Quality advice from the Chief Executive of Morningstar, Joe Mansueto (via The Reformed Broker):
An investor should think like a business owner, not a renter. Most businesspeople don’t get up in the morning and ask whether they should sell their business that day. If they own a pizza shop, they don’t think about whether what they really should own is a shoe store instead. They show patience and persistence and try to understand their underlying business better so they can earn the greatest return for the longest period of time.
So investors are in many ways misled by stock-market volatility. The values of the underlying businesses just don’t change as quickly as stock prices do. You really don’t have to watch those changes hawklike day after day.
It is in a lot of people’s interests to get you to do something. Advisers and brokers earn commissions, fund companies want you to bring your assets to them. There are a lot of forces at work in the investment industry to get people to move, and there’s not really a countervailing force to encourage you to do nothing. But you should.
"You don't need them in a bull market, you don't want them in a bear market." --common sense axiom about most Wall Street professionals
A good New Year's resolution is to find out how much you are paying in your mutual funds and for any other professional advice. If you are with the likes of Merrill Lynch or some private wealth firm, your due diligence could be worth the majority of your future returns. Downtown Josh Brown has more:
At the end of the day, paying a high cost for stock-picking mutual funds is not worthwhile over the long-term for the majority of investors. And the American public has figured this out. Their mutual funds were almost uniformly demolished in the 2008 crash. The thinking has become “Why do I need to outperform the S&P by 200 basis points in a large cap stock fund if the manager’s going to get crushed during the next sell-off anyway?” Bob Olstein, for example, rode big bets on housing and banks right off the cliff to a 43% loss in 2008 – much worse than the overall market – thus negating several years of alpha in a relatively short period of time [SG- the famed Bill Miller of Legg Mason gave up more than a decades worth of out-performance --and then quite a bit more -- in the last crash, too].
Active management works, it just doesn’t work for most people. And when you look at the dollar-weighted returns for investors in mutual funds rather than the time-weighted returns tracked in the media, the picture is even bleaker. High-cost, mean-reverting investment vehicles paired with the rearview mirror-guided timing of average investors is a deadly cocktail…
What investors have realized is that it’s nearly impossible to select managers who are going to outperform beforehand (just about no one can actually do it) based on any dataset available. Morningstar studied this in 2010 – of all the metrics they track, there were no predictive factors for future outperformance save for one: Low cost. In addition, they also determined that their vaunted star system, largely predicated on past relative performance versus peer funds, meant nothing for future returns.
And then there is the random nature of performance itself – the data shows that buying into managers who have just demonstrated the ability to outperform offers absolutely no benefit. A top fund this year is almost as likely to be a bottom fund in subsequent years as they are to remain on top. The chances of a bottom-dwelling fund becoming a winner are about the same, unless the fund is shutdown due to an inability to retain assets (no one allocates to underperformers, even if, intellectually, they know that last year’s performance is not predictive).
I’m going to show you the SPIVA® December 2013 Scorecard, which just came out this past week. The organization, whose acronym stands for S&P Indices Versus Active, “measures the performance of actively managed funds against their relevant S&P index benchmarks.” The results show that, of the 692 domestic equity mutual funds that were in the top quartile (25%) of performers in September 2011, only 7.23% are still there. The other 93% of September 2011′s “Best Funds” have fallen back into one of the bottom three quartile…
And the longer the study goes, the worse these numbers become. For instance, from the same Scorecard: Of the 710 domestic equity funds that comprised the top quartile in September 2009, only 2.11% remain. In other words, persistence of outperformance over the last five years is statistically non-existent.
My questions to you are: Do you know what your mutual funds cost, and do you know what your all-in fees are to your advisor/broker/money manager? If you don't know, then more than half of your long-term gains are likely going to be going to someone other than you.
"For they have sown the wind, and they shall reap the whirlwind." -Hosea 8:7
Are people paying attention? Ask people in Cyprus or account holders in MF Global if they can relate to this. Rules and laws are being re-written to save the banks and the banking institutions in the next crisis. You and your assets? Cannon fodder, my friends. Your only defense is information and action.
Taken from one of my favorite places, Jesse's Cafe:
“In the old framework, cash was a risk-free asset.
In the new paradigm of systemic risks, no asset (even cash) is risk-free so long as it is in custody of a financial institution. Investors and depositors no longer have clear title to their own assets if they are held in financial accounts.
There is now a body of law (including Dodd-Frank) that allows custodial assets to be swept into the bankruptcy estate and be subordinated to senior claims.
Hand in hand with the evolution of the banking laws is the subtle but pernicious evolution of the practice of banking: “Various rules and practices have made it almost impossible to use cash and securities. Go try to make large cash withdrawal or cash deposit and see what paperwork you would be forced to complete.”
-Simon Mikhailovich, Eidesis Capital LLC, Grant's Interest Rate Observer Nov 15
Just a few recent stories that caught my eye.
-We are told in the media that everything in Europe is on the up-and-up. Crisis averted. Really? You sure about that? See here and here for two of many reasons I remain deeply skeptical.
-There is a push for a higher minimum wage. But what does that mean for stuff like this?
-Fantastic interview with Mike Rowe of Dirty Jobs.
-Perhaps the most controversial person of 2013, I still think the legacy of Edward Snowden will be on the right side of history. Tyranny never wins.
"During my eighty-seven years, I have witnessed a whole succession of technological revolutions. But none of them has done away with the need for character in the individual or the ability to think." --Bernard M. Baruch
Built by God and inherited from our ancestors, our brain is a magnificent organ that has kept us alive on the prairie and jungle and helped avoid us becoming another creatures meal. Natural optimism & group think can be useful tools for staying alive in a dangerous world, however, many of those same qualities make for poor investment decisions. Barry Ritholtz has some things to keep in mind to avoid falling prey to investment errors you are likely making.
Optimism Bias: All traders suffer from the inherent bias you humans have -- you think you can beat the market. Perhaps I can phrase it differently; young traders have not yet figured out that after the costs incurred, expenses, taxes paid, time and labor invested, most of the time, it is not worth the effort.
There are a handful of exceptional traders who make it so challenging to let go. Just as every high school basketball player isn’t going to become Michael Jordan, neither will most traders go on to become Paul Tudor Jones or Jim Simons. But the mere possibility keeps lots of kids working on their crossover dribble -- and plenty of traders busy chasing alpha.
Confirmation Bias: The Internet has allowed us to carve out fiefdoms of reinforcing belief systems, rather than challenge ourselves and our beliefs on a daily basis. We see it in politics (Drudge vs HuffPo), we see it in investing. When we are leveraged long, we all tend to read bullish research and commentary. When we are in cash or short, we seek out bearish writings. This is a basic function of human nature, and in finance its a dangerous and costly habit. The Smart Money seeks out research and commentary that challenges its existing beliefs.
Recency Effect: The regular obsession on every passing data point is a reflection of the way you humans experience the passing of time. You tend to focus on what just occurred, often to the detriment of the bigger picture or the longer-term trend. We see this in the focus on what I call “recession porn” -- every negative news story or idiotic appearance of the Hindenburg Omen. Post-traumatic stress disorder affects not only soldiers but the investing public as well. Post-Crash Stress Disorder -- PCST -- is the likely reason so many investors have been carrying so much cash during a 150 percent rally. They are waiting for the next crash, having missed the last one.
Politics: Whenever I give a speech on behavioral economics, I like to show two charts: the rallies off of the 2003 and 2009 lows. My friends who are Democrats told me how awful the George W. Bush tax cuts were -- they weren’t going to create jobs, would blow out the deficit, etc. To paraphrase someone else’s line, give me a trillion dollars and I will throw you a hell of a party. The market nearly doubled, and all of these guys missed it.
Before my Republican friends start smirking, let me remind you that in a few years ago you were insisting that Obama was a Marxist Kenyan who was about to (in the words of an infamous Michael Boskin WSJ column the very day of the low) destroy the Dow. A market that has gone up more than one and half times since then should not only wipe that smirk off your faces. It should make any investor from either party swear off politics.
Cherished Myths: There are so many myths about investing that are not verified, not tested, not supported by evidence, that it is astounding anyone puts money to risk based on them. How has that Death Cross been treating you? “Sell in May” work recently? Quasi value investing by buying single-digit P/E stocks -- how’d that work with home builders in 2005, banks in 2006 or investment firms in 2007?
Blind Faith: Before you believe anything you read -- including any blather penned by yours truly -- you should do some homework. Look at the long-term track record, the methodology involved, the overall approach. Trust but verify was a good strategy when dealing with the Soviets, and a better strategy for investors is less trust and more verification.
The New Year is almost upon us. Now is a good time to think about what errors you may be making, and what you can do to repair them. There is never a better time than the present.
“The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.” -William Arthur Ward
Hugh Hendry of Ecclectica is one of the most widely followed hedge fund managers in the world. He's been very bearish over the last few years, but he recently switched to being very bullish. He still believes the market fundamentals are poor but that central banks will pick up the slack and blow bubbles. That's what they do. He plans to participate. Hugh notes:
This isn't how it is supposed to work. In a more normal world you can think of finding value in terms of the one-way causality of a thermometer and room temperature. If we doubt the veracity of the thermometer we can always produce an independent, second, thermometer to determine the proper temperature. The temperature is what it is. Just as in investing, the fundamentals are what they are. But what if it wasn't like that? What if by warming the mercury in the thermometer, we could also raise the room temperature? This is what happens in the wacky world of neo-mercantilism. Here "fundamental" investing has little or no merit. There is one reason for being long and one alone: sovereign nations are printing money and you can see that prices are trending. That's it. Nothing else matters. Think of a neo-mercantilist market as if it were a mouse with the toxoplasma virus. The virus hijacks its immune system and makes it fearless. It dies in the end. But not before it does some pretty nutty stuff. There's no more point in yelling "watch out for the cat" at a mouse hijacked by toxoplasma than there is looking at valuation measures in a market hijacked by mercantilism…It’ll crash, of course, just not for awhile.
I don't know if that's being a realist or an idiot, but it's interesting. The hard part is figuring out if the next 5%-10% down move is another buying opportunity for the next thrust up or the start of something more sinister. When markets are this overvalued, I think it's impossible to tell.
Read Hugh's entire piece HERE.
While a year ago I posted on the most fascinating stock in the world, Apple, today my pick is Amazon.com, Inc. (AMZN). The stock is up ~650% from the 2008 low, up 50% in 2013, and up ~25% in the last two months alone! The P/E of the stock is an astounding…wait a minute. There is no P/E because there are no (“E”) earnings! If you use Amazon’s tortured accounting, you can produce a P/E that is around 500x. Extremely lofty to be sure.
While I try to do most of my shopping at local shops, I do enjoy the ease and convenience of the Amazon experience for some items (and my Kindle Fire). There is a lot built into the stock of what the future may hold for the potential earnings at Amazon. When you are losing money on every sale, you can't make it up in volumes. But investors clearly think they will have the scale to eventually produce huge profits. Time will tell, of course. I like the product and the company, but wow, that stock price. No opinion here, just posting for future reference.
"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered." -Thomas Jefferson
Key questions: Who has access to cheap funds? Who can take advantage of artificially low interest rates? Not the common folk. As I've noted many times before, the policies of the Federal Reserve are driving the wealth gap and favoring certain segments of the economy over others -- the banks, hedge funds, Wall Street, the ultra-wealthy. The New York Times provides another example today:
Standing in the dining room of the early 1900s-era brick rowhouse, deep in the Bushwick section of Brooklyn with not a frozen yogurt shop or Starbucks to be found, Alan Dixon, an investor from Australia, struggled to tally the houses he had bought in the area over the last year.
“What, 70? 72?” he asked, raising his eyebrows in question at a group of investors, contractors and designers standing nearby. A dozen construction workers scurried around, fastening plasterboard to walls and laying tile on floors, readying the four-bedroom house that the group purchased in June for $635,000 for leasing in less than two weeks’ time for as much as $5,490 a month.
Finally, someone locates the number on a piece of paper — 70, later corrected to 71. “That sounds right. Something like that,” Mr. Dixon said with a laugh, tugging on the cuff of the pink shirt he wore under his gray suit jacket.
It’s easy to understand why it might be difficult for Mr. Dixon to keep track. In just two years, the investment fund he oversees for Australian investors and retirees has purchased more than 538 homes, townhouses and brownstones from Jersey City to Queens and Brooklyn.
Mr. Dixon and his investments in New York area residential real estate are a microcosm of a much bigger trend sweeping the country.
A handful of large private equity and real estate investment firms, including the Blackstone Group and Colony Capital, have bought billions of dollars’ worth of single-family homes in some of the areas most affected by the housing collapse. The goal for these Wall Street investors is not to buy and flip the properties for a quick profit à la real estate bubble of the early 2000s. Instead, they are hunting for steady, dividend-like returns they believe can be earned by renting out the homes...
The median price of a home in Brooklyn climbed nearly 12 percent in just the past year to hit a 10-year record, according to a recent report released by the real estate brokerage firm Douglas Elliman. Prices for highly desirable one-family brownstones in Brooklyn have leapt almost 40 percent in the last year to a median price of $1.6 million.
Some real estate agents say investors, more often than not, have been at the forefront of buying activity.
“I’d say by the spring, maybe 70 percent of the sales we were seeing were to hedge funds, investors and others taking advantage of what was happening in Brooklyn,” said Stephanie O’Brien, a real estate broker with Douglas Elliman in Brooklyn. “Only about 30 percent were actual end users or first-time buyers.”
A nation of renters to the 1% who own everything. Not exactly the American Dream I think people have in mind.
"The problem with bubbles is that they force one to decide whether to look like an idiot before the peak, or an idiot after the peak." –John Hussman
Earlier this week Josh Brown linked to GMO's Jeremy Grantham's outlook for various asset classes. Grantham's opinion is held in high regard amongst anyone participating in the capital markets. Josh noted:
GMO is out with its latest monthly asset class real returns forecast for this month. The system is largely predicated on mean reversion and so you’ll typically see the most loved sectors projected to have the worst returns (US small caps this go-round) for the future period. Barry [Ritholtz] and I are huge fans of Jeremy Grantham, James Montier and the rest of the thought leadership cabal at GMO, we always take their insights as important food for thought.
Grantham believes that fair value for the S&P 500 is ~1,100, nearly 40% below the current level (this is a similar view as John Hussman). Grantham writes:
My personal view is that the Greenspan-Bernanke regime of excessive stimulus, now administered by Yellen, will proceed as usual, and that the path of least resistance, for the market will be up. I believe that it would take a severe economic shock to outweigh the effect of the Fed’s relentless pushing of the market. Look at the market’s continued advance despite almost universal disappointment in economic growth…
My personal guess is that the U.S. market, especially the non-blue chips, will work its way higher, perhaps by 20% to 30% in the next year or, more likely, two years, with the rest of the world including emerging market equities covering even more ground in at least a partial catch-up. And then we will have the third in the series of serious market busts since 1999 and presumably Greenspan, Bernanke, Yellen, et al. will rest happy, for surely they must expect something like this outcome given their experience. And we the people, of course, will get what we deserve.
We acclaimed the original perpetrator of this ill-fated plan – Greenspan – to be the great Maestro, in a general orgy of boot licking. His faithful acolyte, [Ben] Bernanke, was reappointed by a democratic president and generally lauded for doing (I admit) a perfectly serviceable job of rallying the troops in a crash that absolutely would not have occurred without the dangerous experiments in deregulation and no regulation (of the subprime instruments, for example) of his and his predecessor’s policy. At this rate, one day we will praise Yellen (or a similar successor) for helping out adequately in the wreckage of the next utterly unnecessary financial and asset class failure.
One of the deepest-thinking hedge fund managers is Scotsman Hugh Hendry. On Friday, he announced he's throwing in the towel, noting that fundamentals no longer matter:
"I can no longer say I am bearish. When markets become parabolic, the people who exist within them are trend followers, because the guys who are qualitative have got taken out," Hendry said.
"I have been prepared to underperform for the fun of being proved right when markets crash. But that could be in three-and-a-half-years' time."
"I cannot look at myself in the mirror; everything I have believed in I have had to reject. This environment only makes sense through the prism of trends."
There is a growing list of money managers I greatly admire that believe we are in yet another Fed-induced bubble, but that the bubble may still have some upside -- John Hussman, Todd Harrison of Minyanville, John Mauldin, Hugh Hendry, David Einhorn, Martin Armstrong, Jesse's Cafe Americain, Mike "Mish" Shedlock, Karl Denniger, & Jeremy Grantham, just to name a few. It's impossible to tell when a runaway bubble will pop.
The bubble of the late 90's was big. The bubble that popped in 2007 was even bigger. The one we are currently experiencing may be the Mother-of-All-Bubbles, as it even includes First World sovereign debt. It will be fascinating to see where this goes. Just remember, though, even a first class ticket on the Titanic was still a ticket on the Titanic. Stay nimble, my friends.
"We shall have to repent in this generation, not so much for the evil deeds of wicked people, but for the appalling silence of the good people." -Martin Luther King
David Malone is an author, researcher, and film-maker, and he also writes one of my favorite blogs, Golem XIV. Here's a recent interview he did. I like his perspective.
"During my eighty-seven years, I have witnessed a whole succession of technological revolutions. But none of them has done away with the need for character in the individual or the ability to think." -Bernard M. Baruch
"Confessions of a Quantitative Easer" via the Wall Street Journal:
Not only that, but the Fed's policies are leading directly to the growing wealth and income gap, causing more misallocation of resources, starving savers, causing inflation (though the Fed doesn't measure) and is again ignoring bubbles it is blowing.
It's only one former Fed official, but it's a start. The whole confession is HERE.
"The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists." – Joan Robinson, Cambridge
Friday's jobs figure was viewed positively by the markets, and hopefully the 204k jobs gained is a harginger for the months ahead. But to believe that 204k jobs were added, you have to believe that -- at the height of the gov't shutdown and Congressional squabbling -- hiring at small businesses was stronger than it's been in a decade. Boom times, according to the report. Barry Ritholz has a great take on what to make of the monthly monthly jobs report, generally.
But the one statistic we really ought to watch is the Labor Force Participation Rate (LFPR). This is key because it's these folks that are supporting the rest of the economy, as this represents the taxable base. The only reason the unemployment rate has decreased in the last few years is because the LFPR has declined so much. We are gaining jobs each month, yes, but it's not enough to offset the population growth (and there is also the consideration of the quality of jobs created). If this flat-lines or God-forbid declines further, budgets are going to get worse. Regardless of what the monthly jobs gained is or what the "official" unemployment rate is, this figure needs to improve.
Bruce Krasting has more details HERE.
"The best way to rob a bank is to own one." -Bill Black
Imagine a society where a successful bank robber keeps his loot, but an unsuccessful thief would only pay 5%-10% of his ill-gotten gains in fines and penalties. He keeps the rest. Certainly no jail time.
What you'd see is robbers around the block of every bank and convenience store. It sound ridiculous, but this not far from the current situation on Wall Street. In the aftermath of the early 1990's S&L scandal, thousands of people were prosecuted and did jail time. This time around, almost nothing.
Meet Uncle Sam, Your Partner in Crime
By Barry Ritholtz - Nov 5, 2013
The news leaked over the weekend: Hedge-fund baron Steve Cohen and SAC Capital Advisors were about to pay a monster fine for a decades worth of insider trading and failed supervision of traders. Some prefer the term “expert networks,” but – po-TAY-to, po-TAH-to.
The rules have changed, and so have the penalties. The lessons of the post-crisis era are clear:
- Laws are made to be broken
- Steal Big or don’t bother.
- Always reserve 10 percent of your criminal proceeds for your newest partner, Uncle Sam, to settle all claims, both civil and criminal.
This is a huge shift in the mentality of prosecutors, defense attorneys, accountants and constitutional scholars.
Lack of criminal prosecutions for bankers, hedge funds managers and other moguls has altered the calculus -- huge fines are now a cost of doing business.
Whether you enjoy foreclosure fraud or find insider trading profitable or made money by reckless lending of subprime mortgages to people you knew would default or found your calling creating structured products designed to implode, the Rule of Law no longer applies to you.
Better make some hay while the sun is shining! It’s the newest form of tithing, between Uncle Sam and any financial mogul caught with his hand in the cookie jar.
By all appearances, the once-fierce visage of the Securities and Exchange Commission and the Justice Department has altered radically. Formerly the scourge of white-collar criminals, the prosecutorial apparatus has now morphed into a supersized meter-maid. The goal is no longer discouraging reprehensible behavior or stopping criminal activities; nor is it encouraging confidence in the markets. Rather, the former enforcers of the law have become a giant revenue collecting organization -- Rule of Law be damned.
We have seemingly forgotten why we put people in jail in the first place. As public service, a brief reminder:
In the U.S., we have civil and criminal statutes. We create different levels of penalties for punishing different types of behavior. As a society, we want people to understand exactly what is and isn’t allowable. Some behaviors are frowned upon, and when those laws are violated, a monetary penalty is exacted. Driving faster than the speed limit or making false and misleading statements in the sale of a security leads to a fine, and a blot on your record.
There are other behaviors that are so reprehensible, so dangerous to all of society, that in response we impose a loss of liberty to any who are convicted of committing these crimes.
We make a very clear distinction between the two types of laws, and what the penalties are for violating them. At least, we used to.
Nowadays, so long as you can write a large enough check, you can escape criminal prosecution. Yes, it’s a lot of money and a blot on your reputation. But that’s what CIVIL prosecutions are supposed to be for.
When trying to reduce or eliminate a behavior with extremely negative repercussions for society, we bring out the big stick: Jail time.
At least we used to. Today, not so much.
Decades from now, when legal scholars try to pinpoint the moment when the U.S. abandoned the Rule of Law, they will point to 2008 crisis as a turning point.
The greatest innovation of the financial sector is not the ATM machine or interest-bearing checking accounts or securitization: It was convincing the powers that be that prosecuting them for their actual crimes would (once again) bring the economy to the edge of the abyss.
Nice chart and commentary from Barry Ritholtz:
CAPE looks at the prior 10 years of trailing earnings. It smooths out any given quarters' ups and downs, and theoretically includes a full business cycle. The way Shiller intended it to be used was to create a valuation metric that would suggest whether stocks are likely to outperform their average returns over the next 10 years.
Shiller’s CAPE does this well. As Mebane Faber of Cambria Investment Management observed, when CAPE measures are under 10, forward 10-year returns are outstanding. Over the long run, returns fall the higher CAPE rises. However, over the short run, it is anyone’s guess. The range of returns when CAPE is elevated is fairly broad. Indeed, CAPE has been over 20 for the past few years, and U.S .equity returns have been strong.
The problem we run into is that valuation is not a timing tool. A momentum trader will tell you from personal experience that overpriced stocks can and do get more expensive. Value investors will tell you from their personal experience that cheap stocks can get a whole lot cheaper.
Mean reversion does not occur immediately after an asset moves away from its long-term trend.
It's clear from almost any long-term valuation metric that stocks are irrefutably expensive and poised for lackluster returns over the next 10 years. However, the short-term is entirely different. I have no idea what a catalyst would be to send stocks lower. In fact, one of the smarter market guys I know sees stocks rising significantly through late-2015 before things "get really nasty". It's clear the economy and market fundamentals no longer matter. In fact, for the past 12 months stocks have been declining with better economic figures and rising with bad numbers, apparently based entirely on hopes for more QE from the Fed.
And consider this factoid from Minyanville:
During October, analysts cut Q4 earnings estimates by 1.5%, but the S&P 500 Index rose 4.5%. This marks the 7th time in 9 quarters that earnings estimates dropped and the index rose in the first month of the quarter.
For Q4, 66 companies have issued negative EPS warnings with only 13 issuing positive EPS guidance. That 84% figure is well above the 5-year average of 63%.
Full steam ahead!
"Government is the great fiction, through which everybody endeavors to live at the expense of everybody else."
-Frederic Bastiat
Robert Samuelson of The Washington Post brings up an interesting point: Should we have programs in place that siphon money from young and middle-aged workers and give it to the wealthiest and highest income segments of society? Particularly now with a still-weak economy and tough job market?
Two analysts at the Federal Reserve Bank of St. Louis have produced an important study that should (but probably won’t) alter the climate for Washington’s stalemated budget debate. The study demolishes the widespread notion that older Americans need exceptional protection against spending cuts because they’re poorer and more vulnerable than everyone else. Coupled with the elderly’s voting power, this perception has intimidated both parties and put Social Security and Medicare, which dominate federal spending, off-limits to any serious discussion or change.
It has long been obvious that the 65-and-over population doesn’t fit the Depression-era stereotype of being uniformly poor, sickly and helpless. Like under-65 Americans, those 65 and over are diverse. Some are poor, sickly and dependent. Many more are financially comfortable (or rich), in reasonably good health and more self-reliant than not. With life expectancy of 19 years at age 65, most face many years of government-subsidized retirement. The stereotype survives because it’s politically useful. It protects those subsidies. It discourages us from asking: Are they all desirable or deserved? For whom? At what age?
Examining different age groups, it found that since the financial crisis, incomes have risen for the elderly while they’ve dropped for the young and middle-aged.
The numbers are instructive. From 2007, the year before the financial crisis, to 2010, median income for the families under 40 dropped 12.4 percent to $39,644. For the middle-aged from 40 to 61, the comparable decline was 11.9 percent to $56,924. Meanwhile, those aged 62 to 69 gained 12.3 percent to $50,825. For Americans 70-plus, the increase was 15.6 percent to $31,512. (All figures adjust for inflation and are in 2010 “constant” dollars. The “median income” is the midpoint of incomes and is often considered “typical.”)
There has been a historic shift in favor of today’s elderly. To put this in perspective, recall that many family expenses drop with age. Mortgages are paid off; work costs vanish; children leave. Recall also that incomes typically follow a “life cycle”: They start low in workers’ 20s, peak in their 50s, and then decline in retirement, as wages give way to government transfers and savings. Against these realities, the long-term gains of the elderly and losses of the young are astonishing. From 1989 to 2010, median income increased 60 percent for those aged 62 to 69 while falling 6 percent for those under 40 and 2 percent for those 40 to 61...
The young and middle-aged, with high debts and wealth concentrated in housing, suffered huge losses from the financial crisis. With less debt and more diversified investments, older Americans fared better. From 1989 to 2010, the median inflation-adjusted net worth of those 70 and over rose 48 percent to $209,290. During the same years, the net worth of those under 40 fell 31 percent.
The political implications of these trends are clear, though Emmons and co-author Bryan Noeth avoid policy. We need to stop coddling the elderly. Our system of aid to the elderly — mostly, Social Security and Medicare — has a split personality. On the one hand, it serves as a safety net for the elderly by providing crucial income support for the poor and near-poor as well as health insurance. On the other hand, it provides payments to millions of already-comfortable older Americans who could get along with less or, for some, don’t need subsidies. We ought to preserve the system’s safety-net features while gradually curbing the outright subsidies.
The idea that Social Security and Medicare spending should be defended to the last dollar — as advocated by many liberals — is politically expedient and intellectually lazy. Rather than promote progressive ends, as it claims, it prevents government from adapting to new social and economic circumstances. It’s a growing transfer from the young, who are increasingly disadvantaged, to the elderly, who are increasingly advantaged.
Federal government programs should be in place as a safety net to help those truly in need. And I know plenty of people who think they should get benefits because they paid into the system for so many years (and I am not discounting that as a legitimate claim). But I think this dynamic has ethical and moral implications beyond just the economic and financial. It's time our so-called leaders had this conversation with the American people.
"The most common of all follies is to believe passionately in the palpably not true. It is the chief occupation of mankind." -H. L. Mencken
It has been written here that the primary problem facing our nation (and most developing one's) is the over-promise of future benefits that cannot possibly be repaid. Eventually, payments will be cut, taxes will be raised, or both. In an effort to get re-elected, politicians have been promising certain parts of the electorate generous benefits, pensions, and other payouts. It all sounds well and good until those promises actually start to cash flow. We can delude ourselves all we want, but the math is actually quite simple.
From Reuter's:
On Friday, city financial consultant Kenneth Buckfire said he did not have to recommend to Orr that pensions for the city's retirees be cut as a way to help Detroit navigate through debts and liabilities that total $18.5 billion.
Buckfire said it was clear that the city did not have the funds to pay the unsecured pension payouts without cutting them.
"It was a function of the mathematics," said Buckfire, who said he did not think it was necessary for him or anyone else to recommend pension cuts to Orr.
"Are you saying it was so self-evident that no one had to say it?" asked Claude Montgomery, attorney for a committee of retirees that was created by Rhodes.
"Yes," Buckfire answered.
Buckfire, a Detroit native and investment banker with restructuring experience, later told the court the city plans to pay unsecured creditors, including the city's pensioners, 16 cents on the dollar. There are about 23,500 city retirees.
An immediate 84% loss on what pensioners thought they were getting. I wonder how many will be blind-sided by that? It's sad that people who have worked their entire careers won't get what they were promised, but the writing has been on the wall for a long time. They were sold down the river by the unions and politicians, most of whom fled the scene long ago. The same goes for Social Security, Medicare, and for trillions of underfunded state and local pensions across the country. It's time we all stop drinking the Kook-Aid and deal with reality.
"The typical experience of the speculator is one of temporary profit and ultimate loss."
-Benjamin Graham
In the "Investment Checklist" post written a couple weeks ago, it noted: "Arguably the most valuable function you serve is keeping people on track and not being sucked into the euphoria or panics that periodically seize the market." That is a main goal here at Skipgold. And make no doubt about it, things have gotten goofy. Whether it's the stock market trading at double the historical level, nosebleed stock market valuations (see Amazon, Tesla, Netflix, all social media stocks), record margin debt levels and investment scams, and insanity in the housing market, it's easy to sucked into the bubble vortex. Many traps have been set and I personally know people who are falling into them. Have a strategy that is time-tested, and stick to it. Most individual investors buy high and sell low. Stay your course with hopefully a diversified, relatively conservative strategy. Lowly T-bills have nearly outperformed the stock market over the last 15 years.
From market historian Mark Hulbert:
Simple math does not support the bulls
Commentary: Difficult to see what will support a bull market over next 5 years
By Mark Hulbert, MarketWatch
CHAPEL HILL, N.C. (MarketWatch) — Stock market bulls need to recheck their math.
When they do, they will find it surprisingly hard to justify an expectation that the stock market will grow over the next several years at even its historical average rate of around 10% annually…
What happens when you do the math?
You better be sitting down. The conclusion isn’t pretty.
Consider the following back-of-the-envelope calculation of where the S&P 500 will be in five years’ time, based on the following assumptions:
- Sales per share will grow 2% annually. This is a generous assumption, since it assumes no recession (very unlikely), and assumes no share dilution from companies issuing more shares that they repurchase (also unlikely). Note also that, because of “entrepreneurial capitalism,” GDP will have to grow faster than 2% annually in order for sales to live up to this otherwise anemic assumption.
- Profit margins will revert only halfway from their current lofty levels towards their long-term historical mean. This also is generous, since some — such as James Montier, a visiting fellow at the U.K.’s University of Durham and a member of the asset-allocation team at Boston-based GMO — believe profit margins will fall even further.
- The S&P 500’s P/E ratio will stay constant. This again is generous, since the P/E ratio is already above average — significantly so, in fact, by some measures.
Given these assumptions, it’s a matter of simple math to calculate where the S&P 500 will be in five years’ time: 1,589. That translates into a 1.9% annualized loss between now and October 2018.
Don’t like that conclusion? Be my guest: Play around with the numbers yourself, and see what you come up with.
Given my sales growth and profit margin assumptions, how high would the P/E ratio have to be in October 2018 in order for the market to grow at its historical average rate of 10% between now and then? Over 30, something that historically is quite rare — except in recessions, when earnings have been depressed. In fact, the only other non-recession occasion since 1871 in which P/E ratios got above 30 was in the months leading up to the bursting of the Internet bubble in early 2000.
So to bet that stocks will provide even historically average returns over the next five years, you in effect have to bet that we are entering into another bubble. Anything is possible, but is that really how you want to bet your hard-earned assets?
This is a similar conclusion John Hussman mentions each week. Certainly doesn't mean we can't continue to march ever higher, but long-term returns are unlikely. More myth busting in the entire piece.
"Every mania in financial history has been liquidity-driven. You can go back to the South Sea bubble or tulips in Holland. As long as the money is coming in, everything is fine."
-Raymond DeVoe
The capital markets are made up of millions of people who have different goals, outlooks, risks tolerances, time frames, and perspectives. How you personally view all those things will determine your investment allocation. Two super-sharp guys offer their current outlook on the stock market. First, Downtown Josh Brown offers up his very bullish, but short-term outlook:
Let me set the scene for you:
* There is a Debt Deal in the works that removes the ceiling and related draconian cuts from the discussion til at least February. Out of sight, out of mind.
* There is no election this fall.
* There is no war with Syria and high level talks are happening with Iran for the first time in decades.
* The incoming Fed Chairperson is the most dovish in the institution's 100 year history. There will be no taper talk whatsoever so long as employment data remains muted. At least not this quarter and probably not until the spring barring a huge tsunami of good economic news.
* Stock markets around the world are selling at fair to absurdly cheap valuations.
* The banks are as highly capitalized as they have ever been.
* Home prices are back to long-term trend and appreciation continues despite recent mortgage slowdown -normalization being the operative word.
* US households reclaimed the 2007 peak in total net worth and have now surpassed it.
* Small and mid cap stocks are at all-time highs and yet still under-owned by the largest pools of capital in the US - pensions, endowments and insurance companies.
* Going back 110 years, when the Dow has been up in the first half, it's finished the year strong with gains in the back half 70% of the time.
* Hedge funds are at their highest net short positions since January and have massively trailed every equity benchmark you can think of.
Thats the set-up going into year-end.
What happens from here? My guess would be that we have all the rocket fuel we need for an explosion.
Absent from his list are things dealing with a stronger economy or solid corporate earnings growth. But hey, we have the Fed to offset those trivial things, right? That's been good enough to work so far.
Next up is John Hussman. He has also used some call options to capture potential short-term gains, but his longer-term outlook is decidedly more bearish (much more in the full piece):
As investors, we should be aware that the current Shiller P/E of 24.8 (S&P 500 divided by the 10-year average of inflation adjusted earnings) is now above every historical instance prior to the bubble period since the late-1990's, save for the final weeks approaching the 1929 peak…
Examining various historically useful fundamentals, the S&P 500 price/revenue ratio of 1.6 is now twice its pre-bubble historical norm of about 0.8. For perspective, it’s worth noting that the 1987 peak occurred at a price/revenue ratio of less than 1.0 and neither the 1965 secular valuation peak, nor the 1972 peak (before stocks dropped in half) breached even 1.3…
For example, the market value of non-financial stocks to GDP…presently works out to about 1.24. This is twice the pre-bubble norm, well above the 2007 peak, and already at late-1999 levels.
On a diverse set of reliable fundamentals, we now estimate a 10-year nominal total return for the S&P 500 of just 2.6% annually. Put another way, stocks are likely to achieve zero risk premium over 10-year Treasuries in the coming decade, despite having about five times the duration, volatility and drawdown risks. The entirety of that total return can be expected to arrive in the form of dividends, leaving the S&P 500 below its current level a decade from now. This would be a less depressing conclusion if I didn’t correctly say the same thing in 2000, and if even simple versions these valuation methods didn’t have a nearly 90% correlation with subsequent 10-year returns.
All of this is a mixed situation – one where valuations and long-run evidence are extremely clear, but where perception and sentiment may dominate over the short-run.
Overvalued markets can become extremely overvalued markets. The Nasdaq is still down over 25% from its all-time high in 2000. Although being leveraged, long risk assets has worked wonders on the back of the endless Federal Reserves "QE", one would be wise to consider your perspective to make sure you don't get out over your skis.
"There is no distinctly American criminal class -- except Congress."
"Suppose you were an idiot, and suppose you were a member of Congress, but I repeat myself."
-both quotes attributed to Mark Twain
Just remember, "It's all legal". It's time to just blow it up and start over. 9% approval ratings? Just who are those 9%?
“Isn’t it funny when you walk into a investment firm, and you see all of the financial advisors watching CNBC — that gives me the same feeling of confidence I would have if I walked into the Mayo-clinic or Sloan Kettering and all the medical were watching General Hospital…”
-Senior portfolio manager
David Hultstrom of Financial Architects gives advice to a neophyte in the financial advisory business. I thought many of the points were also excellent from the point of view of most investors who manage their own money or those who rely on a “professional”, particularly those who are influenced by the financial media. Here’s a partial list:
Checklist of Errors
Advice to a Neophyte
• Stocks beat bonds (because they are riskier), but less consistently than you think.
• Value stocks outperform growth stocks (because people like growth stories and overvalue the companies, particularly in the small cap space), but again, less consistently than you would like.
• Simple beats complicated.
• It almost certainly isn’t different this time.
• Arguably the most valuable function you serve is keeping people on track and not being sucked into the euphoria or panics that periodically seize the market.
• You can do a lot worse than simply putting 60% of a portfolio into a total stock market index fund and 40% into a total bond market index fund. You should have a high level of confidence that what you are suggesting is superior to that simple strategy before implementing it.
• Performance may come and go, but costs are forever.
• The purpose of fixed income in a portfolio is for ballast. It is not there to increase returns, it is there to reduce risk, hence you should keep the fixed income portion of a portfolio relatively short term, high quality, and currency hedged (if using international fixed income).
• The projections of market prognosticators have neither precision nor accuracy.
• It isn’t what you don’t know that will hurt you. It’s what you don’t know you don’t know and what you do know that isn’t so.
• Don’t buy individual stocks and bonds. You won’t get adequate diversification, you will tend to end up concentrated in certain sectors and in U.S. large growth stocks, and you and your client will make emotional decisions based on how you feel about the company.
• A good company or sector or country isn’t necessarily a good investment and a poor one isn’t necessarily a bad one. In fact the reverse is generally true.
• Successful people have long time horizons, unsuccessful people have short ones.
• One of the best fixed income investments is paying down debt.
• IRA and Roth type investments beat insurance products hands down.
• If everything in the portfolio is going up, you aren’t diversified.
• As Warren Buffett said, “Be fearful when others are greedy, and be greedy when others are fearful.”
• Don’t change investment strategy when scared or euphoric. Wanting to change your strategy is an early warning sign you are about to do something stupid.
• Just because “everyone” is doing it doesn’t make it right. This applies to investment fads.
• The difference between wise and foolish investors is that the first focuses on risk while the second focuses on return.
• Don’t mistake a bull market for investment skill.
• People don’t have money problems, money has people problems.
See the entire list HERE.
"If the American public knew what was going on in our system, half would be outraged and the other half would apply for benefits."
- Marilyn Zahm, one of the 1,500 disability judges operating in the U.S.
The mainstream media is finally catching on to the rampant fraud in the Social Security Disability Insurance program, in this case 60 Minutes. That participation in the program has skyrocketed in the past 5 years when there is no reason for such a dramatic increase in real disability claims speaks volumes to the lack of accountability within government programs. It is estimated that nearly 50% of the people on SSDI are not disabled in any way.
Part of the problem, too, is that there are forces in play that encourage this fraud. Corrupt attorney's, judges, and doctors grease the wheels, but retail and consumer product companies are huge beneficiaries of this chicanery, as the vast majority of the money flows back directly to them.
Again, few people looking out for the taxpayer.
"The greatest triumphs of propaganda have been accomplished, not by doing something, but by refraining from doing. Great is truth, but still greater, from a practical point of view, is silence about truth." --Aldous Huxley
Two great stories to highlight how American's got and are getting scammed by Washington and Wall Street.
First, in a scam that benefits the few at the sake of the many, we have ethanol:
I’ve pounded tables for years about ethanol as a massive scam. Our national policy diverts 40% of the U.S. corn crop (14% of the global corn crop) in order to produce a fuel that requires almost as much energy to produce as it supplies. Our ethanol mandate has starved millions of people...
Starved millions of people? Don't you know there's a buck to be made?
Corn ethanol has poisoned our planet while it has lined certain private and politically connected pockets with billions. It has succeeded in raising our costs, for minimal net energy gains.
Morgenson and Gebeloff focus on just one aspect of the ethanol boondoggle, but it’s a crucial one:
“the rapidly growing role of Wall St. banks in gaming the ethanol credits market. Ethanol credits (or RINs, as they’re called) were created by the Environmental Protection Agency and Congress as a way to assure the inclusion of ethanol in gasoline as an energy-saving measure. But gasoline producers who couldn’t or didn’t want to include ethanol could buy credits from those who did. Unfortunately, the market for the credits was almost completely unregulated … and Wall St. abhors a profit vacuum. So in stepped the speculators, amassing millions of credits and making a killing on the wide spread between the bid and ask prices of the credits. Predictably, this drove the price through the roof: the credits, which cost 7 cents each in January, peaked at $1.43 in July and now are trading for 60 cents.”
In addition to lining the pockets of the few in Manhattan, it's also a payoff to the politically-connected big-ag companies. And of course it's a direct bribe to corn states (can you say "Iowa").
Next is how much Wall Street executives personally profited from blowing up their firms. Barry Ritholtz, in a post debunking the false narratives of the financial crisis, noted the following:
In addition to Lehman Brothers Dick Fuld earning $522.7 million from 2000 to 2007:
• Bears Sterns (
BSC) former chairman Jimmy Cayne, rescued by a $29 billion Fed shotgun wedding to JPM, received $60 million when he was replaced.• American International Group (AIG) chief executive Martin Sullivan got a $14 million compensation package in 2007. Robert Willumstad was handed $7 million for his three months at the helm..
• Morgan Stanley (MS) Chief Financial Officer Colin Kelleher got a $21 million paycheck in 2007, but in 2008 Morgan Stanley received expedited approval to become a banking holding company in 48 hours — record time. I would spend some time reviewing that if I were head of SEC enforcement.
• Countrywide Financial’s (
CFCfounder & CEO Angelo Mozilo, cashed in $122 million in stock options in 2007; His total take is estimated at over $400 million dollars. The SEC charged (Civil, not Criminal) Mozilo with Insider Trading, and settled for $67.5 million.• Merrill Lynch (NYSE:MER) Stanley O’Neal steered Mother Merrill into financial collapse, was taken over by Bank of America. His exit package was $160 million.
• Bank of America (NYSE:BAC) acquired both Merrill and Countrywide. Stupidity isn’t criminal, and for his genius in nearly destroying BofA, CEO Kenneth Lewis brought home $25 million in 2007.
• Fannie Mae (FNM) CEO Daniel Mudd received $11.6 million in 2007. His counterpart at Freddie Mac (FRE) Richard Syron, brought in $18 million. They certified their quarterlies under Sarbanes-Oxley just like other CEOs right up until the point they became insolvent and were nationalized by the Federal government.
• Washington Mutual (WM) WaMu chief executive Kerry Killinger received $88 million in compensation between 2001 and 2007 — just before they collapsed in a heap of subprime and were sold by the FDIC to JPM.
David DeBoskey, a San Diego State University professor, created an estimate pf the total compensation for just 4 firms that collapsed: Lehman Bros., American International Group, Fannie Mae and Freddie Mac. Professor DeBoskey calculated their top executives received total compensation in excess of $1.4 billion in salaries, bonuses and stock-related pay from 2003 to 2007.
I find it incredible, nearly impossible to believe, that the prior quarterly earnings filings met the legality of SarBox certifications.
That was the first place Justice should have begun their investigations for prosecutions.
Prosecute their biggest campaign contributors? Surely you jest!
The Colbert Report
Get More: Colbert Report Full Episodes,Video Archive
"I've missed more than 9,000 shots in my career. I've lost almost 300 games. 26 times, I've been trusted to take the game winning shot and missed. I've failed over and over and over again in my life. And that is why I succeed."
-Michael Jordan
"Strength does not come from winning. Your struggles develop your strengths. When you go through hardships and decide not to surrender, that is strength."
-Arnold Schwarzenegger
It has taken awhile, but the "culture of self esteem" is finally losing some battles. Thank God. Filling people up with false confidence is a sure way to end up in crushing failure. If success and winning is the end result, making sure a kid's journey is smooth and easy and obstacle free is the surest way they never get there.
From of all places, The New York Times:
Losing Is Good for You
By ASHLEY MERRYMAN
LOS ANGELES — AS children return to school this fall and sign up for a new year’s worth of extracurricular activities, parents should keep one question in mind. Whether your kid loves Little League or gymnastics, ask the program organizers this: “Which kids get awards?” If the answer is, “Everybody gets a trophy,” find another program…
Po Bronson and I have spent years reporting on the effects of praise and rewards on kids. The science is clear. Awards can be powerful motivators, but nonstop recognition does not inspire children to succeed. Instead, it can cause them to underachieve.
Carol Dweck, a psychology professor at Stanford University, found that kids respond positively to praise; they enjoy hearing that they’re talented, smart and so on. But after such praise of their innate abilities, they collapse at the first experience of difficulty. Demoralized by their failure, they say they’d rather cheat than risk failing again…
By age 4 or 5, children aren’t fooled by all the trophies. They are surprisingly accurate in identifying who excels and who struggles. Those who are outperformed know it and give up, while those who do well feel cheated when they aren’t recognized for their accomplishments. They, too, may give up.
If children know they will automatically get an award, what is the impetus for improvement? Why bother learning problem-solving skills, when there are never obstacles to begin with?
Having studied recent increases in narcissism and entitlement among college students, she warns that when living rooms are filled with participation trophies, it’s part of a larger cultural message: to succeed, you just have to show up. In college, those who’ve grown up receiving endless awards do the requisite work, but don’t see the need to do it well. In the office, they still believe that attendance is all it takes to get a promotion.
In life, “you’re going to lose more often than you win, even if you’re good at something,” Ms. Twenge told me. “You’ve got to get used to that to keep going.”
When children make mistakes, our job should not be to spin those losses into decorated victories. Instead, our job is to help kids overcome setbacks, to help them see that progress over time is more important than a particular win or loss, and to help them graciously congratulate the child who succeeded when they failed. To do that, we need to refuse all the meaningless plastic and tin destined for landfills. We have to stop letting the Trophy-Industrial Complex run our children’s lives.
“Vladimir Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth.”
–John Maynard Keynes
Very interesting post by Mike "Mish" Shedlock on the impact the Federal Reserve's inflationary policies have had on the average American family. Consider the following:
Real median incomes are down 7.3% since 2000. That means at least half of the population is worse off now than 13 years ago...
As I have stated repeatedly, Fed bubble-blowing tactics benefits those with first access to money (the banks and the already wealthy). From the mid-60s until the year 2000, at least most boats were rising.
Since the year 2000, however, both the mean and the median income has been sinking, but not at the same rate. Worse yet, that income decline does not even properly take into account rising sales taxes and property taxes!
Much more at Mish's entire post HERE.
“First, if the bubble were to deflate on its own, would the effect on the economy be exceedingly large? Second, is it unlikely that the Fed could mitigate the consequences? Third, is monetary policy the best tool to use to deflate a house-price bubble? My answers to these questions in the shortest possible form are, ‘no,’ ‘no,’ and ‘no.’”
-Janet Yellen, at the height of the housing bubble Oct. 2005
“For my own part, I did not see and did not appreciate what the risks were with securitization, the credit ratings agencies, the shadow banking system, the S.I.V.’s — I didn’t see any of that coming until it happened.”
-Janet Yellen, Financial Crisis Inquiry Commission, 2010
Those quotes would be something if they came from come ignorant country bumpkin. But Janet Yellen is widely to be considered the next Federal Reserve Chairman (this after Larry Summers saved Obama the embarrassment of having his first choice for the position soundly rejected by Congress by taking his name out of the running). That she was completely oblivious to the biggest bubble in U.S. history in the single biggest asset class in the nation speaks volumes of what is to come.
But this should come as no surprise. The Fed's M.O. is to maintain the status quo of the Wall Street cartel and promote the wealth of the 1%. If Main Street happens to go along for the ride, then that's a bonus. Don't believe me?
-The Fed's inflation policies favor the wealthy.
-Meanwhile, the typical American family makes less than it did in 1989. The early 90's is when the financialization of the economy under Alan Greenspan really kicked into gear.
-The Fed's "QE" program has transferred $700 billion from individuals and pensions to large corporations.
-During the "recovery", most of women's job gains have come from one area -- waiting tables.
It's clear that the middle class is falling further and further behind. And while the financial media knows nothing except higher stock prices, I give the American people credit for knowing what's really going on. 7 in 10 believe government policies have favored banks and financial institutions and large corporations while leaving low- and middle- class people and small business in the dust (so they are paying enough attention to know that, but will they ever do anything about it?)
Until then, I guess we'll have to be content to wait until the third Fed-induced bubble pops again (which brings up my question of how investors can believe the Fed will prevent all future recessions and bear markets if they couldn't stop the last two?).
(chart from my friend Matt)
"Men occasionally stumble over the truth, but most of them pick themselves up and hurry off as if nothing ever happened."
-Sir Winston Churchill
Well, we have to stay on message. Don't want to mess with the dynamics of the Washington-Wall Street-Media triumverate.
Time magazine's covers this week for their four main regions (if you have troubling viewing, the cover on the far right is South Pacific):
"People say, what is the sense of our small effort? They cannot see that we must lay one brick at a time, take one step at a time. A pebble cast into a pond causes ripples that spread in all directions. Each one of our thoughts, words and deeds is like that. No one has a right to sit down and feel hopeless. There is too much work to do.” --Dorothy Day
I saw the first couple of episodes of HBO's The Newsroom last year, but did not watch much beyond that. However, I thought the opening scene of last year's inaugural season was one of the most interesting moments I'd ever seen on TV. Something to think about as we are being lead to yet another military adventure and budget crisis amid the dysfunction in Washington.
"The political class has reached some kind of critical mass in the 21st century. There is something going on in Washington that needed to be called out. I do not think it can be sustained, and I think it is indecent. It is not how Americans want their government and their capital city to be."
-Mark Leibovich
This is a fascinating interview with journalist & author Mark Leibovich on his new book, This Town. He exposes Washington DC for the bipartisan cesspool it has become. This Town is an inside look at the culture of unwarranted privilege, unprincipled greed, and self-delusional narcissism amongst the ruling elite in Washington, New York, and the entertainment industry. Welcome to The Hunger Games. While we haven't yet officially been divided up into Districts, there is no question we have our Capitol.
"May the odds be ever in your favor."
John Mauldin's most recent letter had a great take from geophysicist and complex systems analyst Didier Sornette. Sornette is Professor on the Chair of Entrepreneurial Risks at the Department of Management Technology and Economics of the Swiss Federal Institute of Technology Zurich (that's the longest job title I've ever seen). He notes:
Chasing fantasies is not the exclusive pastime of little girls in fairy tales. History is speckled with colorful stories of distinguished scientists and highly motivated inventors pursuing the holy grail of technology: the construction of a perpetual motion machine. These are stories of eccentric boys with flashy toys, dreaming of the fame and wealth that would reward the invention of the ultimate gizmo, a machine that can operate without depleting any power source, thereby solving forever our energy problems. In the mid-1800s, thermodynamics provided the formal basis on what common sense informs us: it is not possible to create energy out of nothing. It can be extracted from wood, gas, oil or even human work as was done for most of human history, but there are no inexhaustible sources.
What about wealth? Can it be created out of thin air? Surely, a central bank can print crispy banknotes and, by means of the modern electronic equivalent, easily add another zero to its balance sheet. But what is the deeper meaning of this money creation? Does it create real value? Common sense and Austrian economists in particular would argue that money creation outpacing real demand is a recipe for inflation. In this piece, we show that the question is much more subtle and interesting, especially for understanding the extraordinary developments since 2007. While it is true that, like energy, wealth cannot be created out of thin air, there is a fundamental difference: whereas the belief of some marginal scientists in a perpetual motion machine had essentially no impact, its financial equivalent has been the hidden cause behind the current economic impasse.
The Czech economist Tomáš SedláÄek argues that, while we can understand old economic thinking from ancient myths, we can also learn a lot about contemporary myths from modern economic thinking. A case in point is the myth, developed in the last thirty years, of an eternal economic growth, based in financial innovations, rather than on real productivity gains strongly rooted in better management, improved design, and fueled by innovation and creativity. This has created an illusion that value can be extracted out of nothing; the mythical story of the perpetual money machine, dreamed up before breakfast.
To put things in perspective, we have to go back to the post-WWII era. It was characterized by 25 years of reconstruction and a third industrial revolution, which introduced computers, robots and the Internet. New infrastructure, innovation and technology led to a continuous increase in productivity. In that period, the financial sphere grew in balance with the real economy. In the 1970s, when the Bretton Woods system was terminated and the oil and inflation shocks hit the markets, business productivity stalled and economic growth became essentially dependent on consumption. Since the 1980s, consumption became increasingly funded by smaller savings, booming financial profits, wealth extracted from house prices appreciation and explosive debt. This was further supported by a climate of deregulation and a massive growth in financial derivatives designed to spread and diversify the risks globally.
The result was a succession of bubbles and crashes: the worldwide stock market bubble and great crash of 19 October 1987, the savings and loans crisis of the 1980s, the burst in 1991 of the enormous Japanese real estate and stock market bubbles and its ensuing "lost decades", the emerging markets bubbles and crashes in 1994 and 1997, the LTCM crisis of 1998, the dotcom bubble bursting in 2000, the recent house price bubble, the financialization bubble via special investment vehicles, speckled with acronyms like CDO, RMBS, CDS, … the stock market bubble, the commodity and oil bubbles and the debt bubbles, all developing jointly and feeding on each other, until the climax of 2008, which brought our financial system close to collapse.
Each excess was felt to be "solved" by measures that in fact fueled following excesses; each crash was fought by an accommodative monetary policy, sowing the seeds for new bubbles and future crashes. Not only are crashes not any more mysterious, but the present crisis and stalling economy, also called the Great Recession, have clear origins, namely in the delusionary belief in the merits of policies based on a "perpetual money machine" type of thinking.
"The problems that we have created cannot be solved at the level of thinking we were at when we created them." This quote attributed to Albert Einstein resonates with the universally accepted solution of paradoxes encountered in the field of mathematical logic, when the framework has to be enlarged to get out of undecidable statements or fallacies. But, the policies implemented since 2008, with ultra-low interest rates, quantitative easing and other financial alchemical gesticulations, are essentially following the pattern of the last thirty years, namely the financialization of real problems plaguing the real economy. Rather than still hoping that real wealth will come out of money creation, an illusion also found in the current management of the on-going European sovereign and banking crises, we need fundamentally new ways of thinking."
We've been living with this kind of thinking for awhile now. Alan Greenspan was a main architect. Ben Bernanke was his right-hand man. And based on the handful of names that have been floated by President Obama to replace Ben Bernanke, things are not likely to change anytime soon. That's a shame for hard-working American's who deserve much better.
The advancement of technology over the past decade or so has improved the quality of life and productivity for so many. Facebook is not one of them. As one of the few remaining holdouts of not having a Facebook account, I found this article from The Economist to be refreshing. Do yourself a favor and delete your account (or minimize your "friends" to just your closest family and friends). From my observation, this is right on the money.
Using the social network seems to make people more miserable
THOSE who have resisted the urge to join Facebook will surely feel vindicated when they read the latest research. A study just published by the Public Library of Science, conducted by Ethan Kross of the University of Michigan and Philippe Verduyn of Leuven University in Belgium, has shown that the more someone uses Facebook, the less satisfied he is with life…
Those who used Facebook a lot were more likely to report a decline in satisfaction than those who visited the site infrequently. In contrast, there was a positive association between the amount of direct social contact a volunteer had and how positive he felt. In other words, the more volunteers socialised in the real world, the more positive they reported feeling the next time they filled in the questionnaire. A volunteer’s sex had no influence on these findings; nor did the size of his (or her) social network, his stated motivation for using Facebook, his level of loneliness or depression or his self-esteem. Dr Kross and Dr Verduyn therefore conclude that, rather than enhancing well-being, Facebook undermines it…
They found that the most common emotion aroused by using Facebook is envy. Endlessly comparing themselves with peers who have doctored their photographs, amplified their achievements and plagiarised their bons mots can leave Facebook’s users more than a little green-eyed. Real-life encounters, by contrast, are more WYSIWYG (what you see is what you get).
Most people think of a political spectrum as being Right vs. Left. At least that's how the media and powers-that-be-spin it, as the divide-and-conquer and us-vs-them mentality suits their agendas and keeps most focused on one hand while the other picks our pockets. I view the parties more as two sides of the same coin. Two parties who care about power and big government, as long as it's their kind of big government. Big deficits, expanded (and unfunded) wars, supporting NSA spying on all American's activities, support for corporate oligopolies, and Federal Reserve monetizing their incompetence, and on and on. This explains why regardless of party -- and even when someone is elected on a historic platform of change -- that nothing really changes.
“In money management what sells is the illusion of certainty... a fund manager who tells the truth (the truth being that he may be wrong at any time) is a more difficult sale but a better investment.”
— John Hempton
Few investment shops have the long-term track record of Jeremy Grantham's GMO. They produce this chart every once in awhile. Here's their latest outlook for major asset classes:
Despite excellent returns lately, that is a sober outlook and bodes poorly for those needing big returns to reach their investment and retirement goals. So what to do? Grantham has a few suggestions:
So what is an investor to do? I believe there are at least four (possibly not mutually exclusive) paths an investor could go down to try to avoid this outcome:
(i) Concentrate. Simply invest in the highest-returning assets. This is obviously risky as you become dependent upon the accuracy of your forecasts, and right now nothing is outstandingly cheap so you are “locking in,” at best, fair returns (assuming you wanted to have a portfolio that was 100% invested and split between, say, European value and emerging market equities). You are, however, giving up the ability to rebalance.
(ii) Seek out alternatives. This meme had been popular until the GFC revealed for all to see that many alternatives were anything but alternatives. True alternatives may be fine, but they are likely to be few and far between.
(iii) Use leverage. This is the answer from the fans of risk parity. Our concerns about risk parity have been well documented. As a solution to a low-return environment, leverage seems like an odd choice. Remember that leverage can never turn a bad investment into a good one, but it can turn a good investment into a bad one (by forcing you to sell at just the wrong point in time).
(iv) Be Patient. This is the approach we favour. It combines the mindset of the concentration “solution” – we are simply looking for the best risk-adjusted returns available, with a willingness to acknowledge that the opportunity set is far from compelling and thus one shouldn’t be fully invested. Ergo, you should keep some “powder dry” to allow you to take advantage of shifts in the opportunity set over time. Holding cash has the advantage that as it moves to “fair value” it doesn’t impair your capital at all.
Of course, this last approach presupposes that the opportunity set will shift at some point in the future. This seems like a reasonable hypothesis to us because when assets are priced for perfection (as they generally seem to be now), it doesn’t take a lot to generate a disappointment and thus a re-pricing (witness the market moves in the last month). Put another way, as long as human nature remains as it has done for the last 150,000 years or so, and we swing between the depths of despair and irrational exuberance, then we are likely to see shifts in the opportunity set that we hope will allow us to “out-compound” this low-return environment. As my grandmother used to chide me, “Good things come to those who wait.”
This doesn't mean we can't continue to see big gains in the short-term, of course, but that will only mean even weaker returns going forward from that point.
"I worry about the effects on the long-run stability and efficiency of our financial system if the Fed attempts to substitute its judgments for those of the market. Such a regime would only increase the unhealthy tendency of investors to pay more attention to rumors about policymakers' attitudes than to the economic fundamentals that by rights should determine the allocation of capital."
-Ben Bernanke, Federal Reserve Chairman, in a 2002 speech
I mean, you could not state today's environment any better than he did 11 years ago. Not a single day goes by that a significant amount of financial news airtime isn't consumed with guessing, interpreting, anticipating, and predicting what Ben Bernanke will say and do next. Apparently Ben is not worrying about those effects these days. I don't know if the environment today is more comical or tragic.
I saw these comments from Federal Reserve Chairman Ben Bernanke in his most recent report to Congress in this post from my friend Matt Ford:
Last week found Ben Bernanke sitting before Congress for his semi-annual "Humphrey Hawkins" exchange. Bernanke made some epic statements. A sample:
Congress: "Are you printing money?"
Bernanke: "Not literally"
and...
Bernanke: "The amount of US student loan debt is large, but not particularly likely to cause macroeconomic instability."
(Bernanke in 2007: The sub-prime mess is grave but "largely contained".)
and to a question has to whether most Fed policy gains have gone to owners of financial assets...
Bernanke: "Wall Street hasn't benefited more than Main Street."
Now that is a whopper of titanic proportions. The wealth gap has never been greater in this nation than it is today. But it seems that if Bernanke says something, the press accepts it as gospel. There is little questioning from anyone in the press or Washington about what is going on. As Jesse said, Wall Street consists of a "cartel-like structure where a few large companies dominate the field, exercising considerable political power and the ability to obtain subsidies and protections from the system while fending off regulation and price restraints". And the Fed is their money-maker.
Bernanke's comment about not favoring Wall Street couldn't be further from the truth. It is his modus operandi. In addition to the aiding the wealth gap, here are a few quick examples (of about a billion I could name):
-The finance sector, fresh from nearly blowing up the global economy and recipient of trillions of taxpayer support, is set to surpass technology to become the single most profitable sector of the economy.
-You will be pleased that those lucky folks at Goldman Sachs are back to making pre-crisis compensation. The average pay at Goldman is a measly $431,956.
-A collapse in the U.S. median income level historically is directly tied to the Fed running a policy of negative real interest rates.
-The Fed's policies distort financial markets, discourage savings, crush savers, and promote speculation as a matter of policy (also see Bloomberg article HERE called "Bank Revenues Surge on Trading Over What Fed Will Do". That is a zero-sum game; if they win, everyone else loses).
Hundreds of millions of times a day, thirsty Americans open a can of soda, beer or juice. And every time they do it, they pay a fraction of a penny more because of a shrewd maneuver by Goldman Sachs and other financial players that ultimately costs consumers billions of dollars...The maneuvering in markets for oil, wheat, cotton, coffee and more have brought billions in profits to investment banks like Goldman, JPMorgan Chase and Morgan Stanley, while forcing consumers to pay more every time they fill up a gas tank, flick on a light switch, open a beer or buy a cellphone. In the last year, federal authorities have accused three banks, including JPMorgan, of rigging electricity prices, and last week JPMorgan was trying to reach a settlement that could cost it $500 million [SG: seems like a lot, but consider the company made nearly $20 billion last year].Using special exemptions granted by the Federal Reserve Bank and relaxed regulations approved by Congress, the banks have bought huge swaths of infrastructure used to store commodities and deliver them to consumers - from pipelines and refineries in Oklahoma, Louisiana and Texas; to fleets of more than 100 double-hulled oil tankers at sea around the globe; to companies that control operations at major ports like Oakland, Calif., and Seattle.After a sustained lobbying effort, the Securities and Exchange Commission late last year approved a plan that will allow JPMorgan Chase, Goldman and BlackRock to buy up to 80 percent of the copper available on the market.
"Bureaucracy defends the status quo long past the time when the quo has lost its status."
-Laurence J. Peter
One thing is clear -- politicians have made more promises in order to buy votes than can possibly be paid. When it comes to Social Security and Medicare, many battles are going to be fought in coming years that determine who will get paid and who won't, who will end up paying and who won't. However, one area where this may happen sooner rather than later is state and local pension funds. This week's lead story in The Economist, called "The Unsteady States of America", notes:
Though some of its [Detroit] woes are unique, a crucial one is not. Many other state and city governments across America have made impossible-to-keep promises to do with pensions and health care. Detroit shows what can happen when leaders put off reforming the public sector for too long...
Nearly half of Detroit’s liabilities stem from promises of pensions and health care to its workers when they retire. American states and cities typically offer their employees defined-benefit pensions based on years of service and final salary. These are supposed to be covered by funds set aside for the purpose. By the states’ own estimates, their pension pots are only 73% funded. That is bad enough, but nearly all states apply an optimistic discount rate to their obligations, making the liabilities seem smaller than they are. If a more sober one is applied, the true ratio is a terrifying 48% [SG: this simply means that less than 1/2 of the money promised has actually been set aside; where the rest of the money is supposed to come from is a problem for someone else once they are out of office]...
By one recent estimate, the total pension gap for the states is $2.7 trillion, or 17% of GDP [SG: Ben Bernanke can just print this amount without any negative consequences, so I am not sure what anyone is worried about]. That understates the mess, because it omits both the unfunded pension figure for cities and the health-care promises made to retired government workers of all sorts. In Detroit’s case, the bill for their medical benefits ($5.7 billion) was even larger than its pension hole ($3.5 billion).
Some of this is the unfortunate side-effect of a happy trend: Americans are living longer, even in Detroit, so promises to pensioners are costlier to keep. But the problem is also political. Governors and mayors have long offered fat pensions to public servants, thus buying votes today and sending the bill to future taxpayers. They have also allowed some startling abuses. Some bureaucrats are promoted just before retirement or allowed to rack up lots of overtime, raising their final-salary pension for the rest of their lives. Or their unions win annual cost-of-living adjustments far above inflation. A watchdog in Rhode Island calculated that a retired local fire chief would be pulling in $800,000 a year if he lived to 100, for example. More than 20,000 retired public servants in California receive pensions of over $100,000.
I hope there is a way to sort out the reasonable pensioners claims from those that have turned the taxpayer into a slush fund for fellow cronies. It will be interesting to see this all plays out. The situation in Detroit is the first shot across the bow in the battle of overpaid pensioners and irresponsible bondholders vs. the taxpayers who have unfairly been put on the hook for far more than they can possibly be expected to play.
Is there a prescription drug for APDD?
"Everyone, sooner or later, sits down to a banquet of consequences." --Robert Louis Stevenson
If you are offered to get into an investment of any kind by someone that is claiming abnormal returns, it’s best just to say “Thanks”, put your wallet back in your pocket, and run in the other direction. With all due respect to Gordon Gekko, sometimes greed is not good. Even if the returns are actually legit, the main way to generate excessive positive returns is to either take totally irresponsible risks (and those bets have to be a large percentage of one’s portfolio to make a big difference) or to use massive amounts of leverage (or more likely, both). And what that means is that if you can gain that much with those bets, you can lose it just as quickly, if not quicker.
This is also a good lesson not to get greedy. Albert Einstein noted “Compounding is the 8th Wonder of the World” because of what compounding even modest investment returns year after year does over time. I am quite sure lots of people left their money managers to invest with Glen Galemmo, and I am sure most people investing with him had almost everything with him precisely because of the huge supposed returns.
A Cincinnati money manager has been accused of orchestrating a Ponzi scheme that cost investors “tens if not hundreds of millions of dollars,” according to a July 20 complaint filed in Hamilton County Common Pleas Court…
Galemmo’s company has been raided and closed by federal agents, according to the complaint, which also claims that Galemmo and his wife, Kristine Galemmo, “have fled the jurisdiction of this court, taking property with them.”
About 100 investors are involved, most from Cincinnati, according to a source familiar with the case who asked to remain anonymous. In the complaint, Galemmo is accused of using funds from certain investors to pay earlier investors. The plaintiffs also filed a temporary restraining order with the lawsuit, asking the court to prevent Galemmo and his associates from transferring any money so that the investors can’t access it.
The lawsuit claims that Galemmo and his associates defrauded investors in “an elaborate Ponzi scheme.” It cost investors “tens if not hundreds of millions of dollars,” according to the lawsuit.
Galemmo claimed to have more than $200 million in assets under management from investors, according to the lawsuit.
Glen Galemmo is the former CEO of R.H. York Investments in Cincinnati, who founded his own firm in 1998 with $2 million in assets, according to a 2001 Courier story. His firm’s hedge funds were so successful that in 2002 he moved his office in Hyde Park and added a Sarasota, Fla., location as well as a second fund, according to another Courier story.
Galemmo claimed to have generated powerful investment returns, according to the complaint: He claimed to have generated a 432 percent return from 2006 through 2011. Galemmo would have made more than $60 million in compensation if his figures are accurate, the lawsuit stated. But “he was unable to pay even minor tax bills,” according to the lawsuit.
And as we speak, one of the world’s most prominent and successful hedge funds, SAC Capital, is being indicted for fraud and insider trading.
This type of thing actually happens far more often than you think, it's just the Bernie Madoff type scandals that hit the front pages. I would also assume the people who invested with Galemmo were by and large very wealthy and educated, and they got fooled. Caveat emptor.
"Truth is too simple for us; we do not like those who unmask our illusions." - Ralph Waldo Emerson
One of the people I most respect in the industry is the founder and CEO of Minyanville, Todd Harrison. I thought he had a worthwhile take on markets last week:
I arrived home late last night and began to digest my thoughts. I had been at my desk after-hours when the futures began to spike and turned to identify the catalyst; there he was in all his glory, Mr. People Pleaser, Ben Bernanke.
I've been trading 23 years and I've seen my fair share of events. I won't list them but suffice to say that in almost a quarter-century, the markets have been a whirlwind of multi-linear dynamics. When I began my career, "fills" took up to eight minutes as floor brokers ran back and forth from phones to posts; these days, reports are measured in nanoseconds with fewer and fewer humans involved.
The DNA of the global financial marketplace is what concerns me most and this isn't sour grapes or trades gone awry. A few weeks ago, it genuinely felt as if Ben Bernanke finally found free-market religion; after five years of A Grand Experiment that cost trillions of dollars and failed to produce any semblance of legitimate economic growth, he seemed intent on beginning the long hard road of weaning the markets off synthetic stimulus and steering capitalism toward meritocracy.
Almost immediately after financial markets began to self-correct—and we're talking about a few percentage points—his top lieutenants began to backtrack, saying their Fed head was “misunderstood." We asked at the time whether the jawbone was connected to the backbone; last night, we got our answer.
A decade ago, Alan Greenspan was praised as the Maestro of the Markets. We at Minyanville took the "other side" of that trade and warned of the cumulative comeuppance brewing in the background, imploring folks to pay attention to the why rather than the what—and make no mistake, the “why” was self-evident to anyone who chose to pay attention.
Mr. Greenspan's legacy shifted dramatically in the years that followed; the bloom quickly faded from that rose. Big Ben, for his part and in my view, is following in the footsteps of his predecessor.
Last night, on my way home from my last meeting of the day, I was struck by two things on Twitter. The first was the end-zone dancing by the bulls; the second was the widespread praise for Mr. Bernanke's kick-save of the tape. I censored myself, refusing to share my thoughts as I have strong feelings on the subject. Someone once taught me to sit on an angry email for 24 hours before sending it; I employed the same discipline last night.
Emotion is the enemy when trading; this we know, and I suppose the same can be said for social media. Once it's out there, there's no taking it back. I was upset last night; not about my positions but about how this profession has devolved from a capital market meritocracy to the quivering lips of a single man and his personal feelings on how markets should be managed. We used FUBAR before and I can't think of a more apt description of this environment.
Where do we go from here? For the last several years, we monitored how many of the smartest investors have gone dark, opting to let central bankers "vanquish themselves" before returning to their craft. The list is long and impressive and it continues to grow. In the words of legendary investor Stan Druckenmiller, "The markets are rigged…and people are chasing assets without growth backing confidence."
I hearken back to my days at Syracuse University when I studied finance; "following the smart money" was a tactic taught in textbooks as a legitimate investment strategy.
One of two things is happening before our eyes: Either the baton is being passed to a new investing world order—one where central bankers and HFT rule the day—or we're approaching an extremely dangerous juncture where following the smart money will be rewarded in spades.
That choice is yours and yours alone; my job is to paint both sides of this very important picture.
"In the short run, the market is a voting machine but in the long run it is a weighing machine." -Warren Buffett
It is widely known that the economy and the stock market often march to a different tune. The markets often discount the future before the actual economy moves. Investor sentiment is a huge driver of markets. Even if economic or corporate news is very good, the market or an individual stock can sell-off if great news was the bar (and vice versa). That's the voting machine part. But broadly, what will drive the stock market over time is a growing economy and growing corporate profits. The weighing machine.
That's what makes today so interesting.
I think everyone acknowledges that the economy is generally weak. Despite headlines that show job gains much greater than reality, the job market remains lackluster and distorted by Obamacare (another example, the +195k jobs gains for June reported last Friday consisted of a loss of 240k full time jobs and a gain of 360k part-time jobs (the difference is in seasonality factors, birth-death, etc.)). In addition nearly 1 in 6 American's is a recipient of food stamp assistance. The IMF just downgraded global and US economic growth again. Macro-economic data is not terrible, but it's been stagnating for a year:
So the economy is not driving markets ever higher, so it must be corporate earnings growth, right? Well, not really. Revenues are actually expected to decline sequentially this quarter. Bloomberg News noted "U.S. companies are poised to post some of their weakest quarterly earnings reports in four years, in part as a stronger dollar erodes the value of toothpaste to tablet computers sold overseas." And earnings estimates from Wall Street have been trending down:
I got an email alert from CNN on Friday that said, "The Dow and S&P finished at record highs as investors hoped the Federal Reserve will continue stimulus". As ridiculously lame as that is, it's what investors are hanging their collective hats on. And it's been working. CNBC's experts tell us that the Fed's "QE" program benefits stocks so investors believe that QE benefits stocks. No other qualifiers are needed, apparently. That despite active QE programs during the 50% declines in 2000-2002 and again in 2007-2009. People believe it's that easy? One of the smartest guys I know thinks markets can continue to rally through 2014 on "smoke and hope". It's lasted this long so he may be right. It just would be nice if the fundamentals mattered anymore. One day soon they will again.
"The plans of the diligent lead to profit as surely as haste leads to poverty." -Proverbs 21:5
I do all the grocery shopping in our household. While I am an admitted food snob, eating mostly fresh, organic, and when possible, local, food. It definitely makes for a more expensive monthly grocery bill, so I am always on the lookout for sales and deals. I regularly purchase 3-4 gallons of milk or a couple of cases of greek yogurt or a few extra pounds of chicken or beef if what I like is on sale. Who doesn't like to save money? It is only natural to purchase more of what we like when prices are lower and purchase less when the prices spike.
Except in one area: Investing.
For some reason, investors routinely purchase things that are very expensive and popular and shun those securities that are on sale. Whether we are talking about tulip bulbs or tech, houses or social media stocks, people throughout history have thrown common sense and good investing advice out the window in order to feel the rush of excitement and invest poorly just like everyone else. Research has shown over and over that individuals greatly underperform the markets because their emotions lead them astray.
On his Wall Street Journal blog, Jason Zweig posted some of the best investment advice I’ve seen in print in some time:
…That’s because good advice rarely changes, while markets change constantly. The temptation to pander is almost irresistible. And while people need good advice, what they want is advice that sounds good.
The advice that sounds the best in the short run is always the most dangerous in the long run. Everyone wants the secret, the key, the roadmap to the primrose path that leads to El Dorado: the magical low-risk, high-return investment that can double your money in no time. Everyone wants to chase the returns of whatever has been hottest and to shun whatever has gone cold. Most financial journalism, like most of Wall Street itself, is dedicated to a basic principle of marketing: When the ducks quack, feed ‘em.
In practice, for most of the media, that requires telling people to buy Internet stocks in 1999 and early 2000; explaining, in 2005 and 2006, how to “flip” houses; in 2008 and 2009, it meant telling people to dump their stocks and even to buy “leveraged inverse” exchange-traded funds that made explosively risky bets against stocks; and ever since 2008, it has meant touting bonds and the “safety trade” like high-dividend-paying stocks and so-called minimum-volatility stocks.
It’s no wonder that, as brilliant research by the psychologist Paul Andreassen showed many years ago, people who receive frequent news updates on their investments earn lower returns than those who get no news. It’s also no wonder that the media has ignored those findings. Not many people care to admit that they spend their careers being part of the problem instead of trying to be part of the solution…
One of the main reasons we are all our worst enemies as investors is that the financial universe is set up to deceive us.
From financial history and from my own experience, I long ago concluded that regression to the mean is the most powerful law in financial physics: Periods of above-average performance are inevitably followed by below-average returns, and bad times inevitably set the stage for surprisingly good performance.
But humans perceive reality in short bursts and streaks, making a long-term perspective almost impossible to sustain – and making most people prone to believing that every blip is the beginning of a durable opportunity.
My role, therefore, is to bet on regression to the mean even as most investors, and financial journalists, are betting against it. I try to talk readers out of chasing whatever is hot and, instead, to think about investing in what is not hot. Instead of pandering to investors’ own worst tendencies, I try to push back. My role is also to remind them constantly that knowing what not to do is much more important than what to do. Approximately 99% of the time, the single most important thing investors should do is absolutely nothing…
The perennial refrain from critics is: You just don’t get it. Internet stocks / housing / energy prices / financial stocks / gold / silver / bonds / high-yield stocks / you-name-it can’t go down. This time is different, and here’s why.
But this time is never different. History always rhymes. Human nature never changes. You should always become more skeptical of any investment that has recently soared in price, and you should always become more enthusiastic about any asset that has recently fallen in price. That’s what it means to be an investor…
To be a good long-term investor, it's vital to keep his words of wisdom in your mind, always and forever. Jason ends with this takeaway, that is also part of the inspiration for SkipGold:
We can’t assist or save the age, but the attempt to do so is the only way we have of even coming close to realizing some dignity and meaning for our lives. The longer the odds, the greater the obligation to try to beat them. That’s why I keep at it, even though I have profound doubts that most people will ever learn how to be better investors. I never expect everyone to listen; all I ever hope for is to get someone to listen.
"History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling the money and its issuance."
-James Madison
I thought this commentary by Rick Hamilton of "Pawn Stars", History Channel's most popular show, was interesting in light of my post HERE. Yes, I own gold, and I've mentioned ad nauseum that I view it (as Rick notes) as an insurance policy. I will view it that way if gold is at $500/oz or $5,000/oz. I don't plan to trade it. Unlike some cottage industry goldbugs out there, I don't get emotional about it. If gold goes lower and I feel the central banks and governments of world are continuing to implement what I view as dangerous monetary experiments, then I will purchase more insurance. I may be at that point now, in fact.
One of my favorite bloggers, Jesse's Cafe Americain, has a series of short post on what he feels is gold's manipulation by big Wall Street banks. They have been rumored to be massively short gold and very short of the physical metal for delivery, demand which continues to increase. People no longer trust the banks to hold their gold with just a paper receipt to prove ownership. They are demanding delivery and holding it themselves. What are the banks to do? With one hand smash the price lower in after-hours markets using paper substitutes when the volumes are extremely low, and buy physical gold with the other. Wash, rinse, repeat. Yet another stealth bailout on the backs of the people and no worries at all about the regulators doing anything about it.
It is the paper gold -- sold in abundance above and beyond what actually exists -- that is being crushed. Actual physical metal is in short supply around the world, as Rick mentions. Interesting times.
“The duty of a patriot is to protect his country from its government.” --Thomas Paine
“The further a society drifts from the truth, the more it will hate those that speak it.” --George Orwell
"The best weapon of a dictatorship is secrecy, but the best weapon of a democracy should be the weapon of openness." --Niels Bohr
"Every thing secret degenerates, even the administration of justice; nothing is safe that does not show how it can bear discussion and publicity." --John Dalberg Lord Acton
The media is supposed to act as a check on power, both public and private, reporting and exposing fraud and corruption. But the Fourth Estate today has become shills for their political and corporate masters. Who does CNBC and the financial media serve? I watch financial news and I am stunned at the obviousness of their biases. The people they have on are not experts in finance but marketing, mostly for themselves. Fox News and MSNBC. Are you kidding me? And news coming out of official Obama Administration circles is thick with propaganda (remember, he once was going to be "The Greater Reformer"). Editors of The Onion would be jealous.
Glenn Greenwald, the journalist who broke the NSA spying story, had this to say about insiders and the profession of "journalism" in light of recent events:
But it is true that the Guardian generally, and me in particular, are outsiders, not members of the Beltway establishment media clique. I’ve purposely made myself an outsider by very aggressively and harshly criticizing not just the culture itself but the most prominent members of it, including David Gregory and Andrew Ross Sorkin, who this morning suggested on CNBC that I be arrested.
Some of what is driving this hostility from some media figures is personal bitterness. Some of it is resentment over my having been able to break these big stories not despite, but because of, my deliberate breaching of the conventions that rule their world.
But most of it is what I have long criticized them for most: they are far more servants to political power than adversarial watchdogs over it, and what provokes their rage most is not corruption on the part of those in power (they don’t care about that) but rather those who expose that corruption, especially when the ones bringing transparency are outside of, even hostile to, their incestuous media circles.
They’re just courtiers doing what courtiers have always done: defending the royal court and attacking anyone who challenges or dissents from it. That’s how they maintain their status and access within it. That’s what courtiers to power, by definition, do.
So yes, some establishment journalists have been hostile to our reporting, usually by ignoring the substance in favor of personalized attacks (is Snowden a narcissist? Am I engaged in “advocacy journalism”?). But truly: if I weren’t upsetting the David Gregorys and Andrew Ross Sorkins of the world, I’d be very alarmed, as it would be proof that I wasn’t engaging in meaningful adversarial journalism against their political and financial masters.
Enron, Worldcom, subprime, the economic quackery of Alan Greenspan, Wall Street fraud, Jon Corzine and MF Global, etc. Journalists didn't break any of these stories -- they aided and abetted them.
More on the Edward Snowdon case and the war on whistleblowers here. I am not necessarily defending him, and I don't know what is to come, but I find his revelations and the completely anti-Constitutional nature of what our gov't is doing to be deeply disturbing. Who the mainstream media has chosen to defend and attack speaks volumes. This is one of those funny subjects that finds the civil libertarians further from the center on both the Right and Left in alliance against the status quo that makes up the majority of both corrupt political parties.
Both Bloomberg News and the New York Times came out with pieces against the federal governments actions. But I cannot recommend a piece more than Golem's. It is must-read material.
Sometimes I feel like we are drifting into a storyline from George Orwell's 1984. Other times I think The Hunger Games is more apt.
"The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists." – Joan Robinson, Cambridge
Here's a great piece by John Mauldin highlighting that economists of all stripes (gov't, private, and especially central bankers) have absolutely no clue what they are doing, have awful track records, never predict recessions or financial crises, and have abysmal forecasting records, yet have enormous confidence to the contrary. Why is this so dangerous? John notes:
So, we have cataloged the incredible failures of economists to predict the future or even to understand the present. Now think of the vast powers Fed economists have to print money and move interest rates. When you contemplate the consummate skill that would actually be required to manage post-Great Recession policies, you realize they're really just flying blind. If that reality doesn't scare the living daylights out of you, you're not paying attention. The longer the Federal Reserve sticks to its current policy, the more likely that policy will end in tears.
In the article, John highlights some great quotes and poor forecasting records, including from our own Ben Bernanke. Yes, he of the infamous "subprime is contained" theory. I highlight the above and below so individual investors are not misled. Most of the "experts" on CNBC and other financial media are really sales and marketing people with advanced degrees. Their insight is usually not only self-serving, but wrong. Their confidence and assertiveness belie an underlying ignorance.
In John Hussman's recent piece, he also highlights why we are in dangerous territory with Ben Bernanke and the Fed's policies, even though higher financial markets feels great now:
Frankly, I view the present course of monetary policy as reckless - not because it threatens inflation (which I don't think it will for several years), but because it diverts scarce capital away from productive investment and toward speculative activities; because it fails to act on any economic constraint that is actually binding here, so has little hope of providing the economic "support" that it purports to offer; because decades of historical evidence provide no basis to expect a material "wealth effect" from stock values to the economy; because the policy lowers hurdle rates and encourages borrowing for unproductive purposes - including stock buybacks at record highs (and there is no evidence that buybacks are a good indication of value); because it punishes the elderly on fixed incomes; because it perpetuates a bubble-bust cycle created by Fed intervention, which is not the medicine but the very poison itself; and because moving to the left on the liquidity preference curve will likely be as painful as moving to the right has been pleasant...
Of course, one might explain elevated [corporate] profits by observing that wage payments as a fraction of GDP have fallen to the lowest share in history, that high government transfer payments have supported consumption, and that companies took a year’s worth of benefit from investment tax credits in the first quarter, which also contributed to profits. All of these are true, but they are operationally identical to saying that the household and government sectors are running a large combined deficit.
The bottom line is simple. Corporate profits have benefited in recent years from enormous fiscal distortions that have bloated margins 70% above their historical norms. Stock prices have benefited in recent years from enormous monetary distortions that have suppressed interest rates and encouraged investors to “reach for yield.” Combining those effects, investors have been encouraged to chase stocks, placing elevated price/earnings multiples on already elevated earnings. Investors who value stocks on the basis of these distortions are likely to discover in hindsight that they have paid a very dear price.
So what we have is an environment of speculative excesses that is benefitting the financial markets (time will tell if that proves to be permanent or transitory in nature) to the detriment of Main Street (and Wall Street will certainly not point this out since they directly benefit). And this is being driven by folks, who despite all their higher degrees and absolute certainties of what they are doing, have proven they are clueless.
One final reminder about the dangers of making investment decisions based on "experts". When watching the video below, remember that this is before not just a run-of-the-mill recession, but months leading up the the worst recession and financial crisis since the Great Depression. And this is the guy whose every utterance, every statement, every breath of air causes markets to rise and fall on a daily basis to this very day.
"Remember, austerity is not a punishment but a consequence of past failures to control spending."
-John Mauldin
I have said for the last 5 years we would have been better served to take the "crash" and rid ourselves of the "cancer". Yes, we would have had a deeper recession with higher unemployment, but it would have been quick, and after purging the bad debts and allowing those who poorly allocated their capital to take their losses, we would now be in year four of real, sustainable economic growth. Instead, we have muddled along for nearly six years, run up massive debts and deficits, allowed the Fed to destroy savers and further misallocate capital, and let our zombie banking system become even bigger, more powerful, and more dangerous. In a sense we've just hooked up an overweight, out-of-shape, diseased patient to a respirator, pumped him full of antibiotics, put band-aids on the festering wounds and declared victory without ever even addressing the actual underlying problems. The imbalances underneath the economy remain as tilted as ever.
Paul Krugman and his band of fellow influential academic economists claim "compassion" in their efforts to have no American citizen suffer the effects of our collective past poor decisions. I and others think they are only delaying the inevitable and making the ultimate scenario even worse. You can hold your breath for one minute in ten feet of water, but you will drown if you try to hold your breath for ten minutes in one foot of water. Millions of American's have to know what I mean. One of my favorite economic commentators, Caroline Baum, seems to agree:
Kinsley, Krugman and Austerian Aliens
Michael Kinsley, my former Bloomberg View colleague, goes to bat in the New Republic for "'austerians," a term he says is "a clever Krugman coinage that makes adherents sound like aliens from another planet." That would be Paul Krugman, Nobel laureate in economics, Princeton professor and New York Times columnist.
Toward the end of his column, Kinsley gets to the crux of the argument and something Krugman ignores. It's not that austerians -- those who advocate cuts in government spending and increases in taxes during bad times -- want other people to suffer. "They, for the most part, honestly believe that theirs is the quickest way through the suffering," Kinsley writes.
Exactly. This is the oldest economic argument in the book, as I wrote in my column two weeks ago. It's Keynes v. Hayek, or Keynesians v. Austrians. Keynesians want to fix what they see as a problem of insufficient aggregate demand with more government spending. They claim that a dollar spent by the government becomes someone else's income, which is then spent, multiplying the impact initial dollar borrowed or taxed from the public. They ignore what's unseen: What that same dollar, extracted from a saver, would have been used for if it hadn't been commandeered by the federal government.
Austrians believe that the cure for "malinvestment," or the misallocation of capital into, say, residential real estate in the first half of the last decade, is allowing prices to clear. Which means fall or dive or plummet. The more quickly that happens, the sooner the economy can start to grow. Austrians point to the depression of 1920-1921 and rapid recovery as evidence that a laissez-faire response leads to a better outcome.
"I don't think suffering is good, but I do believe that we have to pay a price for past sins, and the longer we put it off, the higher the price will be," Kinsley writes. Why, he sounds like an Austrian, which isn't nearly as alien as an austerian.
I find it so odd that the holy grail of economic study is The Great Depression. As if that was the first and only time the world had a serious economic setback. No, it was the first time that the federal government stepped in to such an unprecedented degree to stop the downturn, and that is precisely what caused it to be so deep, so long, and so damaging. I think that is the lesson the "experts" like Krugman, Bernanke, etc. all miss. That their prescription is worse than the disease itself.
"Oh what a tangled web we weave. When first we practice to deceive." -Sir Walter Scott
Often attributed to him, but no, that's not Shakespeare.
One of the big stories of the week has been trumpeted around by the media is that this year’s fiscal deficit is expected to decline to around $600 billion and future deficit projections are coming down massively. This is in stark contrast to the $1 trillion+ deficits we’ve racked up for the last 5 years. Alright, fiscal sanity is returning! Only it’s not really true. Bummer.
The Treasury Dept. has come out with this graphic on a year-to-date basis (starting fiscal year is Oct. 1st):
So we’ve had a deficit of ~$487mm year to date and that equates to the annualized ~$600 billion. However, if you look at the actual debt added to the total, which represents the actual cash outlays, you get a very different figure:
More simply stated:
Sept. 28, 2012 debt was $16.066 trillion.
April 30, 2013 debt was $16.829 trillion.
That is a deficit of $762 billion over 7 months. For the full fiscal year that equates to $1.307 trillion, or yet another $1 trillion+ deficit year. The smaller deficit figure being bandied about does not include the cash deficits of Social Security and Medicare and includes all sorts of debt ceiling accounting games. Going forward the deficit is reduced due to unprecedented economic growth, no recessions for the next decade, and corporate taxes that will increase by 57% in 2014 and by 88% in 2015, among other things. In short, the projections are delusional and then some.
Cash expenditures and additional debt is what matters, not nonsense accounting gimmicks. It looks like the press is just using the Administration/Treasury Dept. deficit figures and not even bothering to check the facts themselves. Par for the course.
"We are in danger of being overwhelmed with irredeemable paper, mere paper, representing not gold nor silver; no sir, representing nothing but broken promises, bad faith, bankrupt corporations, cheated creditors, and a ruined people."
-Daniel Webster, 1782-1852
It is acknowledged today that markets are increasingly manipulated by the powers that be. As long as asset prices are going up, few have any issues (the unintended consequences will be severe, but that is not the point of the post). Perhaps no market is more manipulated than the gold market. I have been meaning to post on the differences between the paper gold market and the metal itself. Few have made the distinction in the past, but I think there is going to be a sea-change at some point in the future, perhaps violently. After a decade-long bull market, the price of gold has been falling lately, but the reason may be important.
Golem XIV has more:
The price of gold is going down. That is what the charts, newspapers and pundits are all saying. What I think they are deliberately not saying is that the value and desirability, as opposed to the price of gold, is going up and will go up further.
Make no sense? Well I think it does if you remember there are two types of ‘gold’ for sale. One is metal, the other is paper. It is paper gold that is being dumped not the metal. The metal is being bought at a fair old rate. But because there is so much paper gold around and the major sellers and market makers in paper gold prefer metal and paper to be confused, even thought to be identical (their trade depends on this confusion), no one seems to be pointing out the very different dynamic happening in paper and metal gold.
Paper gold is being sold. And those selling it are the likes of Soros Fund Management LLC and BlackRock Inc. As Bloomberg reports today,
"Filings showed Soros Fund Management LLC and BlackRock Inc. (BLK) were among funds that cut stakes in the SPDR Gold Trust, the biggest gold ETP, in the first quarter."
Does that say Soros and BlackRock no longer want gold? No it does not. It says they don’t want paper gold. They don’t want paper claims of gold...
It is these paper claims that big players seem to be selling as fast as they can without it looking like they are going for the exit. In fact, I think that is exactly what they are doing.
The fact is there is a vast pyramid of paper claims on gold which dwarfs the amount of actual gold avaialable. Since the trade in gold ETFs took off we have been living in a fiat gold world. There are as many claims on gold as there are bits of paper on which to print them. And this fact confuses a great deal of the punditry about gold as a safe haven.
In the Bloomberg piece we find Mr James Moore, an analyst at FastMarkets Ltd. in London saying,
"The reasons for holding safe-haven assets have abated…Investors are looking again at stronger growth assets.”
I think he is wrong. 180 degrees wrong. I think the reason Soros and BlackRock are selling paper gold is because they know paper claims are not safe. Bits of paper with the word gold printed on them are not gold themselves and their claims in the metal are not safe. I suspect we will find they have sold paper and bought metal.
I think Soros and BlackRock have sold paper gold because, contrary to Moore, the reasons for holding safe haven assets have not abated but are getting stronger. I am not saying ‘buy gold’. I do not offer investing advice. I am not saying gold will save you. I am also not saying that people are not looking for higher yielding investments. Because they are. They are caught in a nasty trap of really needing yield in a world they can also see is getting more volatile and less safe. What is a thrusting city boy to do? Answer, invest other people’s money in risk and keep quiet about what you are investing in yourself.
I own a gold mutual fund and the exchange-traded fund GLD, but my largest holding by far is the metal itself. If you hold gold for the reason many own gold -- which is a reciprocal to the trust and faith in central bankers -- then a claim on the actual metal is the only thing that will do.
Read Golem XIV's entire post HERE.
"Never have investors reached so high in price for so low a return. Never have investors stooped so low for so much risk." -Bill Gross, PIMCO
I haven't written as much lately as nothing has really struck me as blog-worthy. I have noticed that on days of seeming "good" economic news, the markets are up. But on days of bad (or worse than expected) news, the market is up even more. We are living in the perfect world where good news is "good" (because it's good) and bad news is even better because Bernanke and the Feds will step on the gas even more. More and more people are piling into this game. It's a dangerous one, but people are playing. People have become convinced the Fed will guarantee -- indefinitely, apparrently -- that no losses in the stock and bond market will be had. "Winning" as they say.
But I am one who is content to sit and watch others hit it big at the blackjack tables. I know despite all the current fun and excitement how the game ultimately ends. I am not a speculator, and I am more than content to wait until stocks and bonds present better values. I am confident they will. I value the money I work hard for, and there is no law that states you have to be invested all the time. I don't have clients or short-term return goals, and I am not getting paid 2 and 20. I have my own goals, risks, and expectations, and I am content to sit it out when all assets appear to be priced for poor returns. I am gravely concerned about the actions of the Fed and the manipulation of markets that so many have become comfortable with and even encouraged. We've seen this story before, recently in fact.
Jesse over at his Cafe said it well earlier this week:
Those of us who stood by and watched the Fed blow asset bubbles in financial paper and the housing market from 2003 to 2007, after the bubble in tech stocks from 1998 to 2001, are understandably appalled that the Fed has seen fit to follow essentially the same game plan again, matched by a lack of reform in the financial system.
Bernanke's policy failure is, in my humble opinion, going to cause another financial crisis if he continues on. There are much more effective ways of reflating and stimulating the economy than creating paper asset bubbles for Wall Street, and hoping that the Banks allow for a trickle down effect to the real economy. Not a chance when gaming the markets can produce outsized profits and perfect trading records. Where is the downside, where is the risk? And where are the regulators?
Asleep at the wheel, or aiding and abetting, as they have been wont to do over the past few decades.
I recognize that it's tough to sit out the fun and games, but remember how the last bubbles worked out. Stocks are trading at over 24x the Shiller P/E and high yield bonds trade below 5%. And how sustainable do you think this is (corporate profits as a % of GDP):
Despite much ink being spilled in recent months talking up the improving jobs outlook, Friday's employment report was a bit of a bummer. The statistics we've been presented don't tell the story of reality. Simply, we had a huge downdraft of job losses during the Great Recession, and since then it's been a flat-lining. We have gained jobs, yes, but just enough to keep up with the population growth. There has been little headway in improving the population-adjusted unemployment problem.
So why has the official unemployment rate fallen so dramatically? Simple. A plunging of the labor force participation rate to 30-year lows:
Had the participation rate stayed consistent, the unemployment rate would be 11.6% (red line) instead of 7.6% (black line). Lies, damed lies, and statistics.
There continues to be a laser-like focus on quantity and no mention of job quality. We continue to add lower wage and benefit service jobs. And even the jobs gained are still going to those over 55 years old. Those under 55 can just eat cake, I guess?
Overall, I would say the jobs picture has been one of slow, steady but subpar growth. Not terrible but weak by all historical post-recession recoveries. These sluggish employment figures jive with other indicators like the continual monthly record levels of American's on food stamps, weak income growth, and the growing ranks of "the new welfare", the growing fraud that has become disability.
"Crisis is the rallying cry of the tyrant." -James Madison
I honestly don’t know how much the mainstream media here is following the events in Cyprus, but it is worth paying attention to. You can choose to ignore unfolding events in Europe, but I have a feeling they will not ignore you. The powers that be ("TPTB": IMF, ECB, ECU, and the finance ministers and the 1% they serve and their counterparts here) are trying to completely turn the process of a restructuring on its head. In order to protect their interests, they are stealing the bank deposits customers in Cyprus.
But first a brief primer. When a bank (or any company, really) needs to be restructured, the capital structure typically looks like this:
-Depositors/secured debt (top of the structure, most senior)
-Senior bondholders
-Subordinated bondholders
-Equity (bottom of the structure)
When a bank is restructured – which our own FDIC has done over 100 times since 2007 to various smaller banks – the equity is generally wiped out, and other bondholders take a haircut in order to make the bank solvent again (and that piece is usually sold to a better-run bank). I am unaware of a single dollar of deposit money being lost in a bank restructuring in the U.S. since 2007. Depositors in the failed bank wake up the next day and their fully-funded accounts are at the acquiring bank. (This was one of my main beefs with the farce that was TARP. Depositors at the big banks were NEVER in danger, and thus bailouts not needed. Instead bondholders in AIG, Bear Stearns, Fannie Mae, Freddie Mac, etc. were all made whole at taxpayers expense.) But the bottom line point is that depositors of a bank sit at the top of the capital structure and almost never lose money when a bank “fails”. In addition, there is a gov’t guarantee up to certain amounts in both the US (via the FDIC) and in the Eurozone should those losses be potentially realized.
Enter Cyprus.
Cyprus is a small island nation and is fairly meaningless in the global scheme of things. Its population is around 1 million souls and its GDP is just 0.2% of the Eurozone. It’s peanuts. But their banking system has gotten way out of hand and their banks are insolvent. The Inter’l monetary fund (IMF) and European Central Bank (ECB) have decided that in order to bailout the Cyprus banks, they are demanding the confiscation of depositor money to the tune of 6.75% of anything under 100k euros and 9.9% for accounts over 100k euros. Simply, they are stealing depositors money to pay for the "bailout". If you had 10,000 euros in your checking account before, you now have 9,325 euros (and you'd be lucky to get that out; capital controls now are limiting any withdrawals to 300 euros). They are ignoring the traditional hierarchy of capital structure and they are eschewing the deposit insurance. Insured depositors have been usurped by subordinated bondholders and central banks. Old ladies, retirees, and small businesses are bailing out the 1% who hold bank debt. There are ongoing negotiations, and I don’t know how things in Cyprus will end up, but to say this is a dangerous precedent would be an understatement. If I were a depositor in any bank in Ireland, Spain, Portugal, Italy, Greece, etc. I would move my money yesterday. Money under your mattress in those countries now carries a 6.75%-9.9% premium to your money in a bank. There are working papers out there dealing with this same “bail-in” strategy in Spain and New Zealand. I suspect others are in the firing line, too.
There are many who say that “Europe is fixed”. Europe is not fixed. Far from it. The developed world has made more promises than can ever be repaid, and TPTB will make whatever decisions necessary to maintain their power and the status quo. As I have noted before, you and your investments will be cannon fodder if it suits their needs. And with the unemployment rate in Spain and Greece around 25% (and youth unemployment at 50%), confiscating deposits is hardly the kind of thing to sit well with the man on the street. It might be a long, hot summer in the streets of Europe.
But there is no way that can happen in the US, right? Really? Do I need to remind you that over $1 billion was brazenly stolen out of Jon Corzine’s MF Global in 2011? Nobody has been prosecuted. Nobody has been held accountable. In 1932 FDR confiscated gold from US citizens. I am not saying these types of things will happen in the U.S. anytime soon, I am just saying that these things do happen, and they will happen again if it suits TPTB. As noted above, you can ignore what is going on if you prefer, but what is going on is likely not going to ignore you. And you will not be told anything in advance. In 2011 the ECB gave Cyprus banks a clean bill of health and they all passed the “stress test” with flying colors. Businesses in Cyprus were sent letters last month assuring them that their deposits were safe. They encouraged them to buy “riskless” sovereign bonds, particularly those of Greece. Just last year, Jean-Claude Juncker, head of the eurozone finance ministers, said “when it comes to serious, you have to lie.” That I believe. And now that they have completely failed in their regulation and oversight banks within the euro system, they are coming for the man on the street to pay for it.
On a side note, I do find the outrage here in the States, while justified, a tad ironic. “How dare they confiscate people’s savings!” How dare they, indeed. Our thought leaders are not so bold. Instead of direct confiscation, we allow them to give us artificially low savings rates and hide inflation in manufactured numbers. Honestly, what’s the difference between the gov't directly taking 5% of your savings every year, and the Fed and Treasury stealing an equivalent amount through rate suppression and inflation? There is no difference, and you are poorer for it. What is going on should spark outrage, but we are all just boiled frogs now.
I highly suggest further reading on the subject. I would be surprised if deposit outflows in the likes of Italy, Spain, and others don't commence soon. How the unelected technocrats there react may echo here.
Here are few links I found useful for some further reading on this topic.
-Mike "Mish" Shedlock at Global Economic Analysis
-Josh Brown of The Reformed Broker
-Yves Smith at Naked Capitalism.
-Karl Denninger at The Market Ticker.
Addendum: A few points worth noting since I first wrote this. Fascinating stuff:
-many large foreign depositors where able to get their money out even with the supposed lockdown. In fact it looks like the President's relatives took out many millions.
-it looks as though political parties and many connected individuals in Cyprus have had their loans forgiven. The gall of TPTB has no shame.
-because of all the money that "escaped" the system, it looks as if those with over 100k euros that didn't have connections to TPTB may lose all of that. Stories abound about retirees and small businesses with 500k euros now have just 100k euros in the bank. Tragic for those folks.
"I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if we do prosecute — if we do bring a criminal charge — it will have a negative impact on the national economy, perhaps even the world economy." - Attorney General Eric Holder, March 6, 2013
"There will be no sustainable recovery until the Banks are restrained, the financial system is reformed, and balance is restored to the economy." -Jesse's Cafe Americain
You may think the bailouts were a thing of the past, they are ongoing TODAY:
The top five banks -- JPMorgan, Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and Goldman Sachs Group Inc. - - account for $64 billion of the total subsidy, an amount roughly equal to their typical annual profits (see tables for data on individual banks). In other words, the banks occupying the commanding heights of the U.S. financial industry -- with almost $9 trillion in assets, more than half the size of theU.S. economy -- would just about break even in the absence of corporate welfare. In large part, the profits they report are essentially transfers from taxpayers to their shareholders.
Another massive bailout program HERE. And this nugget:
Using international standards for derivatives and consolidating mortgage securitizations, JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co. would double in assets, while Citigroup Inc. would jump 60 percent, third- quarter data show. JPMorgan would swell to $4.5 trillion from $2.3 trillion, leapfrogging London-based HSBC Holdings Plc and Deutsche Bank AG, each with about $2.7 trillion.
JPMorgan, Bank of America and Citigroup would become the world’s three largest banks and Wells Fargo the sixth-biggest. Their combined assets of $14.7 trillion would equal 93 percent of U.S. gross domestic product last year, the data show.
If an individual citizen was caught with a gram of cocaine, they'd spend years behind bars. But what if you launder hundreds of millions of drug money? Well, if you are a bank, you pay a fine equal to a small fraction of your profits, and not a single individual goes to jail.
The whole thing would be some big joke on the rest of us if this weren't so sadly true and preventable with even the slightest bit of political leadership from the top. There is a class of people in this country who are, in short, above the law. And regardless of how destructive to the greater economy it is, neither party will take a stand since it is their masters, their campaign contributors, that they ultimately serve.
Lastly, a couple of quotes that highlight this occasional theme on the blog -- the complete unaccountability of those who are most at fault for the financial crisis.
“The greatest triumph of the banking industry wasn’t ATMs or even depositing a check via the camera of your mobile phone. It was convincing Treasury and Justice Department officials that prosecuting bankers for their crimes would destabilize the global economy.”
-Barry Ritholtz
"Now that Tim Geithner has resigned as US Treasury secretary, it is time to survey the damage wrought from four years of his approach to the financial crisis. The 'Geithner doctrine' made the preservation of the largest banks, no matter the consequences, a top priority of the US government. Aside from moral hazard, it has also meant the perversion of the US criminal justice system. The US faces a two-tiered system of justice that, if left unchecked by the incoming Treasury and regulatory teams, all but assures more excessive risk-taking, more crime and more crises."-Neil Barofsky, TARP investigator appointed by President Bush
“We Americans are not usually thought to be a submissive people, but of course we are. Why else would we allow our country to be destroyed? Why else would we be rewarding its destroyers? Why else would we all — by proxies we have given to greedy corporations and corrupt politicians — be participating in its destruction?
Most of us are still too sane to piss in our own cistern, but we allow others to do so and we reward them for it. We reward them so well, in fact, that those who piss in our cistern are wealthier than the rest of us.”
-Wendell Berry
As Institutional Risk Analyst noted recently , "We no longer prosecute criminals because our society has been corrupted by exploding public debt. And nobody, nobody wants the game to end."
"Price is what you pay; value is what you get." -Warren Buffett
Europe is a disaster, China is a bubble, but Ben & the Fed have got your back. Maybe the Federal Reserve can continue to overcome all this and equity valuations no longer matter. And maybe Michael Moore will share his last hot dog with you. A few charts to consider:
Warren Buffett himself has noted that the ratio of market capitalization-to-GDP is “probably the best single measure of where valuations stand at any given moment.” The blue line notes that with the exception of recent bubble peaks in 2000 and 2007, Stock Market Capitalization-to-GDP has never been higher. This has been a very good forecaster of future 10-year returns (implies low single digit expected returns).
“In my opinion, you have to be wildly optimistic to believe that corporate profits as a percent of GDP can, for any sustained period, hold much above 6%... Maybe you’d like to argue a different case. Fair enough. But give me your assumptions. The Tinker Bell approach – clap if you believe – just won’t cut it.”
- Warren Buffett, “Mr. Buffett on the Stock Market,” Fortune Magazine 11/22/99
Well, what does it say then that corporate profits are currently at 10% of GDP (blue line, left scale)? Buffett says that normalized profit margins would be 40% lower than where they currently are.
Just one other chart. Again, maybe nothing this time around with Bennie & the Feds boosting the markets. But I'd be hesitant grab that mustard and relish just yet.