Tag Archives: saving

Save, Invest, Speculate, Trade or Gamble? by Doug Casey

The way you deploy your money will determine the quality of your retirement and probably the rest of your life as well. From Doug Casey at internationalman.com:

save, invest

For some time, I’ve been saying that the economy is in the “eye of the storm” and that when it emerged, the weather would be far rougher than in 2008. The trillions of currency units created since 2007, combined with artificially suppressed interest rates, have papered over the situation. But only temporarily. When the economy goes into the trailing edge of the hurricane, the storm will be much different, much worse, and much longer lasting than what we experienced in 2008 and 2009.

In some ways, the immediate and direct effects of this money creation appear beneficial. For instance, by not only averting a sharp complete collapse of financial markets and the banking system, but by taking the stock market to unprecedented highs. It’s allowed individuals and governments to borrow more, and live even further above their means. It may even create what’s known as a “crack-up boom”.

However, a competent economist (as distinguished from a political apologist, many of whom masquerade as economists) will correctly assess the current prosperity as an illusion. They’ll recognize it as, at best, a natural cyclical upturn – a “dead cat bounce.”

What we’re really interested in, however, are not the immediate and direct effects of QE— “Quantitative Easing”, and ZIRP—Zero Interest Rate Policy. As much as I love the way they fabricate these acronyms and euphemisms, what we’re really interested in is their indirect and delayed effects. In particular, how do we profit from them? What is likely to happen next in the economy? Which markets are likely to go up, and which are likely to go down?

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Warren Buffett: “Retirees face a bleak future”, by Simon Black

Negative real interest rates mean there’s no way to save for retirement with even a modicum of safety. From Simon Black at sovereignman.com:

Warren Buffett minced no words in his most recent annual shareholder letter (which came out over the weekend) when he told investors that “retirees face a bleak future.”

Buffett was referring to the pitifully low interest rates that dominate fixed income investments (like bonds and annuities).

In September 1981, he writes, investors could buy a 10-year US government bond yielding nearly 16%.

Now, inflation was a lot higher in the 1980s than it is today. But even after adjusting for inflation, the average annual yield for any investor who held that 1981 bond to maturity over the next decade would have been 5.7% per year.

Today, that same 10 year bond yields just 1.4%. But the official inflation rate in the United States is also 1.4%. This means that, after adjusting for inflation, your net yield today is ZERO.

What’s even more incredible is that there are obvious signs inflation may be on the rise; for example, the most recent Producer Price Index of wholesale price inflation reached its highest level since 2009.

Yet simultaneously the Federal Reserve keeps saying that they want to keep interest rates low. And they’re doing their best to push the 10-year yield even lower than 1.4%.

In other words, inflation could go higher, and interest rates lower. So anyone who buys bonds will actually suffer a negative yield after adjusting for inflation.

And this is precisely what Buffett was talking about.

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David Stockman on the Destruction of the Financial Markets and What it Means for You

The economic consequences of lockdown lunacy are going to be far more severe than most people reckon. From David Stockman at internationalman.com:

International Man: Decades of money printing have created enormous distortions in the market. It seems that the coronavirus popped the Everything Bubble. Where do you see the stock market going?

David Stockman: I’d say it’s going in a new direction, and it’s not up year after year, month after month, day after day.

It’s not going to be a world where buying the dip is a no-brainer thing to do.

I think the stock market was insanely valued when the S&P 500 peaked at 3,380 on February 19th.

It has got a long way yet to correct.

Who knows what earnings are going to be?

No one knows how long these lockdowns will last.

You look at the news flow every day, and it’s like a massive political arm-wrestling match between the White House and the Democratic governors and mayors.

I’m sure in their minds, these local and state politicians, think they’re serving the public good and protecting the safety and lives of their citizens. But, the fact is, back in the unstated regions of their brains, they’re focused on taking down the US economy, which was Trump’s only claim to reelection.

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US Credit Card Debt Surpasses Financial Crisis Record, As Student And Auto Loans Hit New All Time High, by Tyler Durden

US consumer revolving debt (credit card debt) just hit a new all-time high. When it comes to debt, nobody beats the USA. From Tyler Durden at zerohedge.com:

Who would have expected that today’s otherwise boring monthly consumer credit report would be the day’s most exciting event. Well, moments ago the monthly update from the Federal Reserve confirmed that as of the end of June, total revolving (i.e. credit card) credit rose to $1,021.7 billion, an increase of $4.1 billion on the month, and a new all time high, taking out the previous record high set during the summer of 2008.

Coupled with the monthly $8.3 billion increase in non-revolving credit, which also rose to an all time high of $2,834.1 billion…

… means that total consumer credit in June increased by $12.4 billion, slightly less than the $13.9 billion expected and modestly less than the $18.4 billion increase in May, to $3,855.8 billion, also a record high.

Taking a closer look at the quarterly update in non-revolving debt, we find that for another consecutive quarter, both student and auto loans hit record highs, of $1.450 trillion and $1.131 trillion respectively, although there does appears to be a modest slowdown in credit issuance for these two largest categories.

Considering the recent sharp revision to the US household savings rate, which wiped out $250 billion in personal savings with the stroke of an excel pen…

… the fact that US households increasingly have to rely on their credit cards to support their daily lives will hardly come as a surprise.

http://www.zerohedge.com/news/2017-08-07/us-credit-card-debt-surpasses-financial-crisis-record-student-and-auto-loans-hit-new

Double Whammy Economics, by MN Gordon

The US consumer is pulling in his or her belt and not spending as much, but don’t worry, that always happens just before riproaring econonomic expansions, like the kind we’ve been promised for the last six years. Be patient, it’s just around the corner. From MN Gordon at economicprism.com:

What’s up with the U.S. consumer? They seem to have come to their senses at the worst possible time. They can no longer be counted on to push economic growth up and to the right. Specifically, they’re not spending money on stuff.

According to Wednesday’s Commerce Department report, U.S. retail and food services sales for March declined 0.3 percent from February. Apparently, U.S. consumers are tapering back on auto purchases and spending at restaurants, bars, and clothing and department stores. What’s more, sales have fallen or been flat for each of the first three months of the year.

“We are seeing much less impulse buying and hearing more ‘I need to go home and think about it,’” said Randal Weeks, owner of Gray Living, a home décor store in McKinney Texas. Similar anecdotes are being reported by retailers across the country. What in the world is prompting this consumer ambivalence?

“Shoppers feel uncertain because of a stock market that fell more than 10 percent in six weeks and the recent terror attacks in Europe, said Bob Phibbs, CEO of The Retail Doctor, a consulting company based in Coxsackie, New York. And Gray Living’s Weeks said a few of his customers have said they are uneasy because of the presidential election; they don’t have a sense of how it will turn out.”

Perhaps these explanations have something to do with the consumer’s sudden resistance to spending. Still, such instances haven’t held consumers back in the past. There must be something much, much more demanding at work.

Doing the Opposite

If you recall, way back in 2000, when the economy was crumbling from the tech bubble implosion, Dallas Fed President Robert McTeer told everyone that “everything would be OK if we’d all just hold hands and buy SUVs.” The Fed then proceeded to provide gobs of easy credit. And, for many years, the consumer did their part to borrow and spend it. Moreover, after 9/11, consumption became patriotic.

By artificially holding down government bond yields, central bankers believed the big banks would increase lending and create consumer demand. The increased consumption, said their theory, would stimulate the economy and push inflation up to the Fed’s 2-percent target. In practice, this hasn’t happened.

In fact, as interest rates have fallen economic growth has stagnated. Presently, Swiss and Japanese 10-year government bonds are yielding negative returns. Investors are, in effect, paying these governments for the privilege of loaning them money. Nonetheless, they are not borrowing and spending…they are hoarding cash.

Similarly, Fed policies have continued to focus on stimulating growth with issuances of cheap credit. By comparison, the U.S. 10-Year Treasury note’s yielding about 1.7 percent. Yet even this paltry rate is having the opposite effect of what the Fed intended.

Somehow all the smart and clever government economists miscalculated what it is, exactly, their policies would be doing. Specifically, ultra-low or negative rates are not encouraging consumers to borrow and spend money. To the contrary, they’re encouraging increases in savings.

To continue reading: Double Whammy Economics

The Economics of Debt, Deterioration, Deflation, Depression, and Disorder, by Robert Gore

Economies are analogous to ecosystems. Environmentalists’ base state is an ecosystem in a state of nature, unsullied by man. Economists’ base state is an economy in which, other than establishing and maintaining essential conditions—protection of property and contracts rights and physical security—the government is absent. Both systems rely on the autonomous actions of their constituent elements, organically adapting to the myriad stimuli and signals around them. Analyzing the changes and distortions caused by humans on ecosystems is a big part of environmental science. Similarly, much of economics analyzes the perturbations caused by governments in economies.

Money can be broadly defined as whatever enjoys widespread acceptance as a medium of exchange and store of value—a means of saving—within an economy. Demonstrably more efficient than barter, money plays a central role in any advanced economy. A distortion virtually every government has introduced into their economies has been the production of fiat money—money not backed by and therefore not exchangeable into a set weight of a metal or other good—whose acceptance is compelled by legal tender laws.

The ostensible reasons advanced for fiat money are mostly specious; governments do it because they benefit from doing so. Money buys things, and if government is the source of money, it also has an issuer’s advantage. While monetary depreciation eventually leads to price inflation, the government is ahead of the curve. It purchases goods and services with the money it is creating and debasing before the resultant inflation sets in (this issuer’s advantage is known as seignorage).

Fiat money has another benefit for governments, dwarfing seignorage: it supports deficit financing. A government that cannot borrow must extract taxes or fees from its populace, which is never popular and often resisted. Monetary depreciation allows the debtor to repay with money that is worth less than it was when the debt was incurred. If government is a debtor, it realizes that benefit, which is why inflation has been called a hidden tax.

More insidiously, a government can either issue its debt directly as money, or—the more modern approach—a central bank can “monetize” the government’s debt by buying that debt with money it creates. The central bank buys debt either with currency it produces or by increasing the selling counterparty’s account with the central bank (the latter practice is far more prevalent). With fiat money, a government’s debt represents a promise of repayment with either more debt or fiat money, and nothing more.

The central bank is a large, interest-rate insensitive buyer of its government’s debt. Its buying pushes the rate the government pays below what would prevail if there were only interest-rate sensitive private buyers in the market, and lowers most other rates, which are often benchmarked to the interest rates on government debt. A below-market interest rate increases borrowing and decreases saving below what would have prevailed at a higher rate. It is a misleading signal for investment; a lower cost of capital leads to more investment, and consequently more production, than if the economy had a true market cost of capital. Mis-priced money also encourages consumption and speculation in excess of what would have prevailed under higher rates.

Governments and central banks around the world have stretched ultra-low—or in some cases negative—interest rates, sovereign debt, debt monetization, and the promotion of consumption and speculative bubbles to historic extremes (see “A Skyscraper of Cards,” 10/19/14). Metaphysically, just stating the idea that value and real economic growth can be created by governments borrowing money, creating money, and using that created money to buy their own debt casts heavy suspicion on the whole enterprise. It sounds like magic, and it is. Reality confirms the skeptics. While these policies can produce short-term increases in growth and goose financial markets, in the long run those effects are reversed and the net effect is contractive rather than expansionary.

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No nation has practiced this “magic” longer than Japan, whose economy has cycled from recession to anemic recovery to recession since the early 1990s (it just reentered recession). The Japanese once had one of the world’s highest savings rates, but the government has been drawing down its citizens’ savings on a two decade debt binge. Now it is the most indebted government, in terms of debt-to-GDP ratios (227.20 percent), in the developed world. Ultra-low interest rates (the Japanese 10 year interest rate is .47 percent) make saving an exercise in masochism. The central bank owns most of the government’s debt, and has expanded its purchase to private financial assets, including equities.

Japan offers ample proof that in the long term, debt and money magic retard production and growth. Despite a five-year rally, the Nikkei 225 stock index is not even half of what it was in 1989. As for a telling economic indicator, nothing captures people’s assessment of economic prospects and the future so well as the decision whether or not to have babies. Reflecting dwindling opportunities, Japan has one of the world’s lowest birthrates; its rapidly aging population now buys more adult than baby diapers. The elderly cohort will be yet another drain on Japanese savings as it pays for retirement. “Magic” economics requires running ever harder just to stay in place. The world’s financial markets got a Halloween treat when the Japanese central bank announced a 60 percent increase in asset purchases with funny money, but the prior, already massive, purchases have not stopped Japan from sliding back into recession.

Japan has been the pacesetter, but Europe and the United States are not far behind. Despite mammoth expansions of the European Central Bank’s and the Federal Reserve’s balance sheets in pursuit of unprecedented asset monetization, growth rates have been far below historical trend. European growth in 2013 was .1 percent, and the continent currently has either no growth or is in recession, depending on how many statistical angels are dancing on which pin heads and who is doing the counting. In the US, 3 percent plus growth used to be routine; 2 percent is the new normal. The last time the US saw 3 percent annual growth was 2005.

The labor market demonstrates the ongoing deterioration of the US economy. Taking the seasonally- and business-birth-and-death-adjusted, subject-to-future-revision employment statistics as offering a passable approximation of reality (perhaps a heroic assumption), there has been job growth, but the labor force is shrinking. However, it is the qualitative aspect of the labor market where the real story is told. David Stockman recently did a masterful analysis. Since the turn of the century, jobs in what Stockman terms the Breadwinner Economy: construction, manufacturing, white collar, finance, insurance, real estate, transport, information, and trade, have shrunk, replaced by much lower-paying jobs in hospitality, food service, and medical care. Readers are referred to Stockman’s article for a full analysis and explication (http://davidstockmanscontracorner.com/the-feds-paint-by-the-numbers-delusions-about-the-labor-market/ ). During the greatest Federal Reserve balance sheet expansion in history, labor market fundamentals and the economy have deteriorated. It’s no mystery why a plurality of voters in the last election cited the economy as their chief concern, despite the much ballyhooed “recovery.”

Adding to labor’s pain: below market interest rates have promoted the substitution of capital for labor, and by promoting consumption, have fueled the US’s perpetual trade deficits, which create jobs in foreign countries. In a world where money is not the whimsical creation of central bankers, no country would be able to run trade deficits in perpetuity. Pressure on the currency and withdrawals of whatever stands as the government’s reserves backing it would force a deflationary price adjustment, including in wages, and an increase in interest rates to make the country’s economy more competitive in world markets.

No such adjustment is necessary when the world must accept an ever expanding supply of dollars, the so-called “reserve” currency, backed by no reserves but redeemable for more dollars or treasury debt. The usual do-gooders lament the state of the labor market, but champion a higher minimum wage. However, wages in this country must come down relative to wages in other countries—the flip side of years of living beyond our means—before the employment situation can meaningfully improve.

The liquidity that is not promoting economic growth is promoting bubbles in select financial markets, primarily sovereign debt and equities. Paraphrasing President Nixon, we are all speculators now. Central bankers have been candid about one of their motivations for microscopic interest rates: they want to push savers farther out on the risk spectrum, forcing them to buy either lower quality or longer-dated bonds, or equities. Everybody is speculating, from retirees switching money out of money market funds to stocks or bonds to earn a return, to corporations, who can find nothing better to do with their cash than buy their own stock. The expected rate of return on productive investment has equilibrated with the corporate cost of funds—close to zero—due to many years of overinvestment and overproduction. The theory has been that rising asset prices, particularly stock prices, produce a wealth effect, which prompts beneficiaries to go out and spend, in turn producing economic growth.

If, in light of dismal economic growth, that sounds like holding a lit match to a thermometer to heat up a room, it is—more magic. It reverses causality, trying to put the stock price cart before the economic growth horse. Thus, after a four-year rally, in 2013 the US stock market gained almost 30 percent (S&P index) while economic growth was 2.3 percent. Even if one buys the theory that stocks are a discounting mechanism, or predictor of future economic trends, last year’s strong rise has “discounted” growth so far this year of 2.2 percent, or slightly less than last year. Since the turn of the century, neither the wealth effect nor debt “magic” have produced the kind of trend growth during expansions that most of the developed world had taken for granted for at least four decades prior.

Central bankers have been less than candid about two other motivations for microscopic interest rates. Although some central banks are ostensibly independent, like the Federal Reserve, even the Fed can be considered an arm of the government when to comes to the government’s debt. Low rates ease the government’s debt service burden, and central bank monetization provides a ready buyer of debt.

However, the primary reason for easy money is to promote inflation, which devalues governments’ massive debts. If unfunded pension and medical liabilities are added to nominal debt, it is clear that the only way governments can hope to keep their many promises is by substantially devaluing them through monetary depreciation. The 2 percent inflation mantra that central banks around the world chant as a policy goal has nothing to do with the real economy, and everything to do with a hoped-for escalation of inflation governments so desperately need.

That central banks have been unable to achieve even 2 percent inflation is another indication of their policies’ ineffectiveness. The marginal return of an additional unit of debt-based liquidity is actually negative. It is not producing inflation or economic growth, and the debt carries an obligation to pay back an amount greater than the original loan. Underlying the oft-expressed fear of deflation is recognition that it would crucify governments. Just as inflation devalues debt, benefitting debtors, deflation makes debt more expensive to pay back. Deflation would make governments’ mounting debt loads that much more onerous, thus the almost hysterical fear of it.

Part and parcel of shrinking private-sector opportunity is expanding public-sector rapacity. Although taxes and fees keep rising, governments keep running deficits. The productive have been increasingly milked for the vote-buying benefit of the unproductive, with the state taking its cut. Its dead-hand grip on economic activity is tightening, not for the purported public-benefit justifications, but to increase economic rents to the government and its officials. Individuals and businesses lobby, curry favor, donate, and bribe to get subsidies, tax breaks, and regulatory dispensations. It speaks volumes that the Washington D.C. metropolitan area is now the nation’s wealthiest. Obamacare promises bounteous new opportunities for payola, taxes, and regulatory extortion, which was the real reason it was passed.

When “magic” economic nostrums can no longer keep an economy running in place, it falls backwards, painfully. In “non-magic” economics, debt growth well in excess of economic growth for an extended period, rising taxes, and increased regulatory sand in the gears and government rent-seeking eventually produces an economy that not only stops growing, but contracts. Almost immediately, debt in the most leveraged sectors of the economy starts unravelling, and in a debt-saturated economy that unravelling spreads quickly, because virtually every financial asset is someone else’s debt (or equity, which occupies an even lower rung on the priority-of-payback ladder). In 2008, it started with mortgages and mortgage-backed securities and engulfed the world’s financial system with frightening speed.

For years the world has looked one way down the railroad track, watching for the inflation locomotive, oblivious to the deflation locomotive coming from the other direction. There are always quibbles about the accuracy of price indexes, but the just-around-the-corner outbreak of skyrocketing inflation has remained just around the corner, despite years of massive central bank balance sheet expansion. Debt has become the medium of exchange (even the US currency, which is not usually thought of as debt, bears the title: Federal Reserve Note) and the global economy runs on debt. When debt plays such a central role and the gross amount starts to shrink, the result has to be economically contractive and deflationary. Debt shrinkage acts as a margin call: assets are sold, economic activity curtailed, and debts repudiated as debtors try to reduce their debt burdens. Their creditors must write off assets, sell other assets, curtail their economic activity, and repudiate their debts as the vicious cycle gathers steam.

The collapse of the world’s skyscraper of debt will take prices and economic activity with it. If the crash is proportional to the debt build up that preceded it (and it wouldn’t be wise to assume that it won’t be), it will take down governments as well. The Orwellian nightmare of totalitarian government, amplified by the Edward Snowden revelations, may be another case of the world fixating on the wrong fear. Come the crash, most governments will be flat broke, unable to borrow except at prohibitive rates. Command and control—monitoring, repressing, incarcerating, and torturing the populace—is expensive and stifles economic activity. Destitute governments will have their hands full maintaining the barest semblance of public order.

The smart money bet for what emerges from the rubble is chaos and anarchy, not government-maintained order. Which suggests that investments in self-sufficiency and self-protection, including firearms and training in their use, are prudent (There are a multitude of organizations and internet sites that provide guidance and sell provisions.) The people who have made those investments have been derided as the fringe, but events will probably give them the last laugh, if anyone is laughing in such a world.