401K Donors to Wall Street (which as a cruel joke are called 401K investors) are currently
travelling on the Cruise Ship "Affluent Society" in Stormy Fiat Currency Waters to the final destination,
which might be the Frugality Island :-). Fleecing by financial oligarchy of middle class retirements
plans is the fact of US life. Recent "crazy" run of S&P500 to 1800 eased the pain, but structurally
the situation essentially remains the same:
...America’s overall retirement system is in big trouble. ...
Many workers used to have defined-benefit retirement plans, plans in which their employers guaranteed
a steady income after retirement. And a fair number of seniors ... are still collecting benefits
from such plans.
Today, however, workers who have any retirement plan at all generally have defined-contribution
plans — basically, 401(k)’s... The trouble is that at this point it’s clear that theshift to 401(k)’swas a gigantic failure. Employers took advantage of the switch to surreptitiously cut benefits;
investment returns have been far lower than workers were told to expect; and, to be fair, many people
haven’t managed their money wisely.
As a result, we’re looking at a looming retirement crisis, with tens of millions of Americans facing
a sharp decline in living standards at the end of their working lives. For many, the only thing
protecting them from abject penury will be Social Security. Aren’t you glad we didn’t privatize
It's very probably that without new technological breakthrough the USA economy as well as all major
Western economies are in "permanent stagnation" period. Stagnation of median wages may have been evident
for longer in the US, but the Great Recession has led to declining real wages in many other countries.
And semi-permanent rate lowering by FED and derivatives frenzy of major banks should probably be viewed
as the last, desperate attempt if not to provide growth, then to provide an illusion of growth. At any
cost. Generally, as return on investment in manufacturing diminish more and more money are chasing financial
assets, creating a speculative boom, which sooner or later ends in bust.
Herbert Stein quote "If something can't go
on forever, it will stop" (which sound more like Baby Ruth quote ;-) is fully applicable here. For an
individual investor it is impossible to predict when such a bust happens. But it is reckless not to
take into account this possibility, when financial assets appreciate like there is no tomorrow. Again
for a regular investor the game now is not about the return on capital, but the return of capital.
This neoliberal invention called 401K is, in essence, a privatization of retirement plans. And
instead of growing the funds, many people discovered that it actually impose a tax of savers because
it offloads all kind of investment risks on the individual. It also created a huge and semi-parasitic
industry of mutual funds, which try to lure 401K investors in stocks. Those who were saving in bonds,
especially in bond mutual funds and ETFs now face dramatically lower returns due Bernanke helicopter
money and bringing short term rates below inflation, In no way they are safe. See Coming Bond Squeeze.
Read Saving your 401K (or may be not now; when
S&P500 is above 1700 most people would discard any such recommendations as junk ;-).
But the current value of S&P 500 that does not change general situation: what is proposed for lemmings
in 401K plans is not investing, but gambling with Wall Street as a casino owner (aka
Casino Capitalism). As such there is a distinct possibility to
be a victim of computerized financial warfare of Wall Street with middle class. The financial elite
also lusts after Social Security money, and would love to have it transferred over to them for 'safekeeping'.
The news isn’t good about the shift from defined-benefit to defined-contribution pension plans for individual
investors. Wall Street behavior is sticky. As John Kenneth Galbraith noted:
"People of privilege will always risk their complete destruction rather than surrender any
material part of their advantage."
One important side effect of the transformation of the USA society into
neoliberal society since 1970 was offloading
risks on individuals. That's true for retirement too. Now with 401K plan it's individual who assumes
the inflation risk, interest risk (See
Bernanke stole your pension),
market volatility risks and structural unemployment (rampant in the USA) risks. This
neoliberal society now faces several major
crises which lead to the loss of power and prestige and as such deeply affect the US economy:
Consequences of outsourcing of manufacturing and raw materials production. Which led
to overproduction which in turn leads to a decline in profits, and as wages are squeezed to stabilize
profits. As a result demand falls further and further. Moreover the US, which plays the role the
consumer of last resort, cannot continue to borrow indefinitely. The IOUs that the rest of the world
accumulated will eventually have to be repaid.
Military overextension is a second important problem as the wars in Afghanistan and Iraq
demonstrated. Guerillas forces proved to be difficult to fight opponent. The US military is so strained
that it has to hire mercenaries from companies like Blackwater
The decline of legitimacy of the neoliberal ideology. With neoliberalism ("Greed is good")
under attack (including recent attack from
Francis), the US has lost its ideological supremacy it enjoyed in 90th. Because the US dominates
international financial institutions like the IMF, World Bank and most of the regional development
banks, their imposition of neo-liberal structural adjustments programs has led to a revolt against
their destructive policies as witnessed by the revitalization of the left political forces especially
in Latin America but also in the rest of the global South. Furthermore, the US bullying and
sometimes insulting treatment of the UN has further sullied the US's reputation.
The quagmire of domestic politics. Added to this international delegitimization is the
quagmire of domestic politics from the surrender of civil liberties to the patently obvious corporate
control of both major parties.
When a large number of old people expect to receive certain amounts from their retirement portfolios,
reductions in running yields end up reducing their monthly income. People were forcefully pushed into
stock market casino, in which of course Wall Street is the winner and ordinary investors are the losers.
Casino Capitalism, the internal version of neoliberalism the USA
and Great Britain has been nurtured and encouraged by a series of government decisions.
Of which creation of 401K plans was only one among many. There were also important decisions to deregulated
financial markets and allow derivatives with the hope to replace income from manufacturing by income
from financial sector. In other words its was a counter-revolution of the part of ruling elite
that lost its influence in 30th (dismantling New Deal from above in the USA (Reaganomics)
or Thatcherism in the GB). As Nancy Folbre is an
economics professor at the
University of Massachusetts wrote in her article Rowboats for Retirement (NYT,
Jun 24, 2013)
It feels so good to row your own boat. You’re the captain. You can set your own course and speed.
According to the boat advertisements, you are almost sure to reach your destination as long as you
pay for good advice, rebalance and row hard. Sure, there may be big waves, but you can ride them
out, and storms always subside.
A lot of people used to think of 401(k) retirement accounts this way. But in the last six years,
most Americans have gained a new appreciation of financial bad weather and the threat of a perfect
storm. Stock market volatility, low interest rates and a sagging bond market have discouraged retirement
Persistent unemployment and stagnant wages have left many workers treading water, struggling
so hard to stay afloat that they couldn’t open a retirement account even if they wanted to.
new report from the National Institute on Retirement Security, based on analysis of the 2010
Survey of Consumer Finances, shows that about 45 percent of all working-age households don’t hold
any retirement account assets, whether in an employer-sponsored 401(k) type plan or an individual
Among those 55 to 64 years old, two-thirds of working households with at least one earner have
retirement savings less than one year’s income, far below what they will need to maintain their
standard of living in retirement. By a variety of measures, most households, even those with defined
benefit pensions, are falling far short of the savings they will need.
At the same time, the amount of funds you need for retirement now it difficult to estimate as you
now carry both inflation risk and market crash risks. That means that you need to put efforts in creating
a model (using Excel) suitable for your situation to have a realistic
assessment of what you need and can be adapted to the changing situation (for example ZIRP regime installed
by Bernanke and Co.). More or less comfortable monthly income now approaches $4.5K a month for a couple
of two, renting a modest two bedroom apartment, who wants and is able to travel (let's say one trip
to children, one vacation and one trip to parents, $2000 each). Here we assume a pretty modest lifestyle:
Suppl Medical Insurance
Car amortization (two cars)
Car insurance (two cars)
Drugs and out-of-pocket med
Presents to relatives
Cloth, computer, furniture, etc
But to get those funds by growing your 401K investments is a difficult task. At minimum, if one of
spouses SS is at max ($3K at age of 70) you need $300K of your own funds to get from age 65 (when you
lose your full time employment) to age 70. As many IT specialists who reached senior age lose full time
employment much earlier and are underemployed since, that actual task is even harder. Generally it is
realistic to assume that since 60 you will be underemployed and can't get more then 50% of previous
salary. Most of available jobs now are McJobs in service sector.
Yes, once in a while stock market performs a spectacular run and that can help. But the question
is whether it last. Who would expect that when the USA economy is still in zombie state with high unemployment
S&P 500 would reach 1667 as it did on May 17, 2013.
But for each 100 days then stocks are at their five year peak level, there are ten different years.
And the key problem is that to one can predict when the fortune changes and at what level stock market
will be when you desperately need to withdraw money. In any case, the events of 2000 and 2008 for many
people were like losing a boat load of money at a casino, then having the dealer smile at you and say
"How about one more try. Trust us. This time it will be different..." At this point, relations
of Wall Street and 401K investors look like in a classic scorpion and frog fable. Boomers were brainwashed
for the long run" and now they see that returns are below expectations (as of Feb 25, 2013
S&P500 grew 15% less in comparison to the same investment to
Pimco Total Return fund, if we invested from 01/01/1996
biweekly to Feb 2013).
As most 401K investors feel that they do not have enough money for retirement they tend to take outsized
risks and recently jumped back to stocks and junk bonds (aka reaching for yield), because
interest in regular bond funds and Treasuries disappeared (thanks to Bernanke Fed).
But the May 2013 boom in stock prices is no escape: in the current oil-constrained US economy stock
prices have been sliding in real terms since the 2000 peak, and every time after peak they suffer a
collapse, as the pump-and-dump insiders start a dump phase, the Fed opens the credit tap to push them
back up, thus the oscillating pattern around a downwards trend in 2000-2012. One positive for 401K investors
trend is that S&P500 became like another government statistics. That means that it is the US government
who now desperately wants to stop or slow the decline of the SP500, because the SP500 goes down, most
pension funds and other insurers blow up... As Greenspan argued recently the main goal of USA policy
is to boost stock prices (and house prices).
But at the same time ZIRP — the near zero percent rates sinking already retired Boomers retirement
dreams. Some can't bear the pressure and do move assets back into stocks reaching to yield. They can
be lucky, but if they are not then the next crisis will wipe out that paper gains in no time like has
happened in 2008. And there is no guarantee that the third great robbery of the century is far away:
halfway across that stream, scorpion again will show the frog its true nature…
That's why the first thing in retirement planning is to learn
Excel. Even with crappy rates your Social Security will kick in at 66, or your financial situation
will be better if you can wait till 70. In most cases this "66-70" increase in SS can be tremendous
help. In o ther words minimal size of 401K should give you the ability to postpone Social Security till
70. Also with crappy interest rates you need to understand that your health is becoming your most valuable
Minimal size of 401K should give you the ability to postpone Social Security
till 70. Generally IT staff can't assume that they will be employed till 66, so it is better
to reach this amount around 60. That means that you should strive to contribute the amount which
at 60 "theoretically" makes you 401K sufficient to support "self-financed" retirement for 10
years. Assuming $60K a year and 3% return after inflation a year that comes approximately to
$500K. With $12 a year ($6 an hour) supplementary income you need only $400K and with $24K ($12
an hour) supplementary income this amount drops to $300K.
It's not a rocket science to calculate approximate year by year expenses from the day of your retirement/unemployment
to your longevity expectation date +7 (very few people exceed their longevity estimate obtained using
Retirement & Survivors Benefits
Life Expectancy Calculator by more then five years) to see do you really need to play in the casino,
or you still can live frugally, but securely without taking outsize risks. Here is an example of an
Life Expectancy Calculator
The following table lists the average number of additional
years a male born in 1950, can expect to live when he reaches a specific age.
If you are at Age
Additional Life Expectancy
Estimated Total Years
The means that as you (and your wife) age, you better decrease your equity exposure to the level
where your minimum life expenses are covered without your stock part of the portfolio.
For the examples table below shows minimum monthly expenses obtained by drastically downsizing retirement
life style shown above:
Suppl Medical Insurance
Car amortization (one car)
Car insurance (one car)
Drugs and out-of-pocket
Cloth, computer, furniture, etc
Presents to relatives
This calculation means that you probably can survive on around 60% of your "desired" retirement income.
Unfortunately this involves pretty big sacrifices in life quality. So in no way you can allow you next
egg to drop 50% due to stock market calamities, as happened in 2008. So please remember that the game
is rigged and it's you who might pay the price of all this gambling...
But here with almost no cushion you need to be aware about growing medical expenses. Like with older
cars, maintenance became more frequent and more expensive with age probably doubling each ten years
In order to model your personal situation in Excel more realistically
on year-by-year basis you need just a few inputs such as:
Life expectancy (there are good calculators available on the Web such as
MSN Money calculator).
As a rule of thumb, a person without serious diseases (asthma, diabetes, etc) who reached age 60
are expected to live another 22 years, if he is a male and 26 years, if she is a female (see
Wisconsin Life Expectancy 2006-2008)
Medical expenses estimate (including "out of the pocket", which can be channeled via
Flexible saving account to avoid taxes on such spending).
Before tax savings, including 401K and Roth account savings (they should be treated differently
as separate items as tax consequences for them are different -- Roth distributions and income are
not taxable. )
After tax savings. Everything else you have.
Social security. Use the estimate provided by government.
Value of your house, if any and/or your gold/precious metals, if any. This class of assets
generally can be viewed as protected from inflation.
Comfortable minimal level of monthly income (depends on the area where you plan to spend
your retirement, there are expensive places to live and less expensive places to live; also modest
changes in life-style typically can cut expenses 10% or so)
After that you need to create you first simple spreadsheet, with the columns such as Total assets,
Interests income, SS income, Pension (if nay), Other sources and Expenses columns like listed above.
Each row of the spreadsheet should correspond to one year. Some cells can be initially calculated manually.
You will be surprised how much information you can get from this simple exercise.
In selecting you allocation try to fight greed and opt for security. That includes avoidance of anything
that has a slightest shadow of possible scams involves. Stakes are just too high.
Warning ! Warning !Warning !
Please read section about
scams first !!! This is real danger for those close to retirement and all people already
in retirement. Targeting is very sophisticated and the fact that you have a university diploma
might not save you, unless you understand the risks. Often scamsters are seniors themselves
and live in the same community and/or attend the same church. Remember, if the investment it
too good to be true it usually is.
Now in order to survive, many financial advisers are faced with tough choices. And this
type of behaviors is no longer limited to sleazy "cold-call" financial advisors.
Moreover, there are three important factors that IMHO dictate extreme caution as for stocks holdings
for people who are close to retirement (see discussion at
Economist's View for more details)
Stock market like Ponzi scheme depends in entering of new and new players for growth.
That conditions held true when baby boomers aged and stock market dramatically risen as self-fulfilling
prophecy, but now is it less true and may even became false.
Quality of corporate earnings is extremely low now. Most of this often sited "increased
profitability" is just result of draconian cost cuts across the board. Large corporation are
still shrinking their workforce in order to maintain the level of EBITRA earnings. This scorch land
policies can't last indefinitely. I think without some kind of technological breakthrough, the situation
can spin out of control in less then a decade. So far corporations did not shred "all the fat" but
in some areas (for example IT) they are close.
The current unemployment is structural. Computers and
outsourcing really eat people jobs. They will never return. So there is big difference between "Clinton
years" and "Obama years." During Clinton years many created jobs were relatively well-paid IT and
financial sector jobs. Even later a lot of them, during Bush II were construction jobs. Right now
most of newly created jobs are service-sector McJobs. That impoverish population and dampen consumption
from the lower 60% of population considerably (although in the USA consumption is mainly top 10%
game in any case; lower 60% simply does not matter).
Neoliberalism is now entered zombie phase and that creates some difficulties for the US government
and US global corporation in pushing their agenda through the other countries throat. Those
difficulties might increase in he future. Just count the number of left governments in Latin America
now and in 1991. The gold years of neoliberalism after disintegration of the USSR with subsequent
colonizing the new half-billion people economic space (the key source of Clinton's years prosperity)
Boomers might get clobbered by the impact of volatility, or they can lose purchasing power due to
inflation. This another reason why increasing the share of equities is the solution. A better solution
is to think of retiring with a part-time job. One realistic plan to enhance your retirement financial
security is to continue part time working till 70. That not only allows to
maximize the Social Security pension but also allow
you to dispose you unprotected from inflation assets in a shorter time frame, lessening the impact of
Getting part time job not only allows you to get supplementary income from your private retirements
assets, but it permits some of us (especially for former office slaves, may be the first time in life)
to realize untapped in regular work potential. The first $12K are generally tax free.
People do miss their jobs - even jobs they hated. I have never seen statistics, but my experience
suggests at least 50% of those who quit without another job regretted the decision. One discussion
list posted a note from a 40-something woman who had chosen enjoyable, low-paying jobs. Now she is against
the wall, with no nest egg to fund a career transition.
In any case don't be suicidal and try to compensate insufficient funds by buying some complex financial
product from Wall Street. As one trader put it (naked
capitalism, Aug 02, 2013):
“My advice to people dealing with the financial sector is: never buy anything that’s complex.
Because the more complexity the more opportunities there are to screw you over. I just
can’t get my mind around how banks can still call clients in the corporate world and say, look we’ve
got this great idea that’s going to make you a lot of money.
I mean, what are they thinking? Nobody in the City can be trusted because they don’t work
for you, they work for themselves.”
Yves here. While I agree with the general thrust of Ilargi’s argument,
some small caveats are in order. First, the idea of progress, which is the
foundation of the internalized belief in rising incomes and improving living
standards, is a child of the Industrial Revolution. And that is despite the
fact that the first generation, in fact, nearly two generations of the
Industrial Revolution brought worse living standards for ordinary people in
England (see here for details).
Second, we’ve had considerable periods even in the modern era where
living standards have stagnated and people didn’t have good reason to be
optimistic about the future. Consider the 1920s in England and Europe
through the reconstruction after World War II. The UK didn’t get fully off
WWII rationing for well more than a decade after the war ended. The US
didn’t get whacked by the post Great War malaise, but the period from 1929
to 1945 was no party, and the later half of the 19th century had America
going from the Civil War into the Long Depression. So the idea of more or
less continuous improvement in living standards is an artifact of the 1980s
and 1990s (and a lesser degree the first few years of the new century,
although I’d argue that was projecting previous experience onto
deteriorating fundamentals) projected backwards (the 1970s were an
economically lousy, anxious decade, until you compare it to our current
By Raúl Ilargi Meijer, editor-in-chief of The Automatic Earth,
Cross posted from Automatic Earth
What worries me most about the world today, in the last weeks before
Christmas and New Year’s Day 2014, is that all the plans we make for our
futures and more importantly our children’s futures are DOA. This is because
nobody has a clue what the future will bring, and that’s more than just some
general statement. Is the future going to be like the past or present? We
really don’t know. But we do exclusively plan for such a future. And that’s
not for a lack of warning signs.
One might argue that in the western world over the past 50 years or so,
we’ve not only gotten what we hoped and planned for, but we’ve even been to
a large extent pleasantly surprised. In a narrow, personal, material sense,
at least, we’ve mostly gotten wealthier. And we think this, in one shape or
another, will go on into infinity and beyond. With some ups and downs, but
While that may be understandable and relatively easy to explain, given the
way our brains are structured, it should also provide food for thought. But
because of that same structure it very rarely does.
The only future we allow ourselves to think about and plan for is one in
which our economies will grow and our lives will be better (i.e. materially
richer) than they are now, and our children’s will be even better than ours.
If that doesn’t come to be, we will be lost. Completely lost. And so will
The ability of the common (wo)man to think about the consequences of a
future that doesn’t include perpetual growth and perpetually improving lives
(whatever that may mean), is taken away from her/him on a daily basis by
ruling politicians and “successful” businessmen and experts, as well as the
media that convey their messages. It’s all the same one-dimensional message
all the time, even though we may allow for a distinction between on the one
hand proposals, and their authors, that are false flags, in that their true
goal is not what is pretended, and on the other hand ones that mean well but
accomplish the same goals, just unintended.
This all leads to a nearly complete disconnect from reality, and that is
going to hurt us even more that reality itself.
We extrapolate the things we prefer to focus on in today’s world, with our
brains geared for optimism, into our expectations for the future. But what
we prefer to focus on is, by definition, just an illusion, or at best a
partial reality. We don’t KNOW that there will be continuing economic
growth, or continuing sufficient energy supplies, or continuing plenty food.
Still, it’s all we plan for. Not every single individual, of course, but by
far most of us.
The last generation in the western world old enough to live through WWII
fully aware, i.e. the last who knew true hardship – as a group -, is now 75
or older. Everyone younger than 70 or so have lived their entire lives
through a time of optimism, growth and prosperity. That this could now be
over is therefore something the vast majority of them either fail to
recognize or refuse to.
They stick to their acquired possessions and wealth, which they view wholly
as entitlements, and fail to see even the risk that they can continue to do
so only by preying on their children, their children’s children, and the
weaker members of the societies they live in. That notion may be tough to
understand, even tougher to process mentally, and for that reason provoke a
lot of resistance and denial, no doubt about it, but that doesn’t make it
less true. The more wealth you want to retire with, the less your children
and grandchildren will have to retire with, and even to live on prior to
retirement. That is because there is a solid chance that the pie is simply
no longer getting bigger.
As societies we must find a way to deal with these issues as best we can, or
our societies will implode. If trends from the immediate past continue,
then, when the entire baby boomer generation has retired, 10-15 years from
now, income and wealth disparities between generations will have become so
extreme that younger people will simply no longer accept the situation.
That is what should arguably be the number one theme in all of our planning
and deliberations. It is not; indeed, there is nobody at all who talks about
it in anything resembling a realistic sense. Every single proposal to deal
with our weakened economies, whether they address housing markets, budget
deficits, overall federal and personal debt, or pensions systems, is geared
towards the same idea: a return to growth. It doesn’t seem to matter how
real or likely it is, we all simply accept it as a given: there will be
growth. It is as close to a religion as most of us get.
And while it may be true that in finance and politics the arsonists are
running the fire station and the lunatics the asylum, we too are arsonists
and loonies as long as we have eyes for growth only. That doesn’t mean we
should let Jamie Dimon and his ilk continue what they do with impunity, it
means that dealing with them will not solve the bigger issue: our own
illusions and expectations.
We allow the decisions for our future to be made by those people who have
the present system to thank for their leading positions in our societies,
and we should really not expect them to bite the hand that has fed them
their positions. But that does mean that we, and our children, are not being
prepared for the future; we’re only being prepared, through media and
education systems, for a sequel of the past, or at best the present. That
might work if the future were just an extrapolation of the past, but not if
it’s substantially different.
If there is less wealth to go around, much less wealth, in the future, what
do we do? How do we, and how do our children, organize our societies, our
private lives, and our dealings with other societies? Whom amongst us is
prepared to deal with a situation like that? Whom amongst our children is
today being educated to deal with it? The answer to either question is never
absolute zero, but it certainly does approach it.
Obviously, you may argue that we don’t know either that the future will be
so different from the past. But that is only as true as the fact that
neither can we be sure that it will not. So why do we base our entire
projections of the future on just one side of the coin, the idea that we
will have more of the same – and then some more -, without giving any
thought to what will be needed when more of the same will not be available?
That looks a lot like the “everything on red” behavioral pattern of a
gambling addict. But who amongst us is ready to admit they’re gambling with
their children’s future?
I see the future as completely different than a mere continuation from the
20th century past and the 21st century present. I even see the latter as
very different from the former, since all we’ve really done in the new
millennium is seek ways to hide our debts instead of restructuring them. You
can throw a few thousand people out of their homes, but if you label the by
far biggest debtors, the banks, as too big to fail, and hence untouchable,
nothing significant is restructured. But that doesn’t mean it’s going to go
away by itself, the by far biggest debt in the history of mankind. At some
point it must hit us in the form of a massive steamroller of dissolving and
disappearing credit. In a world that can’t function without it.
And if we refuse to consider even the possibility that the debt will crush
us under its immense weight, and profoundly change our societies when it
does, then we will be left unprepared. And lost. That should perhaps scare
us into action, not denial. Denial simply doesn’t seem very useful. Is there
a risk that business as usual will no longer be available? Yes, and that
risk is considerable. But we plan our futures as if it’s non-existent. That
is a huge gamble. Not to mention the worst possible kind of risk assessment.
The best, or most, that people seem to be able to think of doing, even if
they feel queasy about their economic prospects, is to stuff as much manna
as they can into their pockets. That is the sort of approach that may have
worked in the past, but it offers no guarantees for the future. It’s just
We love to tell ourselves how smart we are. It’s time we walk that talk.
Read more at http://www.nakedcapitalism.com/2013/12/ilargi-all-the-plans-we-make-for-our-futures-are-delusions.html#uKUR4M87ZGp3Z20g.99
Gail Tverberg, is a professional actuary who applies classic risk assessment procedures to global
resources: studying issues such as oil & natural gas depletion, water shortages, climate change,
etc. She is widely known in the Peak Cheap Oil space for her reports issued across energy websites
over the years under the penname "GailTheActuary".
In this week's podcast, Chris asks Gail to assess the merits of the shale oil "revolution". Does
it usher in a new Golden Age of American oil independence?
With her actuarial eyeshade firmly in place, Gail quickly begins discounting the underlying economics
behind the shale model:
We have to ask: At what price is the oil available? Is this shale oil available
because prices are high and in fact, because interest rates are low, as well? Or is it available
if it were cheap oil with interest rates at more normal levels?
I think what we have is a very peculiar situation where it is available ,but it is available
only because of this peculiar financial situation we are in right now with very high oil prices
and very low interest rates.
The shale oil plays are going to be probably much less than a 10-year flash in the
pan. They are very dependent on a lot of different things, including low interest rates and
the ability to keep borrowing - which could turn around very quickly. Lower oil prices would
tend to do the same thing. But even if you hypothesize that we can keep the low interest rates
and that the oil price will stay up there, under the best of circumstances, the Barnett data
says they probably will not go for very long.
You know, when you take how long the payout really is on those wells, I think the companies
drilling these plays have been very optimistic as to how long those wells are going to be economic.
There was a recent study done saying just that: 10 years or 5 years; but certainly not 40 years.
And so these companies put together optimistic financial statements that have the benefit
of these extremely low interest rates. They keep adding debt onto debt onto debt. How long can
they continue to get more debt to finance this whole operation? It's not a model that anybody
who is very sensible would follow.
Similar to many energy experts Chris has interviewed prior, Gail looks at the math and concludes
that humans (especially those in the West) have been living on an energy subsidy that is beginning
to run out. We have been living outside of our natural budget, and will be forced to live within
what remains going forward. As a result, she expect great changes in store for the next several
decades: socially, politically and lifestyle-wise.
Click the play button below to listen to Chris's interview with Gail Tverberg (38m:07s):
They say those who forget the lessons of history are doomed to repeat them.
As a student of market history, I’ve seen that maxim made true time and again. The cycle swings
fear back to greed. The overcautious become the overzealous. And at the top, the story is
always the same: Too much credit, too much speculation, the suspension of disbelief, and the spread
of the idea that this time is different.
It doesn’t matter whether it was the expansion of railroads heading into the crash of 1893 or
the excitement over the consolidation of the steel industry in 1901 or the mixing of speculation
and banking heading into 1907. Or whether it involves an epic expansion of mortgage credit, IPO
activity, or central-bank stimulus. What can’t continue forever ultimately won’t.
The weaknesses of the human heart and mind means the swings will always exist.
Our rudimentary understanding of the forces of economics, which in turn, reflect ultimately
reflect the fallacies of people making investing, purchasing, and saving decisions, means policymakers
will never defeat the vagaries of the business cycle.
So no, this time isn’t different. The specifics may have changed, but the themes remain
In fact, the stock market is right now tracing out a pattern eerily similar to the lead up to
the infamous 1929 market crash. The pattern, illustrated by Tom McClellan of the McClellan Market
Report, and brought to his attention by well-known chart diviner Tom Demark, is shown below.
Excuse me for throwing some cold water on the fever dream Wall Street has descended into over
the last few months, an apparent climax that has bullish sentiment at record highs, margin debt
at record highs, bears capitulating left and right, and a market that is increasingly dependent
on brokerage credit, Federal Reserve stimulus, and a fantasy that corporate profitability will never
again come under pressure.
On a pure price-analogue basis, it’s time to start worrying.
Fundamentally, it’s time to start worrying too. With GDP growth petering out
(Macroeconomic Advisors is projecting fourth-quarter growth of just 1.2%), Americans abandoning
the labor force at a frightening pace, businesses still withholding capital spending, and personal-consumption
expenditures growing at levels associated with recent recessions, we’ve past the point of diminishing
marginal returns to the Fed’s cheap-money morphine.
All we’re doing now is pushing on the proverbial string. Trillions in unused bank reserves are
piling up. The housing market has stalled after the “taper tantrum” earlier this year caused mortgage
rates to shoot from 3.4% to 4.6% between May and August. The Treasury market is getting distorted
as the Fed effectively monetizes a growing share of the national debt. Emerging-market economies
are increasingly vulnerable to a currency crisis once the taper finally starts.
The Fed knows it. But they’re trapped between these risks and giving the market — the one bright
spot in the post-2009 recovery — serious liquidity withdrawals.
But the specifics of the run up to the 1929 crash provide true bone-chilling context
for what’s happening now.
The Bernanke-led Fed’s enthusiasm for avoiding the mistakes that worsened the Great Depression—-
a mistimed tightening of monetary conditions — has led him to repeat the mistakes that caused it
in the first place: Namely, continuing to lower interest rates via Treasury bond purchases well
into an economic expansion and bull market justified by low-to-no inflation.
(Side note here: As economist Murray Rothbard of the Austrian School wrote in America’s Great
Depression, prices dropped then, as now, because of gains in productivity and efficiency.)
Here’s the kicker: The Fed (mainly the New York Fed under Benjamin Strong) was knee deep in quantitative
easing in the late 1920s, expanding the money supply and lowering interest rates via direct bond
purchases. Wall Street then, as now, was euphoric.
It ended badly.
Fed policymakers felt like heroes as they violated that central tenant of central banking as
outlined in 1873 by Economist editor Walter Bagehot in his famous Lombard Street: That they should
lend freely to solvent banks, at a punitive interest rate in exchange for good quality collateral.
Central-bank stimulus should only be a stopgap measure used to stem panics, a lender of last resort;
not act as a vehicle of economic deliverance via the printing press.
It’s being violated again now as the mistakes of history are repeated once more. Bernanke
will be around to see the results of his mistakes and his misguided justification that quantitative
easing is working because stock prices are higher, ignoring evidence that the “wealth effect” isn’t
Strong died in 1928, missing the hangover his obsession with low interest rates and credit expansion
caused after bragging, in 1927, that his policies would give “a little coup de whisky to the stock
The level of governmental influence in the financial markets is different today than it was
during 1929 – it’s *much* greater now. Therefore, I’m thinking the USG will probably do a significant
amount of meddling in the future to prevent a crash like 1929. (It probably already has.)
I agree that a crash will eventually hit, but this time it will likely include a more sudden
drop than in 1929, because the upcoming crash will signal that the USG has lost control, and
electronic trading systems will quickly reflect reality. The only way there will be a "relatively
slow" crash like 1929, is if the USG decides to purposely orchestrate it.
So, let’s recap: The Fed has managed to spark another surge in risky lending (that “exceeds precrisis
levels”) that threatens to blow up in investors faces leaving them less prepared for retirement
than they are today.
And there’s more. Take a look at the recent stock buyback frenzy, which is where companies
buy their own stock to goose the price instead of investing in plants, equipment, hiring, or any
other type of useful, productive activity. This is from Bloomberg:
“Multiple expansion through share buybacks have been driving indeed the stock market higher
greater than earnings have. …. Buybacks rose by 18% Quarter-over-quarter to $118 billion in
2013, up 11% year-over-year to $218 billion.” (Bloomberg)
Even so, Greenspan sees no bubble. Stock prices are based on good old fundamentals, like earnings.
What could be more fundamental than earnings, right?
Take a look at this from the Testosterone Pit:
“Corporate earnings will grow this year at their lowest level since 2009. Revenue
growth at public companies is almost non-existent. Companies are buying back stock at a record
pace to boost per-share earnings.” (“What Really Bothers Me About this Stock Market”, Michael
Lombardi, Testosterone Pit)
Huh? So earnings aren’t so hot either?
Apparently not. And that means the fundamentals are actually weak, which makes sense since the
economy is in the crapper.
Then we ARE in a bubble, after all?
Yep. And when it bursts it’s going to cost a lot of people a lot of money. Just like last time.
"Many thousands are in want of common necessaries; hundreds of thousands are in want of common comforts,
"Are there no prisons?"
"Plenty of prisons."
"And the workhouses." demanded Scrooge. "Are they still in operation?"
"Both very busy, sir."
"Those who are badly off must go there."
"Many can't go there; and many would rather die."
"If they would rather die," said Scrooge, "they had better do it, and decrease the surplus population."
"People of privilege will always risk their complete destruction rather than surrender any material
part of their advantage." -- John Kenneth Galbraith
While it may appear at first glance that the first chart below shows just one data series, what
we have shown are two data sets: one presents, on an inverted axis, the Civilian Employment-to-Population
rate, which unlike the unemployment rate as a fraction of the labor force (most recently printing
at just 7%), has barely budged since the Lehman collapse. The other data set shows what an implied
unemployment rate as calculated by Zero Hedge would be assuming a long-term average of 65.8% worker
labor participation rate.
As we reported earlier, according to the BLS this number most recently was 63.0%: a 20 bps rebound
from the 35 year low posted in October, but still woefully wrong. The chart shows much more accurately
what the real unemployment rate would be when looking at the overall noninstitutional population
instead of the ever rising amount of Americans who for one reason or another are not in the labor
... ... ...
In short: applying a realistic labor force participation rate to the unemployment rate series,
shows that the real US unemployment rate is now 11.5%, a 4.5% difference from the reported number,
and the second highest ever, only better compared to October's 4.7%.
Of course, don't inform the Fed of this discrepancy: if aware, the Fed's monetary mandarins would
likely never taper. Then again, if indeed the Fed never does taper as many suggest (since it is
the flow, not the stock), we will know just which series of unemployment data the Fed is looking
Chocolate rations have been increased to 20 grams.
It is well-known that who you know and who you are connected to matters greatly for your business
success in many countries. This is nicely documented in several papers that show how connections
to powerful politicians have a huge value in countries with weak institutions.
in a famous
paper Ray Fisman used an event study methodology exploiting rumors about the health of the Indonesian
dictator President Suharto to show how close connections to Suharto were greatly valuable: these
adverse news reduce the stock market value of the firms connected to him.
But the consensus view has been that such connections don’t matter in countries with strong institutions
such as the United States.
In fact, Larry Summers used this as the basis for his argument for why the response to financial
crises should be different in the United States in his
Ely Lecture to the American Economic Association:
strong US institutions imply that policies that should not be tried in Indonesia or Malaysia because
of concerns about cronyism and corruption could be adopted with little worry in the United States.
This view was supported by work that applied similar methodology to the United States. For example,
other work by Ray Fisman,
together with co-authors, found that the value of connections to Dick Cheney were small or nonexistent.
So US institutions do seem to work as they are supposed to.
Recent work by Daron, Simon Johnson, Amir Kermani,
James Kwak and Todd Mitton finds something quite different, however.
Focusing on the announcement of Timothy Geithner as President-elect Obama’s nominee for Treasury
Secretary in November 2008, they report robust and large returns to financial firms with connections
to Geithner. Connections here are defined either from Timothy Geithner’s meetings with financial
firm executives during the previous two years when he was the President of the Federal Reserve Bank
of New York, or from his overlap on non-profit boards with these executives. What’s going on?
One possibility is that this just reflects the fact that firms that had such connections are
also those that would have actually benefited from the safe pair of hands that Timothy Geithner
would bring to the job of Treasury Secretary. Though plausible, this explanation does not receive
any support from the data: controls for characteristics that could capture such benefits do not
change the results, and in fact the results hold when comparing firms of very similar size, profitability
and leverage, and similar risk and stock market return profiles.
Another possibility is that the same sort of shady dealings that went on in Indonesia, Malaysia
or Pakistan are also present in the United States — or at the very least were thought to be present
by stock market participants. But this seems very unlikely, and there is no evidence to support
this. Timothy Geithner appears to be an honest technocrat, with no interest in doing favors in order
to get campaign contributions or financial gain.
Instead, the paper suggests a different hypothesis: “social connections meets the crisis”.
Namely, the excess returns of connected firms may be a reflection of the perception of the market
(and likely a correct perception) that during turbulent times there will be both heightened policy
discretion and even more of the natural tendency of government officials and politicians to rely
on the advice of a small network of confidants. For Timothy Geithner this meant relying on, and
appointing to powerful positions, financial executives from the firms he was connected to and felt
comfortable with. But then, there is no guarantee that these people would not give advice favoring
their firms, knowingly or perhaps subconsciously (for example, they may be under the grips of a
worldview that increases the perceived importance of their firm’s survival for the health of the
So Larry Summers is probably right that strong US institutions preclude the sort of dealings
that went on in Indonesia under Suharto or in Malaysia under Mahathir Mohamad. But this does not
mean that connections don’t matter or that we should not worry and be vigilant about them, particularly
during turbulent times when important decisions have to be made quickly and the usual mechanisms
for scrutinizing important policy decisions are weakened or suspended.
Actually, we finally have a recovery tailored to what economists love: a real "reform" of
the labor sector and efficiencies out the wazoo! I caught this paragraph in the latest New Yorker,
which reviews books about the new landscape of media blockbusters and includes this nuggett
from Tylor Cowen:
"Cowen is less troubled by the further enrichment of the already rich. He takes it for granted
that America will be increasingly influenced by “labor-market polarization”: productivity will
continue to increase, but an ever larger proportion of the gains will go to “a relatively small
cognitive elite”—human blockbusters, economically speaking. Meanwhile, more and more workers
will find themselves in various service industries, assuming they can find full-time work at
all. According to Cowen, future citizens will agree that “America is one of the nicest places
in the world.” He predicts that even those with stagnant or falling wages will have “a lot more
opportunities for cheap fun and also cheap education.” The formulation “cheap fun” explains
much of what makes people so excited, and so anxious, about the future of popular culture."
I think we can all be excited that there is, on the one hand, a boom rewarding the 'cognitive
elite' - geniuses, every one of those hedge fund traders - and on the other hand allowing cheap
fun for the non-cognitive sloberati. More video games at cheaper prices! Playing these things
can help you forget, for instance, the diseases that you suffer from that you can't afford to
cure! Its a win-win Great Moderation recovery, and the graphs go to show how, finally, we've
stumbled on the right formula for a more exciting America.
There have been eleven recessions since WW II, and, the collapse of the financial system
after Lehman Bros. filed for bankruptcy on September 15, 2008. This was the first time the financial
system collapsed since October 1929. Nine of the eleven recessions and the collapse of the financial
system occurred during Republican presidential administrations.
It is not correct to compare the economic downturn caused by the Federal Reserve raising
interest rates to combat inflation with that caused by the collapse of a nations financial system.
In the former case once the recession takes hold inflation ceases and interest rates are reduced
and more normal GDP growth ensues for the most part.
In contrast, interest rates were reduced to 0-.25% in December of 2008 where they have remained
to the present time with no appreciable impact on growth. In 1935 Marriner Eccles described
this as "pushing on a string" which can't be done. Economists today call it a "liquidity trap".
Eccles called for economic stimulus as the only means for dealing with "under consumption" which
is now called "lack of aggregate demand".
It is very difficult to get out of a liquidity trap. FDR thought the economy had reached
"escape velocity" in 1936 and he believed in balanced budgets. He was wrong and the country
slipped back into recession.
It really behooves a nation to keep and maintain a safe and sound financial system which,
by definition, cannot be done with a laissez faire approach to finance. The only extended period
of financial stability we have had in our nations history occurred following the "strict supervision"
of finance from 1933 to the deregulation of the Savings and Loan banks. Still we pressed ahead
with deregulation of the rest of finance, and, have not returned to "strict supervision". We
have also returned to "austerity by sequestration" and slow growth.
We are slow learners.
Matt Young said in reply to John Cummings...
The folks at thye Manhattan Institute agree with you:
We think the global growth outlook is deteriorating due to lack of structural reforms, under-investment
and contractionary U.S. monetary policy.
Interest rates are set below-market, limiting credit growth and channeling it to the government
and established corporations. This rationing process causes the same problems experienced with other
types of price controls. In the case of credit rationing, it leaves labor growth and dynamism weak.
While many of the assets favored by the Fed’s policy have been pushed up in price on the theory
that the Fed is creating extra credit, we think non-favored activities (like new business formation,
a critical factor in job growth) are harmed, leaving a sluggish and disinflationary environment
despite inflation in government-favored assets.
Get ready for another year of slow economic growth, across the country and in California.
That’s according to a forecast presented Monday in Costa Mesa by economists at Orange County’s
Chapman University. Their message: The economy is stuck in low gear.
“The current mild expansion pales in comparison to previous recoveries,” says the forecast,
from Chapman’s A. Gary Anderson Center for Economic Research. “But despite its weak nature,
and perhaps because of it, the recovery is still in gear. It is going on 53 months. By now,
most other recoveries would be experiencing accelerating inflation and tightening labor markets.
Yet, there is no sign of those pressures.”
Obama and his advisers, very poor economists.
The Rage said...
Everybody is also forgetting about peak oil, which is definitely here.
If oil prices were still around 20 dollar a barrel as in the previous 20 years, consumption
would be higher as would be growth. That was a big reason why the Bush era credit boom didn't
drive higher economic growth and why the recovery "seems" weak. Going by jobless claims unemployment
is fading rapidly and this will show up in the next 6-12 months as unemployment is the final
lag in economic data. But we would have been there faster with cheaper oil.
We may be entering in a "goldilocks" period were oil prices stay generally flat why the economy
outgrows it for awhile. But I suspect by the 2020's, another ugly price increase is coming.........
There are several factors that make the current situation unique:
1. Growth of energy prices make recovery of manufacturing sector impossible without new technological
breakthrough. As a result money flows into financial sector creating speculative booms and busts:
financial bubbles are generated because too much money (profits and surplus value) is chasing
too few fruitful investment projects.
2. Financisation makes exit from each new recession more difficult. As Minsky's observed
in Stabilizing an Unstable Economy excessive financisation makes economy unstable.
3. Military expenditures became at some point a drag on the economy.
4. Successful oligopolistic corporations try to maintain and increase profits by reducing
share of them which is paid to labor. This way they further undermine consumption (outside of
consumption of luxury good aka conspicuous consumption)
Looks like this is not a Great Recession. This is a new normal as Grossgnation as a norm.
I think The Endless Crisis How Monopoly-Finance Capital Produces Stagnation and Upheaval
from the USA to China by John Bellamy Foster, Robert W. W. McChesney explains this quite well.
Art Cashin expects stocks to keep rising, but still sees some serious risks for the market
Art Cashin says the market could continue to run higher into the end of the year, but warns that
any of three events could put the kibosh on the rally: a European slowdown, a geopolitical flare-up
and a continued rise in interest rates.
"The 'Santa rally' traditionally start the week after Thanksgiving, so we'll get a good look
at it," Cashin said on Tuesday's episode of "Futures
"The only thing that could throw it off is if the European economies start to stutter. Because
the S&P has benefited from the fact that it's not just the U.S.—it's filled with multinationals
that have made money in Europe—and I think we're doing a little pause for reflection here, trying
to figure out how much the European component will kick in."
More broadly, Cashin said "there's always the risk" that the hazard of a market decline outweighs
the reward of further gains. He adds that this could be particularly true if a geopolitical conflict
rears its ugly head.
"What troubles me is that everything away from the United States is kind of marched off the stage,"
said Cashin, the director of floor operations for UBS. "We've had a lot of geopolitical worries
over the past two years, and they seem to have disappeared. And if suddenly [a geopolitical conflict
arises], whether it's in the Middle East or something pops up in the South China Sea, then I think
we could see a little take-back."
However, the most pressing worry for this market veteran is a far more commonly discussed one.
"The most immediate domestic concern is what will happen to interest rates," Cashin said. "They
are temptingly looking at that area between 2.7 and 3 percent on the 10-year [Treasury yield], and
that could send a lot of bidders off the field."
David Stockman: There's a worldwide bubble in stocks
Former OMB Director David Stockman says the actions of the Fed and central banks around the world
have led to a massive bubble, and the end result won't be pretty. With CNBC's Jackie DeAngelis and
the Futures Now Traders.
The actions of the
have created a massive bubble not just in U.S. stock prices, but in a variety of assets all across
the world, contends David Stockman, who served as the director of the Office of Management and Budget
under Ronald Reagan.
"The Fed is exporting this lunatic policy worldwide," Stockman said, referring to the Federal
Reserve's asset-purchasing program. "Central banks all over the world have been massively expanding
their balance sheets, and as a result of that there are bubbles in everything in the world, asset
values are exaggerated everywhere."
"It's only a question of time before the central banks lose control, and a panic sets in when
people realize that these value said.
The issue, says Stockman, is that central banks around the world have followed the Fed's dovish
lead "for either good reasons of defending their own currency and their trade and their exchange
rate, or because they're replicating the Fed's erroneous policies."
Either way, "Central banks have been massively expanding their balance sheets," which has reduced
interest rates on government bonds, and increased the amount of money chasing a fixed set of assets.
Stockman, who is the recent author of "The Great Deformation: The Corruption of Capitalism in
America," says that it takes little digging to discover that assets are overextended.
"This is a financial asset bubble, and you can see it in the valuations if you want to look at
it," Stockman said on Tuesday's episode of "Futures
Now." "The Russell 2000 is hitting another peak today—it's trading at 75 times reported trailing
earnings. That makes no sense. It's up 43 percent in the last year, but earnings of the Russell
2000 companies have not increased at all. It's up 230 percent from the bottom. Mainstream America
is not doing that well."
In fact, Art Cashin, director of floor operations for UBS, made a similar point on the same episode
of "Futures Now."
"This market, this whole economy has kind of a split personality," Cashin said. "Wall Street
is making a record, and yet your brother-in-law can't find a job."
Yet while Cashin doesn't call this a Fed-induced bubble, crediting the situation instead to "the
miracle of managers in all the major corporation doing more with less," Stockman warns that the
end of the bull run will be very painful.
"This is dangerous. We're in a dangerous financial system that has been more or less wrecked
by central banks and their policies," Stockman said, adding that "I haven't seen too many bubbles
in history" that haven't ended violently.
Pope Francis called for renewal of the Roman Catholic Church and attacked unfettered capitalism
as "a new tyranny", urging global leaders to fight poverty and growing inequality in the first major
work he has authored alone as pontiff.
The 84-page document, known as an apostolic exhortation, amounted to an official platform for
his papacy, building on views he has aired in sermons and remarks since he became the first non-European
pontiff in 1,300 years in March.
In it, Francis went further than previous comments criticizing the global economic system, attacking
the "idolatry of money" and beseeching politicians to guarantee all citizens "dignified work, education
He also called on rich people to share their wealth. "Just as the commandment 'Thou shalt not
kill' sets a clear limit in order to safeguard the value of human life, today we also have to say
'thou shalt not' to an economy of exclusion and inequality. Such an economy kills," Francis wrote
in the document issued on Tuesday.
"How can it be that it is not a news item when an elderly homeless person dies of exposure, but
it is news when the stock market loses 2 points?"
The pope said renewal of the Church could not be put off and said the Vatican and its entrenched
hierarchy "also need to hear the call to pastoral conversion".
"I prefer a Church which is bruised, hurting and dirty because it has been out on the streets,
rather than a Church which is unhealthy from being confined and from clinging to its own security,"
In July, Francis finished an encyclical begun by Pope Benedict but he made clear that it was
largely the work of his predecessor, who resigned in February.
Called "Evangelii Gaudium" (The Joy of the Gospel), the exhortation is presented in Francis'
simple and warm preaching style, distinct from the more academic writings of former popes, and stresses
the Church's central mission of preaching "the beauty of the saving love of God made manifest in
In it, he reiterated earlier statements that the Church cannot ordain women or accept abortion.
The male-only priesthood, he said, "is not a question open to discussion" but women must have more
influence in Church leadership.
A meditation on how to revitalize a Church suffering from encroaching secularization in Western
countries, the exhortation echoed the missionary zeal more often heard from the evangelical Protestants
who have won over many disaffected Catholics in the pope's native Latin America.
In it, economic inequality features as one of the issues Francis is most concerned about, and
the 76-year-old pontiff calls for an overhaul of the financial system and warns that unequal distribution
of wealth inevitably leads to violence.
"As long as the problems of the poor are not radically resolved by rejecting the absolute autonomy
of markets and financial speculation and by attacking the structural causes of inequality, no solution
will be found for the world's problems or, for that matter, to any problems," he wrote.
Denying this was simple populism, he called for action "beyond a simple welfare mentality" and
added: "I beg the Lord to grant us more politicians who are genuinely disturbed by the state of
society, the people, the lives of the poor."
Since his election, Francis has set an example for austerity in the Church, living in a Vatican
guest house rather than the ornate Apostolic Palace, travelling in a Ford Focus, and last month
suspending a bishop who spent millions of euros on his luxurious residence.
He chose to be called "Francis" after the medieval Italian saint of the same name famed for choosing
a life of poverty.
Stressing cooperation among religions, Francis quoted the late Pope John Paul II's idea that
the papacy might be reshaped to promote closer ties with other Christian churches and noted lessons
Rome could learn from the Orthodox such as "synodality" or decentralized leadership.
He praised cooperation with Jews and Muslims and urged Islamic countries to guarantee their Christian
minorities the same religious freedom as Muslims enjoy in the West.
Kevin Drum poses a reasonable question about the existence of a retirement crisis in a recent
blogpost. He notes that retirement income projections from the Social Security Administration's
MINT model show income for older households rising from 1971 to the present, while incomes for those
in the age 35 to 44 were nearly stagnant. The model also shows income for older households continuing
to rise over the next three decades. Kevin's conclusion is that we are wrong to spend a lot of time
worrying about retirees, and would be wrong to consider increasing Social Security taxes on the
working population to maintain scheduled benefits for Social Security recipients.
While the story of rising income for retirees is correct, there are several points to keep in
mind. First, the main reason that income for the over 65 group has risen is that the real value
of Social Security benefits has risen. Social Security benefits are tied to average wages, not median
wages. This is important. Most of the upward redistribution of the last three decades has been to
higher end wage earners like doctors, Wall Street types, and CEOs, not to profits. Since the average
wage includes these high end earners, benefits will rise through time, pushing up retiree incomes.
For the median household over age 65 Social Security benefits are more than 70 percent of their
income, so the story of rising income is largely a story of rising Social Security benefits.
However even with this increase in Social Security benefits, replacement rates at age 67 are
fall relative to lifetime wages (on a wage-adjusted basis) from 98 percent for the World War II
babies to 89 percent for early baby boomers, 86 percent for later baby boomers and 84 percent for
GenXers. There are several reasons for this drop. The most important is the rise in the normal retirement
age from 65 for people who turned 62 before 2002 to 67 for people who turn 62 after 2022. This amounts
to roughly a 12 percent cut in scheduled benefits. The other reason for the drop is the decline
in non-Social Security income. This is primarily due to the fact that defined benefit pensions are
rapidly disappearing and defined contribution pensions are not coming close to filling the gap.
It is also important that the over age 65 population on average has a considerably longer life
expectancy today and in the future than was the case in 1971. In 1971 someone turning age 65
could expect to live
roughly 16 years, today their life expectancy would be over 20 years. This is a good thing of
course, but it means that when we use the same age cutoff today as we did 40 plus years ago we are
looking at a population that is much healthier, and therefore also more likely to be working, and
further from death. If we adjusted our view to focus on the population that was within 16 years
of hitting the end of their age 65 life expectancy, the story would not be as positive.
The data from the MINT model may also be somewhat misleading because it includes owner equivalent
rent (OER) as income. While not having to pay rent is clearly an important savings to an older couple
or individual that has paid off their mortgage, it can give an inaccurate picture of their income.
There are many older couples or single individuals that live in large houses in which they raised
their families. The imputed rent on such a house can be quite large relative to their income as
retirees. (Imputed rent is almost
one quarter of total consumer
expenditures even though only two-thirds of families are homeowners.) There are undoubtedly
many retirees who live in homes that would rent for an amount that is larger than their cash income,
which will be primarily their Social Security check.
In principle it might be desirable for such people to move to smaller less expensive homes or
apartments, but this is often not easy to do. Government policy that hugely subsidizes homeownership
and denigrates renting is also not helpful in this respect.
The other part of the income picture overlooked is that almost all middle income retirees will
be paying for Medicare Part B, the premium for which is taking up a large and growing share of their
cash income. That premium has risen from roughly $250 a year (in 2013 dollars) to more than $1,200
a year at present. This difference would be equal to almost 5 percent of the income (excluding OER)
of the typical senior. That means that if we took a measure of income that subtracted Medicare premiums
(not co-pays and deductibles) it would show a considerably smaller increase than the MINT data.
The higher costs faced by seniors for health care and other expenditures is the reason that the
Census Bureau's supplemental poverty measures shows a much higher poverty rate than the official
Finally, there is the need to focus on the question of how well seniors are doing. Seniors income
has been rising relative to the income of the typical working household because the typical working
household is seeing their income redistributed to the Wall Street crew, CEOs, doctors and other
members of the one percent. However, even with the relative gains for seniors their income is still
well below that of the working age population. The median person income for people over age 65 was
$20,380 in 2012 compared to a median person income of $36,800 for someone between the ages of 35
to 44. Now we can point to the fact that incomes have been rising considerably faster for the over
65 group, but this would be like saying that we should be annoyed because women's wages have been
rising more rapidly than men's wages. Women still earn much less for their work and seniors still
get by on much less money than the working age population.
The bottom line is that it takes some pretty strange glasses to see the senior population as
doing well either now or in the near future based on current economic conditions. We can argue about
whether young people or old people have a tougher time, but it's clear that the division between
winners and losers is not aged based, but rather class based.
The 83-year-old, appearing at his former grade school in Omaha, Neb., in honor of
American Education Week, said on "CBS This Morning,"
"I don't know what stocks will do next week or next month or next year. Or five or ten years from
now, I would say that they're very likely to be higher."
The Dow hit 16,000 for the first time on Monday, and the index has gained more than 3,000 points
this year alone. Some analysts believe investors could be riding the bull market into a bubble.
Asked if he thinks stocks are overpriced (investor Carl Icahn has called them a "mirage"), Buffett
said, "I would say that they're in a zone of reasonableness. Five years ago, I wrote an article
for The New York Times that said they were very cheap. And every now and then, you can see that
that they're very overpriced or very underpriced. Most of the time, they're in an area where maybe
they're a little high, a little low, and nobody really knows exactly. They're definitely not way
overpriced. They're definitely not underpriced."
The situation is probably more complex then obvious lack of desire of Fed to raise rates. See
The Great Stagnation
The paper, published in the latest Economic Letter from the Federal Reserve Bank of San Francisco,
looks in detail at data through late May. At that time, the researchers said, investors and economists
expected a first Fed rate hike around mid-2015, based on economist surveys and Treasury yields interpreted
in light of near-zero rates.
Although the paper does not explicitly say so, the decline in market rates since May -- when
Fed Chairman Bernanke offered a timeline for the end of the Fed's massive bond-buying program that
now sees too aggressive -- suggests that traders may now see the Fed's first rate hike as coming
Convincing the public that the U.S. central bank will keep rates low for a long time is a key
pillar of the Fed's super-easy monetary policy, which seeks to stoke investment and hiring by keeping
borrowing costs down.
The Fed is simply not going to taper. The Fed has become the glue which keeps the Government
solvent and the stock market inflated. Artificial as it is, the Fed is trapped with no escape.
In my opinion, QE isn't going to end anytime soon because the financial and banking community
won't allow it to end. They've become so accustomed to cheap government loans and the subsequent
orgy of quick profits, they will politically destroy any politician that gets in their way.
The average joe just has no clue what is about to happen...we have a necessary but unsustainable
heroin addiction to QE. We cannot stop until we overdose. And the overdose is coming soon.
all the bullsheet about the economy doing so good and the markets at all times high, but
why keep printing then???? governmint is not your friend people...wake up, the time will come..we
have to stop the corrupt politicians or else would be too late
"... limit it [your company stock --NNB] to ~10% of your portfolio."
Under a law passed last year, you can even sell shares that your employer contributed to your
account, as long as you've been there for three years.
Being too conservative
Plowing too much money into low-risk choices like stable value, bond and money funds may seem
safe since it protects your 401(k) from market setbacks.
But it's dangerous in the long run because your savings won't grow enough to provide you with
an adequate income in retirement.
A better approach: Create a blend of stocks and bonds that provides a cushion against price
drops but also gives you a shot at the gains you'll need to amass a sizable nest egg.
For help setting the appropriate mix for your age, check our Asset Allocator tool.
Doin' the smorgasbord thing
In an attempt to diversify, some people spread their money evenly across all the options on their
That doesn't produce a well-rounded portfolio any more than scarfing every item at a buffet assures
a balanced meal. You might wind up with too big a helping of growth or bonds, depending on your
What to do? First plug your choices into the Instant X-Ray tool at morningstar.com to
see how your portfolio breaks down by the major asset classes - large and small stocks, bonds and
You can then compare your current mix to the blend our Asset Allocator recommends and, if necessary,
rejigger your choices to get your 401(k) on track.
Avoiding these errors won't guarantee you a giant nest egg. But you will be making the most of
every penny you set aside. And in the long run, that will pay off.
It can be a month, it can be year, but S&P500 at 1800 with economy and consumers suffering and cutting
back is a real disconnect...
Activist investor Carl Icahn on Monday said there was a chance the stock market could suffer
a big decline, saying valuations are rich and earnings at many companies are fuelled more by low
borrowing costs than management's efforts to boost results.
Unnerved by Icahn's prognosis, investors pushed stocks lower. The S&P 500, which was trading
near unchanged before Icahn spoke, closed down 0.4 percent.
"I am very cautious on equities today. This market could easily have a big drop," Icahn said.
He said share buybacks are driving results, not profitability.
"Very simplistically put, a lot of the earnings are a mirage," Icahn told the Reuters Global
Investment Outlook Summit. "They are not coming because the companies are well run but because of
low interest rates."
In the near term, BofAML's Macneil Curry warns "we are growing a bit cautious/nervous, as US
equity volatility is flashing a warning sign of market complacency that has often preceded a correction
or a pause in trend."
This 'red flag' is asterisk'd appropriately in the new normal with "to be clear, the balance
of evidence is still very much US equity positive, but the near term downside risks have increased."
Via BofAML's MacNeil Curry,
We are bullish stocks, with the S&P500 targeting 1844 into year end [ZH: which sounds awfully
close to an extraplotaed protjection of where the Fed's balance sheet implies year-end target].
Another bullshit post. As if there could be a pullback with Ben/Janet printing out their
ass. Get with it Tyler.
The top chart shows multiple pullbacks, with Ben printing. Wait until it crashes with the
At least it's not a complete echo chamber. It is good to hear what the other side of the
human brain is saying, even if it is wrong.
If we're all waiting for a Black Swan, is it still a Black Swan?
We've read this disclaimer 3-4 times over the last 2 weeks?
Be prepared MUPPETS. All your pensions are belong to us...
Remember the game is not "return on capital". It is "return of capital". "death of surpise" is more
like "death of markets."
"The period of peak liquidity will remain in place for the foreseeable future," suggest
Brown Brothers Harriman in a recent note, and as Reuters reports, for all the fevered speculation
about when the Federal Reserve will begin scaling back its monetary stimulus, market volatility
has been taking a leisurely nap, suggesting investors see no major shocks on the horizon to derail
their bets. "We're not trying to follow the twists and turns of the very short-term investment cycle,"
confirms one wealth manager who will only change his strategy if the Fed "dramatically changed,"
The market's apparent ignorance of the ebb and flow of data surprises - both positive and negative
- is clear as it has virtually no bearing on short-term yields, which have remained at historic
lows thanks to the trillions of dollars of liquidity and zero interest rates from the Fed. "Fear
not the Fed," advises BofAML, as the Fed's $85 billion-a-month asset purchase program trumps everything.
Sweet- always nice to see the top- when everyone is absolutely, positively sure that nothing
can go wrong.....
This liquidity will disappear as soon as the Chinese repatriot to cover their bullshit real
estate bubble- Ben will be sitting on his hands, cursing why he didn't get out a month earlier......
I'm guessing you were around for the last two blow-off tops. Does feel a bit similar, doesn't
Everyone = < 1% of the population now? Yeah, that's a real signal there bro.
The party will go on until everyone, including the shoe shine boy is a trillionare
"...since mid-2011, the correlation between U.S. economic surprises and two-year Treasury
yields has completely broken down"
This couldn't possibly have anything to do with the beginning of QEternity, right?
The modern Keynesian state is broke, paralyzed and mired in empty ritual incantations about
stimulating “demand,” even as it fosters a mutant crony capitalism that periodically lavishes the top
1 percent with speculative windfalls.
The Dow Jones and Standard & Poor’s 500 indexes reached record highs on Thursday, having completely
erased the losses since the stock market’s last peak, in 2007. But instead of cheering, we should
be very afraid.
Over the last 13 years, the stock market has twice crashed and touched off a recession: American
households lost $5 trillion in the 2000 dot-com bust and more than $7 trillion in the 2007 housing
crash. Sooner or later — within a few years, I predict — this latest Wall Street bubble, inflated
by an egregious flood of phony money from the Federal Reserve rather than real economic gains, will
Since the S.&P. 500 first reached its current level, in March 2000, the mad money printers at
the Federal Reserve have expanded their balance sheet sixfold (to $3.2 trillion from $500 billion).
Yet during that stretch, economic output has grown by an average of 1.7 percent a year (the slowest
since the Civil War); real business investment has crawled forward at only 0.8 percent per year;
and the payroll job count has crept up at a negligible 0.1 percent annually. Real median family
income growth has dropped 8 percent, and the number of full-time middle class jobs, 6 percent. The
real net worth of the “bottom” 90 percent has dropped by one-fourth. The number of food stamp and
disability aid recipients has more than doubled, to 59 million, about one in five Americans.
So the Main Street economy is failing while Washington is piling a soaring debt burden on our
descendants, unable to rein in either the warfare state or the welfare state or raise the taxes
needed to pay the nation’s bills. By default, the Fed has resorted to a radical, uncharted spree
of money printing. But the flood of liquidity, instead of spurring banks to lend and corporations
to spend, has stayed trapped in the canyons of Wall Street, where it is inflating yet another unsustainable
When it bursts, there will be no new round of bailouts like the ones the banks got in 2008. Instead,
America will descend into an era of zero-sum austerity and virulent political conflict, extinguishing
even today’s feeble remnants of economic growth.
THIS dyspeptic prospect results from the fact that we are now state-wrecked. With only brief
interruptions, we’ve had eight decades of increasingly frenetic fiscal and monetary policy activism
intended to counter the cyclical bumps and grinds of the free market and its purported tendency
to underproduce jobs and economic output. The toll has been heavy.
As the federal government and its central-bank sidekick, the Fed, have groped for one goal after
another — smoothing out the business cycle, minimizing inflation and unemployment at the same time,
rolling out a giant social insurance blanket, promoting homeownership, subsidizing medical care,
propping up old industries (agriculture, automobiles) and fostering new ones (“clean” energy, biotechnology)
and, above all, bailing out Wall Street — they have now succumbed to overload, overreach and outside
capture by powerful interests. The modern Keynesian state is broke, paralyzed and mired in empty
ritual incantations about stimulating “demand,” even as it fosters a mutant crony capitalism that
periodically lavishes the top 1 percent with speculative windfalls.
The culprits are bipartisan, though you’d never guess that from the blather that passes for political
discourse these days. The state-wreck originated in 1933, when Franklin D. Roosevelt opted for fiat
money (currency not fundamentally backed by gold), economic nationalism and capitalist cartels in
agriculture and industry.
Under the exigencies of World War II (which did far more to end the Depression than the New Deal
did), the state got hugely bloated, but remarkably, the bloat was put into brief remission during
a midcentury golden era of sound money and fiscal rectitude with Dwight D. Eisenhower in the White
House and William McChesney Martin Jr. at the Fed.
Then came Lyndon B. Johnson’s “guns and butter” excesses, which were intensified over one perfidious
weekend at Camp David, Md., in 1971, when Richard M. Nixon essentially defaulted on the nation’s
debt obligations by finally ending the convertibility of gold to the dollar. That one act — arguably
a sin graver than Watergate — meant the end of national financial discipline and the start of a
four-decade spree during which we have lived high on the hog, running a cumulative $8 trillion current-account
deficit. In effect, America underwent an internal leveraged buyout, raising our ratio of total debt
(public and private) to economic output to about 3.6 from its historic level of about 1.6. Hence
the $30 trillion in excess debt (more than half the total debt, $56 trillion) that hangs over the
American economy today.
This explosion of borrowing was the stepchild of the floating-money contraption
deposited in the Nixon White House by Milton Friedman, the supposed hero of free-market economics
who in fact sowed the seed for a never-ending expansion of the money supply. The Fed, which celebrates
its centenary this year, fueled a roaring inflation in goods and commodities during the 1970s that
was brought under control only by the iron resolve of Paul A. Volcker, its chairman from 1979 to
Under his successor, the lapsed hero Alan Greenspan, the Fed dropped Friedman’s
penurious rules for monetary expansion, keeping interest rates too low for too long and flooding
Wall Street with freshly minted cash. What became known as the “Greenspan put” — the implicit assumption
that the Fed would step in if asset prices dropped, as they did after the 1987 stock-market crash
— was reinforced by the Fed’s unforgivable 1998 bailout of the hedge fund Long-Term Capital Management.
That Mr. Greenspan’s loose monetary policies didn’t set off inflation
was only because domestic prices for goods and labor were crushed by the huge flow of imports from
the factories of Asia. By offshoring America’s tradable-goods sector, the Fed kept the Consumer
Price Index contained, but also permitted the excess liquidity to foster a roaring inflation in
financial assets. Mr. Greenspan’s pandering incited the greatest equity boom in history, with the
stock market rising fivefold between the 1987 crash and the 2000 dot-com bust.
Soon Americans stopped saving and consumed everything they earned and
all they could borrow. The Asians, burned by their own 1997 financial crisis, were happy to oblige
us. They — China and Japan above all — accumulated huge dollar reserves, transforming their central
banks into a string of monetary roach motels where sovereign debt goes in but never comes out. We’ve
been living on borrowed time — and spending Asians’ borrowed dimes.
This dynamic reinforced the Reaganite shibboleth that “deficits don’t
matter” and the fact that nearly $5 trillion of the nation’s $12 trillion in “publicly held” debt
is actually sequestered in the vaults of central banks. The destruction of fiscal rectitude under
Ronald Reagan — one reason I resigned as his budget chief in 1985 — was the greatest of his many
dramatic acts. It created a template for the Republicans’ utter abandonment of the balanced-budget
policies of Calvin Coolidge and allowed George W. Bush to dive into the deep end, bankrupting the
nation through two misbegotten and unfinanced wars, a giant expansion of Medicare and a tax-cutting
spree for the wealthy that turned K Street lobbyists into the de facto office of national tax policy.
In effect, the G.O.P. embraced Keynesianism — for the wealthy.
The explosion of the housing market, abetted by phony credit ratings,
securitization shenanigans and willful malpractice by mortgage lenders, originators and brokers,
has been well documented. Less known is the balance-sheet explosion among the top 10 Wall Street
banks during the eight years ending in 2008. Though their tiny sliver of equity capital hardly grew,
their dependence on unstable “hot money” soared as the regulatory harness the
Glass-Steagall Act had wisely imposed during the Depression was totally dismantled.
Within weeks of the Lehman Brothers bankruptcy in September 2008, Washington,
with Wall Street’s gun to its head, propped up the remnants of this financial mess in a panic-stricken
melee of bailouts and money-printing that is the single most shameful chapter in American financial
There was never a remote threat of a Great Depression 2.0 or of a financial
nuclear winter, contrary to the dire warnings of Ben S. Bernanke, the Fed chairman since 2006. The
Great Fear — manifested by the stock market plunge when the House voted down the TARP bailout before
caving and passing it — was purely another Wall Street concoction. Had President Bush and his Goldman
Sachs adviser (a k a Treasury Secretary) Henry M. Paulson Jr. stood firm, the crisis would have
burned out on its own and meted out to speculators the losses they so richly deserved. The Main
Street banking system was never in serious jeopardy, ATMs were not going dark and the money market
industry was not imploding.
Instead, the White House, Congress and the Fed, under Mr. Bush and then
President Obama, made a series of desperate, reckless maneuvers that were not only unnecessary but
ruinous. The auto bailouts, for example, simply shifted jobs around — particularly to the aging,
electorally vital Rust Belt — rather than saving them. The “green energy” component of Mr. Obama’s
stimulus was mainly a nearly $1 billion giveaway to crony capitalists, like the venture capitalist
and the self-proclaimed outer-space visionary
Musk, to make new toys for the affluent.
Less than 5 percent of the $800 billion Obama stimulus went to the truly
needy for food stamps, earned-income tax credits and other forms of poverty relief. The preponderant
share ended up in money dumps to state and local governments, pork-barrel infrastructure projects,
business tax loopholes and indiscriminate middle-class tax cuts. The Democratic Keynesians, as intellectually
bankrupt as their Republican counterparts (though less hypocritical), had no solution beyond handing
out borrowed money to consumers, hoping they would buy a lawn mower, a flat-screen TV or, at least,
dinner at Red Lobster.
But even Mr. Obama’s hopelessly glib policies could not match the audacity
of the Fed, which dropped interest rates to zero and then digitally printed new money at the astounding
rate of $600 million per hour. Fast-money speculators have been “purchasing” giant piles of Treasury
debt and mortgage-backed securities, almost entirely by using short-term overnight money borrowed
at essentially zero cost, thanks to the Fed. Uncle Ben has lined their pockets.
If and when the Fed — which now promises to get unemployment below 6.5
percent as long as inflation doesn’t exceed 2.5 percent — even hints at shrinking its balance sheet,
it will elicit a tidal wave of sell orders, because even a modest drop in bond prices would destroy
the arbitrageurs’ profits. Notwithstanding Mr. Bernanke’s assurances about eventually, gradually
making a smooth exit, the Fed is domiciled in a monetary prison of its own making.
While the Fed fiddles, Congress burns. Self-titled fiscal hawks like Paul
D. Ryan, the chairman of the House Budget Committee, are terrified of telling the truth: that the
10-year deficit is actually $15 trillion to $20 trillion, far larger than the Congressional Budget
Office’s estimate of $7 trillion. Its latest forecast, which imagines 16.4 million new jobs in the
next decade, compared with only 2.5 million in the last 10 years, is only one of the more extreme
examples of Washington’s delusions.
Even a supposedly “bold” measure — linking the cost-of-living adjustment
for Social Security payments to a different kind of inflation index — would save just $200 billion
over a decade, amounting to hardly 1 percent of the problem. Mr. Ryan’s latest budget shamelessly
gives Social Security and Medicare a 10-year pass, notwithstanding that a fair portion of their
nearly $19 trillion cost over that decade would go to the affluent elderly. At the same time, his
proposal for draconian 30 percent cuts over a decade on the $7 trillion safety net — Medicaid, food
stamps and the earned-income tax credit — is another front in the G.O.P.’s war against the 99 percent.
Without any changes, over the next decade or so, the gross federal debt,
now nearly $17 trillion, will hurtle toward $30 trillion and soar to 150 percent of gross domestic
product from around 105 percent today. Since our constitutional stasis rules out any prospect of
a “grand bargain,” the nation’s fiscal collapse will play out incrementally, like a Greek/Cypriot
tragedy, in carefully choreographed crises over debt ceilings, continuing resolutions and temporary
The future is bleak. The greatest construction boom in recorded history
— China’s money dump on infrastructure over the last 15 years — is slowing. Brazil, India, Russia,
Turkey, South Africa and all the other growing middle-income nations cannot make up for the shortfall
in demand. The American machinery of monetary and fiscal stimulus has reached its limits. Japan
is sinking into old-age bankruptcy and Europe into welfare-state senescence. The new rulers enthroned
in Beijing last year know that after two decades of wild lending, speculation and building, even
they will face a day of reckoning, too.
THE state-wreck ahead is a far cry from the “Great
Moderation” proclaimed in 2004 by Mr. Bernanke, who predicted that prosperity would be everlasting
because the Fed had tamed the business cycle and, as late as March 2007,
that the impact of the subprime meltdown “seems likely to be contained.” Instead of moderation,
what’s at hand is a Great Deformation, arising from a rogue central bank that has abetted the Wall
Street casino, crucified savers on a cross of zero interest rates and fueled a global commodity
bubble that erodes Main Street living standards through rising food and energy prices — a form of
inflation that the Fed fecklessly disregards in calculating inflation.
These policies have brought America to an end-stage metastasis. The way
out would be so radical it can’t happen. It would necessitate a sweeping divorce of the state and
the market economy. It would require a renunciation of crony capitalism and its first cousin: Keynesian
economics in all its forms. The state would need to get out of the business of imperial hubris,
economic uplift and social insurance and shift its focus to managing and financing an effective,
affordable, means-tested safety net.
All this would require drastic deflation of the realm of politics and
the abolition of incumbency itself, because the machinery of the state and the machinery of re-election
have become conterminous. Prying them apart would entail sweeping constitutional surgery: amendments
to give the president and members of Congress a single six-year term, with no re-election; providing
100 percent public financing for candidates; strictly limiting the duration of campaigns (say, to
eight weeks); and prohibiting, for life, lobbying by anyone who has been on a legislative or executive
payroll. It would also require overturning Citizens United and mandating that Congress pass a balanced
budget, or face an automatic sequester of spending.
It would also require purging the corrosive financialization that has
turned the economy into a giant casino since the 1970s. This would mean putting the great Wall Street
banks out in the cold to compete as at-risk free enterprises, without access to cheap Fed loans
or deposit insurance. Banks would be able to take deposits and make commercial loans, but be banned
from trading, underwriting and money management in all its forms.
It would require, finally, benching the Fed’s central planners, and restoring
the central bank’s original mission: to provide liquidity in times of crisis but never to buy government
debt or try to micromanage the economy. Getting the Fed out of the financial markets is the only
way to put free markets and genuine wealth creation back into capitalism.
That, of course, will never happen because there are trillions of dollars
of assets, from Shanghai skyscrapers to Fortune 1000 stocks to the latest housing market “recovery,”
artificially propped up by the Fed’s interest-rate repression. The United States is broke — fiscally,
morally, intellectually — and the Fed has incited a global currency war (Japan just signed up, the
Brazilians and Chinese are angry, and the German-dominated euro zone is crumbling) that will soon
overwhelm it. When the latest bubble pops, there will be nothing to stop the collapse. If this
sounds like advice to get out of the markets and hide out in cash, it is.
Speculative markets are always a reflection of market participants' collective greed. To support
speculative behavior, participants formulate justifications which are often delusional. The "madness
of crowds" is a well-known phenomenon that is all-too-common in the investing world.
Speculative markets are always a reflection of market participants' collective greed. To support
speculative behavior, participants formulate justifications which are often delusional. The "madness
of crowds" is a well-known phenomenon that is all-too-common in the investing world. Each time -
whether the late-90's internet bubble, the mid-00s real estate bubble, or the current equities bubble
- participants find a way to convince themselves that this time is truly different.
The speculative frenzy always reaches the point where those prudent investors who have remained
on the sideline can no longer tolerate feeling foolish while everyone else is making so much money.
So they dive in too, and each passing week brings more conversions to the bullish case. Eventually,
everyone is a bull...and there are very investors left with the courage to stay out of the market.
At present, this phenomenon likely explains why Investors Intelligence sentiment data is hitting
extremely low numbers of bears. The spread between Bulls & Bears is now at its highest since April
2011, which was precisely where the market last topped. A 20% correction followed shortly after.
You might want to have a quick glance over the chapter regarding John Law's highly innovative
dalliance into the théorie monétaire moderne that was adopted by the nation of France, almost to
the point of its demise. It is a useful reminder that truly, there is nothing new under the sun.
As theoretical as all these pricing antics and market manipulations might seem, exercises in
price setting for personal greed or policy considerations have real world consequences, especially
when they are applied over long periods of time, and with some resort to coercion.
The longer that valuations are maintained against the market, the stronger the coercion to sustain
them must become, to the demise of freedom, and the point of exhaustion and collapse. The Soviet
ruble is a possible case study for what happens when the unsustainable meets the inevitable, even
with a hairy knuckled police state backing it up.
We might start thinking about 2014 as the year of financial consequences.
The goal of this page is not to time the market. It is to prevent 401K investors from stupid, self-defeating
move, which are typical when greed overwhelm those who missed S&P500 rally and now can try to catch
the train. In this particular role ZeroHedge is OK.
It is becoming increasingly obvious that we are seeing the disconnect between financial markets
and the real economy grow. It is also increasingly obvious (to Citi's FX Technicals team) that not
only is QE not helping this dynamic, it is making things worse. It encourages misallocation of capital
out of the real economy, it encourages poor risk management, it increases the danger of financial
asset inflation/bubbles, and it emboldens fiscal irresponsibility etc.etc. If the Fed was prepared
to draw a line under this experiment now rather than continuing to "kick the can down the road"
it would not be painless but it would likely be less painful than what we might see later. Failure
to do so will likely see us at the "end of the road" at some time in the future and the 'can' being
"kicked over the edge of a cliff." Enough is enough. It is time to recognize reality. It is time
to take monetary and fiscal responsibility - "America is exhausted…..it is time."
Via Citi FX Technicals,
Small business (the “backbone of the US economy”) is struggling again
These numbers were released this week and give rise for concern. The outlook here does not look
very promising as we see all of the charts above starting to look shaky.
We are particularly focused on the overall small business optimism index and what it suggests.
... ... ....
As can be seen from the chart above the Small business optimism index and the S&P were very correlated
from 2007-2012. If anything, the Small business optimism index has tended to slightly lead i.e.
the business backdrop seemed to reflect the economic backdrop which was then reflected in the equity
However, since Sept. 2012 when the Fed went “all in” with QE “infinity” there has been a huge
divergence between these two. After an initial “hiccup” of about 9% in the Equity market it has
since rallied 32% in 11 months, with no corresponding support from the business index.
There is now a “huge divergence” between the “backbone of the US economy” (Small business) and
the Equity market. This clearly shows that while sharp balance sheet expansion at the Fed continues
to “elevate” the equity market, it is far from clear that it is providing incremental benefit to
the real economy. If these small business indicators continue to deteriorate as we expect then there
is likely an inevitable negative feedback loop to the real economy and ultimately employment creation
(Which at this point remains “qualitatively poor”)
If the Fed is not concerned about the dangers of creating a potential “bubble” in financial assets
that does not see fundamental support, then they should be. They might want to explain what their
next policy measure would be IF they allow a financial bubble to emerge while they sit at “Zero
bound” short-term rates and a balance sheet likely sitting above $4 trillion.
The Equity market move is fundamental: Yeah right!
S&P and the Fed balance sheet since early 2009. Not at all correlated... well maybe a little
S&P, Fed Balance sheet and US GDP: QE infinity is working really well…..DUH..
Year on year real GDP growth peaked in 2010 at 2.8%.(YOY growth in nominal GDP peaked at 5.2%
in 2012 and is now back at 3.1%). These levels remain extremely low by “normal” recovery standards
and have failed to re-accelerate despite the fact that the Fed has nearly doubled the size of its
balance sheet since 2010.
The Fed balance sheet is now $3.85 trillion and still rising.
the Fed and the government of the US (and UK for that matter) are pursuing policy designed to enhance
the well-being of the wealthiest few, and doing very little for the public at large, except perhaps
just enough to keep them confusedly apathetic.
The unstoppable Wall Street money machine keeps rolling on the QE express.
What could possibly go wrong?
Have a pleasant evening.
... ... ...
There was a slight downward pressure today as it was a bit of risk off, with some commodities,
bonds, and stocks trading weakly because of 'taper talk.'
There should be no doubt in anyone's mind that the Fed and the government of the US (and UK for
that matter) are pursuing policy designed to enhance the well-being of the wealthiest few, and
doing very little for the public at large, except perhaps just enough to keep them confusedly apathetic.
"We run carelessly to the precipice, after we have put up a façade to prevent ourselves from
"We run carelessly to the precipice, after we have put up a façade to prevent ourselves from
Gold and silver largely chopped sideways today with a slight downward bias, but nothing of real
There was a small amount of movement of gold out of the Scotia Mocatta warehouse on Friday. The
report is shown below.
The way to play the precious metals market is to not take leveraged or timed (option) positions.
Why is this?
Because the markets are being price manipulated, like the currency markets, LIBOR, base metals,
and quite a few others it seems.
So what do we not do? We do not try to time the market, since the guys who are pushing prices
around have the advantage of 'seeing our hands' given their market positioning and access to non-public
This means we are trading for the intermediate to long term. Daily price antics cannot affect
us because we are not leveraged, and we are not holding things like options which have expirations.
I wanted to clarify this, because lately I have been getting some questions that make me think
that some are trying to time this market, and pile into leveraged positions to maximize their outsized
gains. That is not likely to work. The worst thing that can happen to a new trader is to hit a jackpot
like that, because they will break themselves trying to regain the feeling of being fortune's child
by playing long shots.
Convergence is a more likely way to play markets. That means that even though some things can
get out of bounds and stay there for longer than we might think, eventually the fundamentals will
come to bear and the markets will converge back to probability again.
In the case of gold, claims per ounce at these prices are at historic highs. The last two times
this happened, we saw a major intermediate trend change within six months. Can it be nine months?
Sure, why not? With regulators turning a blind eye and the Fed essentially handing the banks and
trading desks $80 billion per month by buying their assets at non-market prices, things can go on
for quite some time.
But eventually the fundamentals of supply, demand, and value will apply, and sometimes with
a vengeance. We saw this in the financial crisis of 2008, wherein the mispricing of risk in Collateralized
Debt Obligations blew up, and the housing bubble collapsed.
Sometimes that is what happens when trend becomes overextended. You can break yourself trying
for the maximum profit and bragging rights, and miss the big move when it comes from sheer exhaustion.
So I think that is where we are with the precious metals, and with gold in particular. There
are no sure things, but this one seems to be unfolding in a fairly classic manner. Try not to pig
out and get sidelined before the time comes. As Bernard Baruch once said, better to lose the
first ten percent of a major bull move than to try and get in early.
Now, you may not think we are going to see another leg up in precious metals. And you could be
right. So what do you do? You sit out and wait for a clear breakout and confirmation. For those
more aggressively inclined you take light positions with cool money and no leverage. And then sit
and wait to be right.
I do not know how this will unfold exactly. But I do know one thing. All the pundits and master
traders don't know any more than that either. But they will be glad to sell you their opinions,
and hope that you do the natural human thing and remember the three times they were right, and forget
about the six times that they were wrong. Most people certainly tend to keep score that way.
There are ways to get nearly perfect records in trading. But most of them are not available to
the average, honest person.
Speaking Freely is an Asia Times Online feature that allows guest writers to have their
say. Please click hereif you are interested in contributing.
When Naomi Klein published her ground-breaking book The Shock Doctrine (2007), which compellingly
demonstrated how neoliberal policy makers take advantage of overwhelming crisis times to privatize
public property and carry out austerity programs, most economists and media pundits scoffed at her
arguments as overstating her case. Real world economic developments have since strongly reinforced
Using the unnerving 2008 financial crash, the ensuing long recession and the recurring specter
of debt default, the financial oligarchy and their proxies in the governments of core capitalist
countries have embarked on an unprecedented economic coup d'état against the people, the ravages
of which include extensive privatization of the public sector, systematic application of neoliberal
austerity economics and radical redistribution of resources from the bottom to the top. Despite
the truly historical and paradigm-shifting importance of these ominous developments, their discussion
remains altogether outside the discourse of mainstream economics.
The fact that neoliberal economists and politicians have been cheering these brutal assaults
on social safety-net programs should not be surprising. What is regrettable, however, is the liberal/Keynesian
economists' and politicians' glaring misdiagnosis of the plague of austerity economics: it is all
the "right-wing" Republicans' or Tea Partiers' fault, we are told; the Obama administration and
the Democratic Party establishment, including the labor bureaucracy, have no part or responsibility
in the relentless drive to austerity economics and privatization of public property.
Keynesian and other liberal economists and politicians routinely blame the abandonment of the
New Deal and/or Social-Democratic economics exclusively on Ronald Reagan's supply-side economics,
on neoliberal ideology or on economists at the University of Chicago. Indeed, they characterize
the 2008 financial collapse, the ensuing long recession and the recurring debt/budgetary turmoil
on "bad" policies of "neoliberal capitalism," not on class policies of capitalism per se. 
Evidence shows, however, that the transition from Keynesian to neoliberal economics stems from
much deeper roots or dynamics than pure ideology ; that neoliberal austerity policies are class,
not "bad," policies ; that the transition started long before Reagan arrived in the White House;
and that neoliberal austerity policies have been pursued as vigorously (though less openly and more
stealthily) by the Democratic administrations of Bill Clinton and Barack Obama as their Republican
Indeed, it could be argued that, due to his uniquely misleading status or station in the socio-political
structure of the United States, and equally unique Orwellian characteristics or personality, Obama
has served the interests of the powerful financial oligarchy much better or more effectively than
any Republican president could do, or has done - including Ronald Reagan. By the same token, he
has more skillfully hoodwinked the public and harmed their interests, both in terms of economics
and individual/constitutional rights, than any of his predecessors.
Ronald Reagan did not make any bones about the fact that he championed the cause of neoliberal
supply-side economics. This meant that opponents of his economic agenda knew where he stood, and
could craft their own strategies accordingly.
By contrast, Obama publicly portrays himself as a liberal opponent of neoliberal austerity policies
(as he frequently bemoans the escalating economic inequality and occasionally sheds crocodile tears
over the plight of the unemployed and economically hard-pressed), while in practice he is a major
team player in the debt "crisis" game of charade, designed as a shock therapy scheme in the escalation
of austerity economics. 
No president or major policy maker before Obama ever dared to touch the hitherto untouchable
(and still self-financing) Social Security and Medicare trust funds. He was the first to dare to
make these bedrock social programs subject to austerity cuts, as reflected, for example, in his
proposed federal budget plan for fiscal year 2014, initially released in April 2013. Commenting
on this unprecedented inclusion of entitlements in the social programs to be cut, Christian Science
Monitor wrote (on April 9, 2013): "President Obama's new budget proposal ... is a sign that Washington's
attitude toward entitlement reform is slowly shifting, with prospects for changes to Social Security
and Medicare becoming increasingly likely."
Obama has since turned that "likelihood" of undermining Social Security and Medicare into reality.
He did so by taking the first steps in turning the budget crisis that led to government shutdown
in the first half of October into negotiations over entitlement cuts. In an interview on the second
day of the shutdown (October 3rd), he called for eliminating "unnecessary" social programs and discussing
cuts in "long-term entitlement spending". 
Five days later on October 5th, Obama repeated his support for cutting Social Security and Medicare
in a press conference, reassuring congressional Republicans of his willingness to agree to these
cuts (as well as to cuts in corporate tax rates from 35% to 28%) if the Republicans voted to increase
the government's debt limit: "If anybody doubts my sincerity about that, I've put forward proposals
in my budget to reform entitlement programs for the long haul and reform our tax code in a way that
would ... lower rates for corporations". 
Only then, that is, only after Obama agreed to collaborate with the Republicans on ways to cut
both the entitlements and corporate tax rates, the Republican budget negotiators agreed to the higher
budget ceiling and the reopening of the government. The consensus bill that ended the government
shutdown extends the automatic across-the-board "sequester" cuts that began last March into the
current year. This means that "the budget negotiations in the coming weeks will take as their starting
point the $1 trillion in cuts over the next eight years mandated by the sequestration process".
And so, once again, the great compromiser gave in, and gave away - all at the expense of his
To prepare the public for the long-awaited attack on Social Security, Medicare and other socially
vital programs, the bipartisan ruling establishment has in recent years invented a very useful hobgoblin
to scare the people into submission: occasional budget/debt crises and the specter or the actual
pain of government shutdown. As Sheldon Richman recently pointed out:
"Wherever we look, there are hobgoblins. The latest is … DEFAULT. Oooooo.
Apparently the threats of international terror and China rising aren't enough to keep us
alarmed and eager for the tether. These things do tend to wear thin with time. But good old
default can be taken off the shelf every now and then. It works like a charm every time.
No, no, not default! Anything but default!". 
Economic policy makers in the White House and the Congress have invoked the debt/deficit hobgoblin
at least three times in less than two years: the 2011 debt-ceiling panic, the 2012 "fiscal cliff"
and, more recently, the 2013 debt-ceiling/government shutdown crisis - all designed to frighten
the people into accepting the slashing of vital social programs. Interestingly, when Wall Street
speculators needed trillions of dollars to be bailed out, or as the Fed routinely showers these
gamblers with nearly interest-free money through the so-called quantitative easing, debt hobgoblins
were/are nowhere to be seen!
The outcome of the latest (2013) "debt crisis management," which led to the 16-day government
shutdown (October 1-16), confirmed the view that the "crisis" was essentially bogus. Following the
pattern of the 2010, 2011 and 2012 budget/debt negotiations, the bipartisan policy makers kept the
phony crisis alive by simply pushing its "resolution" several months back to early 2014. In other
words, they did not bury the hobgoblin; they simply shelved it for a while to be taken off when
it is needed to, once again, frighten the people into accepting additional austerity cuts - including
Social Security and Medicare.
The outcome of the budget "crisis" also highlighted the fact that, behind the apparent bipartisan
gridlock and mutual denunciations, there is a "fundamental consensus between these parties for
destroying all of the social gains won by the working class over the course of the twentieth century".
 To the extent there were disagreements, they were mainly over the tone, the temp, the magnitude,
the tactics, and the means, not the end. At the heart of all the (largely contrived) bipartisan
bickering was how best to escalate, justify or camouflage the brutal cuts in the vitally necessary
The left/liberal supporters of Obama, who bemoan his being "pressured" or "coerced" by the Tea
Party Republicans into right-wing compromises, should look past his liberal/populist posturing.
Evidence shows that, contrary to Barack Obama's claims, his presidential campaigns were heavily
financed by the Wall Street financial titans and their influential lobbyists. Large Wall Street
contributions began pouring into his campaign only after he was thoroughly vetted by powerful Wall
Street interests, through rigorous Q & A sessions by the financial oligarchy, and was deemed to
be their "ideal" candidate for presidency. 
Obama's unquestioning followers should also note that, to the extent that he is being "pressured"
by his political opponents into compromises/concessions, he has no one to blame but himself: while
the Republican Party systematically mobilizes its social base through offshoots like Tea Partiers,
Obama tends to deceive, demobilize and disarm his base of supporters. Instead of mobilizing and
encouraging his much wider base of supporters (whose more numerous voices could easily drown the
shrill voices of Tea Partiers) to political action, he frequently pleads with them to "be patient,"
and "keep hope alive."
As Andre Damon and Barry Grey have keenly observed, "There was not a single mass organization
that denounced the [government] shutdown or opposed it. The trade unions are completely allied with
the Obama administration and support its policies of austerity and war". 
Obama's supporters also need to open their eyes to the fact that, as I have shown in an earlier
essay,  Obama harbors ideological affinities that are more in tune with Ronald Reagan than with
FDR. This is clearly revealed in his book, The Audacity of Hope, where he shows his disdain
"...those who still champion the old time religion, defending every New Deal and Great Society
program from Republican encroachment, achieving ratings of 100% from the liberal interest groups.
But these efforts seem exhausted…bereft of energy and new ideas needed to address the changing
circumstances of globalization". 
(Her own shortcomings aside, Hillary Clinton was right when, in her bid for the White House against
Obama, she pointed out that Obama's economic philosophy was inspired largely by Reagan' supply-side
economics. However, because the Wall Street and/or the ruling establishment had already decided
that Obama was the preferred choice for the White House, the corporate media let Clinton's comment
pass without dwelling much on the reasons behind it; which could readily be examined by simply browsing
through his own book.)
The repeated claim that the entitlements are the main drag on the federal budget is false - for
at least three reasons. To begin with, the assertion that the large number of retiring baby-boomers
is a major culprit in budgetary shortfalls is bogus because while it is true that baby-boomers are
retiring in larger than usual numbers they do not come from another planet; before retiring, they
also worked and contributed to the entitlement trust fund in larger than usual numbers. This means
that, over time, the outflow and inflow of baby-boomers' funds into the entitlement trust fund must
necessarily even each other out.
Second, even assuming that this claim is valid, the "problem" can easily be fixed (for many years
to come) by simply raising the ceiling of taxable income for Social Security from the current level
of $113,700 to a slightly higher level, let's say, $140,000.
Third, the bipartisan policy makers' hue and cry about the alleged budget/debt crisis is also
false because if it were true, they would not shy away from facing the real culprits for the crisis:
the uncontrollable and escalating health care cost, the equally uncontrollable and escalating military/war/security
cost, the massive transfer of private/Wall Street debt to public debt in response to the 2008 financial
crash, and the considerable drop since the early 1980s in the revenue side of the government budget,
which is the result of the drastic overhaul of the taxation system in favor of the wealthy.
A major scheme of the financial oligarchy and their bagmen in the government to substitute the
New Deal with neoliberal economics has (since the early 1980s) been to deliberately create budget
deficits in order to justify cuts in social spending. This sinister feat has often been accomplished
through a combination of tax cuts for the wealthy and spending hikes for military/wars/security
David Stockman, President Reagan's budget director and one of the main architects of his supply-side
tax cuts, confirmed the Reagan administration's policy of simultaneously raising military spending
and cutting taxes on the wealthy in order to force cuts in non-military public spending: "My aim
had always been to force down the size of the domestic welfare state to the point where it could
be adequately funded with the revenues after the tax cut".  That insidious policy of intentionally
creating budget deficits in order to force neoliberal austerity cuts on vital social needs has continued
to this day - under both Republican and Democratic administrations.
Although the bipartisan tactics of austerity cuts are subtle and obfuscating, they can be illustrated
with the help of a few simple (hypothetical) numbers: first (and behind the scenes), the two sides
agree on cutting non-military public spending by, let's say, $100 billion. To reach this goal, Republicans
would ask for a $200 billion cut, for example.
The Obama administration/Democratic Party, pretending to represent the poor and working families,
would vehemently object that this is too much ... and that all they can offer is $50 billion, again
for example. Next, the Republican negotiators would come up with their own counter-offer of, let's
say, $150 billion. Then come months of fake haggling and passionate speeches in defense of their
positions ... until they meet eventually half way between $50 billion and $150 billion, which has
been their hidden goal ($100 billion) from the beginning.
This is, of course, an overly simplified hypothetical example. But it captures, in broad outlines,
the essence of the political game that the Republican and Democratic parties - increasingly both
representing big finance/big business - play on the American people. All the while the duplicitous
corporate media plays along with this political charade in order to confuse the public by creating
the impression that there are no alternatives to austerity cuts, and that all the bipartisan public
bickering over debt/budgetary issues vividly represents "democracy in action."
The atmosphere of panic and anxiety surrounding the debt/deficit negotiations is fabricated because
the central claim behind the feigned crisis that "there is no money" for jobs, education, health
care, Social Security, Medicare, housing, pensions and the like is a lie. Generous subsidies to
major Wall Street players since the 2008 market crash has lifted financial markets to new highs,
as evinced by the Dow Jones Industrial Average's new bubble above the 15000 mark.
The massive cuts in employment, wages and benefits, as well as in social spending, have resulted
in an enormous transfer of economic resources from the bottom up. The wealthiest 1% of Americans
now own more than 40% of the entire country's wealth; while the bottom 80% own only 7%. Likewise,
the richest 1% now takes home 24% of the country's total income, compared to only 9% four decades
This means that there really is no need for the brutal austerity cuts as there really is no shortage
of financial resources. The purported lack of resources is due to the fact that they are concentrated
largely in the deep coffers of the financial oligarchy.
Ismael Hossein-zadeh is Professor Emeritus of Economics, Drake University, Des Moines,
Iowa. He is the author of The Political Economy of U.S. Militarism (Palgrave-Macmillan 2007)
and Soviet Non-capitalist Development: The Case of Nasser's Egypt (Praeger Publishers 1989).
His latest book, Beyond Mainstream Explanations of the Financial Crisis: Parasitic Finance Capital,
will be forthcoming from Routledge Books.
he Twitter IPO looms over the market action as well as the real economy, and I have a sneaking
hunch that the Street will support stocks until Twitter gets shoved out the door tomorrow, and perhaps
for a few days after. As you have probably heard it is coming out on the higher side of $26 per
share. Let's see how it does in the market.
I am not in stocks here, but am fighting an urge to get something going on the short side until
we get a better idea if they can keep this pig in makeup for the year end ramp at least. Twitter
may give us some insight.
This market is built on a foundation of meringue, supplied by those little elves at the Fed,
who are pumping huge sums to Wall Street while Main Street languishes with little excess buying
power and a floundering median wage.
While the Fed does not control fiscal policy, they have a huge amount of leverage as a primary
bank regulator that they are not using well.
That is an analysis perfectly appropriate for 2013, with the Fed embarked upon quantitative easing,
extended guidance, and the economy with lots and lots and lots of economic slack.
My point was that an increase in default risk will induce China -- and perhaps more importantly
all foreign central banks and private entities -- to have reduced demand for dollar assets over
time, relative to what would have occurred in a world without a group of people hell-bent upon
Treasury default (technical or not). If that reduction in demand shows up at a time (say five years
from now) when demand for credit is rising, then interest rates will rise above what would otherwise
occur. Figure 2 depicts projected Federal interest payments and ten year yields, from the February
2013 CBO Budget and Economic Outlook (data
Figure 2: CBO forecasts/projections of net interest payments as a share of GDP (blue,
left scale), and ten year Treasury yields (red, right scale). Source: Budget and Economic Outlook
data for figures, figures 1-3, 2-4.
The net interest payments were projected to be 2.5% of GDP in 2018 if the ten year yield were
5.2%; compare against the 2.6% recorded on 10/18. Now, who knows how much of a default premium is
built in, and how much more if the Ted Cruz faction can produce yet more debt ceiling standoffs
(or an actual default).
Coming back to China, current projections from the IMF (see
Article IV report from July)
are for an increasing current account balance from the relatively small levels of 2012 -- up to
2.7% of GDP in 2014, and 4% by 2018. By 2018, reserves will be increasing on the order of $668 billion.
However, this forecast is clearly predicated on moderate progress on structural reform and a
constant real exchange rate. If there is anything the Chinese government has demonstrated, it
is that when the political will is summoned, it can undertake substantial changes in policy direction.
The alternative, with structural reforms and continued RMB appreciation, the current account balance
to GDP ratio could be as small as 1% by 2018.
So, imagine a US economy close to potential GDP five years hence, with a considerably smaller
demand for US Treasurys, partly because we have made US government debt less attractive. This will
result in some combination of a weaker dollar and a higher long term interest rate. Not a good outcome
(a weaker dollar due to from a higher exchange risk premium might not be such a bad thing, as Krugman
points out). Then we might worry about crowding out, and some of that crowding out will be directly
attributable to the actions of those who had no worry about Federal government default.
Background on international currencies
here. For more on
the RMB as an reserve currency, see
trading, here; and
for a statistical analysis of the RMB as an invoicing currency, see
Stagflationary Mark wrote on Fri, 10/25/2013 - 5:55 pm (in reply to...)
emergency hotdog wrote:
but if it was at an apex it would be a blow off top. we're too good at finding reasons to be
Been bearish 9 years so far. No complaints. Long-term treasuries have treated me very well,
as did gold and silver from 2004 to 2006.
some investor guy:
Most small businesses don't grow or shrink much. They are either happy where they are at,
or complain and blame others.
At a prior employer, we had a middle markets group. There were several types of clients:
Long term family owned functional business. Slow to no growth.
Franchises. Not much growth at each one, but sometimes more and more franchisees.
Mean, disfunctional, and under the impression that they shouldn't pay much for anything.
They wanted to have everyone else compensate for their poor planning, disorganization, drinking
problem, or untreated psychological issues.
Smooth growth, mostly on internal funds. Usually good people to work with.
Explosive growth. Moved to our large client group within a few years. Many software
companies in this group.
some investor guy
1 currency now -yogi:
And if they shrank much, they'd be out of business, because they are small
I used to be a small business. One of my clients hired me at a pretty good rate. When you
hear that stat that 85% of small businesses are gone in 5 years, remember, many of them closed
for happy reasons. Hired, bought out.
Trading permanent changes in Social Security and Medicare for some short-term spending is
stupid, both as a matter of policy and politics.
It's long been a mistake to sell your birthright for a mess of pottage.
Darrell said in reply to foosion...
Except that we can get the spending now, and roll back the cuts later.
Any cuts to SS and MC will be targeted for 10+ years from now, as you need at least half
of boomer support.
A few years from now, demographics will better support rolling back the cuts.
ilsm said in reply to Darrell...
It is the death of a thousand cuts.
Thirty years ago Reagan with Tip O'Neill, Moynihan and Greenspan sold increased age and increased
payroll taxes to keep SS for the Boomers.
That the extra money was squandered!
No benefit cuts and no payroll increases, they will be squandered and another "entitlement"
crisis will be 10 years off.
Don't appease them they have been after SS since 1937.
ilsm said in reply to Aaron...
Put politicians aside, their tool is misdirection. 40% of US government outlays are other
than "mandatory" and all projections keep them steady even though the pentagon's half of the
40% is twice the burden it was in 2000.
The largest part of the safety net trust funds' "t-bills" paid for war profits, more money
for the funds will be more of the same and 5 years in the future there will be more about "actuarial
The answer to long term actuarial "stability" of medicare and social security is not short
term revenue increases or safety net outlay "reform". That extra cash hides deficits, misspending
for war profiteers' wars of choice, tax cuts and crony capitalism.
If anyone really cares about long term stability of the great society build the middle class,
eliminate war profiteering, shutter the empire, and raise progressive taxes.
First step, tell the pentagon safety net for the needy is more important than the health
of the war industry and a new occupation command in Africa.
What Christiaan Hofman said!
Michael Pettengill -> Min...
When I was a teen in the 50s, SS wasn't going to exist by the time I got old, but next month
I qualify for full SS and the claim is it will run out of money in 18-20 years and then only
pay 75% of the stated benefit.
But the irony is President Reagan is the hero of those who seek to destroy SS, but three
decades ago he said:
"Today, all of us can look each other square in the eye and say, ``We kept our promises.''
We promised that we would protect the financial integrity of social security. We have. We promised
that we would protect beneficiaries against any loss in current benefits. We have. And we promised
to attend to the needs of those still working, not only those Americans nearing retirement but
young people just entering the labor force. And we've done that, too.
"So, today we see an issue that once divided and frightened so many people now uniting us. Our
elderly need no longer fear that the checks they depend on will be stopped or reduced. These
amendments protect them. Americans of middle age need no longer worry whether their career-long
investment will pay off. These amendments guarantee it. And younger people can feel confident
that social security will still be around when they need it to cushion their retirement.
"These amendments reaffirm the commitment of our government to the performance and stability
of social security. It was nearly 50 years ago when, under the leadership of Franklin Delano
Roosevelt, the American people reached a great turning point, setting up the social security
system. F. D. R. spoke then of an era of startling industrial changes that tended more and more
to make life insecure. It was his belief that the system can furnish only a base upon which
each one of our citizens may build his individual security through his own individual efforts.
Today we reaffirm Franklin Roosevelt's commitment that social security must always provide a
secure and stable base so that older Americans may live in dignity."
The problem is that the right has grouped SS and Medicare together under entitlements, and
from the posts in here, it seems the left has fallen for their trap.
We have to separate those two programs when we talk about entitlements. When we allow them
to be lumped together, we make both look like they are fundamentally flawed and need to be fixed.
That is not the case.
99% of our problem has been the escalation of healthcare costs. So let's talk about those
and Medicare and leave SS out of the mix.
We play into the hands(budget scare) of the right when we allow the two programs to be joined
at the hip.
ilsm said in reply to EMichael...
On the 8 Nov the past two year GAO's financial audit of the public debt is released for the
FY just completed on 30 Sep.
Waiting to see this years!
Last year SS was up $87B to `$2.6T, while medicare was down to ~$400B in holdings. All that
represents money that should not have gone to phony wars!!
The other two big federal pensions have combined ~$1.3T with the OPM having a tiny bit from
employee contribution the rest is appropriated which keeps those funds actuarially solvent.
Maybe a bit of appropriated funds for Grandma instead of Lockheed.
Min said in reply to EMichael...
"99% of our problem has been the escalation of healthcare costs. So let's talk about those
and Medicare and leave SS out of the mix."
Social Security is neither broke nor broken.
As for Medicare and medical costs, Medicare is part of the solution. It is much more efficient
than private medical insurance. It is part of the solution, not part of the problem.
Roger Gathman said in reply to drb48...
Yes yes and yes. Jamie Galbraith has been pushing for increasing ss benefits for a while
- in fact, it would have been a great way to inject money into the system in this period of
slumpiness. And of course the cost of medicine in the US is a scandal, as compared with other
countries. If competition is supposed to be about the efficiencies gained by letting the deregulated
price system work its magic - than the US system must be the most uncompetitive in the world.
Or perhaps the price system doesn't reflect competitiveness, and perhaps the US medical system
persistently pretends to be a free market one when it is of course a guild system, with a government
supported and enforced guild making up the healthcare labor force. The argument about socializing
or not socializing medicine is, frankly, simply ridiculous when you have a guild controlling
I think AARP should simply run ads that are simply 30 seconds of President Reagan saying
what he said April 20, 1983. That might get Reagan redefined as a radical leftist socialist
Some rather scary predictions out of Paul Farrell
inevitable: Wall Street banks control the Federal Reserve system, it’s their personal piggy bank.
They’ve already done so much damage, yet have more control than ever.Warning: That’s a set-up.
They will eventually destroy capitalism, democracy, and the dollar’s global reserve-currency
status. They will self-destruct before 2035 … maybe as early as 2012 … most likely by 2020.
Last week we cheered the Tea Party for starting the countdown to the Second American Revolution.
Our timeline is crucial to understanding the
historic implications of Taleb’s prediction that the Fed is dying, that it’s only a matter
of time before a revolution triggers class warfare forcing America to dump capitalism, eliminate
our corrupt system of lobbying, come up with a new workable form of government, and create a
new economy without a banking system ruled by Wall Street." And just like in the Hangover,
where the guy is funny because
he's fat, Farrell is scary cause he is spot on correct.
Handily, Farrell provides a projected timeline of events:
Stage 1: The Democrats just put the nail in their coffin confirming they’re
wimps when they refused to force the GOP to filibuster Bush tax cuts for billionaires.
Stage 2: In the elections the GOP takes over the House, expanding its strategic
war to destroy Obama with its policy of “complete gridlock” and “shutting down government.”
Stage 3: Post-election Obama goes lame-duck, buried in subpoenas and vetoes.
Stage 4: In 2012, the GOP wins back the White House and Senate. Health
care returns to insurers. Free-market financial deregulation returns. Lobbyists intensify their
Stage 5: Before the end of the second term of the new GOP president, Washington
is totally corrupted by unlimited, anonymous donations from billionaires and lobbyists. Wall
Street’s Happy Conspiracy triggers the third catastrophic meltdown of the 21st century that
Robert Shiller of “Irrational Exuberance” fame predicts, resulting in defaults of dollar-denominated
debt and the dollar’s demise as the world’s reserve currency.
Stage 6: The Second American Revolution explodes into a brutal full-scale
class war with the middle class leading a widespread rebellion against the out-of-touch, out-of-control
Happy Conspiracy sabotaging America from within.
Stage 7: The domestic class warfare is exaggerated as the Pentagon’s global
warnings play out: That by 2020 “an ancient pattern of desperate, all-out wars over food, water,
and energy supplies would emerge” worldwide and “warfare is defining human life.”
It gets worse: Farrell postulates that the closer we get to the Mad Max moment, the less those
in charge will discuss this "optionality" of the end of the world trade.
In this rapidly unfolding scenario, the Fed cannot survive. Why? Not because the Fed is at
the center of America’s economic problems, beyond repair, a dying institution. But because the
Fed is a pawn of Wall Street’s Happy Conspiracy, which is incapable of seeing the train wreck
that it set up.
This out-of-control, conspiracy of greedy Wall Street bankers, corporate CEOs, corrupt politicians
and Forbes 400 billionaires will, in the near future, trigger the third catastrophic meltdown
of the 21st century, a collapse that paradoxically can transform America into a new, stronger
post-capitalist economy … but only after a revolution and brutal class warfare. But few will
talk about what’s coming.
The problem is that by using a simple metric suggested by Nassim Taleb, there is nobody Americans
can trust to be the bearer of bad news, which is why everyone is and will be responsible for their
own well being.
Here’s Taleb’s “simple metric for judging whose economic opinions are worth his time: ‘Did someone
predict the crisis before it happened” in the past? “If the answer is no, I don’t want to hear
what the person says. If the person saw the crisis coming then I want to hear what they have
to say” about future crises.
Taleb target No. 1: Treasury Secretary Tim Geithner, who spoke
just before Taleb at the forum. Of course, experience tells us you really can’t trust anyone
in government. All politicians fudge the numbers, cherry-pick data to suit their personal goals,
biases and political rhetoric.
Remember Hank Paulson, Wall Street’s Trojan Horse inside Washington? Earlier he had made
over half a billion as Goldman’s CEO. Back in July 2007 before the meltdown he bragged to Fortune
that this is “the strongest global economy I’ve seen in my business lifetime.” Never trust anything
“leaders” like him say. Never. Worse, he and our clueless Fed Chairman Ben Bernanke later lied
to the public that the subprime crisis was “contained.” No, my friends, you cannot trust politicians
and government insiders. Never.
Others whose opinions can be summarily dismissed include economists and authors:
Taleb warns: Nobel economist Krugman not only supports Keynesian deficit spending, he favors
the “transformation of private debt, with all the moral hazard it entails, into public debt”
that’s toxic from a “risk standpoint.” Worse, it’s “immoral.” Our “grandchildren should not
bear the debts of the grandparents.” OK, add Nobel economists to the list of people Taleb says
you can’t trust to speak “the truth.
Actually, using Taleb’s “metric,” you can’t trust any economists. Why? Because all economists,
even the best, are capable of making catastrophic errors: Remember Greenspan’s sad apologies
during congressional hearings after undermining America for 18 years. And remember Michael Boskin’s
classic $12 trillion error? Bush Sr’s chairman of the Council of Economic Advisers, a respected
Stanford economist, attempted to justify some cockamamie logic that his newfound Social Security
savings would lower America’s debt, giving a political boost for his party. He was $12 trillion
No, folks, you can’t trust any economists, they’re just average humans. Most have strong
political biases. They’re hired mercenaries who say whatever their employers ask them to say,
pawns working for some Wall Street bank, corporation or politicians.
Yes, Allan reveals another character Taleb can’t trust for economic advice. Prizewinning
authors like NY Times columnist Tom Friedman who’s book, The World is Flat is “very bad for
society,” misleading, having failed to “assess risk.” So scratch celebrity authors from the
list you can trust to tell you the truth about the future of America.
The circle of mistrust obviously includes all the corrupt idiots who control over the sheeple:
Taleb is merciless when it comes to politicians like President Obama, Congress and The Fed
chairman: You can’t trust any of them. Earlier Bernanke’s reappointment “stunned” Taleb: He
“doesn’t even know he doesn’t understand how things work or that the tools he uses are not empirical,”
wrote Taleb in HuffPost. But it’s “the Senators appointing him who are totally irresponsible
... The world has never, never been as fragile,” and we’re stuck with an economist running The
Fed whose methods make “homeopath and alternative healers look empirical and scientific.”
Obama’s reappointment of Bernanke left Taleb so distraught he “withdrawing into the Platonic
tranquility of my library, to work on my next book, find solace in science and philosophy, and
… structure trades betting on the next mistake by Bernanke, Summers and Geithner.”
Taleb’s “metric” essentially warns Americans to trust no one, certainly not Washington and
Wall Street insiders. The vast majority fail his simple metric, “Did someone predict the last
crisis before it happened? ... If the answer is no, I don’t want to hear what the person says.
If the person saw the crisis coming, then I want to hear what they have to say’.”
Follows listing of some of the biggest hypocrites in the world:
Bernanke: “I don’t anticipate any serious failures among large internationally
active banks.” Wow, was he ever wrong.
Billionaire Ken Fisher: “This year will end in the plus column ... so keep
buying.” Main Street lost trillions on advice like this.
‘Mad Money’ Jim Cramer: “Bye-bye bear market, say hello to the bull.”
Goldman Sachs’ Abby Joseph Cohen: “The fear priced into stocks is likely
to abate as recession fears fade.” Soon after, Goldman was essentially bankrupt.
Congressman Barney Frank: “Freddie Mac and Fannie Mae are fundamentally
Barron’s: “Home prices about to bottom.” Three years later they still haven’t
Worth: “Emerging markets are the global investors’ safe haven.”
Kiplinger’s: “Stock investors should beat the rush to the banks.” Costly
Bernie Madoff: “It’s virtually impossible to violate the rules.” But it’ll
To be sure, some continue to spit in the face of docile complicity and warn the world about what
These twenty did warn America between 2000 and 2008. Although few listened: We reported on
warnings from economists Gary Shilling, Marc Faber and Nouriel Roubini, the St. Louis Fed president
(Greenspan ignored him, just as Bernanke is ignoring the Kansas City Fed president today), former
Nixon Commerce Secretary and SEC chairman, billionaires Warren Buffett and oilman Richard Rainwater,
institutional portfolio managers Jeremy Grantham, Bill Gross and Robert Rodriguez, and major
cover stories in Fortune, Harper’s, Vanity Fair, The Economist and The Wall Street Journal.
However, at the end of the day, everyone has an agenda:
So who can you trust? Nobody, not me, not even Taleb. Why? In the final analysis the Buddha
said it best: “Believe nothing, no matter where you read it or who has said it, not even if
I have said it, unless it agrees with your own reason and your own common sense.”
The problem is that if left to the average American, the looting will not finish until well after
Unfortunately, America is losing its capacity to reason, its common sense, its values, its
vision of the future.
Which is why the silent minority is best advised to stock up on popcorn, and watch the cannibalization
and the race to the bottom resume at an unprecedented pace, as everything unravels: the best we
can do is hope for some amusement as the endgame approaches the finale.
I recently posted an article posing the question of whether, or not, the markets had entered
"3rd Stage Of A Bull Market?" In the article I stated:
"Are we in the third phase of a bull market? Most who read this article will immediately
say "no." However, those were the utterances made at the peak of every previous bull market
cycle. The reality is that, as investors, we should consider the possibility, evaluate the risk
and manage accordingly."
During the radio program last night I was discussing the long term trends of the market and discussing
the deviations from the long term moving averages. Moving averages are like "gravity" to
stock prices. The farther away (deviation) from the moving averages that prices get; the greater
the probability becomes for a reversion back to the mean. The chart(s) of the day is a monthly analysis
of the S&P 500 Index and the very broad Wilshire 5000 Index from 1970 to present.
It is worth noting that currently both markets are pushing deviation extremes only seen four
times previously. The difference has much to do with the "secular market" within which these
deviations occurred. The deviation extremes were much shorter lived during the secular "bear"
market of the 70's which effectively ended in 1982. With interest rates and inflation falling the
secular "bull" market of the 90's, combined with the "irrational exuberance" of
the "tech bubble", the markets were able to sustain extreme deviations from the long term
average for an extended period. Ultimately, however, those extremes have always been reversed.
The current deviation from the long term average, fueled by Federal Reserve interventions, is
approaching extremes in both deviation and duration. As I stated above - as investors we should
always remain mindful of the risk.
"I have to admit that I start to feel a bit uneasy about things when I see all news reported
as good news because it either means the economy is getting better or more QE is coming. That
wouldn't bother me so much if corporate earnings were still booming and the economy was growing
strongly, but neither one is occurring. In fact, the market is just driving higher on what looks
like sheer optimism of continued QE; and little else.
You can see this optimism in two indicators you'll recognize. The first is Warren Buffett's
favorite valuation metric – total market cap to GNP. The latest reading of 110% has only been
surpassed by the Nasdaq bubble.
I'll be honest – I've never really understood the obsession with equities and being a macro
guy I probably never will because I have so much love for so many asset classes and approaches.
But if I were 100% allocated in equities at this point in the cycle I would feel rather uneasy
about my positioning."
I have to admit that I start to feel a bit uneasy about things when I see all news reported as good
news because it either means the economy is getting better or more QE is coming. That wouldn’t bother
me so much if corporate earnings were still booming and the economy was growing strongly, but neither
one is occurring. In fact, the market is just driving higher on what looks like sheer optimism of
continued QE and little else.
You can see this optimism in two indicators you’ll recognize. The
first is Warren Buffett’s favorite valuation metric – total market cap to GNP. The latest reading
of 110% has only been surpassed by the Nasdaq bubble.
I have to admit that I start to feel a bit uneasy about things when I see all news reported as good
news because it either means the economy is getting better or more QE is coming. That wouldn’t bother
me so much if corporate earnings were still booming and the economy was growing strongly, but neither
one is occurring. In fact, the market is just driving higher on what looks like sheer optimism of
continued QE and little else.
You can see this optimism in two indicators you’ll recognize. The
first is Warren Buffett’s favorite valuation metric – total market cap to GNP. The latest reading
of 110% has only been surpassed by the Nasdaq bubble.
The only missing ingredient for such a correction currently is simply a catalyst to put "fear"
into an overly complacent marketplace.
In the long term, it will ultimately be the fundamentals that drive the markets. Currently,
the deterioration in the growth rate of earnings and economic strength are not supportive of
the speculative rise in asset prices or leverage. The idea of whether, or not, the Federal Reserve,
along with virtually every other central bank in the world, are inflating the next asset bubble
is of significant importance to investors who can ill afford to lose a large chunk of their
It is all reminiscent of the market peak of 1929 when Dr. Irving Fisher uttered his now famous
words: "Stocks have now reached a permanently high plateau."
Does an asset bubble currently exist? Ask anyone and they will adamantly say 'NO.' However,
maybe it is precisely that tacit denial which might be an indication of its existence."
I suspect from a capital flows pov, there is nothing Greenspan thinks he could of done.
But from a regulatory pov, yes, there are things he could have done.
Outside the policy rate and bond swapping, the only other real "tool" the FOMC has is regulatory.
Textbook free markets makes completes sense & it will work perfectly if not for humans. Its
free market fundamentalists like Greenspan who completely (conveniently?) ignore to include
human nature in their modeling, i.e. Greed, self interest, thirst for wealth power over fellow
human beings, etc. Etc.
I also belief in free markets. My understanding of free markets however takes into account
human nature & realise achieving free markets is rather more complex with all this human nature
bakho said in reply to Oupoot...
All markets have rules, or they would not function. "Free Market" refers to the set of rules
preferred by the Malefactors of Great Wealth.
One review of Greenspan's book on Amazon
=== start of quote ===
History repeats itself, first as tragedy, second as farce. Those immortal Marx's words are fully
applicable to Chairman Greenspan.
The book actually reads as a typical Soviet Politburo memoir,
partially ghost written, mostly hagiographic, and filled with spicy animosity toward former
peers. Nixon's portrait (the latter shrewdly did not appoint Greenspan to the coveted position)
in the book is actually quite revealing about Greeenspan's personality.
Like Bolshevik's theories, neo-classical economic theories Greenspan preached have the power
of shaping (and distorting) the economics of the country. In this sense Greenspan, like members
of Soviet Politburo, played a destructive role by forcing the economy of the USA (mal)adapt
to a superficially attractive but unrealistic economic doctrine.
The extremes and absurdities of financialization of the economy, government interference
with the stock market, as well as financial market deregulation of the last twenty years neatly
correspond to the extremes of Bolsheviks policies after they came to power in perfect "tragedy
vs. farce" fashion. As in "extremes meet" cases, the promise of brighter economic future brought
lemmings on board and (later) off the cliff (extreme centralization and restoration of feudal
rule under smoke screen of leash for banksters and parasitic rents in case of Bolshevism, extreme
deregulation and restoration of the "Law of Jungles" under smoke screen of "free markets" propaganda
in case of Greenspan).
Greenspan's commonality with members of Soviet Politburo runs deeper then the merely superficial
similarities such as being over the age of 60 when elected to the position (Greenspan was 61
when he was appointed by Reagan as Fed Chairman).
First of all, as revealed by the book, the personality of Greenspan pretty well resembles the
personality of members of Soviet Politburo. His failure is also very similar and is an apt manifestation
of the failure of a broader class of economic messianism and a lack of humility in the face
of the complexity of the economic world, coupled with an aggressive, quasi-platonic desire to
shape the world according to the particular economic ideal.
Among striking commonalities:
- Compulsive, almost sociopathic careerism. Ability to change views on the spot when it is
conductive to career objectives (Greenspan's views on gold is one example). Relentless desire
to preserve his position at all costs. Actually this typical "member of the Politburo" trait
was pretty skillfully exploited by the Bush administration and colored the presentation of actions
of Bush administration (famous "Iraq war was about oil" statement) and whitewashing of his own
actions in promoting Bush tax cut in the book.
- Extreme, sociopathic evasiveness and hypocrisy; the tremendous ability and skill in diverting
the blame for blunders from his own person. As for hypocrisy, here is a man preaching laissez-faire
who repeatedly intervened in the market to save the wealthiest Wall Street players. Like members
of Soviet Politburo who send their wives for shopping in Paris and sons and daughters to study
in Oxford, Greenspan actually used his laissez-faire clichés as a smokescreen to mask his real
intentions, the same way the Politburo members used communistic slogans. Another analogy is
that Greenspan used Ayn Rand positivism philosophy in the typical way Marxism was used in the
USSR by aspiring candidates to Politburo: as a magical "Sesame" word that opens the door to
high office for ruthless careerists. Actually Ayn Rand positivism has a lot of common with Marxism:
while Marxism presents working class as a hero and demonize capitalism, her heroic version of
Capitalism includes demonizing socialism or even the milk of human kindness. Ayn Rand's capitalist
entrepreneurs are depicted in the idealized fashion uncanny similar to "the fearless fighters
for the right of working people" in communist literature. You need just to replace the key hero
of The Fountainhead with the director of Soviet factory to get Onion's style parody on Soviet
literature with its still characters and artificial dialogues. This was also the way I see "free
market" fundamentalism ideology was used by Greenspan, who in reality was promoter of corporatism,
or at least state capitalism. Like Politburo members, he was far from "true believer" -- rather
he was simply a careerist, serving ideas that he never fully personally supported himself. In
the same venue his association with Ann Rand was just "marriage of convenience", an association
useful for promoting his career and we will read too much into it if we assume that he really
shared her positivist views. Similarly it was a popular saying in the USSR that there was fewer
Marxists in the Soviet Politburo then in any Montmartre cafe at any time of the day.
-- The same brilliant Machiavellian-style political abilities. Greenspan book reveals him
as a masterful political tactician, a real master of Washington politics chess. At the same
time much like members of the Soviet Politburo he was pretty average in his specialty, a shallow
economist unable to read or accurately forecast the markets trends (a standing joke in his private
practice) despised by some talented hedge fund managers like Jim Rogers.
-- Enjoyment and active pursuit of the role of the "Grand Inquisitor" of economic profession
suppressing any dissent in best Soviet Politburo style ( the Brooksley Born and Alan Blinder
stories are two well known examples and just the tip of the iceberg).
-- A pathological desire for admiration, narcissism. Greenspan suffers from common with members
of the Soviet Politburo inclination toward cult of personality. And his desire for admiration
includes equally common with the Politburo members uncanny ability to make pretty destructive
for the country moves to ease political pressure. For example, Greenspan did not enjoy being
slapped by the Senate Subcommittee for the slow recovery of the economy after the dot-com crash,
and that might partially explain devastating for the country Fed policies he adopted to stimulate
the economy, such as keeping the interest rate too low for too long and, as a result, inflating
enormous housing bubble. Even now at his pretty advanced age, Greenspan is relentless in trying
to protect and "interpret" his legacy in the most favorable way possible.
- Like the Soviet Politburo, Greenspan tried to sell ghosts of the past as robins from the
coming bright future. Much like Bolshevism was a neo-feudal doctrine (in a very deep sense,
revenge of feudalism over capitalism ;-) with the fig leaf of Marxism on top, Greenspan libertarianism
was in reality just a variant of old "might-makes-right" philosophy of jungle capitalism, the
brutal, direct dictatorship of big corporations and the rich with the fig leaf of "free market"
philosophy on top ( what is so "free market" in centrally controlling price of money and suppressing
interest rates ? ). In no way Greenspan was/is a proponent of "free market", he is a proponent
of unlimited freedom of action for big financial corporations: socialism for rich. Actually
a variant of socialism for "nomenklatura" that Soviet Politburo practiced for 70+ years. Now
one can reread Animal Farm for really striking depiction of similarities of Soviet system and
socialism for rich dominated by financial oligarchy.
Manipulation of statistics to exaggerate growth and make his policies more acceptable ( the
rate of inflation in one such measures in Greenspan's case: Like Arthur Burns he promoted the
completely unscientific "core inflation" ). He also was susceptible to the "Cult of GDP" so
typical for the Soviet Politburo.
All this makes reading Greenspan's memoir much like reading a former Soviet Politburo members
memoir. Somewhat fascinating but equally disturbing.
One amusing detail is that he himself is blissfully unaware of the stark similarities of
his position to the position of members of the Soviet Politburo (the most powerful unelected
official in the country) which makes reading his assessment of Soviet economic nomenklatura
really funny and worth the price of admission. Actually it's just one cent in the used hardcover
market, which just about the fair market price of a typical memoir of any discredited Soviet
All in all the book is about the "triumph and tragedy" of a pretty talented person who betrayed
everything to achieve career success. A cautionary tale about the value of moderation in personal
pursuits and desires as well as importance of self-knowledge in personal success and happiness.
=== end of quote ===
Matt Young said...
Clinton/Greenspan, a solid 3.5% YoY real growth, upward concave real growth at 4% in the end,
both G and the banker outperforming the market. The only dynamic duo to accomplish the feat.
Congrats to them both.
1987 to 2005 Real GDP = 3.17%
1987 to 2005 Real GDP per capita = 2.04%
Clinton - Greenspan
1993 to 2000 Real GDP = 4.06%
1993 to 2000 Real GDP per capita = 2.85%
anne said in reply to Matt Young...
The quickest economic growth during a Presidential term from 1945 till the present came during
Kennedy-Johnson, then came Clinton, then Reagan. Kennedy-Johnson was easily the quickest, while
Clinton was far quicker than Reagan.
Typepad is holding the data.
kievite said in reply to anne...
During 1992-2000 period even drunkard Yeltsin would perform well as a US president. There
was a unique confluence of several factors:
1. It was the triumph of neoliberalism (collapse of the USSR happened in 1991) which gave
international corporations and especially US corporations carte blanche for foreign expansion
2. It was period of dollarization of xUSSR space where assets were bought for pennies on
a dollar. Dollarization of the xUSSR space also suppressed/eliminated inflation in the USA.
It is very difficult not to show decent growth figures during such a period.
3. It was period of internet revolution where the US hardware and software were sold at large
premium all over the globe. And was one of the two (the other was financial sector) of the USA
real growth industries (which went into a bubble, but that's another story).
4. During this period outsourcing became especially profitable due to the revolution in telecommunications
and growth of power of computers, which simplified logistics.
5. Introduction of 401K provided large publicly traded corporations (along with Wall Street)
with systematic infusion of money, that helped to finance capital projects (and helped to increase
bonuses for the brass). It also led to tremendous growth of mutual fund industry, which was
the main beneficiary of decimation on old pension plans that started at this period.
Once again I resort to this format since Google is toddling towards a fix, but slowly. I may add
things here, top down, throughout the day.
"He who makes a beast of himself gets rid of the pain of being a man."
“Truly, this earth is a trophy cup for the industrious man. And this rightly so, in the service
of natural selection. He who does not possess the force to secure his Lebensraum in this
world, and, if necessary, to enlarge it, does not deserve to possess the necessities of life.
He must step aside and allow stronger peoples to pass him by.”
Default Deniers(In fairness there is a lot of goofiness being tossed around by people
with no sense of what 'full faith and credit' means, especially to those not under their control.)
Single Payer Prescription For What Ails Obamacare - Amy Goodman (I think Obama et al
understand this. I think the chances of getting it into law and accepted was about zero. Notice
the grief the country is getting for a compromise that was previously generated by a conservative
think tank Heritage House.)
Republican Crazy Talk About the Debt Ceiling
- Reich (I include this not because I think it likely or even agree, but it does point out
that this *could* end in a Constitutional crisis that few anticipate. But few anticipated WW
I or the mass murder of 'unworthy lives' even as it unfolded. Part of the problem is that in
times of stress, people retreat into the self-defining worlds of Fox News and MSNBC in order
to stop the pain of thinking.)
I think the slogan for the US might become 'we reject your reality and substitute our own.'
At least I heard that expressed about twenty or thirty times on Bloomberg television today, and
too often from the mouths of guest economists.
Is there something in the water, or the phases of the moon? While driving to and from the hospital
today I saw more foolishly aggressive driving from people than I have seen in some time. And I am
not fussy or unused to busy roads. This was almost gratuitous aggression, speeding up to cut other
people off and gain nothing, and I am not even counting those who were obviously texting.
Have a pleasant evening.
Jeffrey Sachs Interview at The Guardian About Economics and Ethics
07 October 2013
I have started this interview after an introductory discussion, some words about the World Bank
and its role in the world, and some innovative work that Sachs and others have been doing to improve
the life of people in sub-Saharan Africa.
He begins to move now into a more general discussion now of economics and ethics after some explanatory
comments on the Millenial Village movement in Africa.
(Check out the video to see why his background in the OMB and experience with shutdowns leads
him to say this.)
... ... ...
And the first thing the government will do, he says, is spend $30 billion paying the interest
on the debt (according to Stockman, the government could also pay social security retirees, the
armed services, and medicare reimbursements despite broaching the debt limit).
“It is a complete red herring to say there will be a default,” he tells us. “There will never
will be a time in which there is not enough cash to pay the interest.”
While talking to WSJ, an industry participant said concern over the debt ceiling battle would
be raised during the meeting.
On the first day of shut down my true love gave to me
One JP Morgan CEO
Wolf Richter: Bubble Trouble: Record Junk Bond Issuance, A Barrage Of IPOs, “Out Of Whack”
Valuations, And Grim Earnings Growth
By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and
author, with extensive international work experience. Cross posted from Testosterone Pit.
When Blackstone’s global head of private equity, Joseph Baratta, said Thursday night that
“we” were “in the middle of an epic credit bubble,” the likes of which he hadn’t seen in his
career, he knew whereof he spoke.
Junk bond issuance hit an all-time record of $47.6 billion in September, edging out the prior
record, set in September last year, of $46.8 billion, according to S&P Capital IQ/LCD. Year
to date, issuance amounted to $255 billion, blowing away last year’s volume for this period
of $243 billion. The year 2012, already in a bubble, set an all-time record with $346 billion.
This year, if the Fed keeps the money flowing and forgets about that taper business, junk bond
issuance will beat that record handily.
Junk-bond funds got clobbered in July and August as retail investors briefly opened their
eyes and realized what they had on their hands and fled, and they went looking for yield elsewhere,
but there was still no yield in reasonable places, and so they held their noses and picked up
these reeking junk-bond funds again. Cash inflow doubled over the last week to $3.1 billion,
the most in ten weeks.
I wonder if Dimon and Obama will notice that ginormous bubble in the market?
U.S. stock-index futures advanced, signaling the Standard & Poor’s 500 Index will rebound
from a three-week low, as investors weighed the impact of the first partial government shutdown
in 17 years.
Merck & Co. jumped 2.9 percent after the company announced an overhaul that will eliminate
8,500 workers. Under Armour Inc. increased 0.9 percent as JPMorgan Chase & Co. upgraded the
maker of workout clothing. Symantec Corp. lost 2 percent after saying its chief financial officer
Shutdown? What shutdown?
Yesterday, ED.gov provided its annual update - this time to the 2010 three year and 2011
two year cohorts - and to nobody's major surprise, learned that things just got even worse.
To wit: "The national two-year cohort default rate rose from 9.1 percent for FY 2010 to 10 percent
for FY 2011. The three-year cohort default rate rose from 13.4 percent for FY 2009 to 14.7 percent
for FY 2010." Putting this in context, according to Bloomberg defaults have risen to the highest
level since 1995.
This is what has been driving JP Morgan out of the business for the past few months.
WASHINGTON — ... Senator Harry Reid, the Nevada Democrat and majority leader, had his own
colorful, if somewhat skewed, metaphor about why much of the government was about to grind to
halt in a take-no-political-prisoners fight over what is essentially a simple six-week funding
bill, attributing it to the emergence of a “banana Republican mind-set.”
Mr. Reid’s language was evocative, and the implication was serious. With Democrats controlling
the White House and Senate and with millions of dollars spent getting the health care law to
the starting line, what gives House Republicans the idea that they can triumph in their push
to repeal, or at least delay, the Affordable Care Act when so many veteran voices in their party
see it as an unwinnable fight?
“Because we’re right, simply because we’re right,” said Representative Steve King, Republican
of Iowa, one of the most conservative of House lawmakers. “We can recover from a political squabble,
but we can never recover from Obamacare.”
Representative Raúl Labrador, Republican of Idaho and one of the original proponents of the
so-called Defund Obamacare movement, was similarly sanguine. “We can always win,” he said Monday
afternoon, as he jogged up the stairs to a closed-door conference meeting, where House Republicans
gathered to plot their next move.
Representative Pete Sessions, Republican of Texas and chairman of the House Rules Committee,
hinted that Republicans were unlikely to give up without at least another round since they see
their campaign against the health care law as something of a higher quest. And many, if not
most, people they talk to — colleagues, friendly constituents, activists, members of advocacy
groups — reinforce that opinion, bolstering their belief that they are on the right side not
just ideologically, but morally as well.
“This isn’t the end of the road, guys,” Mr. Sessions said with a grin. “This is halftime.”
Socking away money for retirement is a great idea, but how much do you really need to save? How
long do you need to work to set yourself up comfortably in your golden years? Enter your information
below, the charts and numbers on the right will change as you go along, so try a few different numbers
and see how different scenarios might play out for you.
All amounts are calculated using today's dollar values. The rate of return on investments
is adjusted for a 3% inflation rate.
Below are sample for simulation "reasonably conservative investor" responses. The sample was done
of Sep 4, 2007 so the allocation looks a little bit strange for the market conditions but we have what
we have... What idiots programmed this junk ?
Here are the results of your profile questionnaire. The possible allocation models are Very Defensive,
Defensive, Conservative, Moderate, Moderately Aggressive, Aggressive, and Very Aggressive. Your
risk propensity suggests a Conservative portfolio allocated with the following mix:
Revenue Sharing Controversy There are two big points in a recent article in Kiplinger.com on
the topic of hidden 401k
fees. The first is the issue of “revenue sharing” between a 401k fund choice and the 401k’s
plan administrators. Apparently what happens is that large investment companies are essentially
offering a “kickback” to a plan administrator if they recommend the use of their funds. Last fall,
insurance giant ING settled, without admitting wrongdoing, an investigation by New York Attorney
General Eliot Spitzer into payments to a New York teachers union to endorse and promote ING annuities
in the union’s retirement savings plan...
Will you ever be able to retire
- Cracked Nest Egg - MSNBC.com Traditional defined-benefit pensions spread that "longevity"
risk among a large pool of workers, using actuarial research on predicted life spans. Now annuities
sellers will fleece individuals: with individually managed plans, the longevity risk falls
fully on each retiree.
The term "irrational exuberance" derives from some words that Alan Greenspan,
chairman of the Federal Reserve Board in Washington, used in a black-tie dinner speech entitled
Challenge of Central Banking in a Democratic Society" before the American Enterprise Institute
at the Washington Hilton Hotel December 5, 1996. Fourteen pages into this long speech, which
was televised live on C-SPAN, he posed a rhetorical question: "But how do we know when irrational
exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged
contractions as they have in Japan over the past decade?" He added that "We as central bankers
need not be concerned if a collapsing financial asset bubble does not threaten to impair the
real economy, its production, jobs and price stability."
Immediately after he said this, the stock market in Tokyo, which was open as he gave this
speech, fell sharply, and closed down 3%. Hong Kong fell 3%. Then markets in Frankfurt and London
fell 4%. The stock market in the US fell 2% at the open of trade. The strong reaction of the
markets to Greenspan's seemingly harmless question was widely noted, and made the term irrational
exuberance famous. It would seem to make no sense for markets to react all over the world to
a question casually thrown out in the middle of a dinner speech. Greenspan probably learned
once more from this experience how carefully someone in his position has to choose words. As
far as I can determine, Greenspan never used the "irrational exuberance" again in any public
venue. The stock market drops around the world that occurred after his speech on December 6,
1996 have all been forgotten, eclipsed by bigger subsequent events, but it was those stock market
drops that focussed public attention on the phrase irrational exuberance and which caused it
to enter our language.
The term irrational exuberance became Greenspan's most famous quote, out of all the millions
of words he has uttered publicly. The term "irrational exuberance" is often used to describe
a heightened state of speculative fervor. It is less strong than other colorful terms such as
"speculative mania" or "speculative orgy" which discredit themselves as overstating the case.
I chose this phrase as the title for my book because many people know instantly from this title
what this book is about.
Often people ask me whether I coined the term irrational exuberance, since I (along with
my colleague John Campbell and a number of others) testified before Greenspan and the Federal
Reserve Board only two days earlier, on December 3, 1996, and I had lunch with Greenspan on
that day. I did testify that markets were irrational. But, I very much doubt that I am the origin
of the words irrational exuberance. Actually, Greenspan is quoted in a Fortune Magazine article
in March 1959, long before he became Federal Reserve chairman, about "over-exuberance" of the
financial community. Probably, "irrational exuberance" are Greenspan's own words, and not a
speech writer's, and probably Alan Greenspan had written a draft of his 1996 speech even before
Robert J. Shiller
Cowles Foundation for Research in Economics
and International Center for Finance
30 Hillhouse Avenue
New Haven, CT 06511
Amazon.com Unexpected Returns Understanding Secular Stock Market Cycles Books Ed Easterling
One of the strongest points emphasized by the book is that interest rates and inflation have never
been stable for long, and the recent condition of low inflation price stability is a historical
anomaly. The author uses a plethora of graphs and charts to prove that "buy and hold" doesn't
always provide the best returns. Obviously, then, it's better to pull out during the bear markets,
but that's easier said than done
[Sept 22, 2006]
Growing Economic Inequality Threatens U.S. Values - Newsweek Robert Samuelson - MSNBC.com
The rich are getting an ever-bigger piece of the economic pie. In 2005, the richest 5 percent
of households (average pretax income: $281,155) had 22.2 percent of total income, reports Census.
In 1990, the share was 18.5 percent; in 1980, 16.5 percent. These figures exclude capital gains—profits
on stocks and other assets—that have most benefited the richest 1 percent. With capital gains, their
pretax income averaged about $1 million in 2003. That was about 20 times the average income of households
in the middle of the economic distribution. In 1979, the ratio was 10 to 1.
Please note that CCM Capital Appreciation C was not involved in the
of fraudulent market-timing aimed at PIMCO nor was Bill Gross, PIMCO's chief investment
officer, who opines in this month's
Investment Outlook that the high fees charged by hedge funds make them "generally overpriced."
Bill Gross manages PIMCO's humongous Total Return Institutional Bond Fund, which has an expense
ratio of 0.43% and tracks the comparable Lehman index with an R-Squared of 95%. Vanguard has
an institutional fund that closely tracks the Lehman index for a 0.05% expense ratio.
Therefore, Mr. Gross gets about 0.38% for the active 5% of the fund, which is a "true" expense
ratio of 7.8%. It must be said that Mr. Gross delivers an impressive alpha of 0.84 on
that active 5%, so he could have a bright future in hedge funds.
Unfortunately, the use of "Lysenkoism" as an epithet has been degraded by overuse, especially
in absurd situations. I propose to restrict "Lysenkoism" to circumstances where a clear case
can be made for coercive enforcement of the belief system from outside the system (e.g.,
by state patronage). For example, if a concept spreads concurrently among the scientific communities
of several countries, it is almost certainly not Lysenkoism. One might feel like calling it
that, but the analogy with Lysenko would fail to apply.
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