"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'!
Friday, June 3, 2016
Friday, May 27, 2016
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.
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.
Friday, May 13, 2016
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:
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.
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:
- 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?
- 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?
- 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?
- 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.
Saturday, May 7, 2016
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.
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.
Friday, April 29, 2016
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!
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!
Friday, April 8, 2016
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.
Friday, April 1, 2016
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!
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!
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