Wow! Dow futures down over 200 points!
Friday, December 28, 2012
Thursday, December 27, 2012
Stocks Crater; More Americans On Welfare Than Working In 11 States
Dow down 140 now!
In 11 different U.S. states, the number of government dependents exceeds the number of private sector workers. This list of states includes some of the biggest states in the country: California, New York, Illinois, Ohio, Maine, Kentucky, South Carolina, Mississippi, Alabama, New Mexico and Hawaii. It is interesting to note that seven of those states were won by Barack Obama on election night. In California, there are 139 “takers” for every 100 private sector workers. That is crazy! The American people have become absolutely addicted to government money, and it gets worse with each passing year.
Aetna CEO Says Obamacare to Double Insurance Premiums
Yesterday on CNBC, Aetna CEO Mark Bertolini said that health
insurance premiums could as much as double if Obamacare comes into full
effect:
To provide all Americans with health insurance, premiums will
have to rise to pay for it, Aetna CEO Mark Bertolini told CNBC’s
“Closing Bell” on Wednesday.
Bertolini said that insurance premiums could double in some places just on the basis of what types of policies people buy today.
Anticipating a criticism, Bertolini said that higher premiums wouldn’t mean higher profit margins for insurance companies. The reason is that it will actually be more expensive to insure people due to some of the Obamacare mandates.
Sad Summary of America From a Canadian Perspective
On
this lackluster Boxing Day dominated by illiquid moves in every asset
class, we thought a few succinct minutes spent comprehending the US and
European government policies of social welfare and their outcomes was
time well spent. Canadian MP Pierre Poilievre delivers a rather epic
speech destroying the myths of US and European ‘wealth’ noting that
“Once the US citizen is in debt, the US government encourages them to stay in debt,”
noting that “the US government encouraged millions of Americans to
spend money they did not have on homes they could not afford using loans
they could never repay and then gave them a tax incentive never to
repay it.” His message, delivered seamlessly, notes the inordinate rise
in the cost of all this borrowing, adding that “through debt interest
alone, soon the US taxpayer will be funding 100% of the Chinese Military
complex.” From Dependence to Debt to the Welfare State and back to
Dependence, this presentation puts incredible context on the false hope
so many believe in the US and Europe. Must watch.
“By 2020, the US Government will be spending more annually on debt interest than the total combined military budgets of China, Britain, France, Russia, Japan, Germany, Saudi Arabia, India, Italy, South Korea, Brazil, Canada, Australia, Spain, Turkey, and Israel.”
“Through government spending the indulgence of one is the burden of another; through government borrowing, the excess of one generation becomes the yoke of the next; through international bailouts, one nation’s extravagance becomes another nation’s debt”
“Everyone takes, nobody makes, work doesn’t pay, indulgence doesn’t cost, money is free, and money is worthless.”
More Welfare Recipients Than Workers In 11 States
Interesting perspective from Investmentwatchblog.com:
America is rapidly becoming a nation of takers. An increasing number
of Americans expect the government to take care of them from the cradle
to the grave, and they expect the government to dig into the pockets of
others in order to pay for it all. This philosophy can be very
seductive, but what happens when the number of takers eventually
outnumbers the number of producers? In 11 different U.S. states,
the number of government dependents exceeds the number of private
sector workers. This list of states includes some of the biggest states
in the country: California, New York, Illinois, Ohio, Maine, Kentucky,
South Carolina, Mississippi, Alabama, New Mexico and Hawaii. It is
interesting to note that seven of those states were won by Barack Obama
on election night. In California,
there are 139 “takers” for every 100 private sector workers. That is
crazy! The American people have become absolutely addicted to
government money, and it gets worse with each passing year. If you can
believe it, entitlements accounted for 62 percent of
all federal spending in fiscal year 2012. It would be one thing if we
could afford all of this spending, but unfortunately we simply cannot.
We are drowning in debt,
and we are stealing more than a hundred million more dollars from
future generations with each passing hour. No bank robber in history
can match that kind of theft.
Yes, we will always need a safety net. There are many people out
there that simply cannot take care of themselves. We certainly don’t
want to see anyone sleeping in the streets or starving to death.
But if the number of people jumping on to the safety net continues to
grow at the current pace, the net will break and it will not be
available for any of us.
For example, the number of Americans on food stamps grew from about
17 million in 2000 to more than 47 million today. It nearly tripled in
just 12 years.
What will happen if it nearly triples again over the next 12 years?
The federal government even has a website (benefits.gov) that guides people through the process of figuring out what welfare programs they can take advantage of.
Overall, the federal government runs nearly 80 different “means-tested welfare programs” and more than 100 million Americans are already enrolled in at least one of those programs.
Yes, I realize that figure is very hard to believe. I had a hard time believing it when I first came across it.
And it is even more shocking when you realize that the figure of 100
million Americans does not even include those who only receive Social
Security or Medicare.
Today, there are 56.76 million Americans on Social Security.
To support all of those Americans on Social Security, there are only about 94.75 million full-time private sector workers.
So there are just 1.67 full-time private sector workers to support each American that is on Social Security.
Medicare is also growing like crazy. As I wrote about the other day, the number of Americans on Medicare is expected to grow from 50.7 million in 2012 to 73.2 million in 2025.
How much farther can we push things before the entire system collapses?
In order to support this exploding entitlement system, we need a lot more Americans to be working good paying jobs.
Unfortunately, millions of good paying jobs continue to be shipped overseas and they aren’t coming back.
We are even losing good jobs to our own prisoners. The United States
has the largest prison population in the world by far, and the
exploitation of that low wage labor pool has become a boom industry in
America. Even Microsoft and Boeing are using prison labor now. Just
check out this video.
Meanwhile, there are millions upon millions of law-abiding Americans that cannot find jobs and that cannot take care of their families.
So poverty and dependence on the government are absolutely exploding. We have a system that is so messed up that it is hard to even put it into words. The middle class is being viciously shredded, and most Americans just continue to applaud the politicians from both parties that are doing this to us.
Our economy is being gutted at the same time that the welfare state is experiencing unprecedented growth. Instead of giving us real answers, our “leaders” just continue to borrow, spend and print more money. We are about to hit the debt limit again, and the Obama administration is saying that we should just do away with the debt limit permanently.
Most of our politicians don’t seem to understand that they are systematically destroying our economy and the bright futures that our children and our grandchildren were supposed to have.
But there are some politicians out there that get it. Unfortunately, many of them live in other countries. For example, Canadian MP Pierre Poilievre seems to have a firm grasp on what debt is doing to the United States. The following are some excerpts from one of his speeches…
“By 2020, the US Government will be spending more annually on debt interest than the total combined military budgets of China, Britain, France, Russia, Japan, Germany, Saudi Arabia, India, Italy, South Korea, Brazil, Canada, Australia, Spain, Turkey, and Israel.”You can see his entire speech right here.
“Through government spending the indulgence of one is the burden of another; through government borrowing, the excess of one generation becomes the yoke of the next; through international bailouts, one nation’s extravagance becomes another nation’s debt”
“Everyone takes, nobody makes, work doesn’t pay, indulgence doesn’t cost, money is free, and money is worthless.”
And if we continue down this path it is most definitely true that our money will eventually become worthless at some point. Just today I was down at the grocery store, and a can of chili that I was able to get on sale for 75 cents a couple of years ago now has a “sale price” of $1.69. If the Federal Reserve keeps recklessly printing dollars, eventually we will be fortunate to get a can of chili for 10 bucks. Things cost too much already, and the Fed seems absolutely determined to cut the legs out from under the U.S. dollar.
Unfortunately, printing money is the only way that we are going to be able to service the gigantic amounts of debt that we are accumulating.
According to Chris Cox and Bill Archer, two men who served on Bill Clinton’s Bipartisan Commission on Entitlement and Tax Reform, there is no way in the world that we could raise taxes high enough to pay for all of the obligations that we are currently taking on. They say that even if we taxed all corporations and all individuals at a 100% tax rate on all income over $66,193, “it wouldn’t be nearly enough to fund the over $8 trillion per year in the growth of U.S. liabilities.”
Are you starting to get an idea of how much trouble we are in?
We don’t have enough money to pay for all of this.
We are broke.
Our current economy is a debt-induced illusion, and we will soon be waking up to a tremendous amount of pain.
Are you ready?
Stocks Drop Following Still More Bad News
The Dow is holding above 13,000, and the S&P 500 is holding above 1400. Both are precarious, at best, but I expect them to hold. And just as we were being told that housing had finally bottomed! I think Wall St will dismiss then as one day's news.
Here are the headlines, none of which are good:
from Zero Hedge:
"Today's Consumer Confidence data missed by its biggest margin in 7 months, dropped below the year's average, and saw the largest 2-month drop in over 15 months. All age cohorts lost confidence with the eldest most and it appears those earning over $35k are also beginning to worry (as those between $35k and $15k seem more confident). Over 40% expect stock prices to decline and it is expectations that have plummeted from a hope-filled 80.9 to a 13-month low of 66.5. In other news, we got the November New Homes Sales report from the Census Bureau. On the surface the number was good, but like the initial claims dats, below the surface its not as pretty - on an unadjusted, unannualized basis, November saw a tiny 27K houses sold - lowest since Feb 2012. In fact, the only thing that really did soar was the number of homes for sale at the end of the period which rose to 151K: the highest since November of 2011."
Wednesday, December 26, 2012
Worst Christmas for Retailers In Four Years
Stocks, after opening higher early this morning, have now gone negative.
Monday, December 24, 2012
Over the Cliff, and Through the Woods...
...to Grandmother's house we go...
Fiscal Cliff Dead Ahead
But it's only going to be temporary, of course!
"...it seems likely that the U.S. will briefly go over the “fiscal cliff,”
which will automatically kick in a rash of spending cuts and
across-the-board tax increases, which Congress will then likely reverse
a few days later with an agreement to both cut spending and also
reduce the then-higher taxes for various income groups. Frankly, we’ll
be surprised if the GOP agrees to vote for tax hikes before year-end
when they can wait a few days and get the identical result by voting
for tax cuts in January." -- John Hussman
Over the Fiscal Cliff We Go
...and into the economic abyss!
Friday, December 21, 2012
Our Destructive Interconnectedness
Washington Turmoil Sends Stocks Off a Fiscal Cliff
Last night, when Speaker Boehner was unable to find enough votes to pass a tax bill, stocks had another flash crash and the S&P 500 index dropped 50 points for a few minutes. Some relatively benign news this morning on consumer spending and income has given stocks some buoyancy, but the Dow is still down about 150 points.
Wednesday, December 19, 2012
Economic Ennui -- and It's Only Going to Get Worse!
by Brandon Smith at Alt-Market.com
The markets, as most people reading this should now well know, no
longer reflect in any way the true economic health of our country. If
one was to measure the financial “recovery” of this nation by the
strength of global stocks alone, he would probably come to the
conclusion that the collapse of 2008 was a mere hiccup in the overall
success of the worldwide economic system. However, electronically
traded equities with little more to back their value than scraps of
receipt paper and numbers on a screen have no bearing on what is going
to happen to you, and to me, over the course of the coming year. The
stock market is a sideshow, a popcorn movie, a façade. The real drama
is going on behind the scenes and revealed in fundamentals that
mainstream analysts no longer discuss…
The only advantage of a
long drawn disintegration of the overall system is that as the years
pass, it becomes possible to discover a pattern through which we can
gauge where we really stand today and will stand tomorrow, giving us a
chance (a narrow chance) to limit the eventual damage. Unfortunately,
the pattern now in motion suggests that the next year will be exactly
what we have been predicting over the past several months: Dismal.
The
MSM refuses to discuss it at great length, but all signs show an epic
global slowdown in demand and production, especially in the final
quarter of 2012. This slowdown cannot be denied, nor can it be shrugged
off as inconsequential. This development is exactly as I predicted in
January of this year using the Baltic Dry Index as a guide. During that
first quarter, the BDI fell to record lows, indicating an extreme
decline in shipping demand around the world, which, in turn, indicated a
fall in demand for raw goods, which, in turn, indicated a fall in
demand for consumer goods. Mainstream pundits sought to distract the
public from this fact by claiming that the BDI was collapsing due to an
“oversupply of ships”, not rescinding demand. This disinformation was
proven incorrect in the beginning of the third quarter of this year,
when export nations from China, to Japan, to Germany all began reporting
abysmal manufacturing numbers and steep faltering in overseas
purchases.
Of course, we all know what happened next: The
markets began to tank when they caught the scent of a slowdown, losing a
thousand points within the span of a week. Not so unpredictably (since
I also predicted it at the beginning of the year) the Federal Reserve
leapt into action with its announcement of QE3 (QE Infinity).
QE3
has done little to change the problem of falling global demand, but it
has certainly defibrillated stocks. In fact, I think it is safe to say
that a majority of QE fiat funds are flowing (directly or indirectly)
into the DOW, and not much else. International trade and consumption is
starting to feel the pain, and respective countries are no longer able
to hide it. Keep in mind that this slowdown is occurring right at the
height of the Christmas season, when consumption is usually supposed to
reignite.
Despite the sugar coated claims of insane Keynesians
who only a few years ago were predicting a “resurgence” of American
industry and exports due to the Federal Reserve’s ongoing devaluation of
the dollar, production in the U.S. has remained pathetically weak, and
continues to decline:
http://www.nytimes.com/2012/12/12/business/economy/decline-in-exports-hurts-us-trade-deficit.html
This
is of course a direct result of slowing global demand, reducing
potential markets all over the world, which is something deflation fear
mongers apparently didn’t see coming. The reality is that demand is
faltering EVERYWHERE, not just in the U.S., and this begs a particular
question: In an interdependent economic system driven primarily by
consumption, who is going to fill the void when all nations are dry of
spending cash? That is to say, who is going to take up the slack, when
obviously no one has the wealth to do so? Without a cultural cash
engine, the globalized framework is destined to fail.
China’s
export growth fell far more than expected in November, something which
many Chinese economists are attributing to a complete lack of revival in
American markets:
http://www.reuters.com/article/2012/12/10/us-china-economy-idUSBRE8B80FL20121210
Manufacturing
in the UK went into steep decline almost simultaneously, showing that
sinking demand is striking both the Pacific and the Atlantic:
http://www.bloomberg.com/news/2012-12-07/u-k-manufacturing-drops-more-than-forecast-on-food-alcohol-1-.html
Germany,
the largest economy in the EU and the only country still holding the
absurd political entity together, has been shocked to discover that its
own Bundesbank is forecasting a contraction in growth to near zero in
2013:
http://www.actionforex.com/analysis/daily-forex-fundamentals/germany%27s-bundesbank-revise-lower-2013-outlook-20121207180090/
Japan’s
economy suffered an annualized decline in GDP in November greater than
that which occurred during the Fukushima disaster:
http://www.bloomberg.com/news/2012-11-11/japan-s-economy-shrinks-at-fastest-pace-since-earthquake.html
This
contraction has recently caused Japan to install a new revamped
government during elections this month, which unfortunately will be
instituting almost identical policies to the last regime.
Finally,
Brazil, a developing export nation with very important significance as a
litmus test for world consumption, posted near zero growth in the third
quarter of 2012, far below expectations but in line with the bigger
picture. The global financial machine is grinding to a halt right under
our very noses…
http://www.reuters.com/article/2012/11/30/us-brazil-economy-gdp-idUSBRE8AT0KM20121130
At
the end of 2012, it is undeniable; the system is running out of steam,
and not even constant fiat injections by central banks are reversing our
current course.
In order to understand what is happening, I
want you to imagine a quickly diminishing cycle. Imagine that in 2008,
America was on the edge of a whirlpool, or a spinning vortex, and was
suddenly caught in the outermost current. Today, we have circled the
epicenter several times, each rotation becoming smaller and more
volatile than the last. Eventually, the whirlpool will reach an end,
and our economy will be sucked into the destructive funnel. One can see
clear evidence of this decline in the Baltic Dry Index:
Notice
how each year since 2008 there is a spike in shipping rates indicating a
rise in demand for materials at the onset of the Christmas season,
which is the natural progression of things. Yet, also notice that this
spike in demand grows smaller with each passing year. In 2012, the
increase has been almost nonexistent, meaning that we are likely very
close to going down the drain.
Some pundits may argue that
November’s Black Friday sales were tremendous, and this signals a
recovery in spending and consumption. I would point out that such
numbers are deceiving. High sales during the most discounted day of the
Christmas buying season is not necessarily a good thing. What it
really reveals is that a majority of shoppers were looking for the
lowest prices possible because of a lack of personal savings. It is a
sign of desperation, not revitalization. Full season numbers have not
yet been released, but when they are, I believe we will see a fantastic
spike in sales on Black Friday followed by a complete flatline for the
rest of the year. Obviously high consumption has not been sustained,
otherwise, worldwide manufacturing and shipping would be in much better
shape.
The issue here is one of priorities. With multiplying
distractions going on around the globe, including the fear of recent
mass murders at home, will the public be able to keep track of the
deadly financial tidal waves just off the coast, or will they even care
when distracted by so many sharks in the water? The next two months
will be very revealing. The so-called “fiscal cliff” is on the way, and
the question of whether or not the U.S. government should kick the can
down the road or take the sour medicine it needs and move on has arisen
once again. This debate is and always has been an illusion. Whether we
continue to increase government spending, taxation, and inflation, or
we cut all spending and shut down the fiat presses, there is still going
to be a collapse.
However, the “fiscal cliff” could be very dangerous in an entirely different respect…
The
coming collapse will not be due to the indecision or partisan bickering
of our politicians. They are in much closer agreement than the MSM
would like to admit. Instead, the monolithic Catch-22 of our age will
be the direct result of the actions of the private Federal Reserve and
the peripheral international banking cartel; the engineers who gave
birth to the toxic derivatives implosion in the first place. What I
fear most is that the results of the fiscal cliff negotiation along with
other triggers around the planet (Syria, Iran, the EU breakdown, etc.)
will be used to veil the true weaknesses of our already imploding
system, and eventually be exploited as scapegoat events for a disaster
that has been in the making for decades, not just a few years. The
omens are not good for 2013, and we can only circle the drain for so
long…
Tuesday, December 18, 2012
Risk Is Being Ignored, Amplified
Our biggest concern here on the cusp of 2013 is the current odd combination of extreme complacency about the risks presented by extend-and-pretend macro policy making and rapidly accelerating social tensions that could threaten political and eventually financial market stability. Before everyone labels us ‘doomers’ and pessimists, let us point out that, economically, we already have wartime financial conditions: the debt burden and fiscal deficits of the western world are at levels not seen since the end of World War II. We may not be fighting in the trenches, but we may soon be fighting in the streets. To continue with the current extend-and-pretend policies is to continue to disenfranchise wide swaths of our population - particularly the young - those who will be taking care of us as we are entering our doddering old age. We would not blame them if they felt a bit less than generous. The macro economy has no ammunition left for improving sentiment. We are all reduced to praying for a better day tomorrow, as we realise that the current macro policies are like pushing on a string because there is no true price discovery in the market anymore. We have all been reduced to a bunch of central bank watchers, only ever looking for the next liquidity fix, like some kind of horde of heroin addicts. We have a pro forma capitalism with de facto market totalitarianism. Can we have our free markets back please?
Potential Implications of Our Debt
In today's Outside the Box I bring you two pieces that, at first
glance, may not seem to have much to do with each other. First, Bill
Gross, PIMCO managing director, runs down the fierce structural
headwinds that our hard-pedaling global economy faces over the next
decade. I am going to deal at length with not only his GDP projections
for the rest of the decade but those of Grantham and others in the last
two Thoughts from the Frontline of this year. This is a
challenging environment for traditional portfolio construction, but it’s
par for the course as we slog through the secular bear market I was
first writing about in 1999.
Then Charles Gave instructs us on the distortions in the
measurement of risk that have been introduced as the "plain, boring and
well-meaning economists working in the entrails of the world central
banks" have supplanted the Marxist avant garde in the world's shift
away from “scientific socialism” to "scientific capitalism."
However, when you think about it, these pieces dovetail in a
very convincing – and somewhat frightening – manner. Because what they
add up to – if the econocrats are yanking the rug out from under a
capitalist system that is already reeling, as Gross says, from debt and
deleveraging, a slowing of the locomotive of globalization,
and dislocations in technology and demographics – is a profound, ongoing
challenge to you and me as investors. Gross and Gave have their own
ideas about how we get through this. I don’t agree with all their
conclusions – this letter is not called Outside the Box for
nothing – but I offer these essays because they’ll make us think through
our own presuppositions. However you view their analysis, they do
reinforce the idea that we're all going to have to be not only careful
but very nimble.
I post this note from 35,000, feet flying back from Cleveland to
Dallas. American Airlines has now put internet on nearly all of their
domestic flights, and I find the time I spend read and respond without
interruption up here some of the more productive time I get. Which is
good, since the record shows that I have been on some 110-plus different
planes this year, most of which were AA. (Lately, when I am asked where
I live, I just say my closet is in Dallas.)
It is not just me but other “road warriors” who have noticed
that the staff of AA have markedly stepped up their personal service
levels (as opposed to United, when they were in similar financial
difficulties). More than a few of their employees have gone far out of
their way to make my difficult travel schedule a little bit easier and
smoother, from frontline staff to their back-office phone mavens, who
often perform a little bit of magic rearranging my schedule. And as they
add newer planes to their fleet, seat 5B has almost become my home
office. So here’s a tip of the hat to them and all the service people
who make life on the road better. And may your own road be a little
smoother these holidays.
I spent last night at Dr. Mike Roizen’s home before seeing a few
doctors at the Cleveland Clinic. I rode in a limo with him to a speech
in Youngstown, Ohio, and we had time to visit at length. Mike has become
one of my dearest friends, and our times together are easy ones, deeply
treasured. Without this peripatetic life I would not have so many good
friends, far and wide. It is the best perk of traveling.
Mike is on the board of the Cleveland Clinic, and he is deeply
worried about the fiscal cliff. Even assuming the “doc fix” is passed,
as it always is, without an alteration or repeal of the current law, the
Cleveland Clinic will be faced with an almost 9% budget cut on January
1. They will lose money on every Medicare and Medicaid patient they see.
There are no good solutions other than deep budgets cuts. And since the
largest portion of their budget is salaries?...
The CC is held up (rightly so) as one of the most efficient
medical organizations in the world. They have no fat to cut. I met the
lady, in my walking around at the clinic, who cut $24 million in energy
costs and another $2 million in trash-removal costs, at some
considerable effort and investment. They leave no dollar stone unturned
in the pursuit of efficiency.
Mike and I talked deep into the night and much of the next day,
when we could, about our healthcare system. It fills me with deep
concern. I have asked Mike to give us an outline of his speech today for
an Outside the Box. His five-step “solution” has lowered
healthcare costs for the 43,000 CC staff and all firms that have adopted
their plan. When you look at his numbers, you understand why the US
spends more money on healthcare than Europe. We are indeed that much
less healthy. The CC has found out that paying each staff member $2,000
to adopt a healthier lifestyle lowers overall costs by even more than
that.
Smoking cigarettes may be your personal choice and God-given
right, but it costs the American healthcare system and taxpayers
multiple tens of billions. And the same goes for four other lifestyle
habits. Want to live long and prosper? And be smarter and have better
sex? Just eat right, exercise and avoid a few items. I hope Mike gets me
that essay soon, as I want all my closest friends (that would be you!)
to stay around with me for a long, long time.
Have a good week. I am looking forward to the holidays and home
and family. And while I try to get exercise on the road, my home gym is
still the best.
Your ready for a few good nights’ sleep in my own bed analyst,
John Mauldin, Editor
Outside the Box
JohnMauldin@2000wave.com
Strawberry Fields – Forever?
Bill Gross, Managing Director, PIMCOMisunderstanding all you see
I think I know I mean a yes
But it’s all wrong
That is I think I disagree
I built that ................................... 206
Well, I guess that settles it: you didn’t build that after all. Or maybe you did, but not all of it. Or maybe like the convoluted John Lennon above “you think you know a yes, but it’s all wrong. That is you think you disagree.” Whatever. Rather than an economic mandate, November’s election was more of social commentary on the Republicans’ habit of living with eyes closed. Their positions on what Conan O’Brien labeled “female body parts” – immigration, gay rights and student loans – proved to be big losers, and they will have to amend rather than defend those views if they expect to compete in 2016. I suspect they will. Political parties are living social organisms that mutate in order to survive. We will see straight talking Chris Christie or Hispanic flavored Marco Rubio leading the Republican charge four years from now versus a reenergized Hillary Clinton. It should be quite a show with a “No C ountry for Old (White) Men” caste to it.
But whoever succeeds President Obama, the next four years will likely face structural economic headwinds that will frustrate the American public. “Happy days are here again” was the refrain of FDR in the Depression, but the theme song from 2012 and beyond may more closely resemble Strawberry Fields Forever, as Lennon laments “It’s getting hard to be someone but it all works out.” Why is it so hard to be someone these days, to pay for college, get a good-paying job and retire comfortably? That really was the economic question of the 2012 election towards which very few specifics were applied from either side. “There’s a better life out there for us,” Governor Romney bellowed to a crowd of thousands in
Des Moines, Iowa just days before the election, but in truth he never told us how we were going to achieve it or, importantly, why we weren’t realizing it in the first place. The president’s political mantra of “Forward” was even more vague.
Their words were mum if only because the real cause of slower economic growth lies hidden in a number of structural as opposed to cyclical headwinds that may be hard to reverse. While there are growth potions that undoubtedly can reduce the fever, there may be no miracle policy drugs this time around to provide the inevitable cures of prior decades. These structural headwinds cannot just be wished away as we move “forward” whether it be to the right, the left or dead center. Last month in a major policy speech at the New York Economic Club, Fed Chairman Ben Bernanke concurred that the U.S. economy’s growth potential had been reduced “at least for a time.” He in effect confirmed PIMCO’s New Normal which has been in place for three years now, laying the blame in part on the financial crisis, diminished productivity gains, and investment uncertainty due to the near-term fiscal cliff. We do not disagree. However, there are numerous oth er structural headwinds that may reduce real growth even below the New Normal 2% rate that Bernanke has just confirmed, not only in the U.S. but in developed economies everywhere.
They are:
1) Debt/Delevering
Developed global economies have too much debt – pure and simple – and as we attempt to resolve the dilemma, the resultant austerity should lower real growth for years to come. There are those that believe in the “Brylcreem” approach to budget balancing – “a little dab‘ll do ya.” Just knock a few percentage points off the deficit/GDP ratio, they claim, and the private sector will miraculously reappear to fill the gap. No such luck after 2–3 years of austerity in Euroland, however. Most of those countries are mired in recession and/ or depression. Political leaders there should have studied the historical evidence presented by Carmen Reinhart and Ken Rogoff in a critically important paper titled, “Growth in a Time of Debt.” They conclude that for the past 200 years, once a country exceeded a 90% debt/GDP ratio, economic growth slowed by nearly 2% for both developed and developing nations for an average d uration of nearly a decade. Their work displayed below in Chart 1 shows the result in the United States from 1790–2009. The average annual U.S. GDP rate growth, while clearly influenced by the Great Depression, was -1.8% once the 90% barrier was exceeded. The U.S., by the way, is now at a 100% debt/GDP ratio on the basis of the authors’ standard measuring yardstick. (Note as well the 5_% average inflation rate during the same periods.)
In addition to sovereign debt levels which were the primary focus of the Reinhart/Rogoff studies, it is clear that financial institutions and households face similar growth headwinds. The former needs to raise equity via retained earnings and the latter to increase savings in order to stabilize family balance sheets. The combined need to increase our “net national savings rate” highlighted in last month’s Investment Outlook is a long-term solution to the debt crisis, but a near/ intermediate-term growth inhibitor. The biblical metaphor of seven years of fat leading to seven years of lean may be quite apropos in the current case with the observation that the developed world’s growth binge has been decades in the making. We may need at least a decade for the healing.
2) Globalization
Globalization has been an historical growth stimulant, but if it slows, then the caffeine may wear off. The fall of the Iron Curtain in the late 1980s and the emergence of capitalistic China at nearly the same time was a locomotive of significant proportions. Adding two billion consumers to the menu made for a prosperous restaurant, increasing profits and growth in developed economies despite the negative internal effects on employment and wages. Now, however, these tailwinds are diminishing, producing an airspeed which inexorably slows relative to the standards of prior decades. Is it any wonder that markets now move up or down as much on the basis of policy changes coming out of China as opposed to the U.S. or Euroland? If China and the accompanying benefits of globalization slow, so too may developed economy growth rates.
3) Technology
Technology has been a boon to productivity and therefore real economic growth, but it has its shady side. In the past decade, machines and robotics have rather silently replaced humans, as the U.S. and other advanced economies have sought to counter the influence of cheap Asian labor. Almost a century ago, Keynes alerted the economic community to a “new disease,” what he called “technological unemployment” where jobs couldn’t be replaced as fast as they were being destroyed by automation. Recently, Erik Brynjolfsson and Andrew McAfee at MIT have affirmed that workers are losing the race against the machine. Accountants, machinists, medical technicians, even software writers that write the software for “machines” are being displaced without upscaled replacement jobs. Retrain, rehire into higher paying and value-added jobs? That may be the political myth of the modern era. There aren’t enough of those jobs. A structurally higher unemployment rate of 7% or more is the feared “whisper” number in Fed circles. Technology may be leading to slower, not faster economic growth despite its productive benefits.
4) Demographics
Demography is destiny, and like cancer, demographic population changes are becoming a silent growth killer. Numerous studies and common sense logic point to the inevitable conclusion that when an economic society exceeds a certain average “age” then demand slows. Typically the dynamic cohort of an economy is its 20 to 55-year-old age group. They are the ones who form households, have families and gain increasing experience and knowhow in their jobs. Now, however, almost all developed economies, including the U.S., are gradually aging and witnessing a larger and larger percentage of their adult population move past the critical 55-year-old mark. This means several things for economic growth: First of all from the supply side, it means productivity and employment growth rates will slow. From the demand side, it suggests a greater emphasis on savings and reduced consumption. Those approaching their seventh decade need fewer cars and new homes as shown in Cha rt 2. Almost none of them have babies (thank goodness!). Such low birth rates and a significant reduction in demand have imperiled Japan for several lost decades now. A similar experience will likely turn many developed economy “boomers” into “busters” within the next several years.
Investment Conclusions
I’m fond of reminding PIMCO’s Investment Committee that you can’t buy GDP futures – at least not yet. Hypotheses about real growth rates, no matter how accurate, must be translated into investment decisions in order to justify the discussion. Before doing so, let me acknowledge that these structural headwinds can and will likely be somewhat countered by positive thrusts. Cheaper natural gas and the possibility of reversing or even containing the 40-year upward trend of energy costs may be a boon to productivity and therefore growth. There is talk of the U.S. being energy independent within a decade’s time. Housing as well may be experiencing a multiyear revival. In addition, unforeseen productivity breakthroughs may be just over the horizon. How many gloomsters could have forecast the Internet or any other technical breakthrough before it actually happened? Jules Verne we are not.
But if a 2% or lower real growth forecast holds for most of the developed world over the foreseeable future, then it is clear that there will be investment consequences. Shown below, as recently published in a TIME Magazine article by Rana Foroohar, is a PIMCO list of future Picks and Pans based upon these ongoing structural changes:
Picks
· Commodities like Oil and Gold
· U.S. Inflation-Protected Bonds
· High-Quality Municipal Bonds
· Non-Dollar Emerging-Market Stocks
Pans
· Long-Dated Developed-Country Bonds in the U.S., U.K. and Germany
· High-Yield Bonds
· Financial Stocks of Banks and Insurance Companies
The list to a considerable extent reflects the view that emerging economy growth will continue to be higher than that of developed countries. Their debt on average will remain much lower, and their demographic age much younger. In addition, the inevitable policy response of developed economies to slower growth will be to reflate in order to minimize the impact of the aforementioned structural headwinds. If successful, reflationary policies will gradually move 10 to 30-year yields higher over the next several years. The 30-year Treasury hit its secular low of 2.50% in July and such a yield may seem ludicrous a decade hence. Investors should expect future annualized bond returns of 3–4% at best and equity returns only a few percentage points higher.
As John Lennon forewarned, it is getting harder to be someone, and harder to maintain the economic growth that investors have become accustomed to. The New Normal, like Strawberry Fields will “take you down” and lower your expectation of future asset returns. It may not last “forever” but it will be with us for a long, long time.
The Control Engineers and the Notion of Risk
Charles Gave, GaveKalThere is a great movie scene where Harpo and Groucho Marx meet in the “socialist restaurant.” Groucho says, “this food is disgusting and inedible!” To which Harpo replies, “and on top of that, the portions are far too small!” So by the late 1930s and the golden era of the Marx Brothers, it was already obvious that socialism was bad fare in high demand. Yet it took another half century for “scientific socialism” to be finally discredited in rivers of blood, murder and poverty. With the economic disasters wrought by socialism, one might have assumed that policymakers would accept that the future cannot be forecasted. The role of economists, governments and central banks is to promote a stable monetary and legal framework for the risk-takers (entrepreneurs, money managers etc.) to make their decisions as rationally as they could.
Unfortunately this has not happened. Instead, in a new and improved declination of Friedrich Hayek’s "fatal conceit," we seem to be moving away from “scientific socialism” to "scientific capitalism" – where the overconfident and overeducated control-engineers are no longer members of the avant garde of the proletariat, but plain, boring and well-meaning economists working in the entrails of the world central banks. My intent is not to show why these economists will fail (bigger and brighter minds such as Hayek, Mises, Friedman, etc. have already done this) – but rather to review the impact that the misguided manipulation of the price of money (exchange and interest rates) is having on the notion of risk.
In standard financial theory, most practitioners use the volatility of underlying assets as a measure of risk. To some extent, quantitative easing policies have had their biggest impact on this measure. Not only are prices totally artificial for a number of assets (government debt chief amongst them), but the volatility of these prices is also completely meaningless. Volatility no longer indicates the risks involved in holding certain assets, but instead measures the amount of the manipulation that the poor prices are enduring. For example, no-one today could say with a straight face that there is any information in the volatility of the euro-swiss exchange rate, or that this zero volatility adequately measures the risks that a Swiss based investor takes in buying euro-denominated assets.
So as a direct consequence of the manipulations of our well-meaning "control engineers" of market prices, today’s volatility readings have absolutely nothing to do with the underlying risks. From here, it is hard to escape the following conclusions:
· This will lead to the next disaster, for major financial accidents typically find their source in a misconception of risks, rather than a misconception of returns (e.g., Greek bonds are just as risky as German bonds, levered US mortgage bonds are as safe as houses, etc).
· Building a rational portfolio, where risks can be properly hedged, is almost impossible when market signals have disappeared (explaining the recent difficulties of so many macro and CTA hedge funds?).
Staying with the above ideas, consider that all the quantitative models and statistical techniques like “value at risk” will prove to be hopelessly wrong when true volatilities re-emerge (as they always do!). And when that occurs, who doubts that many financial institutions will, once again, find themselves in the line of fire. After all, as Karl Popper explained: "In an economic system, if the goal of the authorities is to reduce some particular risks, then the sum of all these suppressed risks will reappear one day through a massive increase in the systemic risk and this will happen because the future is unknowable". The sum of the risks in an economic system over time is a constant and the only question confronting economists is whether we should prefer to take our risk in small doses, or in a massive injection (as occurs when a fixed exchange rate system breaks down, or when a debt restructuring happens etc...)?
So in a world of “suppressed volatility,” the only smart thing a long-term investor can do is to buy the assets which have been sold because of their higher volatilities. This obviously is equities, and in particular, the very long duration equities of companies in technology, healthcare, energy, etc. A well-diversified portfolio of such shares will be volatile, but investors will likely see their money back over time and then some.
In fact, strange as it may seem, the only way to reduce the risk today is to own assets that still sport a "market price" – which will thus automatically have a very high volatility compared to the other assets exhibiting a very low, but artificial volatility. To reduce risk today, one has to build a very volatile portfolio! This is partly because a lot of non-volatile assets are extraordinarily risky. For example, I cannot think of more dangerous assets to own today than French or Japanese government bonds. I could easily imagine Groucho looking at a menu of JGBs and OATs and exclaiming, “these assets are terrible and have no yield”, only for Harpo to reply, “and their aren’t enough for everybody.” This last line will change rapidly when reality hits. Because economic history teaches us that no policymaker can control volatility for ever. The real hedge for portfolios today no longer is government fixed income, or even gold, but is instead volatility strategies.
Monday, December 17, 2012
Hussman: Destined for Economic Malaise
Roach Motel Monetary Policy
John P. Hussman, Ph.D.
All rights reserved and actively enforced.
Reprint Policy
Thursday, December 13, 2012
Wednesday, December 12, 2012
Fed Announcement Sends Stocks Vertical
Monetary manipulation at its finest. The "fiscal cliff" is forgotten. Who needs an economy? We have printed prosperity now!
Baltic Dry Index Gets Crushed
One of the economic indicators that is one of the most prescient about
the direction of the global economy is the Baltic Dry Index. It measures
shipping around the world as a predictor of the health of the global
economy. When shipping in the world declines, so does economic activity.
from Zero Hedge:
It has been a while since we looked at the
Baltic Dry Index, which when normalizing for the excess glut in dry
container ship supply (such as right now - 5 years after all the excess
supply in the industry - has long been normalized), continues to be
one of the best concurrent indicators of global shipping and trade. We look at it today, moments ago it just posted an epic 8.2% plunge, crashing from 900 to 826, or the biggest drop since 2008!
Of course, conisdering the collapse in global trade confirmed in past
days by both Chinese and US data, this should not come as a surprise,
although we are certain it will merely bring out the BDIY apologists who
tell us that supply and demand here (like in every other Fed-supported
market) are completely uncorrelated.
Waiting For More Feddling
Markets are in a holding pattern as we await an announcement from the Fed which is widely expected to open the monetary spigots still wider. Inflation this way comes!
Tuesday, December 11, 2012
Monday, December 10, 2012
Outsized Inflation Risk Increasing!
When it comes to market experts with decades of insight, we will pick
soon to be Second Admiral of his own sovereign navy (comprising of
privateered Argentinian schooners, Belize catamarans, and soon, Greek Made in Germany submarines),
Elliott's Paul Singer, over those of any fly by night TV talking head,
or "information arbitrageur" whose only 'alpha' in the past decade was
courtesy of expert networks. The same Paul Singer whose outlook on what
the next crisis may look like we posted yesterday.
It is the same Paul Singer, who three weeks ago was a headline speaker
at the Archstone Partnerships annual meeting, in which speech he laid
out not only the biggest threat facing America - namely the arrogance of the United States "by
not realizing that in today's world... you have to be attractive as a
country [because] capital will go where it's welcome", but more
importantly, the thing that keeps him up at night: "The thing that scares me most is significant inflation, which could destroy our society."
In other words, one of the best and brightest investors in the world,
is most terrified by the one thing that every central-planning
dispensing economist says will never happen: hyperinflation. Our money is certainly not on the theoreticians.
Extracting the key parts from Singer's speech. Highlights ours
Or, perhaps, the developments over the past several months were geared with precisely this outcome in mind: because there is nothing quite like "social unrest" to resolve decades of untenable economic and monetary imbalance build up...Let me make a few comments and observations on the current investment scene. I said before that every once in a while things really are “different this time,” and I thought of a metaphor earlier that might be useful to illustrate an important point. Let’s do a thought experiment: Let’s make believe we are in 1960 and sitting in Germany, and we are a group of German investors and businesspeople, about the same ages as the people here today. The group would be people who had seen the most astonishing changes in the underlying conditions of investing and growing capital—a complete evaporation of savings from 1914 to 1923; complete destruction of society; and a complete change in governance from 1943 until after the War. Keep that image in your mind when you come back to 2012 in New York City today and realize the basic terms and conditions of everybody in this room have not really changed over your entire career. There have been booms and little crashes, you’ve made money and lost money, some people were wiped out and others became wealthy, but the elections come every four years, power is transferred peacefully, and taxes go up or go down.
It concerns me that we might be entering a period—we have to think about this possibility—when the basic terms and conditions of owning capital, making a rate of return, and keeping the money you earned might be in the process of changing. Charles Krauthammer said some time ago that most of American political life is between the 40-yard lines and that this crowd, which has been elected for another four years, is kind of at the 30-yard line. I had thought about it at the 10-yard or 5-yard line, but Charles is more mature than I and I’ll accept what he said. But I’m very concerned about class warfare generated from the top, about the possibility of an extended period of lacking strong economic growth. I think economic growth could be easily achieved in the United States at greater levels, and I’m quite concerned that the current prospects, beyond the so-called “fiscal cliff” and a deal on taxes and spending cuts, will be an extended period of low growth and possibly a recession, the continued bashing of money and success and very large tax increases.
I want to call to mind a micro choice that I think is relevant. If you lived in the upper Midwest, you’d know the difference between Indiana and Illinois. You would know Indiana welcomes jobs and businesses, and finds ways to work with businesses; and Illinois is on a slide to Hades. Illinois—and I suppose Michigan, too—is doing everything possible to support unsupportable expenses, structures and make thing miserable for taxpayers.
By the same token, I think America—and this goes beyond President Obama’s administration—has been quite arrogant for a long time by not realizing that in today’s world, where many countries around the globe can turn out products and services more cheaply than America, and where America has lost so many industries and jobs to other countries, that you have to be attractive as a country. Capital will go where it’s welcome. It is subject to an understandable rule of law, regulation, fair and attractive taxation, and the quality of life. I’m afraid of that, because when you look at the sweep of the booms since the Internet boom and monetary policy, and the extremism that has become embedded in current monetary policy, the United States, Europe, the U.K. and Japan, you do see extreme monetary policy.
They say this is not massive money printing, but first they are wrong; and second, monetary authorities in the United States did not see the crash coming and the unsoundness of the financial system. In fact, right up until the crash they were saying that nothing like what happened could ever happen. So money printing and zero-percent interest rates, which have distorted the economic recovery and the landscape in the United States and Europe, have become a substitute for sound, pro-growth, fiscal regulatory tax policy. As a result, they say they are not concerned about inflation. This monetary policy, $3 trillion of bond buying in the United States, $3 trillion in Europe and another $2.5 trillion to $3 trillion in Japan, is unprecedented. It is not the case that they know the ultimate inflationary potential when this low-velocity money gets back into the system and acquires some velocity. If and when people lose confidence in paper money because of repeated bouts of quantitative easing and zero-percent interest rates—it could happen suddenly and in a ferocious manner in the commodity markets, in gold, possibly in real estate—interest rates could go up at the long end by hundreds of basis points in a very short time.
I’m quite concerned as a money manager that we have to manage money, not just for the boundaries of what’s in front of our faces—maybe we’ll have a little tax increase or not, the fiscal cliff, or the stock market might go up or down 10% or 15%—but for a basic shift. The thing that scares me most is significant inflation, which could destroy our society. Frankly, in my view the recent election has diminished the probability of a strong resurgence of growth, and I’m quite concerned. Others are concerned about the course of the next 12 to 24 months in terms of growth, taxation, regulation and social unrest, a resurgence or larger version of bashing anyone who has made money or makes money and not paying their fair share.
Stocks Go Positive for Day
This is amazing. Investors are so pleased and so filled with faith in Bernanke, that they believe that stocks are worth more today, than they were on Friday, despite the worsening economic news. Here's the proof! Stocks just went positive for the day.
This sure looks like a bubble to me, when investors ignore all the fundamentals and worsening economic climate and keep buying, despite all of it. That's the very definition of a bubble.
Will the Fed Print Even MORE Money This Week?
Ben "Bubbles" Bernanke and the Fed's FOMC will meet this week and Wall St is expecting Bernanke to announce a doubling of the Fed's program of monetizing US debt.
Currently, the Fed is monetizing about $40 billion/month in mortgage debt, and has continued its program of monetizing an additional $45 billion/month of US government debt by swapping short-term US debt for long-term US debt under its continuing program (sorry, the name escapes me as I type this).
But this week, due to the on-going weakness in the economy (yes, the same one Michelle Antoinette termed a "huge recovery"), Wall St is now expecting the Fed to begin a NEW program of monetizing even MORE US government debt. It is widely expected that the Fed will monetizing an additional $40-$45 billion/month, to be announced this Wednesday!
This is why, despite worsening economic indicators since this last summer, the stock market has continued near five-year highs, and Wall St has continued its Pollyanna Party, dismissing the endless parade of bad news as just "temporary" ("Hurricane Sandy did it, Mommy") or merely anecdotal singular events.
The Fed has so pumped up the stock market bubble that news, data, and analysis are no longer even relevant in this "bubble" mirage economy. In a November 2010 op ed in the Wall St Journal, Bernanke boasted of his ability to endlessly pump up stocks, even referring to asset bubbles (stocks, housing, and remember the now-forgotten "sub-prime" mortgage bubble?) glowingly as "the wealth effect". Bernanke literally considers all his bubble blowing as a GOOD THING!
When Bernanke, in one of his few interviews with the news media, told Scott Pelley that 1) he wasn't printing money, and that 2) he wasn't monetizing the debt, he was boldly lying to the American people, counting on the ignorance of the vast majority of them.
While technically, he was correct in saying that the Fed doesn't literally "print" money any more, he intentionally misleads people, because the Fed DOES create money out of thin air. They do it in a computer now, not with a printing press. But this same Bernanke gave his now-famous "helicopter" speech by boasting of the Fed's "this thing called a printing press" (HIS own words). He then denied to Pelley what he had previously boasted about?
And in #2 above (Bernanke's claim that the Fed is NOT monetizing the national debt), he blatantly and LIED bold--faced to the American People. The Fed has monetized more than 90% of the issuance of long-term US government debt in the past 4 years, adding nearly $3 trillion of government-issued debt to the Fed's balance sheet, and plans to increase its balance sheet of US debt to more than $5 trillion in the next two years. If that's not "monetizing the debt", Mr. Bernanke, what IS? Ah, that's right! We "sophisticates" call it "quantitative easing" now! We've become so much more svelte in our deceptions, now! As long as it sounds arcane, it just MUST be good, now!
Overnight, when markets tanked again in Europe, stock futures tanked along with them. Here is the result:
But not for long! It's Bubbles Bernanke to the rescue. Stocks were soon pumped higher again beginning at 6 am EST, while nearly all Americans were still asleep, and stocks are now back to flat for the day, just in time for the NYSE to open 30 moments from now. Here is the most recent stock futures chart a few minutes ago:
This endless money pumping ultimately does NOT yield jobs or prosperity. It brings inflation and Dollar devaluation, and it only empowers politicians to engage in still more destructive spending, taxing, and pandering to economic ignoramuses -- Obama's legions of leeching lemmings!