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A 1970s self-help guru’s hint why investors may be duped (again)
America’s top forecasters missed the 2008 market crash, during which stock investors lost half their money. Now with stocks approaching bubble territory it looks they are again ignoring warnings signs. What gives?
The biggest red flag is the S&P 500 index, which groups 500 of America’s largest public companies and is trading near record highs. This despite a sluggish US economy driven by record government spending, borrowing and money printing.
In short, conditions look exactly like those that prevailed just before the 2008 financial crisis, when equities investors lost half their money in a matter of months.
So why haven’t the experts, many of whom are near-genius-level, ivy-league professionals, provided clear warnings about the risks in the system?
The S&P 500 index
Wisdom from a 1970s self-help guru?
One clue might come from consulting creative thinkers from outside the economics profession, like er…Robert Ringer?
Yes that Robert Ringer. The self-help guru, who in his 1970s best-seller Looking out for #1, outlined a useful template to use when assessing human behavior.
“All people act in their own interest all the time,” writes Ringer, who believes that people re-define self-interested actions to make themselves look virtuous.
What Ringer calls the “definition game” enables politicians, like recently-retired ex-Conservative Party leader Rona Ambrose who took home nearly $5 million in salaries and pension benefits for just 13 years work, to describe herself as a “public servant.”
Ringer’s “human nature group” theory in many ways explains modern human action better than Hobbes, Nietzsche and even Ayn Rand, yet appears dark when applied to individuals – even to politicians. However it has a strong basis in academic theory.
…click on the above link to read the rest of the article…
Rosen Slams Canadian Accountants: “Investors Are Being Swindled” – Peter Diekmeyer
That’s not surprising – because, as the Fraser Institute notes, nearly three quarters of those debts are not included in the federal and provincial governments’ financial statements. So, Canadians have no clue how bad the country’s true financial situation is.
This lax reporting is spread throughout the system, including public companies, says one expert.
“Investors are being systematically swindled out of large amounts of retirement savings,” says Al Rosen, a forensic accountant and co-author of Easy Prey Investors, a recently-released book that details shortfalls of Canada’s lax reporting standards.
Accounting scandals abound
“Investors mistakenly believe that their pension plans, mutual funds and other investments are safeguarded,” says Rosen. “In fact, they are suffering losses that are monumental, compared to individual publicized scams.”
A key challenge, says Rosen, relates to Canada’s use of International Financial Reporting Standards, which “assign excessive power and choice to corporate management, providing them the ability to inflate corporate profits.”
Rosen cites a range of accounting scandals including Valeant, Nortel and Sino-Forest as examples of Canadian laxness.
(In one famous fraud case, Bre-X, auditors couldn’t be bothered to check if the company’s gold mine, its only major asset, actually existed. External accountants instead essentially relied on a manager’s claim that he had “found gold” in the core samples he presented to a valuation firm, when they signed off on the statements).
…click on the above link to read the rest of the article…
How Solid are Canada’s Big Banks?
The World Economic Forum consistently ranks Canada’s banks among the world’s safest. Competent regulators have overseen stress tests, tightened lending standards and delinquency rates are low. Demographics are good and the country’s diversified economy is backed by a treasure of oil, wood, gold and other natural resources.
So the experts say.
Institutional investors, relying on the work of Jeremy Rudin, Canada’s chief bank regulator, agree. In fact, Canadian financials accounted for 35.5% of the market capitalization of the benchmark exchange (NBF February).
However this façade hides major uncertainties. Key concerns stand out, which if unaddressed, could spark solvency and liquidity issues in one or more of Canada’s Big Six banks.
The fragilities can be seen in an IMF report, which calculated that Canada’s financial sector accounted for a stunning 500% of GDP in 2012. Today, the assets of the Big Six banks alone are more than double the size of the country’s economy.
Each (RBC, CIBC, Scotiabank, BMO, TD and National Bank) have been designated “systemically important,” which in turn, due to sheer size and interconnectedness, suggests that they are almost certainly “too big to fail.” That means the collapse of any one Big Bank would threaten to trigger systemic implosion.
More ominously, if Canada’s financial system, arguably the world’s best, is riddled with pores, what does that say about the US, the UK, and Japan? Let alone Italy and Spain?
Yet signs of fragility are everywhere. Consider:
Complacency following “secret” $114 billion bailout
A quick review of key metrics suggests Canada’s banking sector, which, on the surface, having largely escaped the 2008 financial crisis, has thus learned little from it.
As David Macdonald demonstrated in a paper for the Canadian Center for Policy Alternatives, Canada’s Big Banks benefited from nearly $114 billion in cash, liquidity, and other bailout help from both local and US sources following the financial crisis.
…click on the above link to read the rest of the article…
Ken Rogoff’s Government Debt Default Plan
Ken Rogoff’s Government Debt Default Plan
Ken Rogoff is by all accounts a brilliant man. The Harvard professor and former IMF chief economist is a chess grandmaster. His thesis committee included current Fed vice-chair Stanley Fischer. But like many survivors of Ivy League hoop jumping, the poor fellow appears to have emerged punch drunk.
That’s the only conclusion to be drawn from Rogoff’s new book, The Curse of Cash , which, in effect, proposes a ban on paper currency.
It’s terrifying piece of work, for several reasons.
First, the cashless society, which Rogoff proposes in order to make it easier for the US government to confiscate private wealth, in effect, amounts to an admission that Washington can’t pay back its debts.
Second, the fact that Rogoff uses the fight against “terrorism” and “crime” arguments in selling his proposals to the public – justifications which he as a mathematician should know are farcical – suggest that his arguments hide another agenda.
Third, and most important, is the fact that not only would banning cash not achieve Rogoff’s objectives – it could cause irreparable harm to the dollar’s role in the American economy and as a reserve currency.
Let’s look at these arguments one at a time.
Enforced negative rates ARE debt defaults
Rogoff’s “cashless society” is an elegant solution to a key problem bedeviling the Federal Reserve: with interest rates at the zero bound, the US central bank has no ammunition left to fight the next recession – because if cuts rates below zero, savers will withdraw their cash and put it under their mattresses.
“In principle, cutting interest rates below zero ought to stimulate consumption and investment in the same way as normal monetary policy,” Rogoff writes. “Unfortunately, the existence of cash gums up the works.”
That argument is spurious at best.
…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…
Canada goes full Krugman. Finance minister jacks up borrowing and spending, confirms gold sale – Peter Diekmeyer
Bill Morneau took centre stage last week in the Canadian Parliament and didn’t disappoint. The new Liberal finance minister’s first budget jacked up program spending across the board, to be paid for by borrowing and, eventually, presumably, money printing. His rhetoric was coated with suggestions that “economic growth” would solve the country’s problems. The only folks left out were taxpayers and savers.
On the face of it, Morneau’s logic makes sense. With interest rates near zero and the Canadian government’s debts among the lowest in the G-7, why not borrow a bit and invest in infrastructure? Well, there are several reasons – and all of them augur well for the future of gold.
Canadian government debt at record levels
Morneau is technically right. The Canadian government’s debt is at low levels compared to that of other advanced economies. However, those numbers are shaky. For one, they include only federal debts, not provincial debts. If you include all Canadian government debts including the provinces (US states are not allowed to run deficits), things look far worse.
Furthermore, Morneau’s numbers don’t include huge debts that the former Conservative Harper Government never bothered to record as liabilities, such as deferred pension and healthcare costs, a policy Prime Minister Trudeau’s Liberal government is continuing. Canada’s Fraser Institute estimates that such unfunded liabilities totalled nearly $4.1 trillion1 in 2014. Those unrecorded debts alone are equal to more than 200% of Canada’s GDP. Worse, Canadians, whose household debt-to-disposable-income ratios are at record levels, are in no position to finance those additional government obligations.
Sell off gold, spend the cash
During the hours before Mr. Morneau tabled the budget, he wandered into the lock-up room, where reporters were poring over advance copies of the document.
…click on the above link to read the rest of the article…
