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Which Assets Are Most Likely to Survive the Inevitable “System Re-Set”?

Which Assets Are Most Likely to Survive the Inevitable “System Re-Set”? 

Your skills, knowledge and social capital will emerge unscathed on the other side of the re-set wormhole. Your financial assets held in centrally controlled institutions will not.

Longtime correspondent C.A. recently asked a question every American household should be asking: which assets are most likely to survive the “system re-set” that is now inevitable? It’s a question of great import because not all assets are equal in terms of survivability in crisis, when the rules change without advance notice.

If you doubt the inevitability of a system implosion/re-set, please read Is America In A Bubble (And Can It Ever Return To “Normal”)? This brief essay presents charts that reveal a sobering economic reality: America is now dependent on multiple asset bubbles never popping–something history suggests is not possible.

It isn’t just a financial re-set that’s inevitable–it’s a political and social re-set as well. For more on why this is so, please consult my short book Why Our Status Quo Failed and Is Beyond Reform.

The charts below describe the key dynamics driving a system re-set. Earned income (wages) as a share of GDP has been falling for decades: this means labor is receiving a diminishing share of economic growth. Since costs and debt continue rising while incomes are declining or stagnating, this asymmetry eventually leads to insolvency.

The “fix” for insolvency has been higher debt and debt-based spending–in essence, borrowing from future income to fund more consumption today. But each unit of new debt is generating less economic activity/growth. This is called diminishing returns: eventually the costs of servicing the additional debt exceed the increasingly trivial gains.

…click on the above link to read the rest of the article…

These are the Countries with the Biggest Debt Slaves, and Americans Are Only in 10th place

These are the Countries with the Biggest Debt Slaves, and Americans Are Only in 10th place

So who the heck are the Really Great Ones?

Americans have been on a borrowing binge. To buy their favorite cars and trucks, they’ve loaded up on $1.14 trillion in auto loans. Young and not so young Americans are mortgaging their future with student loans that now amount to $1.28 trillion. Credit card and other debts are at $1.12 trillion. And mortgage debt stands at $8.82 trillion.

So, total household debt was $12.35 trillion, according to the New York Fed’s Household Debt and Credit Report for the third quarter 2016. That’s a massive amount of debt. Many consumers are struggling with it. Student loans are seeing enormous default rates, and repayment rates are far worse than previously disclosed. And “debt slaves” has become a term in the financial vernacular.

But it isn’t nearly enough debt…

Neither for the New York Fed whose President William Dudley, in a speech a few days ago, practically exhorted households to borrow more against the equity in their homes so that they blow this cash and drive up retail sales: “Whatever the timing, a return to a reasonable pattern of home equity extraction would be a positive development for retailers, and would provide a boost to aggregate growth,” he mused, with nostalgic thoughts of 2008.

Nor for the global rankings of debt slaves, where US households squeaked into the ignominious 10th place, barely ahead of Portugal! I mean, come on! Portugal!!

There are many ways to measure household indebtedness and debt burdens. Comparing total household debt to the overall size of the economy as measured by GDP is one of the measures. And per this household-debt-to-GDP measure, the Americans are 10th place with 78.8%  and look practically prudent compared to the peak just before the Financial Crisis (via Trading Economics):

…click on the above link to read the rest of the article…

What has gone wrong with oil prices, debt, and GDP growth?

What has gone wrong with oil prices, debt, and GDP growth?

(1) The big thing that pulls the economy forward is the time-shifting nature of debt and debt-like instruments.

If we want any kind of specialization, we need some sort of long-term obligation that will make that specialization worthwhile. If one hunter-gatherer specializes in finding flints that will start fires, that hunter-gatherer needs some sort of guarantee that others, who are finding food, will share some of their food with him, so that the group, as a whole, can prosper. Others, who specialize in gathering firewood, or in childcare, also need some kind of guarantee that their efforts will be rewarded.

At first, these obligations were enforced by social norms such as, “If you don’t follow the rules of the group, we will throw you out.” Gradually, reciprocal obligations became more formalized, and included more time shifting, “If you will work for me, I will pay you at the end of the month.” Or, “If you will pay my transportation costs to a land of more opportunity, I will repay you with 10% of my wages for the first five years.” Or, “I will sell you this piece of land, if you will pay me x amount per month for y years.”

In some cases, the loan (or loan-like agreements) takes the form of stock ownership of an enterprise. In this case, the promise is for future dividends, and the possibility of growth in the value of the stock, in return for the use of funds. Even though we generally refer to one type of loan-like agreement as “equity ownership” and the other as “debt,” they have a great deal of similarity. Funds are being provided to the enterprise, with the expectation of greater return in the future.

…click on the above link to read the rest of the article…

President-elect Trump stated in his victory speech that he intends to make America great again by infrastructure spending.

President-elect Trump stated in his victory speech that he intends to make America great again by infrastructure spending.

Unfortunately, he is unlikely to have the room for manoeuvre to achieve this ambition as well as his intended tax cuts, because the Government’s finances are already in a perilous state.

It is also becoming increasingly likely that the next fiscal year will be characterised by growing price inflation and belated increases in interest rates, against a background of rising raw material prices. That being the case, public finances are not only already fragile, but they are likely to become more so from now on, without any extra spending on infrastructure or fiscal stimulus. So far, most informed commentaries on the prospects for inflation have concentrated on the negative effects of an expansionary monetary policy on the private sector. With the pending appointment of a new President with ideas of his own, this article turns our attention to the effects on government finances.

Government outlays are already set to increase, due to price inflation, more than the GDP deflator would suggest. The deflator is always a dumbed-down estimate of price inflation. At the same time, tax receipts will tend to lag behind any uplift from price inflation. Furthermore, the wealth-transfer effect of monetary inflation over a prolonged period reduces the ability of the non-financial private sector to pay the taxes necessary to compensate for the lower purchasing power of an inflating currency.

Trump is a businessman. Such people often think that running a country’s economy is merely a scaled-up business project. Not so. Countries can be regarded as not-for-profit organisations, and democratic ones are driven by the consensus of diverse vested interests. The only sustainable approach is to stand back and give individuals the freedom to run their own affairs, and to discretely discourage the business of lobbying.

…click on the above link to read the rest of the article…

Global Debt Investors: The Silence of the Lambs

Global Debt Investors: The Silence of the Lambs

More haunting even than the terrified screams of lambs being led was the silence that followed their slaughter.

Such was the searing pain of relentless recollection for FBI agent Clarice Starling, the tortured lead played to Oscar perfection by Jodie Foster. In an agonizingly whispered scene that has forever left its imprint on the minds of horrified audiences, we hear the bleating of Starling’s long-dead tormentors.

Clarice’s hushed revelations to Hannibal reveal a desperate act by her young orphaned self. Unable to bear the horror, she’s running away from the bloodbath of spring lambs being slaughtered and her cousin’s sheep ranch. Desperate to do something, anything, she struggles to drive them from their pens to freedom: “I tried to free them…I opened the gate of their pen – but they wouldn’t run. They just stood there confused. They wouldn’t run…”

A recent, reluctant re-viewing of the film, only the third in history to win the “Big Five” Oscars, Best Picture, Actor, Actress, Director and Screenplay, fed fresh food for thought. The image of captives rejecting their freedom brought to mind another flock of corralled and stunned lambs — bond market investors. They too have been given the opportunity to escape their fate. But so many choose instead to stay. Such is the reality of a world devoid of options, with time ticking ruthlessly by.

Against the cynical backdrop of bulls and bears manipulating data to plead their case, Salient Partners’ Ben Hunt’s insights stand out for their indisputability. In his latest missive he points to one chart that’s incapable of being “fudged,” to borrow his term – that of U.S. household net worth over time vis-à-vis U.S. nominal gross domestic product. Suffice it to say we’re farther off trend than we were even during the dotcom and housing manias.

…click on the above link to read the rest of the article…

The Floodgates Begin To Open

The Floodgates Begin To Open

Now “anemic” is becoming “non-existent.” In the US, mini-credit-bubbles like auto loans, home mortgages and student loans are sputtering, leading economists to dial back their rosy scenarios for 2016. The Atlanta Fed’s GDPNow forecast for Q3 growth, for instance, was a robust 3.8% in August but is now less than 2% — and still falling.

gdp-now-oct-16

Not surprisingly, everyone is starting to panic. In the UK, where admittedly Brexit has created a unique situation:

Mark Carney: Bank of England will tolerate higher inflation for the sake of growth

(Telegraph) – Official data on Friday showed house building, infrastructure and public construction all slumped in August, indicating that the UK’s building industry is slowing sharply and could even enter a recession. Construction output dropped by 1.5pc in the month, an unexpected drop after growth of 0.6pc in July, according to the Office for National Statistics. Separate Bank of England figures showed banks suffered a big drop in demand in the months following the Brexit vote as fewer Britons were prepared to take major financial decisions. Demand for mortgages dipped strongly, with a net balance of 44pc of banks reporting a fall in customer interest – the biggest negative score in almost two years.

Bank of England Governor Mark Carney told an audience in Nottingham that the current environment of low inflation was “going to change”, with the drop in the value of the pound likely to push up prices across the economy.

…click on the above link to read the rest of the article…

 

Hell To Pay

SkillUp/Shutterstock

Hell To Pay

The final condition for a market crash is falling into place 

Sometimes I wonder if I’m ever going to run out of new things to say about the economy. Nothing interesting has happened in a long time.

Our liquidity-drunk “markets” remain over-priced due to the chronic intervention of the global central banking cartel, which has demonstrated over and over again that it won’t tolerate even the slightest drop in asset prices.

Those familiar with my writing know I put the word “markets” in quotes because we no longer have a financial system where legitimate price discovery is a regular — or even recognizable — feature.

It’s destined to fail. What more can be said about such a flawed system?

Well, a lot as it turns out.

And failure to pay attention at this stage of economic and ecological history will prove to be exceptionally painful.

The Beginning of the End

It’s been a long 7 years for those of us who believe fundamentals matter.  For quite some time they have not.

So we reality-based fundamentalists have largely been reduced to pointing at the parade of policy failures and ham-fisted market manipulations and saying, essentially, That’s just dumb.

But ‘dumb’ mistakes have become ‘stupid’, and ‘stupid’ became ‘idiotic’, and now ‘idiotic’ mistakes are piling up, accumulating into a mountain of stored potential energy that will someday topple destructively across the global markets.  We’ve all known, deep down, that money printing is not the same as capital formation, and that prosperity never truly results from redistributing wealth from one group to another. And yet, far too many have been willing to play along and place their trust in the central banks.

Well, we’ve finally reached the beginning of the end.

…click on the above link to read the rest of the article…

China Relies On Property Bubbles To Prop Up GDP


Carl Mydans Sharecropper’s family in Mississippi County, Missouri 1936
Lots of China again today. Most of it based on warnings, coming from the BIS, about the country’s financial shenanigans. I’m getting the feeling we have gotten so used to huge and often unprecedented numbers, viewed against the backdrop of an economy that still seems to remain standing, that many don’t know what to make of this anymore.

Ambrose Evans-Pritchard ties the BIS report to Hyman Minsky’s work, which is kind of funny, because our good friend and Minsky adept Steve Keen is the economist who most emphasizes the need to differentiate between public and private debt, in particular because public debt is not a big risk whereas private debt certainly is.

And that happens to be the main topic where people seem to get confused about China. To quote Ambrose: “..Outstanding loans have reached $28 trillion, as much as the commercial banking systems of the US and Japan combined. The scale is enough to threaten a worldwide shock if China ever loses control. Corporate debt alone has reached 171pc of GDP..”

The big Kahuna question then becomes: should Chinese outstanding loans and corporate debt be seen as public debt or private debt, given that the dividing line between state and corporations is as opaque and shifting as it is? Even the BIS looks confused. I’ll address that below. First, here’s Ambrose:

BIS Flashes Red Alert For a Banking Crisis in China

The Bank for International Settlements warned in its quarterly report that China’s “credit to GDP gap” has reached 30.1%, the highest to date and in a different league altogether from any other major country tracked by the institution. It is also significantly higher than the scores in East Asia’s speculative boom on 1997 or in the US subprime bubble before the Lehman crisis.

…click on the above link to read the rest of the article…

If Everything’s Doing So Great, How Come I’m Not?÷

If Everything’s Doing So Great, How Come I’m Not?

Are you better off than you were 10 years ago?

We’re ceaselessly told/sold that the U.S. economy is doing phenomenally well in our current slow-growth world — generating record corporate profits, record highs in the S&P 500 stock index, and historically low unemployment (4.9% in July 2016).

While GDP growth is somewhat lackluster by historical standards—less than 2% in 2016—it’s growth nonetheless. And the rate of consumer-price inflation is hovering around 1%; negligible by historical standards.

But this uniformly positive statistical view of the U.S. economy raises a question among those not in the top 0.1%: If everything’s going so great, how come I’m not?

Whether it’s struggling to keep up with the rising cost of living, a 0% return on savings, working longer hours while real wages stagnate, scrimping to pay back education loans, despairing at the abuses of power in our banking and political systems, or lamenting the loss of nourishing social interaction in our increasingly isolated and digital lifestyle — most “regular” people find their own personal experiences to be at odds with the rosy “Everything is awesome!” narrative trumpeted by our media.

The Scorecard

To get a more concrete understanding of this gap, let’s establish a scorecard we can individually fill in to make an assessment of just how well we’re doing.

The key point about such a scorecard is this: We can only optimize what we measure. If we don’t measure (for example) leisure time and well-being in our assessment of Are we doing better than we were 10 years ago? then those issues simply aren’t considered.

And this is the flaw in using broad, easily-fudged statistics such as the unemployment rate as the primary measures of how great we’re doing (or not). What actually matters in life—our experiences, our stress level, our leisure time, our well-being and our sense of security, to name a few—is completely ignored by statistics such as GDP and unemployment.

…click on the above link to read the rest of the article…

Can You Trust US Economic Data? Eight “Out Of The Box” Investment Insights – Peter Diekmeyer

Can You Trust US Economic Data? Eight “Out Of The Box” Investment Insights – Peter Diekmeyer 

 

This morning, Canada released GDP data which showed the economy shrank by 1.6% on an annualized quarter-over-quarter basis during Q2. While economists forecast a 1.5% drop, those “projections” were made after the quarter was already over. Six months before it started, almost everyone was saying that things were going to be fine.

Canada isn’t alone. As our old friend Larry Summers has pointed out , “not a single post war recession was predicted a year in advance by the Fed, the Federal government, the IMF or a consensus of forecasters.”

In short, while astute investors need to take into account the official line, they also need to go “outside the box.” Following are eight creative insights from economic and investment thinkers, almost all of whom operate outside consensus silos.

A 23% unemployment rate? John Williams of Shadow Statistics believes that US government has long been presenting misleading economic data. Much of this originated in statistical agencies rejigging calculation methodologies which started in a big way in 1994 during the Clinton Administration. The upshot, says Williams, a gold fan, is massive hidden inflationary pressures.

Headline inflation, for example, which is currently running in the 1% range y/y, would be between 3.5 and 7 percentage points higher using previous methodologies, he notes. Worse, lower official inflation numbers reduce the COLA increases that governments pay pensioners, which in turn amounts to de facto defaulting. Apartment building owners in rent control districts where increases are tied to headline inflation results are also hard-hit because they aren’t allowed raise their prices to match rising costs.

Understating inflation also enables the US government to overstate real GDP, which is calculated by subtracting the inflation rate from nominal GDP. As for headline unemployment, which is currently under 5%, Williams estimates that it could be as high as 23%, if calculated using previous methodologies or by polling ordinary people on how they regard their existing status.

…click on the above link to read the rest of the article…

We’ve Reached the “Zero Point” of Debt Creation

We’ve Reached the “Zero Point” of Debt Creation

Hurtling toward a massive financial crisis.

Forty-five years and counting: We’ve been on a debt spree since the early 1970s when we went off the gold standard, covering every possible angle. Trade deficits, government deficits, unfunded entitlements, private debt – you name it! Our total debt has grown 2.5-times GDP since 1971.

How could economists not see this as a problem? How is this the least bit sustainable?

It isn’t. We’re hurtling toward a massive financial crisis, and all we have to show for it are financial asset bubbles destined to burst. And when they do, they’ll wipe out the artificial wealth they’ve created for many decades… in just a few years, as they did from late 1929 into late 1932!

The chart below shows the common-sense truth.

As with any drug – and debt is a financially enhancing drug – it takes more and more to create less and less of an effect. Eventually, you reach the “zero point” where there is no effect and the drug kills you from its very strain and toxicity.

We’re rapidly approaching that zero point, after every dollar of debt has produced less and less GDP steadily since 1966:

2016-08-31-return-on-debt

Note that the anomaly in the chart after 2008 was due to the impact of unprecedented QE. Ever since that disruption, the trends have pointed back down – making a beeline toward that zero point again.

Back in 2002, Swiss investor and market prognosticator Marc Faber published a similar chart. His findings showed the zero point for debt creation would occur around 2015. With updated data, we now see that the zero point will hit around the beginning of 2017.

…click on the above link to read the rest of the article…

Canadian Economy ‘Double-Dip’ Crashes In Q2 – Worst GDP Growth In 7 Years

Canadian Economy ‘Double-Dip’ Crashes In Q2 – Worst GDP Growth In 7 Years

The first half of 2015 saw Canada informally enter ‘recession’ with two quarters of negative GDP but then, everything bounced back and policy shifts were ‘proven’ effective. However, that dead-canadian-cat-bounce is over as Q2 2016 GDP growth just slumped 1.6% – double-dipping to the worst since Q2 2009. The problem with this plunge is that oil prices actually had their best quarter in 7 years as the economy tanked.

As Bloomberg reports, Canada’s economy suffered its biggest contraction since the 2009 recession as wildfires in Alberta crimped oil production.

Gross domestic product fell at a 1.6 percent annualized pace in the second quarter, Statistics Canada said Wednesday in Ottawa. Economists expected a 1.5 percent decline, according to the median estimate of a Bloomberg survey with 24 responses.

Exports of goods and services plunged at a 16.7 percent annualized pace, and Statistics Canada said that excluding the damage from the wildfires output edged up. Nevertheless, export declines ranged beyond the oil industry: automobiles and metals both fell while shipments of consumer goods posted the largest drop since 2003.

Wednesday’s figures showed a good handoff to the third quarter, with monthly output rising 0.6 percent for June, faster than the 0.4 percent that economists predicted. It was the fastest gain since July 2013 and reversed a similar decline for May.

The quarterly figures signaled the main forces in the economy this year are still at work: weak business investment and strong consumer spending. Business gross fixed capital formation fell 0.5 percent, the sixth straight decline, while consumer spending rose 2.2 percent.

Government spending also bolstered the economy with a 4.2 percent increase, with some of it linked to Alberta relief efforts.

So Q2 was a disaster but Q3 hope is strong.

…click on the above link to read the rest of the article…

Who Or What Will Push Italy Over The Cliff This Year?

Who Or What Will Push Italy Over The Cliff This Year?

Prime Minister Renzi Italy

Traditionally, the Eurozone’s GDP numbers of the second quarter of a calendar year are being released in the first few days of August, and this year isn’t any different. And as expected, the updated report contains some not-so-very-optimistic results.

Germany continues to be the main engine of the economy of the Eurozone, as the largest country of the bloc saw its GDP increase by 0.4%which is better than expected as the market was expecting a weaker growth result. Unfortunately Italy is once again stagnating and instead of a small economic growth of 0.2%, the economy’s growth rate fell flat and remained at exactly at the same level, indicating the program of monetary expansion of the ECB isn’t working just yet.

Italy GDP Industrial Production

Source: Bloomberg

The lower growth rate (after realizing a GDP increase of 0.3% in the previous quarter) also caused both the International Monetary Fund and the Bank of Italy to revise their growth expectations as both institutions now expect the country’s economy to grow by less than 1% in the current year. That’s a very disappointing result as the quantitative easing program of the European Central Bank was predominantly aimed at reducing the impact of economic contractions in the poorer performing countries. But the situation might actually be even worse than you’d expect.

After all, Italy could be considered to be a semi-failed state, and the current prime minister, Matteo Renzi, was planning to push some reforms through after the summer recess of the country’s parliament. Reforms will definitely be necessary to try to the Italian economy going again, as it’s one of the very few countries remaining short of the pre-crisis levels of the GDP considering Italy’s GDP is still approximately 8% lower compared to the pre-crisis GDP numbers whilst the unemployment numbers are increasing again.

…click on the above link to read the rest of the article…

Guided By Nonsense

Guided By Nonsense

“Read the directions and directly you will be directed in the right direction.” — Lewis Carroll

U.S. consumers are at it again.  After a seven year hiatus they’re once again doing what they do best.  They’re buying stuff.

According to the Commerce Department, personal consumption expenditures (PCE), which is the primary measure of consumer spending on goods and services in the U.S. economy, increased $119.2 billion in April.  That marks an increase of 1 percent, and is the biggest one month increase since August 2009…nearly seven years ago.  Indeed, this is quite an achievement.

The consumer, you know, is the primary engine of U.S. economic growth.  Without consumption GDP doesn’t go up; rather, it goes down.  Moreover, in a debt based money system, when GDP goes down the whole financial debt structure breaks down.

We don’t condone it.  Certainly we’d prefer an honest hard money system where savings and investment drives growth as opposed to borrowing and spending.  But our preference has no bearing on reality in this matter.

Still, given the vast array of pretense inherent to a debt based money system, when we hear that PCEs increased by the largest margin in nearly seven years, we take a keen interest.  Naturally, we want to know what’s going on.  Namely, we ask, where’s the money coming from?

Where’s the Money Coming From?

Middle class incomes, the last we recall, scored a big fat rotten goose egg over the last decade.  By this we mean incomes haven’t gone up.  To the contrary, they’ve going down.

Our understanding of this unfortunate situation isn’t based on anecdotes we overheard at the corner donut shop.  Nor is it based on experiences shared by the crusty fellows casting their lines off Belmont Veterans Memorial Pier.  Instead, we have hard evidence and solid proof.  Specifically, we point to the distilled findings of Pew Research released earlier this month.

…click on the above link to read the rest of the article…

The Source of Failure: We Optimize What We Measure

The Source of Failure: We Optimize What We Measure

Rather than measure consumption and metrics that incentivize debt, what if we measure well-being and opportunities offered in our communities?

The problems we face cannot be fixed with policy tweaks and minor reforms.Yet policy tweaks and minor reforms are all we can manage when the pie is shrinking and every vested interest is fighting to maintain their share of the pie.

Our failure stems from a much deeper problem: we optimize what we measure. If we measure the wrong things, and focus on measuring process rather than outcome, we end up with precisely what we have now: a set of perverse incentives that encourage self-destructive behaviors and policies.

The process of selecting which data is measured and recorded carries implicit assumptions with far-reaching consequences. If we measure “growth” in terms of GDP but not well-being, we lock in perverse incentives to boost ‘growth” even at the cost of what really matters, i.e. well-being.

If we reward management with stock options, management has a perverse incentive to borrow money for stock buy-backs that push the share price higher, even if doing so is detrimental to the long-term health of the company.

Humans naturally optimize what is being measured and identified as important.

If students’ grades are based on attendance, attendance will be high. If doctors are told cholesterol levels are critical and the threshold of increased risk is 200, they will strive to lower their patients’ cholesterol level below 200.

If we accept that growth as measured by gross domestic product (GDP) is the measure of prosperity, politicians will pursue the goal of GDP expansion.

If rising consumption is the key component of GDP, we will be encouraged to go buy a new truck when the economy weakens, whether we need a new truck or not.

…click on the above link to read the rest of the article…

Olduvai II: Exodus
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Olduvai
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Olduvai II: Exodus
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Olduvai III: Cataclysm
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