppose radical policy measures.

Elizabeth Drew





WASHINGTON, DC – When the election gods handed Joe Biden the presidency in 2020, they set a trap that he walked right into. 

The question – one that could define his presidency and affect the 2024 presidential election – is whether he can escape the trap formed by the narrow margins the Democratic Party has in both chambers of Congress. 

Along with the presidency, Biden was handed a 50-50 vote in the Senate, with the deciding vote to be cast by Vice President Kamala Harris, and an eight-vote margin in the House of Representatives. 

Thus, one Democratic Senator or four Democratic Representatives can block any Biden initiative.

At least 15 million people today are stateless, and millions more are threatened with national exclusion. 

The issue of statelessness thus demands urgent attention, as do works of history that shed light on the problem.

Notwithstanding this, Biden proposed the expansion or initiation of numerous domestic programs, with improvements to the “social safety net” and environmental efforts, including:

• expanded child tax credits;

• child-care assistance;

• expanded Medicaid coverage, and Medicare to include eye, hearing, and dental care;

• allowing Medicare to negotiate prescription drug prices with drug companies;

• home health-care coverage;

• two tuition-free years of community college;

• universal pre-kindergarten for three- and four-year-olds; and

• aggressive efforts to combat climate change.

Most of these programs are popular. 

Combatting climate change has more Democratic than Republican support, and the White House wants it badly because Biden will attend the UN climate-change summit (COP26) in Glasgow on October 31. 

This may have been what led House Speaker Nancy Pelosi to set the October 31 deadline for Congress to pass the “human infrastructure/climate” bill.

The $3.5 trillion cost of programs on the scale Biden envisaged appeared to be high. 

Spread over ten years, it amounted to $350 billion annually, a less alarming amount (though the White House failed to communicate this effectively). 

Earlier estimated costs of the package had placed it at between $6 and $10 trillion, largely because Senator Bernie Sanders, the most left-leaning senator, is chairman of the Senate Budget Committee. 

Still, $3.5 trillion had the appearance of being a negotiable number.

But in settling on such an apparently high overall number, did Biden and his aides overlook the fact that, of the 50 Democratic senators, at least two couldn’t be counted upon to go along woppith such a sum? 

Joe Manchin, the Democratic senator from West Virginia, which has been turning Republican, is believed to be the only Democrat who can carry the state. 

He won it in 2018 by 3.3 percentage points. 

By contrast, Donald Trump won West Virginia in the 2016 presidential election by 42 points. 

Though Manchin is the most conservative Senate Democrat, his party has a strong interest in him winning re-election in 2024 if it is to maintain control of the Senate.

The other unreliable vote is that of Kyrsten Sinema, a Democrat from Arizona and a mystery to her Senate colleagues. Once a radical leftist, she’s now right of center. 

So far as is known, Sinema has resisted telling almost anyone how she wants the human infrastructure/climate provisions changed – though she says she’s told the president, who has met with Manchin and Sinema several times. 

Further vexing the Democrats’ leaders, the two rebels are understood to want different things. 

White House impatience with Sinema is growing.

Though Biden served as President Barack Obama’s vice president, he apparently failed to learn the lesson of Obama’s health-care initiative. 

Obama and his aides did a poor job of explaining what was in their proposal, which gave the Republicans an opportunity to speak of “socialized medicine” and “death panels.” 

Similarly, most of what the public now understands of Biden’s package is that it was to cost $3.5 trillion. 

The president maintains that the package can be paid for by raising taxes on the super-wealthy and businesses, but not everyone is convinced.

The social welfare-climate program is being considered as a “reconciliation” bill because it would be passed under a Senate procedure that requires a majority vote rather than the 60 votes needed to overcome a filibuster. 

This was necessary because there are not ten Republican votes to add to the 50 Democratic votes (or 49 plus Harris). 

So, if Manchin or Sinema opposes the proposed bill, it would fail, a crushing blow to Biden. 

Manchin, who represents a coal-mining state and has grown rich from holdings in coal mines, has reportedly vetoed the clean-air provisions, which will likely force a rewrite of the bill.

Almost simultaneously, another proposed bill, composed of “hard” infrastructure programs – building or repairing roads, bridges, tunnels, ports, levees and waterways, as well as the delivery of clean drinking water – was moving forward. 

The hard infrastructure program, costing a little over $1 trillion, has bipartisan support: nineteen Senate Republicans voted for it. 

Few politicians want to turn down such a boon to their constituents. 

The coexistence of these two programs deepened divisions within both parties. 

Though moderate Republicans are nearly extinct, the Democrats are deeply divided, particularly in the House. 

Almost no right-wing Democrats remain nowadays, as members who held such views became Republicans. 

The Democratic caucus in each chamber is dominated by liberals – which led them to display little interest in negotiating with the moderates. 

But when Biden indicated that he would go for a smaller number out of necessity, they became more open to compromise. 

The liberal Democrats don’t trust the party’s moderates to keep their word about supposed agreements, such as whether they’d support the “human infrastructure/climate” program in certain circumstances.

One reason for the divide is that these two groups have different constituencies. 

Those on the left have little reason to worry about re-election as opposed to members from “swing” districts. 

The disagreements have prevented progress on the “human infrastructure/climate” bill as well as on the timing of congressional consideration of both bills. 

This stalemate has also contributed to an impression of a hapless president. 

Biden’s team is aware that his presidency may be at stake. 

So, too, is the Democrats’ tenuous control of Congress. 

But something even more important is at risk. 

Though there were other factors, the sense – particularly among the middle class – that the government is incapable of acting in their interest is widely understood to have fueled Donald Trump’s 2016 victory. 

With Trump now hovering on the brink of another presidential race (unless his legal problems prove insurmountable), and likely obtaining almost unhindered power if he wins, something far more than two federal programs is riding on the legislative outcome. 

America’s democracy is also endangered.  


Elizabeth Drew is a Washington-based journalist and the author, most recently, of Washington Journal: Reporting Watergate and Richard Nixon's Downfall.