A Look Ahead

 I want to start by looking back to the beginning of 2020.  Life was simple then; we could travel as we liked, hold social gatherings, go to the beach, attend music concerts, go out to dinner and the movies, and generally come and go as we pleased.  After Covid was declared a pandemic, the world’s health authorities closed the global economy, businesses were shuttered, millions laid off and free money was printed as a temporary stop gap to keep things afloat. 

 Twelve months later we are at the beginning of a vaccine roll out that will take time to implement and who’s effectiveness is being questioned but while we wait more money is being printed but many businesses are still shuttered or gone for good.  Some sectors of the economy have benefitted; logistics, software, delivery, golf gear (one of the few sports that is allowed, and which has seen a remarkable resurgence), video games, home health, fitness and entertainment and several other industries are flying, however if you are in the restaurant business, travel or leisure then you are either out of business or fighting for your survival.  One of the largest and most important industries, housing (at least in the USA) is intriguing.  Prices for housing are spiraling higher due to the limited number of homes for sale but banks are not allowed to foreclose on Covid victims who are months behind on their mortgage payments.  Once this bandage is removed there should be an avalanche of properties coming to market and this could undermine this industry right as the stimulus ends creating a massive drag on any economic growth. 

 Political unrest created by the Trump supporters and Trump himself has created temporary political chaos.  Biden takes office in a week and while I am not convinced that he is the man for the job he certainly will be a welcome change from what has turned into a barbaric exit to Trump’s presidency.  A new President, a new Treasury secretary in Yellen (another money printer) and an economy being kept alive with fake money makes it anyone’s guess as to how the market will react but the reality of the situation is that without depressed interest rates and trillions of fake dollars being printed the stock market would be well below current levels.

 Looking at some of the stock valuations shows an amazing picture.  Tesla with a market capitalization of over $800 Billion produces 140 times less cars than the top ten automakers but has a value higher than all those combined.  It trades at 30 times sales and 1,550 times earnings.  It is the most overvalued stock in market history, and this has catapulted Elon Musk into the position of the world’s wealthiest person even though his company makes no money and is only showing a profit due to carbon credits!  His net worth has jumped from $30 Billion at the beginning of 2020 to $170 Billion today, an increase of $140 Billion in a year or almost $12 Billion a month!

 Apple’s market capitalization soared by almost $1 Trillion in 2020 to $2.26 Trillion at year end.  It was only 17 months ago that it was the first company to reach $1 Trillion but despite lagging sales and profits the stock keeps climbing.  Although certainly not a growth stock, it now has a price to earnings ratio (P/E) of 40.5 up from 24.7.  In a normal market Apple’s P/E ratio would have been in the mid-teens but now is three times that valuation. 

 It is now the most overvalued stock market in history and into the 13^th year of the longest bull market in history.  The price to sales ratio of the S&P 500 is now 20% HIGHER than it was at the peak of the Nasdaq bubble in 2000, the previous record.  There is full blown stock mania in the USA where the small players are piling in just as they always do at market tops.  JMP Securities estimated that a record 10 million new brokerage accounts were opened in 2020.  Most of these are leveraged using margin to juice returns.  Options contract volumes have soared to 30 million contracts a day, 12 times the number traded in 2000.  The insane are running the asylum and this will not end well.

I was recently on the golf driving range trying to fix my golf swing (a never-ending job) and I overheard a few youngsters (market newbies) talking amongst themselves.  One of them was boasting that his day trading profits were so great that he was quitting his job to trade stocks!  Sounds like 2000 all over again.  Another person recently called me (another market newbie) to ask why his option contract had not gone up in value even though the market had moved in his direction.  There was no concept of time value, volatility value or other market driven option values and yet here he was trading options!

 Another crazy metric is the SPAC market.  For those of you who have been with me for a while you will remember that back in 2008 the SPAC market was hot.  A SPAC is a Special Purpose Acquisition Company, essentially a shell of a company that raises money and then buys companies with its cash.  Most of these have no credibility or plan; just invest your money and results will magically follow.  These companies raised $74 Billion in 2020 more than 5 times the previous record which also occurred at the previous market peak!  What are they going to acquire with that hard earned money?  As before, a lot of these SPACs will go to zero.

 The final stock bubble analogy that I will mention is the ARKK fund.  This is now the largest active ETF (exchange traded fund) in the world, and it is run by Cathie Woods.  Cathie’s fund has raised more money in the last two weeks than it did in its first 5 years, and she is now a regular on CNBC where she is touting her positions.  Cathie recently said that Tesla could go to $15,000 a share making Tesla worth $15 Trillion.  Tesla is the basis for her entire fund’s returns, and therefore it is outperforming the market however, back in 2000, there were similar Internet funds that went to the moon only to return to earth in a hurry when the market cratered.  The Jacob Internet Fund, run in 2000 by a 30-year-old money manager Ryan Jacob, was flying high on the New Era Internet stocks.  His fund lost 95.8% of its value when the NASDAQ bubble burst and I anticipate a similar exit for Cathie and her investors.  Interestingly today Cathie announced that she was starting a new fund for Space Exploration where she will invest in public companies involved in space exploration.  After the announcement Virgin Galactic stock surged 22%!  No news just a supply demand play.  This market has gone insane!

 Behind this madness is a Federal Reserve bent on printing money as the only way out of its hole and a government with a mandate to continue to support the economy at any cost.  The new mantra on Capitol Hill is Modern Monetary Theory (MMT).  Some people are now referring to it as Modern Money Tree as apparently you can print as much money as you like with no repercussions.  To the MMT proponents, history is irrelevant.  The tales of woe of the Weimar Republic, Argentina, Zimbabwe, and other economies that printed money without concern are irrelevant.  Their problems of hyperinflation and economic collapse are due to their lack of understanding of modern economic theory so it will be different this time!  Not that I anticipate a return to hyperinflation any time soon but if there is not a check on monetary growth, global inflation will return and with it higher interest rates which any debt ridden individual or country knows is the death knell for balanced budgets and repayments.  This weakens the economy reducing tax receipts and down we go.

 While I am still not convinced that inflation will rear its head soon there are already several warning signs; copper is up 27% in 2020, oil has recently past $53 a barrel and this is before the return to normal travel, the dry goods freight rate is up from below $400 a day to over $1,700 a day, and the USD has declined more than 12% against a basket of currency (all imports into the United States have increased in price).  On the local front I have witnessed the cost to construct a new property climbing from $200 a square foot to $250 a square foot due to lumber and labor shortages.  While these metrics have not fed into the Federal Reserve’s measure of inflation, they are showing some market froth, and this is starting to create a concern in the inflation camp.

I cannot see a way for the Federal Reserve to extract themselves from this mess without a market collapse and a recession to wipe clean all the excesses.  The problem is that the market is so overvalued that anything short of a 75% correction will not do the trick and I doubt that the Federal Reserve (particularly with Yellen now the Treasury Secretary) will stand by and watch that happen so more money will be printed creating a larger problem and a bigger collapse.  Stay tuned but 2021 is going to be a very interesting year it just remains to be seen whether the madness will continue or whether reality will finally restore order.

 As always, I will monitor the markets daily.  Once the music stops and the market finally bakes the reality of the situation into stock prices, I plan to act but at present I will wait until the bandage is ripped off and the true state of the global economy revealed.  In the interim I will not be participating either long or short but will patiently wait for the collapse, sidestepping the volatility and continue to produce excellent returns for all of us throughout this crisis.

Don't Mess With The Bull!

What a difference a week makes!  Prior to this week the markets were once again on a tear to infinity and beyond (to quote Buzz Lightyear).  Up more than 7.50% in three months and all of this while the Federal Reserve is raising rates and removing $50 Billion a month in liquidity.  The breadth of the market had shrunk to just a handful of names pulling the markets forward and the cheering from the sidelines for Apple and then Amazon to eclipse the $1 Trillion market capitalization mark was unbearable.  The market had finally lost all links to reality and was tearing higher based on hope and the euphoria of the previous decade of success.

A week later and most of that gain is lost.  The losses are being blamed on short term profit taking and the fact that we are entering earnings season so company buy-backs cannot support the market for the moment.  Hold on a second, the market is rallying because the people who run the companies and who have no skin in the game other than their gifted stock options are using the money given to them by cheap loans to buy their overpriced stock so that they can benefit from the increase in the price of the stock and THIS is what is supporting the market!  Wow reality definitely has left the building as who in their right mind would invest money into the market if this was the reason for market strength?

Looking at reality shows a starkly different picture.  Yes, we have an historical low unemployment rate and yes company earnings have been solid BUT the worker participation rate is still at multi decade lows and the Federal Reserve is raising rates and withdrawing liquidity.  To date the impact of the withdrawal of liquidity has been muted as the central bankers outside the USA continued their lax policies.  This has now changed as Europe and Japan are removing their support as well.  Added to this the trade wars that Trump is waging with the rest of the globe are creating issues at home in the bond world as previous large purchasers of US debt, namely Japan, China and Europe, are now shunning the new issues moving the price of the bonds lower and propelling the yields higher. 

I have been saying for a long time that should the 10-year Treasury yield reach 3.50% that the market would be in trouble and recently it reached 3.23% within 27 basis points of my target.  This was the inflection point for stocks which have sold off fast pushing the 10-year yield down to 3.14% or almost 3.00%.  I doubt that the yield on the 10-year has reached its peak yet as the Federal Reserve is continuing to raise rates and the government is running a massive $1.4 Trillion deficit and therefore has to sell more debt into a weak market.  Both actions should continue to drive rates higher in the short term but once the market breaks I expect a sharp reversal in rates as the Fed pushes them down artificially once again.  In fact, as far fetched as it seems, negative interest rates will be the norm, but we will have to wait for that to unfold.

How do you run a $1.4 Trillion deficit when you are in the longest expansion known to man?  Surely by now you should be running surpluses as was the case back in 1999?  And what does this mean when a recession finally hits, and you are called on to support the economy?  Where is that money to come from?  There are so many questions surrounding this issue it is like opening Pandora’s box, but the short answer is that you are in a world of trouble BEFORE the market collapses so the only thing you have left NOW is to raise taxes and cut expenditure killing off what remains of the market rally.  The strategy used to support the market of cheap money is now gone and once again has not worked!

As the market is in the longest bull market in history, the only remaining reason for the markets to rally is that consumers must be buying products left and right and are flush with discretionary cash.  As I have mentioned before, while the economy has recovered somewhat, and the unemployment rate is at all-time lows, not many have felt the benefit.  The fat cats in their big leather chairs, flying to work in their helicopters and going to trade shows in their private jets have felt the impact of the support but they are alone.  The average consumer is stretched with massive credit card debt, automobile debt, student loan debt and housing debt and with interest rates rising all of these are now costing them more each month.  Furthermore, with labor participation rates at historic lows wage increases have not kept up with the rate of inflation so the purchasing power of the consumer has weakened over the past 10-years not strengthened.  On top of these issues the price of oil has crept higher and is now over $70 a barrel up from $40 a barrel less than two years ago.  That is a 77.50% increase in less than two years.  Healthcare expenses are up around the same rate of increase and heaven help you if you make some money as once you move off the subsidized health care programs to private programs rates triple!  So no the US consumer is not the bastion of support and this along with reduced international trade will severely impact company results in the coming quarters.

Already we are seeing the impact of the rate increases.  Last month house sales fell 1.5% year over year and car sales fell by around the same amount.  Both industries are large employers and the ripple effects of a slow down in these two industries will be wide felt.  As an example, the slow-down in the automotive industry will be felt in the chip world as autos are a large consumer of tech innovations and the chip makers are already reeling from lower smart phone sales and the lack of orders for personal computers. 

With all of these roadblocks ahead I cannot imagine that the markets can recover from here, but I have been wrong for so long that even I am starting to wonder if a rally is not just around the corner.  What I do know is that money printing has never worked, every interest rate hike cycle has ended in a market correction or a recession and every bull market ends in a bear market.  There is no such thing as a Goldilocks economy as things are always overheating or too cold and humans constantly think that they can “improve” the situation with tinkering and the Federal Reserve is no exception.  But as Clint Eastwood said’ “Don’t mess with the bull young man or you’ll get the horns” or in this case a bear market.

A House of Cards

"Money is the Mc-mansion in Sarasota that starts falling apart after 10 years. Power is the old stone building that stands for centuries. I cannot respect someone who doesn’t see the difference.” - Frank Underwood in The House of Cards

One of the main reasons for limiting my blog posts is that they were starting to sound a bit like a broken record.  Since I started them almost 10 years ago it seems like I have spent the majority of my time warning against the excesses of money printing.  These excesses have to lead to a monumental market capitulation unless money printing continues unabated AND at an accelerated pace.  As both of these criteria continue my doomsday predictions have been wildly off the mark.  Not only has money printing continued, but after the Federal Reserve reduced its money printing efforts the combined might of the rest of the world’s central bankers jumped into the fray not just offsetting the Fed’s reduced participation but expanding the global monetary base.  With this tinder continually being fed into the roaring blaze that is the stock markets of the world, the result is unbated increases in equity prices. As I write this the markets are on a continued tear to infinity and are breaking records daily.  In fact, 2017 has turned out to be one of the smoothest periods of unabated stock market growth in all of history and this is after 8 years of a bull market!  At this late stage in the game you would expect some form of volatility but by all measures risk is off the table.  Forget about a correction (a drawdown of 10% or more), this stock market hasn’t even had a 3% drawdown in all of 2017, the second longest stretch in US stock market history.  Bear funds and ETFs are closing in record numbers and the new millennials are mega bulls as they have never experienced a correction! 

Old hands like myself are not at all optimistic.  I have seen this story all too often before (1987, 1997, 2000, 2008) so why should it be any different this time around?  Certainly, the length of the bull market has many professional investors amazed particularly in light of the weak economic recovery and there is a sense of despair among many sages of Wall Street who see the inevitable but cannot for the life of them fathom why the market continues upward.  Well things recently changed dramatically as the Federal Reserve announced that it would start to drain money out of the market at a rate of $10 Billion a month for the first quarter and then increase the withdrawal by an additional $10 Billion a month each quarter thereafter until they reach the maximum of $50 Billion a month.  Effectively they are starting with a pea shooter (limited impact as the market has shown) and rapidly growing to a rocket launcher which is sure to kill off the market.  I doubt that the market will wait for the rocket launcher and will wilt long before that cannon arrives so to me the time is near.  Whether the market dies this year or next no-one can honestly say but the reality is that this market has been propped up with the excesses of money printing and it will die with the lack of it.

My investment strategy throughout this period has been to ready myself for the inevitable by building up a steady and secure cash flow stream that will allow me the opportunity to jump in when things finally collapse.  As always, I am not looking to time the market (if I was I would still be long stocks and would sell them all at the exact highs) but to wait patiently for the buying opportunity to present itself at which stage I have my cash reserves ready to take advantage of the market malaise.  This to me is the prudent way to invest and I have been encouraging long term readers to do the same.  Those that have will survive and thrive, those that are overexposed will suffer and those that are leveraged will see their net worth disappear.  So, while it has been a long lonely ride to this place, I expect the not too distant future will provide amply.

Bubble, Bubble, Toil and Trouble!

"Double, double toil and trouble; 

Fire burn and caldron bubble. 

Fillet of a fenny snake, 

In the caldron boil and bake; 

Eye of newt and toe of frog, 

Wool of bat and tongue of dog, 

Adder's fork and blind-worm's sting, 

Lizard's leg and howlet's wing, 

For a charm of powerful trouble, 

Like a hell-broth boil and bubble." - William Shakespeare

I mentioned it in the last letter but it is worth mentioning again, by any metric that you can find we are in a bubble (apologies to Shakespeare as he says Double not Bubble but close enough for this blog).  Simple economic mathematics shows that the result of printing money and holding interest rates at below market values is the over-inflation of asset values.  It was just a matter of time before it happened but even the Federal Reserve has now mentioned that asset values “may” be a little high.  By the time they are saying this you can bet that we are in the final throws of the bull market.  That said they still have not learned their lessons and continue to believe that their money printing techniques (that have never worked) can magically manipulate market prices removing the chance of even the slightest drop in economic expansion.  Bernanke stated when he was the Federal Reserve Chairman that “we’ve never had a decline in house prices on a nationwide basis”, right before the property bubble burst.  Now we have Yellen saying that we’ll never have another financial crisis!  Wow the egotism and the ignorance is unbelievable and this is from the most powerful market manipulator in the world.

I have also mentioned repeatedly that economic growth can only resume at a healthy clip when you remove the shackles of debt.  While the Federal Reserve has stopped printing money the rest of the world’s central bankers took up the mantle and have bludgeoned forward mindlessly printing.  This has resulted in the massive run up in stock prices.  These stock prices require this fuel to keep them airborne so when you have Yellen and others start to talk of cutting back on their stimulus there is going to be a fall out, it is just a matter of time.  As with all fall outs the most egregious benefactors will be the hardest hit.  Think of say Tesla with a $60 billion market capitalization and losing $400 million a quarter, or Snap Chat (never made money), or Twitter (same) or a myriad of other stocks and you get the picture.

So, taking Yellen’s comments at face value (I assume that she was not joking although I secretly hope that she was) what will the Federal Reserve do when the market takes a nose dive?  Well for one they can drop rates from the lofty 1% mark that they raised (now that should be really helpful, NOT), or they can print more money and add to the $15 trillion of debt onto the global central bankers’ balance sheets (this has never worked and never will but I am sure that they will try once again), or congress could reduce taxes and increase spending right when they are talking about balancing the budget deficit.  This time around the tools at their disposal are significantly curtailed and while they will no doubt try all of the above the results will be even more feeble than those we have witnessed to date.  Not only has this been the weakest recovery in the history of the world but with the massive buildup of debt the next recovery will be even worse.

I am sure that this will not stop our egotistical maniacal leaders from proving once and for all that their strategies work.  This will mean tens of Trillions (billions will be SO 2010 darling) added to the Federal Reserve’s balance sheet plus negative interest rates (you will now have to pay the bank to place your savings there).  Once again this will kick the can down the road however the recovery will be even more anemic as massive increases in debt DO NOT STIMULATE AN ECONOMY.  Growth stimulates an economy and growth comes from innovation and entrepreneurialism not debt.  Debt becomes a yolk that must be dragged around slowing down the cogs of capitalism grinding the economy down to its knees.  This is why the economic expansion has been weak and why, given the policies of the central bankers around the world, we will suffer for decades to come.

Rate Hike Ahoy!

"If ye thinks ye be ready to sail a beauty, ye better be ready to sink with her!" - Pirate saying  

There is so much talk about the next rate hike.  According to the “experts” there is a low probability of a rate hike in November but a high probability in December!  I guess at some point they will get it right but the last time the Federal Reserve raised rates was a year ago and by now we were supposed to have had four more.  Furthermore, they have not raised rates other than that once in a decade!  Their European, Chinese and Japanese brethren continue on with measures that should ensure that their yields continue to fall even though they are below zero in many instances.  The reasons for the continued “stimulus” is due to a continued weak global economy which is hurting the revenues and profits of multinational companies around the globe.  S&P 500 revenues and earnings have been shrinking for more than a year but somehow with more “stimulus” there will be a magical hallelujah moment that will magically reverse years of perverse policy decisions.

As you can tell I am not at all in favor of the measures being taken and when you factor into the equation the choice of bad or worse presidential outcomes I find it incredibly hard to see any chance of a rate hike this year.  In fact should they throw one out it will be much like a life raft from the Federal Reserve to show their independence more than due to economic strength. 

So let’s assume that they do raise rates another 0.25% to 0.50% I would have to imagine that the markets will take it on the chin.  How ridiculous that a second quarter point move twelve months removed from the last one is so feared.  At that level we will have interest rates at 0.50% people!  If half of one percent can cripple an economy, how weak is that economy?  Well as I have mentioned above, the world economy is in dire straits.  China (although they will not admit it) is on the brink of a recession and Europe, post Brexit, has massive problems of its own.  Japan may remain stagnant forever particularly when you factor in the ever growing government intrusion into business and the markets.  So yes a mere quarter point move when the world has a massive hunger for yield will cause a huge spike in the dollar undermining revenue and profits further and could easily drag the economy into a recession.

To me the obvious place to look for reasons why things are so weak almost a decade after the Great Recession is the Federal Reserve itself.  They have been on a massive debt binge and have managed to convince their cohorts around the globe that this is the only way to stimulate.  Pile more debt onto the world economy and viola everything will be fixed!  Anyone who has read this last sentence can immediately see the folly in that but for some reason they cannot.  Amazingly neither can their peers who not only have embraced the policies but have expanded “stimulus” beyond our wildest imaginations by taking rates to below zero and concocting ever more ludicrous ideas.  Why not start paying all the unemployed to not work, now that would be a winner!

In fact it is not too bad of an idea as it would stimulate demand for products which is what the world needs desperately.  The current use of “stimulus” has crowded the private sector out of markets and is manipulating global markets that used to be free to correct on their own.  The drag created by the overzealous central bankers is now a noose around the neck of global growth and until it is removed it will continue to slow to a halt.  At that point, and it is not very far away, no matter how much more “stimulus” is thrown at the problem all it will do is drive it further into the quagmire.  It is at this point that markets will lose faith in the central bankers of the world and watch out below.

For these reasons I am very comfortable staying out of the markets and waiting patiently.  Once the markets are at a level where there is true value, I plan to jump in and ride the wave of euphoria that will be the relief to be rid of the shackles of the Federal Reserve.  Where that number is will be seen at some point in our future but if I had to place a bet I would say that the lows of 2008 will be taken out.  Take this as a warning and position yourself accordingly.

The Good Old Days

"Wish we could turn back time to the good old days;
When our momma sang us to sleep but now we're stressed out." - lyrics to the song Stressed Out by Twenty One Pilots

I know I have been off the air for a month but it is summer and time for a break right?  In all honesty while it was partially a break, the lack of correspondence was more a factor of too much work on my plate so something had to give and I chose to let the blog go for a month.  That said not a lot has changed in the last month; more hot air from the central bankers of the world, more stimulus and a couple of very poor candidates to chose from to run the country.

I was reminiscing over the last few weeks about what life used to be like in the "good old days".  It is hard to even remember a time before 1995 in the investment world but it seems that with the advent of the Internet everything changed.  To me those were the good old days when central bankers of the world operated in a relatively insulated bubble, focusing on their local economies.  Stimulus was left to tinkering with interest rates and bank reserves with limited open market manipulation.  Recessions came and went as a normal course of business.  Companies were valued on their balance sheet strength, growth opportunities and profitability.  Global debt (businesses, consumers and government) according to The McKinsey Global Institute stood at around $30 Trillion.

Fast forward to today and global debt is north of $200 Trillion or roughly $27,000 per person!  Furthermore the central bankers of the world have decided that $130 Trillion in 20 years is not even close to enough so they are pushing even more debt out into the market.  Just this month the BOE, Bank of Japan and the ECB have announced additional stimulus amounting to more than $50 billion a month!  What are we supposed to do with all this additional debt?

The idea is that we spend it on useless things like another iPhone or a new car (both of which are direct direct beneficiaries) however all that this stimulus does is bring future sales forward stealing economic growth from the future.  An example is China who reduced the tax on automobile purchases to 5% from 10%.  This stimulus increased automobile sales in China to north of 26 million units in the quarter but this incredible run will surely end when the stimulus ends at the end of the year.  People do not need new cars every year and looking forward the result of the stimulus will be to destroy automobile sales in China next year.

The issue is that adding more debt is not helping but is crowing out the normal private market and economic growth.  This crowding out is cutting heavily into GDP growth rates but is shown in its stark reality when you look at Wall Street.  In 1998 when "stimulus" had just begun under Greenspan, the number of companies publicly traded peaked at just over 8,000.  Since then the effect of all of this debt has been to crowd out the public markets and the number of listed companies is now half of what it was.  Some of this has to do with poor management however the bulk of the change has been from companies using debt to acquire other listed companies or management teams taking companies private using debt as the lever.

Not only have companies been using debt to acquire each other, they have also been turning to debt to juice their poor results.  Issue debt, buy back shares and hey presto you have better than expected earnings per share!  In fact companies are so awash with debt that some of them have massive negative tangible book values.  Remember that tangible is something that is real like a desk or a car whereas intangible is imaginary like Goodwill.  In the case of IBM as an example removing $42 billion of goodwill and intangible assets results in a negative book value of $25 billion!  Broadcom is not much better with a negative tangible book value of $22 billion.  Who would ever buy these shares and why are they even listed?

Looking at the balance sheets of some big names it just amazes me that more attention is not given to the balance sheets of businesses.  Microsoft now has $55 billion where not too long ago it had zero, Oracle has $43 billion, Apple has $85 billion, Intel $24 billion, IBM $44 billion and Cisco is at $29 billion.  Now while these companies are large this debt burden is enormous.  Heaven help them if at some point int he future interest rates rise and they cannot repay the debt!

But while interest rates are low the party continues and my analysis points to low interest rates for a while to come.  Not that I think that interest rates should be low, they should not, but because the central bankers of the world are going to continue to manipulate them for as long as possible.  They will also continue to print money in a vein hope that one of these dollars will eventually stimulate the global economy.  How ignorant and blind are they?  This is the biggest experiment known to man and one that has no chance of working out well.  The problem is that while ALL of the central bankers of the world continue to push money into the pot together there are no real repercussions.  Everyone's interest rates remain low or continue lower and everyone's currency weakens at the same rate.  No-one gains the upper hand so they try even more "stimulus".  Bond yields continue to wilt and it is just a matter of time before helicopter money policies are used (by passing the banking system and sending money directly to people).  Already there is talk of a perpetual bond (one with no end) and other crazy schemes but the results are all the same - nothing but a large pool of debt!

In this world of unbelievable craziness comes the demand for social policies and walls from the electorate.  Voters are turning to politicians who are promising things that are not only detrimental to long term growth but to the viability of capitalism.  It will not be long before capitalism is pointed to as the root of the problem.  However, it is not capitalism that is creating the problem it is the manipulation of the very fabric of free markets, the heart of capitalism, by the central bankers of the world, the supposed protectors of capitalism, that is at fault.

So while it is impossible to bring back the good old days it is possible to protect yourself and your portfolio by extracting yourself from debt and moving into gold or other assets that are antifragile.

There's Gold in Them There BREXITs!

Yesterday Britain voted to exit the European Union the so called BREXIT.  As expected the decision was close but the result was unexpected and threw global markets into a frenzy.  The European markets took the brunt of the selloff with Germany down more than 8%.  US markets reacted in less of a panicked fashion but were still off more than 3% at opening.  The initial knee jerk reaction will probably be muted in the short run as the actual exit will take a number of years to effect and it remains unknown as to what sort of impact this will really have on the UK and the rest of the European Union.  Certainly the press and the economists of the world are having a field day predicting a catastrophe but as we all know these predictions are more often than not vastly exaggerated.

I for one am not even going to try (in this blog at least) predict the long term fall out of this decision but there is a chance that other European countries try to exit as well causing the downfall of the EU.  This may well happen but the main question is whether the core group of nations remain and I believe that there are sufficient benefits for the 6 largest economies to remain unified regardless of whether smaller outlier countries exit (not that the UK is a small economy but the UK has sat on the fence of the EU since it was created so the result of an exit should be less impactful than one of the core group of nations exiting).   So while the markets of the world gyrate wildly to the unexpected news it is my thought that in the long run the overall impact will be muted.

That said the vote exposed just how annoyed the world is with their various political bodies.  Not only did the UK snub their noses at the incumbent party leading to the resignation of the Prime Minister, but now there is renewed talk of Scotland leaving Britain.  The United States is no different in that Trump has achieved a level of success that few believed would be possible without a population that is resentful of their leaders.  With the vast majority of Americans feeling that their politicians are out of touch with their plight plus the increasing divide between the have and the have nots it is clear that a change is inevitable.  It is just a shame that this desire for change was not directed towards a candidate with real leadership qualities that could infect rational change rather than a crass bully but unfortunately the desperation has been misdirected.

The other thing that should be clear is that precious metals and particularly gold are a hedge against the current malaise of the world.  Gold spiked more than $70 an ounce after the BREXIT was announced.  As opposed to the collapse of the global markets gold rallied more than 6%!  Gold stocks also went into orbit with some names up more than 10%.  It is amusing to me to listen to gold haters argue about what a poor investment gold is when during times of crisis it has repeatedly proven its worth as a hedge against disaster.  If you believe, as I do, that the world is clearly on the wrong path then owning gold, gold stocks or gold ETFs is a must.  Even if you hate the idea of owning gold today should be a signal that gold will provide downside protection for your highly overvalued stock portfolio.

So take note and realize that there’s gold in these BREXITs and other global catastrophes particularly when you have the world’s central bankers determined to destroy any kind of fiat money value.  Take this as a warning and position yourself accordingly.

A Recipe for Stagnation

"Agitate! Agitate! Ought to be the motto of every reformer.  Agitation is the opposite of stagnation - the one is life, the other is death." - Ernestine Rose

As has been widely broadcast the minimum wages across the country are heading higher.  It seems like the States are in a race to see who can force minimum wage to $15 an hour in the shortest amount of time.  The theory is that if you can move minimum wages higher, the people at the bottom of the wage scale will be moved to a position of financial strength improving their spending power and benefiting all.  Politicians look at it as a transfer of wealth from those that can afford it to those that need it most.  On paper this seems to make sense but digging a little deeper and it is clear that this is another government intervention that will have unintended consequences.

I certainly understand the political agenda behind raising the minimum wage.  I also understand that without some form of government  intervention wages at the lower end of the spectrum would stagnate forever.  That said the problems with the most recent round of forced increases are the timing and the rapid acceleration of the base wage. 

First let's look at the timing of the wage increase.  Were the economy booming companies would be competing for workers and the natural order of business would result in pay rates rising to attract workers.  Currently the economy is on such weak footing that the Reserve Bank is hesitant to raise interest rates even a 1/4% higher.  Furthermore as long term readers of this blog will know, while the unemployment rate is relatively strong, the labor participation rate and the U6 unemployment rate is pointing to anything but strength.  Had the politicians waited for economic strength the market would have been resilient enough to handle the increases however this is not the case today.

The second issue is that the wage rates will increase pretty much every year through 2020 by which time most if not all States will have a minimum wage of $15 an hour.  This rapid acceleration will impact earnings significantly and will be a factor that needs to be considered before starting any new business or expanding into new areas.  This will slow down hiring and make companies reduce expansion affecting job creation.  Furthermore the wage increases are not limited to minimum wage earners but has been extended to lower management as well. 

By the end of the year salaried employees earning less than $48,000 a year will be required to be paid overtime.  This impact will be the largest of all as companies will scramble to reduce these key employees' hours or remove the position completely by consolidating the position into one higher paying position.  It will also impact the upwardly mobile as these go getter's will have to reduce the hours worked thereby negating their advancement opportunities as they will not be able to showcase their can do attitudes without costing the company money. 

The biggest impact of these new policies though is that this is yet another barrier to entry for small and start up companies.  To these companies a high level of pay would be $40,000 a year and that would equate to a senior manager.  Making this position cost more is akin to putting a bullet in the heart of small business and business start ups.  As you would have read in last week's blog there is already a major slow down in net company formations and this slowdown is one of the largest causes of anemic GDP growth.  Raising the cost to starting a company even further will have a massively negative impact on small company start ups which will kill any idea of GDP expansion. 

The results of all of this is that the economy will stagnate.  GDP growth will be anemic until such time as all of these wage increases can be factored into the price of goods and services and given the weakness of the global economy this will take a long time.  In the meantime during this adjustment period the divide between those that have and those that do not will widen even further in complete contrast to the desired impact.  This new law has effectively placed another golden spoon in the hands of large business at the expense of the job and GDP growth engine, small business; their moat is even more secure and this is a huge problem if you want to see GDP accelerate.  Better get used to the stink of stagnation!

Two out of Three Ain't Bad?

"And all I can do is keep on telling you, I want you, I need you; But there ain't no way I'm ever going to love you; Now don't be sad, 'cause two out of three ain't bad" - Lyrics to the song Two Out of Three Ain't Bad by Meatloaf

If there is one metric that tells the true story of the state of the economy it is the labor statistics.  Or does it?  As I have repeated in previous blogs, pretty much every statistic from inflation to the labor market numbers are fudges, guesses, estimates stabs in the dark; call them what you will but they are manipulated and the labor statistics are no different.

As an example take the monthly labor reports.  Each month the Bureau of Labor Statistics adds a fake 75,000 jobs to the labor force from their Birth/Death computer model to account for new company births.  This is based on the range of new company start ups from the previous 20 years prior to the financial crisis.  During this period on average the net number of new firms (that means more firms opening than closing per year) ranged between 75,000 and 200,000 a year.  To account for this the BLS blindly adds 75,000 new jobs per month to their reported numbers.  Well according to the US Census Bureau the number of net new company openings since the financial crisis is just 33,000 a year, less than half of the prior period so this fake number of new jobs is vastly overstated.

Even though we know the numbers are wrong they do tell a story.  If they are consistently wrong each month then at least we have a benchmark to work with.  Taking this benchmark as being overly optimistic (based on the above analysis) means that the printed numbers are far worse than what is published.  To offset some of the errors adjustments are made to reflect miscalculations and these result in revised numbers that are possibly closer to the true number however most people ignore the revisions but their story tells a clearer tale.

Therefore taking today's published May job figures (prior to revisions) of non farm payroll increasing by 38,000 and private sector payroll increasing by 25,000 regardless of the how wrong they are they are still anemic.  Consensus was for them each to increase by 160,000 so these are truly disastrous figures.  On top of this April and March's numbers were revised downwards even further to fall well below the 160,000.  This 160,000 number is Wall Street's current "required" number to show economic health.  This number has also been revised lower as the economy was sputtering so badly that they had to reduce the number in order to print bullish headlines.  Were the economy truly healthy this "required" number would be in the range of 250,000 a month but as that is not even remotely possible, Wall Street analysts have quickly reduced their number of economic stability.

The next interesting statistic comes from the unemployment rate which fell to 4.7% versus 5.0% in April.  Wow, so magically the unemployment rate is falling even as less firms are added to the pool of companies AND as hiring falters.  In an economy the size of the United States you need to increase the number of jobs by roughly 150,000 a month just to remain at status quo in terms of the unemployment rate.  The reason for this is that the population is growing so the economy needs to suck up the additions to the work force to maintain equilibrium but magically the unemployment rate is falling.  How is this even possible?

Well when a person goes on unemployment benefits they are logged as unemployed.  As long as they remain on benefits they are counted.  If their benefits run out before they can find a job then they are magically "employed" according to the count!  This is how the number is improving.  Taking a look at the U6 number which includes people working part time but want full time work the number quickly balloons to 9.7%.  This number is stuck at roughly the same level as where it ballooned to during the 2002 and 2003 recession; hardly something to sing about.

The most telling number of all to me is the participation rate.  This number basically takes the total number of people working divided by the number of people in the population (not quite as simple as that but you get the idea) and this results in another metric.  This number FELL to 62.6% from 62.8% and is well BELOW where it was at the height of the recession!  Yes back in 2009 this number was around 65% so 5 trillion dollars of money has managed to make this number worse by almost 4%!  And to think that they are actually considering an interest rate hike because the economy is "strengthening"; what a joke.  I guess the rate hike is based on the lyrics of the song that, "two out of three (employed) ain't bad'!

Upwardly Mobile

"It is good to follow one's own bent, so long as it leads upward." - Andre Gide

One of the bedrocks of economic theory is that labor will migrate towards areas where there are higher wages and a better quality of life.  The theory goes that if you remove all borders then workers will naturally flow to areas flush with job opportunities.  This is one of the reasons behind creating the Euro Zone or the North American Free Trade Agreement.  Furthermore there is proof that children who are moved to areas with better education, lower crime and where there is a preponderance of two parent families earn more than 10% than their peers.  With this as proof one would think that the theory would hold as what parent doesn't want the best for their children?

A new study however has shown that the theory may not hold true specifically for those reliant on government subsidies.  Unfortunately these are the people that would benefit most from an improvement in living standards and are the demographic of people that are assumed most likely to move with their relevant industries.  The finding is that not only can these people often not afford the expense to move but they are tied to their subsidies.  If they move they lose their subsidies such as housing and food stamps which is often their major source of financial sustenance.

Now moving from one town does not mean that the subsidies are lost forever but it often means that they are lost for a period of time.  This period of time is more than most are able to handle and so they stay put.  Changing the way that the subsidies are issued would be a big step in the right direction however society has found many ways of blocking the needy from entering the upper class halls.  One is to restrict low income housing or change the building specifications to effectively stop the building of any space that would allow cheap units to be rented.

In addition to these issues America has long had a love of the automobile.  This love has created a system where moving large bodies of people around the country is expensive and time consuming.  Public transportation while improving is still far behind Europe and most of the rest of the modern world so spending money on these infrastructure projects would not only create work for those needing it but would bolster the economy far more than throwing more money at banks.

Creating a truly mobile work force should be a priority in the United States.  Spreading the burden of subsidies evenly would assist those cities that are struggling to handle the draws and creating mobility would give everyone the ability to find work at a decent wage.  The result would be a truly upwardly mobile economy and one that would worth celebrating and investing.

Measuring GDP

"Not everything that counts can be counted and not everything that can be counted counts." - Albert Einstein

The above quote is so true but humans have a natural tendency to try to place a value on pretty much everything.  When it come to the world of economics, counting is a virtual impossibility because in most instances the things being counted are so vast and changing so regularly (if not every millisecond) that even after time and effort is made to calculate the number it is guaranteed to be wrong!  The thought in economics is that even though it is well known that the number is incorrect it is better than no number at all.

There is no number more relied on and more wrong than GDP.  The estimate of changes in GDP is used to assess whether the economy is growing too slowly or too fast (or not at all) and to gauge whether inflation is rampant, in line with targets or deflationary.  It is used to determine whether we are in an overheated booming economy or a stagnant spluttering economic recession.  Central bankers rely on it to create their strategies for stimulating or cooling down the economy and governments are held to account, particularly at election time, for the their ability to provide good GDP growth.  Currencies swing higher and lower reflecting the strength or weakness of the underlying economy's GDP growth in comparison to everyone else, and interest rates depend to a large extent on the outlook for GDP growth or lack thereof.  To say it is an important number is an understatement however to calculate it is all but impossible.

Created in the 1930s GDP was initially relatively simple to calculate.  Take a basket of goods and services and then revalue them a year later and there's your answer/  Economies in those times were based more on manufacturing and farming than it was on services so computing the change in the inputs was relatively simple.  Fast forward to today and the complexities of the modern world make a mockery of the number.  Examples abound but I will mention only a few:

1. The smart phone in your pocket has more computing power than a PC had in the 90s and the price is lower so is that deflationary or should there be an adjustment for improved productivity?
2. The new smart phone is more pricey than last year's version but it comes with a number of new features so is this inflationary or should the price be adjusted lower so that it incorporates the technological advances that make your life easier?
3. What about the use of your car to take passengers for a paid ride (Uber) or that extra room in your house that is rented to travelers (AriBnB) or all the free entertainment that is available on YouTube or Facebook?  How should this be included in GDP?
4. What about the billions of dollars that are flowing through the black markets of the world?

The case for the basket of goods capturing a change in GDP is so rife with problems that it is starting to make the number of little relevance.  When you start to consider the inflationary aspects of the number and the adjustments that are made for technological advances it becomes even more haphazard.  How can you compare the change in price of say a fax machine and the use of email or crutches with prosthetics or vinyl records with streaming digital music?

The issues are so complex that whatever number is calculated it is far from reality.  This is why everyone should calculate their own inflation rate particularly when it comes to determining a real rate of return on your investment.  Without it you cannot get a clear indication of real portfolio returns and this will have a tremendous impact on your retirement planning.  But for all its problems having a number is better than having no number at all but basing your financial future on this number is akin to failure.  Use it as a loose gauge of economic activity and follow any large swings but do not hang your hat on this number.

Desperado

"Desperado, why don't you come to your senses, you've been out riding fences for so long now;
Oh your a hard one, I know that you've got your reasons, these things that are pleasing you will hurt you somehow>" - Lyrics to a song by The Eagles

Is it just me or is the world filled with a lot of Deperados?  The central bankers of the world are desperately doing their best to convince the world that more debt is the solution to our problems and are considering more desperate measures to pump more useless money into a flagging economy in a desperate attempt to stave off the inevitable.  The general population is not convinced and is showing its frustrations at the polls by desperately buying in to the rhetorical garbage that is coming from the mouths of the Presidential candidates.  Not only will the policies of either candidate not solve the man in the streets woes, but some of them will create a far larger mess but we will see who takes over in November and deal with that then.

Through all of this the stock market continues to toy with new highs but has yet to print any for over a year and we are now into the May to October low volume trading period so anything can happen.  To me it is truly amazing that the stock market is up at all for the year; corporate sales and earnings are continuing to decline (GAAP earnings were down 15% in 2015 and were down another 8% year over year in Q1 for  the S&P 500), two thirds of the companies reporting earnings cut guidance for the second quarter, GDP growth in the first quarter was only 0.5% and business investment in Q1 was the lowest since the 2009 recession.

With all of these negative data points plus rising oil prices and poor economic activity being reported across the globe I firmly believe that we are entering the end game in terms of the stock market.  As I have mentioned repeatedly though the Federal Reserve will come to its rescue with more support in the form of rate cuts (possibly going negative to join the global party) and money stimulus.  The issue is that the impact of further rate cuts and monetary stimulus will be muted and the results of trillions of dollars of stimulus is weak economic growth and a faltering labor market.  The next step will more than likely be the "helicopter" method coined by Ben Bernanke.  The idea is to go around the banks and directly to the consumer by throwing money out the side of a helicopter!  Sounds like a great and well thought out plan like the rest of the central bank's policies!

All of these desperate attempts at stimulus are not providing the economic windfall that was predicted and more stimulus will not magically create jobs or increase productivity.  In fact productivity has continued to lag as the burden of debt is creating an economic drag that has crowded out the private sector (and more importantly the small business and middle class) resulting in continued lackluster growth and fractions within political parties.  Adding more debt will not magically solve these issues but will create a larger problem.  In this highly volatile environment if you are not posturing yourself for the inevitable then you are opening yourself up to enormous risk.  My advice is to look to gold stocks and alternative investments or go to cash but either way exit as soon as possible.

The Retirement Equation

In life one of the most if not THE most important equation that needs to be solved is how much do I need for my retirement.  The equation is not as simple as it seems as there are numerous variables that will undermine even the most detailed analysis.  As we all know the inputs are; the size of the asset base, the annual returns on that asset base, the remaining life span of the investor and the annual expenses.  These variables change constantly and therefore make it even more complex to determine the amount needed but financial planners like to assure investors that they are covered when often times they are not.  I thought it would be useful to open pandora's box to show you how hard it is to determine the appropriate number and to make you consider in far more detail the inputs and the outputs before you make too bold a step into the world of retirement.

The first variable is the size of the portfolio.  On this front it is always better to have more than not enough.  To me the size of the portfolio needs to be of a size that will be resilient regardless of the market gyrations.  There is no doubt that should you live another 20 years, the market will throw a spanner into your engine of returns and the draw down will destroy the supposed smooth line of returns that you are expecting.  Just take the current market for example.  For those that have followed this blog for some time you will know that I believe the market to be manipulated and over priced but the alternatives are producing such low rate of return that you are almost forced to take on too much risk to produce a meaningful number.  This means that even now (or should I say especially now) the returns to your portfolio (if you want low risk which most retirees do) are too low to support any "normal" expenditure.  One way around this is to invest outside the box but the other way is to have a portfolio that is so big that it does not matter.

Well as this is not a solution for most of us the next alternative is to delay your retirement as every year that you work not only adds to the size of the portfolio but also reduces the amount of time that the portfolio has to support you by one year.  The less time that the portfolio is required to provide support the lower the size of the nest egg and/or the return requirement both of which are a huge benefit to your portfolio and its ability to achieve its goal.

The next thing to consider is the average annual return.  As I have mentioned, achieving a meaningfully positive real rate of return (that is the portfolio return less inflation) is virtually impossible at present unless you take on far too much risk.  Risk here is defined as the probability that your portfolio will suffer a large draw down from which it can never recover.  Most people that I talk to seem to be in this camp as they are not considering the alternatives for the simple reason that their investment advisor is not able to sell them the alternative investments.  This is a flaw in our investment system; the people that need the alternatives the most are "protected" from them so that they are not exposed to losses.  In the meantime they are lead to the slaughter like lemmings but those are the rules and I pity those that are forced to follow them.

The next point regarding returns is that they will change year in and year out.  The idea of a smooth line is almost impossible to achieve so the portfolio has to be able to sustain a draw down and recover.  This is why the average planner suggests that retirees only withdraw 4% of their portfolio each year.  This small amount protects the portfolio but often reduces the amount that the retiree can withdrawal to such a small amount that it does not benefit the retiree at all.  Assume you retire on $500,000 and you can withdraw 4% a year, that is only $20,000 a year or roughly $1,800 a month.  While not a small amount it is not big enough to support most active lifestyles and most retirees do not even have half this amount saved!

Looking at life expectancy tables shows that the older you are the longer you have to live.  So for example at 50 the tables show that you have roughly 35 years to left live but if you are 85 the tables do not show zero years to live but show roughly 10 years left.  The probability that you will live longer is higher the older you get and therefore to plan your retirement requires a constant adjustment to your life expectancy all the while your portfolio size is finite (other than the returns on it).

The final input is the monthly expenses.  While we all know that 95% of our medical expenses are incurred in the last 5 years of life what most planners do not factor is that spending habits change with the size of the portfolio.  People are not going to blindly spend the same amount of money each year particularly if the portfolio size diminishes rapidly due to unforeseen market forces.  People will adjust their spending down as the fear of outliving their income will quickly place a crimp on the spending.  The main issue here is that the catch all, annuities, are not factoring a lot of these inputs as there simply has not been enough time (and here I mean enough years to have past to produce data) to capture the data required to factor in all of these inputs with a sufficient level of understanding to underwrite the majority of the risks.  Not that I expect the annuity world to blow up but it is something to consider when you are told that you are covered because you have an annuity.

So with all of this said it is really clear why you need to constantly review your investment portfolio as there are no constants even if your planner assures you that they have it covered!

Controlled versus Free Markets

Having no trade restrictions; not subject to government regulation; not subject to restriction or official control. - one of the definitions of Free in the Webster Dictionary

During the week I spend a lot of time reading to keep up with the ins and outs of the markets and the macro-economic environment.  I do so to try to assist me in planning my next move but as most macro-economic moves take time to develop I am not in a rush to change things.  It has been my contention that the United States and the world are in a predicament that will lead to severe pain so for the past five years I have been slowly implementing an investment strategy that I believe will benefit from my macro-economic outlook.  Most people do not want to hear my views as they are contrary to what the talking heads want you to believe and the results, if I am right, are painful but in this game you need to do your research and follow your findings in order to succeed.

This week I have been reviewing a number of articles associated with the idea of a free market.  When I first started trading back in the early 80's the markets gave you ample opportunity to prosper from good solid research.  Since then almost 40 years later those days are long gone.  With the advent of the massive control that the Federal Reserve and other central bankers now have over the markets the game has changed.  So the idea of a free market no longer exists.  As the rules of the game have changed the investment strategies need to align themselves with the new playing field so let's look at the playing fields.

A free market as the definition above shows is one where there is no government intervention.  Markets are left to their own devises.  They will move to the beat of the economic environment and the perceived opportunities available to the companies that operate in their various sectors.  When there are good times stock prices run higher as the outlook is solid and profits rise.  During these times more and more companies enter the space eventually stealing market share from the incumbents and hurting the bottom line of all businesses in that space.  The effect of this competition is lower prices to the consumer and expanding employment.  Eventually though when the profits are too thin the weak are weeded out, layoffs and bankruptcies become the norm.  Once these are cleared out the cycle repeats itself.  Market forces take care of the good times and the bad times.

Fast forward to today where there is a shrinking pool of large companies that control larger and larger portions of the global market.  Profits are spent not on research and development but on securing their position in the world by creating, as Warren Buffet terms, a "moat" around their business impregnable to others.  The result is higher prices to consumers and lower employment opportunities. These companies can handle the down turns but due to the lack of competition during recoveries there is little in the way of employment growth.  The only growth that is seen is profits.

In addition you have a Federal Reserve that is becoming more and more like the central planners of Russia and China.  They are not content to let the market operate in a vacuum but tinker with its very existence by lowering rates to juice returns to investors and providing cheap capital to the too big to fail companies.  The result is that the rich who benefit from these interventions get richer and the poor feel no effect of the "stimulus".  At present there is an ever wider dispersion between the wealthy and the poor and this disparity is creating massive problems for growth and political stability.

This intervention is not limited to the United States but has expanded across the globe.  In Japan the BOJ has not only issued debt but now owns around 40% of all the exchange traded funds on the Japanese stock markets.  Furthermore they are demanding new funds be made up of socially responsible companies (read companies that benefit the Japanese people) so they are not only providing capital but are controlling the intricate workings of the stock market itself.  China too has manipulated their markets more aggressively than the Federal Reserve but it is clear that they all have their arms firmly grasped around what used to be a free market.

In the volumes of historical documentation about the central planners of the world it is clear that any time a country pursues a path of central control, or control among the few, it never succeeds in the long run.  There may be some short term gains but eventually it all craters.  Russia blew apart, China is showing signs of instability and needs to open up to a freer market.  Japan is still struggling to stimulate inflation.  The issue is that the worse things get the tighter the central bankers' control over the market.  I have written much since the 2008 crisis and a lot of what was written was the question why, after the crisis was averted, did the Federal Reserve not move to the side?  Their job was done and it was now up to the markets to take over and sort the balance of the problems out themselves, freely; but they have continued to meddle and try to control the markets and their continued tinkering is creating the massive market instability that we face today.  

The result is going to be a very bad market collapse.  The issue is that this will stimulate them to try to control the market even tighter than before.  At some point congress will have to step up and remove the ridiculous powers of the Federal Reserve and restore them to their previous mantra of fighting inflation and lowering unemployment, freeing the markets from their grasp.  Until then my thought is that the global economy will continue to dribble forward on life support with longer recessions and little in the way of any economic recovery, forever.

The Obesity Index

"This is what people don't understand: obesity is a symptom of poverty.  It's not a lifestyle choice where people are just eating and not exercising.  It's because kids - and this is a problem with the school lunch right now - are getting sugar, fat, empty calories - lot's of calories - but no nutrition." - Tom Colicchio

Well the world's central bankers could learn a thing or two from the above statement however their "obesity" is in the form of debt.  A recent article published in the CFA magazine highlights that global debt has risen by $57 trillion between 2007 and 2014.  That is more than $8 trillion a year added or roughly $700 billion a month!  This puts global debt at more than 286% of global GDP.  The sad part is this number only counts the debt that has been issued and does not include what is referred to as "off balance sheet" debt.  These are debt obligations that are owed but have not yet been paid and have no formal debt associated with it.  Examples of this kind of debt would be the unfunded Social Security benefits, pension liabilities and entitlement programs.  If we were to include these obligations the number would be far greater.  Just taking the pension obligations the estimate is $50 trillion more pushing debt to global GDP over 300%.

This has not deterred the globe's central bankers from issuing more debt.  The reasoning seems to be that if the world has taken on this much debt what does it matter if we take on more?  Furthermore, without this infusion of capital in the form of debt the global economy would not be growing and we would be in a world of trouble, so the central bankers say.  But there are two main problems associated with this continued increase in the debt burden; the first is that borrowing no longer generates growth and the second is that instability is increasing.

Taking the first issue regarding the lack of growth, I do not know how much more of an example is required than the post Great Recession's anemic recovery.  As the debt level rises more and more money is spent on servicing the debt and ultimately it crowds out productivity.  Back in the 80's when debt was first added as a stimulant each unit of additional debt resulted in roughly a unit increase of productivity.  Today that marginal productivity has all but evaporated.  Adding more debt is have no impact on growth which is why no matter how much money is thrown at the problem or how low interest rates go there is no economic expansion.

The second issue is that as you pile more and more debt onto the world it results in shorter boom periods and longer periods of bust and recovery.  Defaults are becoming more and more common and people are becoming more and more angry at the establishment and the rules; just look at the mess created by the massive obligation of student loans in the United States.  This instability is feeding into politics as angry voters throw their weight behind people like Trump.

To me adding more debt to the global economy is like piling more sand onto a sand castle, eventually it will buckle under its own weight.  A reverse strategy would be far more effective and stimulating.  Imagine if the United States wrote off all of the student debt in one go.  All of that money would be spent on housing, cars, vacations and the like.  The stimulus would be huge.  Any consumer knows that removing the burden of debt brightens your whole day, the outlook is not cloudy and your are excited to buy something new.  Unfortunately the world has burdened its citizens with the yoke of debt and until this is lifted global economic growth will remain anemic.

If growth therefore is anemic (as it has been) and good paying jobs hard to find (as they are), the world's middle class will continue to shrink as people roll backwards.  In order to stave off the debt collector families are cutting expenditure (creating slow to no economic growth) and, according to the quote above this is one of the main causes of obesity.  Hence the birth of a new index, the Obesity Index.  If obesity continues to grow economic "stimulus" is not working.  Once there is true economic growth you should start to see obesity come under control.  As it is now a growing global problem it would point to continued poor economic growth and a disconnect between the policies of the central bankers of the world and the impact of their "stimulus" on the global economy.

Until such time as there is true global economic expansion, not growth based on fictitious money that is blindly thrown at banks, but real expansion based on growing consumer spending derived from wage increases and jobs, I guess the world will continue to consume the $1 Big Mac and deal with its waistline!