Confidence Collapse

WSJ headline:

Wall St Bets Big on Fiscal Fix

Despite that no "fix" is in sight, stock futures rose on Friday, even following more bad economic data. However, once Congressional leadership reported a "constructive" meeting with President Obama, stocks leaped out of the red and into the black.
Stock futures continued to rise Sunday evening and into the European session, rising modestly during the session. This, even though Spanish debt continues to deepen.

from Business Insider:
"One of the darkest parts of the Spanish economy, and therefore the European economy, the bad loans held by the banking system continues to get worse.
"From Reuters:

Spanish banks' bad loans rose to 10.7 percent of their outstanding portfolios in September, reaching a fresh record high, Bank of Spain data showed on Monday, up from 10.5 percent a month earlier.

"The total pile of bad debt is now a staggering $182.2 billion."

Goldman's Kostin: "Clear and Present Downside Risks"

"Uncertainty swirling around the ‘fiscal cliff’ that must be resolved by year-end, the pending jump in capital gains taxes at the start of 2013, and the debt ceiling that will be reached in late February represent clear and present downside risks to the market in the near-term," writes David Kostin in US Weekly Kickstart.

Hussman: Finger In the Dyke

In the Mary Mapes Dodge book titled Hans Brinker, there is a fictional story within the story of a little Dutch boy who, on his way to school, notices a hole in the dyke. Having nothing else to fix the leak, he plugs the hole with his finger and stays there through the night until workers come to repair it. We are now into the fourth year of efforts to print trillions of little Dutch boys out of dollars and euros in order to stop a tide from crashing through a fundamentally damaged dyke. All of this has bought time, but no workers have arrived, and no real repairs have been done.

The holes seem only loosely related: non-performing mortgages, widespread unemployment, massive U.S. budget deficits, a “fiscal cliff” sideshow, inadequate European bank capital, European currency strains, a surge of non-performing loans in China, and unexpected economic softness in Asia and global trade more generally. All of this gives the impression that these problems can simply be addressed one-by-one. The truth is that they are all intimately related to a single central issue, which is the utter unwillingness of politicians around the globe to accept and proceed with the inevitable restructuring of bad debt, and their preference to defend the bondholders of a fundamentally rotted financial system.

But haven’t things improved? No doubt, bank balance sheets have been relieved of transparency through changes in accounting rules. Nonperforming loans have been easy to kick down the road thanks to an interminable “amend and pretend” process whereby a month or two of mortgage service is exchanged for extensions that tack delinquent payments onto the back of the loans. Meanwhile, banks have recouped some of their losses through wider interest spreads, by refusing to refinance higher interest mortgages, and by paying lower interest costs as a result of monetary policies that provide zero interest compensation to savers.

But aside from the appropriate equity wipeout, debt writedown, contract renegotiation and reissuance of General Motors, very little debt restructuring has occurred anywhere else in the economy – certainly not in financial or mortgage debt. Meanwhile, the European banking system faces major capital inadequacies, particularly in Spain, where delinquent loans have surged to record highs. The Federal Reserve just altered its annual stress tests for too-big-to-fail banks to now include the risk of a slowdown in Asia. The U.S. budget deficit remains near a peacetime high, with little prospect of substantial reduction even if the so-called “fiscal cliff" is resolved. The European economy is clearly in a fresh recession. We continue to infer that the U.S. also entered a recession during the third quarter. This will not be helpful to deficit reduction efforts.

In recent months, our estimates of prospective return/risk in the stock market have moved to the lowest 1% of historical data. In September, and again last week, those estimates dropped to the worst two observations in a century of historical data. Importantly, our concerns about global recession, unrestructured debt, European banking strains, and other issues are not at all responsible for those negative estimates. If anything, the continued (and I believe, misguided) speculation in low quality debt and credit-sensitive corporate bonds is keeping those estimates from being as negative as they would be otherwise. The end result here is a combination of global recession, massive and pervasive deficits, growing volumes of unserviceable and unrestructured debt, a financial picture marked by rich valuations, depressed risk premiums, and record-low yields-to-maturity across the menu of investment alternatives, deterioration in market internals such as breadth (advances vs. declines) and leadership (new highs vs. new lows) and a variety of trend-following measures, all alongside a deep-seated complacency of investors that everything will turn out just fine once the minor sideshow of the “fiscal cliff” is resolved.

Getting past the “fiscal cliff” is the comparatively easy part. What it requires is for both aisles of the U.S. political system to agree on a mutually acceptable (but likely still intolerably large) federal deficit. Whether this happens before December 31 or after is not terribly meaningful because there is not an irreversible outcome on that date. So whatever might happen automatically would be meaningless shortly thereafter anyway. There will likely be a combination of modest spending cuts, modest high-income tax increases, and limits on deductions for second homes. None of these will have a material impact on the size of the deficit. Despite the bluster, few in Congress really appear to see deficit reduction as important as their core interests, which for Democrats is to preserve spending and for Republicans is to maintain tax cuts. Some inadequate compromise seems probable, there will be a brief episode of joy and celebration by investors that they have been released from their chains, and shortly thereafter the data will remind us that the global economy is in recession, and that the U.S. economy entered a recession during the third quarter – well before Sandy was even on the weather map.

Ultimately, three outcomes would improve the global economy more durably. The first would be a process of debt restructuring that might be highly disruptive over the intermediate-term, but would exert the costs of bad debt on the holders of that debt rather than the general public. My expectation is that a large portion of the European banking system will be restructured in the next few years – meaning receivership, a wipeout of equity value, a writedown of liabilities to bondholders, and an eventual recapitalization as the restructured entities are sold back to private ownership. It isn’t clear that Spain or Italy will be forced to default, as long as Germany, Finland, and other relatively strong countries depart from the euro and allow the ECB to monetize as it pleases. Greece is a basket case in that it seems likely to default again regardless of whether the euro remains intact. In the U.S., efforts to create standardized, marketable mechanisms to restructure mortgage debt (e.g. debt-equity swaps such as marketable property appreciation rights in return for principal reductions) remain long overdue.

It would also be advisable for the next Treasury Secretary to significantly extend the maturity of U.S. debt, because we are now too far along to resolve the U.S. debt burden through fiscal austerity alone, and some level of inflation will have to be tolerated in the back-half of this decade (and possibly beyond) to reduce the real burden. This can’t be done if the debt is so short-term that the interest rate can be quickly reset to reflect inflation.

A second beneficial outcome would be a realignment of the prices of financial assets to more adequately reflect risk, to provide an incentive to save, and to raise the bar on rates of return – so that investments with strong prospective returns are funded while those with low prospective returns are not. Probably nothing in the past 15 years has been as damaging to the interests of the global economy as the constant distortion of the financial markets by central banks, which has encouraged bubble after bubble, elevating speculation over the thoughtful allocation of scarce capital toward productive uses.

Finally, we need innovation in new industries that have large employment effects. During periods of economic weakness, a common belief seems to emerge that the government can simply “get the economy moving again” through appropriately large spending packages – as if the economy is nothing but a single consumer purchasing a single good, and all that is required is to boost demand back to the prior level. In fact, however, recessions are periods where the mix of goods and services demanded becomes out of line with the mix of goods and services that the economy had previously produced. While fiscal subsidies can help to ease the transition, the sources of mismatched supply – dot-com ventures, housing, financial services, obsolete products, brick-and-mortar stores – generally don’t come back. What brings economies back is the introduction of desirable new products and services that previously did not exist. This has been true throughout history, where the introduction of new products and industries - cars, radio, television, airlines, telecommunications, restaurant chains, electronics, appliances, computers, software, biotechnology, the internet, medical devices, and a succession of other innovations have been the hallmarks of long-term economic growth. Fiscal policies are part of the environment, but their effect should not be overstated.

No stimulus package or tinkering with tax rates will produce growth in an economy as distorted by misguided monetary policy and unrestructured debt as our global economy has become. What is required is to restructure the burden of past errors, stop the recklessness and distortion of monetary policy, and allow the financial markets to adjust and clear, without safety nets, so that they both allocate capital toward productive investments and are allowed to punish misallocation. Then – deficit or no deficit – refrain from bleeding the patient, and do everything possible to encourage (private) and fully-fund (public) research, development, innovation, investment, and education.

In my view, we are likely to experience some difficult disruptions in the global economy in the transition from an unsustainable economic environment to a sustainable one. Underneath the veneer of a relatively stable U.S. economy is the fact that government deficits presently support about 10% of that activity, the Fed has pushed the monetary base to the largest fraction of GDP in history, and financial assets have been driven to some of the lowest prospective returns ever observed. Absent unsustainable levels of government “stimulus,” the present configuration of U.S. economic activity and asset pricing is also unsustainable. These policies have bought time, but we have done nothing with it, because somehow everyone has become convinced that the house of paper is real even though we all watched it being built.

All of this will change, and despite major challenges over the intermediate-term, there is no reason to lose long-term optimism for the U.S. or the global economy. The problem is that in our view, long-term assets are priced in a way that ignores the prospect for significant disruptions, and allows for inadequate return even in the event that the long-term works out very well. So we do have long-term optimism for the global economy, but also believe that financial assets are mispriced even if that long-term optimism is entirely correct. In bonds, yields-to-maturity remain near record lows. In stocks, valuations only appear tolerable because profit margins remain about 70% above long-term norms, largely because of low savings rates coupled with massive federal deficits (see Too Little to Lock In for the accounting relationships).

Meanwhile, the intermediate-term challenges are daunting, and should not be underestimated. Europe will not likely resolve its challenges without major dislocations and restructuring, Asia is likely to experience the exaggerated supply-chain disruption of a global recession (the Forrester effect, or what ECRI calls the “bullwhip effect”), and though the U.S. will probably move quickly past its immediate “fiscal cliff,” that resolution is unlikely to significantly reduce the deficit, nor to avert a recession that we believe already started in the third quarter.

Blame It All On Sandy!

This from Zero Hedge:

"Because not one Wall Street analyst could have possibly factored in the impact of Sandy into their expectations of the month's Industrial Production, which in October declined by -0.4% to 96.6 from 97.0 in the Fed's index, well below consensus expectations of a 0.2% rise, and down from last month's 0.4% increase, it is only logical to blame it all on Sandy. Sure enough, this is what the Fed just did: "Hurricane Sandy, which held down production in the Northeast region at the end of October, is estimated to have reduced the rate of change in total output by nearly 1 percentage point." So let's get this straight: Sandy - which hit on October 29, or with about 94% of the month of October done and impacted New York and New Jersey, not the entire US, is responsible for 250% of the entire October 0.4% drop?  Can we please get back to the "It's all Bush's fault" excuses already. At least those were idiotic and funny. Blaming everything on Sandy is just the former. And yes, capacity utilization for the entire USA which came at 77.8%, the lowest since November 2011, and well below expectations of 78.3%, was obviously crushed by a tropical storm that impacted New York and New Jersey for 3 days in the month. Brilliant."

So, I might add, was that! Brilliant! 

Risk Rumor Ramp!

Based solely on the words of John Boehner that his meeting with President Obama was "constructive", S&P 500 futures have leaped 16 points (about 120 on the Dow) in less than 30 minutes. Oops! It wasn't "words" (plural), it was WORD (singular).

Harbinger of Things to Come

Stocks are losing ground again today on news that things are only getting worse in the economy. The headlines speak for themselves.

Rising lay-offs!

EU Enters Recession

It's a European-style nightmare!

Stocks Drop Through Pre-Session Lows

Philly Fed Plunges, Stocks Holding Near Zero Line

Follow my earlier posting, stocks fell flat and have been straddling the flat line today. But now, the Philly Fed survey has been released, and it's very bad -- far worse than was expected. 

from Zero Hedge:

Let's see if Bush Sandy can be blamed for not only the Empire Fed, whose employment and expectations components plunged, for the Initial Claims, which soared and missed expectations by the second most in the past 13 years, but also for the Philly Fed, which just plunged from 5.7 to -10.7, far below consensus of 2.0, the 6th miss of the last 8 (except for last month of course), and returning to solidly negative territory after last month's "miraculous" pre-election surge. And while virtually all subcomponents plunged, the one that stood out to the upside was Prices Paid, as the margin collapse is set to ravage all companies not only in the greater Philadelphia region but everywhere else soon as reality, deferred for the duration of the Obama reelection campaign, slams everyone in the stomach.

From the report:

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased 16 points, to a reading of ?10.7. The fallback of the general activity index followed a single positive reading in October that was preceded by five negative monthly readings (see Chart). Nearly 32 percent of firms reported declines in activity this month, while 21 percent reported increases. The demand for manufactured goods, as measured by the current new orders index, declined 4 points from last month and remains in negative territory.

Shipments  also fell this month: The current shipments index fell 7 points, to ?6.7. Declines in inventories were also more widespread this  month; 31 percent of firms reported declines compared with 21 percent in October. Labor market conditions at the reporting firms remained weak this month. The current employment index, at ?6.8, was slightly improved from its negative reading in October (?10.7) but has remained negative for five consecutive months. The percentage of firms reporting decreases in employment (20 percent) exceeded the percentage reporting increases (13 percent). Firms also indicated fewer hours worked: The average workweek index was virtually unchanged but posted its eighth consecutive negative reading.

Price Indexes Drift Higher

The indexes for prices paid for purchased inputs and for prices received for respondents’ own manufactured goods moved higher this month. The prices paid index increased from 19.0 to 27.9, but the increase was attributable to fewer firms reporting lower prices rather than more firms reporting price increases. With respect to their own manufactured goods, the percentage reporting an increase in product prices (16 percent) was greater than the percent reporting a decrease (10 percent). The prices received index increased marginally, from 5.4  to 6.3.

And here is why the combined Empire and Philly Fed diffusion indices spell pain for the upcoming ISM print (courtesy of John Lohman):

Something is Wrong With This Picture!

This morning, we learned that new claims for unemployment are soaring. Initially, when the news was released, stocks went negative for the first time since yesterday's close. However, the second the NYSE opened, stocks began to soar, despite escalating violence between Israel and Hamas, and despite the soaring unemployment. Something is truly wrong with this picture.

Bellicose Talk Tanks Stock

Dow closed down about 190 today, partly on the increasingly bellicose talk and actions in the Mid-East, and also because of the announcement that Sandy will cost much more than expected!

More Weakness at Home and Abroad

More weakness abroad:

Leads to more weakness at home! Dow down 80 so far!

Stock Futures Rise Despite Fiscal Reality, EU Industrial Output Falls

Meanwhile, Obama seeks to extract a pound of flesh:

But futures rise anyway:

Stocks All Over the Map Today

Despite a temporary rally on news that Home Depot is forecasting improvement in the housing sector, stocks have now gone negative with just 15 minutes left in the session.

Stocks Erase 100-Point Deficit

Futures Drop 75 Points in Evening Trading

This is a large move for evening futures trading. Something is afoot!

Dead Day on Wall St

What a strange occurrence when the Dow closes dead flat on Veteran's Day. Bizarre and rare event!

Sharp Reversal Stoked by Consumer Sentiment

Consumer sentiment rises to multi-year highs, and China shows growth, so the market reverses sharply.

Stocks -- Deep Red!

Day to start ugly again! Not pretty!

Obama Collapse Day 2

Perhaps we are now awakening to the reality that this is not going to end with anything but tears!

Another Downer Day!

This is your wake up call, Wall St!

Futures Stable Following More Bad Economic News

Stocks Finish Day Down 313 Points

Ugly day on Wall St!

It's a Full-Scale Crash!

Dow now down 280 points. This is not a sell-off! It's a crash!

From Bad to Worse

Dow now down 245 points, S&P 500 trading below 1400 for the first time since mid-August.

Post-Election Crash!

Following the election last night, stocks rallied after the re-election of Obama seemed assured. Wall St seems to love Obama and his big-spending ways.  But then crashed again during the European session. Dow down 180. Ouch!

Prepare for the worst, and even that may be better than we expected.

No News Is Good News

Today is election day, but there isn't much news to influence the financial markets. Despite the dearth of news, stocks (Dow) are up 140 points.

We're back in the mode of "ignore the fundamentals and buy". It's a Pollyanna Party day!

Stocks Stagnant, In Holding Pattern Before Elections

The S&P 500 is stuck in a holding pattern between Friday's close and the 1400 handle. Dow down marginally at -25. Stocks have been lower since the futures opened last night.

Not A Great Start to the Week As EU Manufacturing Contracts

News that manufacturing contracted in the Eurozone doesn't start the week out very well. The S&P 500 futures are down an additional 6 points from Friday's close!

Mr. Market Is Disappointed

Stocks have now given back most of yesterday's euphoric gains within the past hour. Today's unemployment report showed greater-than-expected job gains, but a higher unemployment rate that rose to 7.9%. Stocks rallied briefly -- about 10 minutes -- then sold off and have grown weaker in the past hour. The Dow is down 110 points.

Party On, Pollyanna

Two misses, one marginal beat. Now that's data to rally on! The Pollyanna Party continues on Wall St!
 ISM Manufacturing: 51.7, Exp. 51.0, Last 51.5
 Consumer Confidence: 72.2, Exp. 73.0, Last 68.4
 Construction Spending: 0.6%, Exp. 0.7%, Last -0.1%
And since when does ADP have any credibility any more, since in recent months, it has revised its previous months' lower by about HALF the subsequent month, once the headline-seeking HFT algorithms are no longer watching? It changes its methodology, then revises its figures downward the next month, and does so with regularity.
And initial claims "beats" expectations again? Last week's "beat expectations" was revised lower this morning such that it no longer "beat expectations" last week.
Note how another media organization -- one that actually does more than post a headline -- predicted actually what the WSJ did today: "Oh, and this week's just as manipulated print of 363K, which was a beat of expectations of 370K, will be spun as a 9K drop in initial claims of course. Next week this number will be revised to 365K-366K as usual, because the BLS has now upward revised its weekly claims number for something like 80 weeks in a row."
This week's "beat expectations" will be revised next week such that it was about as expected -- or a "missed expectations" as last week's revision showed. How do I know? Because today's initial claims "beat expectations" was the 80th week -- in a row -- that has "beat" expectations, only to be revised worse the following week! How can that kind of record be anything BUT either bad data or manipulated data? And since when are just 158,000 considered to be "strong", as the Wall St insider was quoted to say in the article? With that many jobs created, we won't even create enough jobs for population growth, much less a robust or prosperous economy!

Dow up 140 points.

Stocks Slip On Bad News

Bad News All Around Today

It's a steady stream of bad news today. However, with stocks having ramped up while markets were closed over the past two days while Hurricane Sandy pounded the Northeast, there is strong support and stocks are down only modestly thus far.

The Long-Term Consequences of Statism

Authored by Charles Hugh-Smith via Peak Prosperity,
With the US elections approaching next week, as well as the threat of another fiscal cliff showdown looming, we asked contributing editor Charles Hugh Smith to revisit his earlier work on how the expansive Central State has come to dominate both private society (i.e., the community) and the marketplace, to the detriment of the nation’s social and economic stability. In this updated installment, we will examine six critical dynamics that will lead to the devolution of Peak Government.

Massive Borrowing

In a misguided attempt to maintain an unsustainable Status Quo, the Federal government is borrowing unprecedented amounts of money that then must be serviced.  And the Federal Reserve is expanding its balance sheet by trillions of dollars (“printing money”) and intervening in stock, bond, and other markets for the purposes of managing perception (“the recovery is here!”)
These government funds are not just paying the government’s bills – they are being used to guarantee loans and mortgages that subsequently enter default, transferring what was private debt to the public and subsidizing politically powerful special interests.
Guarantees and subsidies both incentivize what is known as moral hazard: the separation of risk from consequence.  This can be summarized very simply.  People who are not exposed to risk act completely differently than those who are exposed to risk.  When risk has been transferred to the taxpayers by guarantees, give-aways, and subsidies, then speculation and mal-investment are incentivized.  If the bet pays off, I get to keep the gain, but if it loses, then I personally lose nothing, as the loss is transferred to the taxpayers.

Institutionalized Mal-Investment

The net result of these policies – borrowing immense sums to prop up an unsustainable Status Quo and institutionalizing moral hazard – leads to misallocation of scarce capital on a grand scale.  In effect, the money borrowed by the federal government and electronically printed by the Federal Reserve is mal-invested, because those receiving the funding are personally not at risk and face no consequence if the money is squandered on speculation or unproductive programs. Once moral hazard has been institutionalized, it becomes a positive feedback loop.  Since everyone in the system faces little personal consequence from mal-investment, the institution loses the ability to police itself.
Even worse, concentrations of private wealth readily influence public institutions via lobbying and political contributions, exacerbating moral hazard and mal-investment of the publicly borrowed money.

Erosion of Trust in Government

Mal-investment inevitably yields poor results, and just as inevitably, the government seeks to mask the dismal results of moral-hazard riddled policies and agencies.  This “perception management” is driven by political expediency, as public outrage at failed policies and unproductive spending would eventually lead to a political price being paid by the leadership.  So failed policies are declared great successes, negative data is massaged into positive data, and unflattering frauds involving public funds are buried or transformed into pseudo-realities.
This institutionalization of mal-investing borrowed funds and the politically expedient falsification of fact to manage perceptions have a destabilizing consequence: The public loses faith in public institutions.

Diminishing Returns on Public Debt

Massive borrowing also has a consequence.  Interest on the immense sums being borrowed squeezes out other government spending.
This triggers two self-reinforcing feedbacks.  Public spending that is not rewarding moral hazard is cut, as those in charge protect their perquisites, and taxes on what’s left of the productive economy increase, reducing the private investment that is the bedrock of capitalist growth and innovation.
This institutionalized mal-investment leads to diminishing return.  Where each dollar of additional public debt generated nearly a dollar of additional GDP in the early 1960s, now borrowing a dollar generates negative growth, as the cost of servicing the debt exceeds the meager yield.  Thus the Federal government borrowed and spent a staggering $6 trillion in a mere four years (2008-2011), while the GDP has yet to return to 2007 levels when measured in real (inflation-adjusted) dollars.
All these forces reinforce each other in a death spiral.  As trillions more are borrowed, interest payments crowd out spending, causing the Central State to borrow even more, which generates even more interest costs, and so on.  As moral hazard infects the entire government and its numerous private contractors and beneficiaries, there are few constraints on rising public debt and mal-investment of public funds.  As trust in institutions that increasingly depend on perception management rather than real solutions declines, public faith in government deteriorates further.

The Hidden Tax of Inflation and the Institutionalization of Falsification

The government has one trick to create the illusion that it is “keeping its promises.”  It prints money to meet its obligations, depreciating the nation’s currency by expanding the money supply.  Creating money out of thin air does not create wealth, productive assets, or prosperity.  What it does is lower the purchasing power of money, which we call inflation.
Inflation robs every holder of the currency and is effectively a form of government-sanctioned theft, or if you prefer, a hidden tax on productivity, as productive people and enterprises are taxed to support crony-capitalist, unproductive mal-investments and the rising interest on public debt. In effect, inflation is a way of transferring wealth from the productive to the unproductive, which then leaves the productive with less capital to invest in innovation. This starves the economy of capital while robbing purchasing power of every citizen, establishing a positive feedback loop of lower income, lower capital formation, and lower productivity.
Since the government has obligated itself to adjust Social Security payments to inflation, the culture of understating inflation (i.e., falsifying data) has been institutionalized, for the Central State has the impossible dual mandate of increasing inflation so that it can meet its obligations with cheaper money while keeping the inflation-indexed cost-of-living adjustments low, lest program costs balloon out of control.
A “modest” rate of 3% inflation will, in a decade’s time, reduce the purchasing power of stagnating paychecks by a third, while setting the “official” rate of inflation at 2% or less will inexorably reduce the purchasing power of Social Security payments.
If the rate of inflation was to rise at a rate similar to that of the late 1970s, i.e., 10% to 12% per year, while the “official” rate was held to half the real rate, all those whose incomes did not rise by 10% a year would be impoverished as the purchasing power of their incomes evaporated. Meanwhile, even as its policies impoverish most of its citizens, the Central State would assure everyone that it was meeting all of its obligations as promised. This is how trust in government is not just eroded but ultimately destroyed.

Self-Reinforcing Feedback Loops of Self-Interest

Government at all levels responds to shrinking tax revenues from a declining economy and budgets squeezed by higher interest payments by seeking additional revenues by whatever means are at hand. Tax rates are raised, junk fees are imposed, fees for minor infractions are jacked up, and deductions and exclusions are eliminated.
The public that does not work for the government (that would be five-sixths of the workforce) increasingly resents what it perceives as predatory extortion in an economy where everyone’s disposable income is falling.
Unfortunately, there is a great divide between those who work (or worked) for the government and those who work in the private sector.  Those in government service understandably view the promises made to them in good times, eras that we now understand were brief speculative bubbles, as sacrosanct. 
The promises were based on the abnormally high returns earned by pension funds in the brief windows of speculative frenzy, and even supposedly conservative pension funds based their projections on annual yields of 6% to 8%.  As the Federal Reserve has attempted to reignite borrowing by lowering interest rates to near-zero, low-risk yields have fallen to 3%, less than half the expected returns.
As a result, there is a massive and sustained shortfall of public-employee pension funding, a shortfall that must be paid out of general tax revenues at a time when those revenues are declining as employment and business activity stagnate.
The net result in many communities is that schools and other local services are falling apart as budgets are slashed to meet skyrocketing pension obligations.  From the point of view of parents, the pension promises that government employees hold as sacrosanct were unrealistic, and what should be sacrosanct (but is not) is the education of their children.
Those of us in the private workforce with spouses, relatives, and friends in government service understand the frustration of those who work for government, but should the self-interest of the few dominate the public budget and chart the course for the many?
The key difference is that the government holds the power of coercion and the citizens do not. Thus those in government who seek to serve the interests of their unions, colleagues, departments, and agencies can impose fees and taxes on all citizens to fund their own perquisites and power.
From the point of view of those inside government, sharply rising parking tickets, higher property taxes, and so on are small prices to pay for essential services. But as citizens observe government services degrading even as fees and taxes increase, they see little value being added, even as self-service and moral hazard remain in institutionalized abundance.
Two destructive feedback loops are generated by this divide: Governments, desperate for more revenues, ignore public resentment and loss of trust, which only deepens the disconnect between those in government and the public.  And the private citizenry sees a lack of accountability, soaring public debt, accounting trickery, political dysfunction, and mal-investment of public funds as the hallmarks of their government.

Debasing More Than Just Currencies

I can only pass on Societe Generale’s work to you once in a while, but the piece for today’s Outside the Box is important enough that its author, Dylan Grice, worked hard to convince his bosses to let me share it with you. Dylan is one of my favorite investments analysts, as well as just an all-around nice guy.
In a change from his usual fun-loving demeanor, Dylan issues a serious warning here.

I am more worried than I have ever been about the clouds gathering today (which may be the most wonderful contrary indicator you could hope for...). I hope they pass without breaking, but I fear the defining feature of coming decades will be a Great Disorder of the sort which has defined past epochs and scarred whole generations….

So I keep wondering to myself, do our money-printing central banks and their cheerleaders understand the full consequences of the monetary debasement they continue to engineer?

He runs through some of the Great Debasements of the past, starting with third-century Rome, running through Europe’s medieval inflations and the French Revolution, to the monetary horror story of Weimar Germany in the 1920s.
His key point is that inflations and hyperinflations don’t just hurt money, they hurt people and the societies they live in. Inflating money is less trustworthy money, and so people doing business trust each other less. Plus, those who are farthest from the source of artificially created money suffer the most (the “Cantillon effect”).

And now the social debasement is clear for all to see. The 99% blame the 1%, the 1% blame the 47%, the private sector blames the public sector, the public sector returns the sentiment … the young blame the old, everyone blame the rich … yet few question the ideas behind government or central banks ...

I’d feel a whole lot better if central banks stopped playing games with money….

All I see is more of the same – more money debasement, more unintended consequences and more social disorder. Since I worry that it will be Great Disorder, I remain very bullish on safe havens.

In just 10 days we will see how the US elections turn out. Depending on what happens after, the US will either remain as one of those safe havens (and perhaps become even more of one) or those of us who reside here will need to start thinking more globally. I know a lot of thoughtful people who are already contemplating (if not acting on) plans to make sure their life savings maintain their buying power through the coming decade. I remain optimistic that we will set ourselves on a course that ends in a safe harbor, although the sailing will be quite volatile. What Dylan describes are the unintended consequences of people who think they understand macroeconomics and who are well-intentioned but whose policies can be most disruptive.