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Unstoppable: The Greatest Depression and the Reverse Wealth Effect

Unstoppable: The Greatest Depression and the Reverse Wealth Effect

We are entering The Greatest Depression because there is no exit.

I’ve endeavored to explain why The Greatest Depression is unstoppable in recent posts:

The Covid-19 Dominoes Fall: The World Is Insolvent March 16, 2020

Pandemic Pandemonium: The Tides of Globalization and Financialization Reverse March 31, 2020

Here’s Why the Economy Won’t Recover–and No, It’s Not Covid-19 or the Lockdown April 23, 2020

What’s Collapsing Can’t Be Saved: Our Fraudulent Economy April 22, 2020

Why Assets Will Crash May 4, 2020

Our Inevitable Collapse: We Can’t Save a Fragile Economy With Bailouts That Increase Fragility May 1, 2020

Globalization and Financialization Are Dead, and so Is Everything That Depended on Them May 15, 2020

Our Fate Is Sealed, Vaccines Won’t Matter: Four Long Cycles Align May 19, 2020

Consumer Spending Will Not Rebound–Here’s Why May 18, 2020

This Is How Systems Collapse May 30, 2020

I’ll try to summarize all this as simply as possible:

1. The global economy’s cost structure has been fatally distorted by central bank policies of inflating asset bubbles and reducing interest rates to near-zero.

2. Earnings from labor have stagnated or eroded since the era of globalization / financialization took off around 2000.

3. Everything costs too much, i.e. is no longer affordable from earnings alone, so the only way to maintain the current costly lifestyle is to borrow money and use it to pay current expenses. This is true for every sector: household, corporate and government.

4. As a result, everyone now needs every dollar of income just to pay their expenses, including interest and principal on their rising debts. There is no slack (buffers) in the system at all.

5. This can be visualized as a row of dominoes. Once the first domino falls, every domino will be toppled.

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

Why Assets Will Crash

Why Assets Will Crash

This is how it happens that boats that were once worth tens of thousands of dollars are set adrift by owners who can no longer afford to pay slip fees.

The increasing concentration of the ownership of wealth/assets in the top 10% has an under-appreciated consequence: when only the top 10% can afford to buy assets, that unleashes an almost karmic payback for the narrowing of ownership, a.k.a. soaring wealth and income inequality: assets crash.

Most of you are aware that the bottom 90% own very little other than their labor (tradeable only in full employment) and modest amounts of home equity that are highly vulnerable to a collapse of the housing bubble. (The same can be said of China’s middle class, only more so, as 75% of China’s household wealth is in real estate, more than double the percentage of wealth held in housing in U.S. households.)

As the chart illustrates, the top 10% own 84% of all stocks, over 90% of all business equity and over 80% of all non-home real estate. The concentration of ownership of assets such as vintage autos, collectibles, art, pleasure craft and second homes in the top 10% is likely even greater.

The more expensive the asset, the greater the concentration of ownership, as the top 5% own roughly 2/3 of all wealth, the top 1% own 40% and the top 0.1% own 20%. In other words, the more costly the asset, the narrower the ownership. (Total number of US households is about 128 million, so the top 5% is around 6 million households and the top 1% is 1.2 million households.)

This means the pool of potential buyers is relatively small, even if we include global wealth owners.

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

The Global Repricing of Assets Can’t Be Stopped

The Global Repricing of Assets Can’t Be Stopped

All bubbles pop, period.

The financial elites are pushing a narrative that asset prices, sales and profits will all return to January 2020 levels as soon as the Covid-19 pandemic fades. Get real, baby. Nothing is going back to January 2020 levels. Rather than the “V-shaped recovery” expected by Goldman Sachs et al., the crash in asset prices will eventually gather momentum.

Why? It’s simple: for 20 years we’ve over-invested in speculative bubbles and squandered borrowed money on consumption and under-invested in productivity-increasing assets. To understand why the market value of assets will relentlessly reprice lower–a process sure to be interrupted with manic rallies and false dawns of hope that a return to speculative good times is just around the corner–let’s start with the basics: the only sustainable way to increase broad-based wealth is to boost productivity across the entire economy.That means producing more goods and services with less capital, less labor and fewer inputs such as energy.

Rather than boost productivity, we’ve lowered productivity via mal-investment and by propping up unproductive sectors with immense sums of borrowed money–money that accrues interest.

The poster child for this dynamic is higher education: rather than being pushed to innovate as costs skyrocketed, the higher education cartel passed its inefficiencies and bloated cost structure onto students, who have paid for the bloat with $1. 6 trillion in student loans few can afford. (See chart below.)

As for Corporate America squandering $4.5 trillion on stock buybacks (Wolf Richter)– the effective gains on productivity from this stupendous sum is not just zero–it’s negative, as the resulting speculative bubble suckered in institutions and individuals who’d been stripped of safe returns by the Federal Reserve’s low-interest-rates-forever policy.

What could that $4.5 trillion have purchased in terms of increasing the productivity of the entire economy? Considerably more than the zero productivity generated by stock buybacks.

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

The Covid-19 Dominoes Fall: The World Is Insolvent

The Covid-19 Dominoes Fall: The World Is Insolvent

Subtract their immense debts and they have negative net worth, and therefore the market value of their stock is zero.

To understand why the financial dominoes toppled by the Covid-19 pandemic lead to global insolvency, let’s start with a household example. The point of this exercise is to distinguish between the market value of assets and net worth, which is what’s left after debts are subtracted from the market value of assets.

Let’s say the household has done very well for itself and owns assets worth $1 million: a home, a family business, 401K retirement accounts and a portfolio of stocks and other investments.

The household also has $500,000 in debts: home mortgage, auto loans, student loans and credit card balances.

The household net worth is thus $1,000,000 minus $500,000 = $500,000.Let’s say a typical financial crisis and recession occur, and the household’s assets fall 30%. 30% of $1 million is $300,000, so the the market value of the household’s assets falls to $700,000.

Deduct the $500,000 in debts and the household’s net worth has fallen to $200,000. The point here is debts remain regardless of what happens to the market value of assets owned by the household.

Then the speculative asset bubbles re-inflate, and the household takes on more debt in the euphoric expansion of confidence to buy a larger house, expand the family business and enjoy life more.

Now the household assets are worth $2 million, but debt has risen to $1.5 million. Net worth remains at $500,000, since debt has risen along with asset values.

Alas, all bubbles pop, and the market value of the household assets decline by 30%, or $600,000. Now the household assets are worth $2,000,000 minus $600,000 or $1,400,000. The household net worth is now $1,400,000 minus $1,500,000 or negative $100,000. the household is insolvent.

On top of that, the net income of the family business plummets to near-zero in the recession, leaving insufficient income to pay all the debts the household has taken on.

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

What Went Wrong With Pensions — And Why The Whole World Should Be Worried

What Went Wrong With Pensions — And Why The Whole World Should Be Worried

The past decade was a uniquely smooth stretch of financial highway. Pretty much every major asset class – stocks, bonds, real estate, fine art, you name it – did well, making it hard for conventional investors to lose money and easy for them to earn outsized returns. 

So why then are US public sector pensions (which own a ton of the above assets) a looming disaster that could trigger the next great financial crisis? Several reasons, ranging from negligence and criminality. 

Let’s start with the fact that Wall Street preys on the ignorance of pension fund managers to extract huge fees for little or no excess return. Here’s a video in which pension expert and “forensic lawyer” Ted Siedle lays it all out for Peak Prosperity’s Chris Martenson:

An even bigger problem is the tendency – understandable but still despicable – of state and local politicians to underfund pensions and then lie about it, pushing the eventual reckoning onto their successors. 

As baby boomer teachers, police and firefighters retire, the required pension payouts are soaring. Combine this with inadequate contributions, and the liabilities of major U.S. public pensions are up 64% since 2007 while assets are up only 30%.

This math is simple enough for even a politician or fund trustee to grasp, but because there’s no immediate penalty for underfunding a pension system, it has become normal practice in a long list of places. 

Another, related problem is also mathematical, but it’s harder to manage in a boom-and-bust world: When pension plans suffer a big loss, as they tend to do in bear markets, the next few years’ returns have to go towards making up that loss before plan assets can start growing again. The following chart, from a recent Wall Street Journal article, shows pension fund assets falling behind in the past two bear markets and having increasing trouble catching up with steadily-growing liabilities.

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

What Happens When More QE Fails to Reverse the Recession?

What Happens When More QE Fails to Reverse the Recession?

The smart money is liquidating assets, paying off debt and moving capital into collateral that isn’t impaired by debt or speculative valuations.

The Federal Reserve’s sudden return to “accommodative” dovishness in response to the stock market’s swoon telegraphs its intent to fire up QE once the recession kicks into gear. QE (quantitative easing) are monetary policies designed to ease borrowing and the issuance of credit, and to prop up assets such as stocks and real estate.

The basic idea is that the Fed creates currency out of thin air and uses the new money to buy Treasury bonds and other assets. This injects fresh money into the financial system and lowers the yield on Treasury bonds, as the Fed will buy bonds at near-zero yield or even less than zero in pursuit of its policy goals of goosing assets higher and increasing borrowing/spending.

This is pretty much the Fed’s only lever, and it pulls this lever at any sign of weakness in stocks or the economy. That sets up an obvious question that few seem to ask: what happens when QE fails? What happens when the Fed launches QE and stocks fall as punters realize the rally is over? What happens when lowering interest rates doesn’t spark more borrowing?

What happens is the smart money sells everything that isn’t nailed down, a process that is arguably already well underway.

Why sell assets when QE has guaranteed gains in the past? Answer: exhaustion. There are limits to everything financial, and once those limits are reached, no amount of goosing will push the limits higher. Rather, further goosing only increases the fragility and vulnerability of the system.Price-earnings ratios only go so high before reversing, rents only go so high before reversing, and so on.

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

Governments Are Sucking in Assets like a Black Hole

Governments Are Sucking in Assets like a Black Hole 

QUESTION: Hello Sir,
I am French and have been reading you for many years (I already read you while you published papers while you were very unfairly imprisoned).
I signed up for Socrates on 6th January and must thank you warmly for opening my eyes to the real state of the global economy and its cycles.
Unfortunately, I live in France and taxes weigh heavily on us. Unemployment is preponderant.

I do not think our President E.Macron knows exactly what he is doing by reforming our economy in his own way…
My question please:

You explained that the next crisis would be a debt crisis and that banks and the economy would be severely heckled.
So, I really think about quickly withdrawing my assets (about 50,000 euros) from the bank and I wonder if converting them into foreign currency and keeping them in a safe in my house would not be a good idea …

If the euro is devalued or disappears as I fear, would not it be smart to convert them as soon as possible into Swiss francs? Indeed, their economy seems stable and it is really a country apart, bordering on France. (Of course, I also thought about owning dollars and yen (although the yen inspires me less confidence)
Thanking you for everything you do for us,

ANSWER: Dollars are probably the best because the USA does not cancel currency as they do in Europe. Dollars from 1860s are still legal tender today. You might want to open an account in the USA, which ironically is not part of the tax reporting schemes. Therefore, you can have an account in the USA with no problem for probably the next 3 years. Governments are becoming like a black hole. They are sucking up all the money to sustain their existence.

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

Gold Outlook 2019: Uncertainty Makes Gold A “Valuable Strategic Asset” – WGC

Gold Outlook 2019: Uncertainty Makes Gold A “Valuable Strategic Asset” – WGC

Gold Outlook 2019 – World Gold Council

As we look ahead, we expect that the interplay between market risk and economic growth in 2019 will drive gold demand. And we explore three key trends that we expect will influence its price performance:

  • financial market instability
  • monetary policy and the US dollar
  • structural economic reforms.

Against this backdrop, we believe that gold has an increasingly relevant role to play in investors’ portfolios.

Gold Outperformed Most Assets In 2018

Why gold why now

Gold’s performance in the near term is heavily influenced by perceptions of risk, the direction of the dollar, and the impact of structural economic reforms. As it stands, we believe that these factors likely will continue to make gold attractive.

In the longer term, gold will be supported by the development of the middle class in emerging markets, its role as an asset of last resort, and the ever-expanding use of gold in technological applications.

In addition, central banks continue to buy gold to diversify their foreign reserves and counterbalance fiat currency risk, particularly as emerging market central banks tend to have high allocations of US treasuries. Central bank demand for gold in 2018 alone was the highest since 2015, as a wider set of countries added gold to their foreign reserves for diversification and safety.

More generally, there are four attributes that make gold a valuable strategic asset by providing investors:

  • a source of return
  • low correlation to major asset classes in both expansionary and recessionary periods
  • a mainstream asset that is as liquid as other financial securities
  • a history of improved portfolio risk-adjusted returns.

‘Outlook 2019: Global economic trends and their impact on gold’ – Full report from World Gold Council here

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

Why the Fed, Nor Any Central Bank, Can Ever Truly “Normalize”

Why the Fed, Nor Any Central Bank, Can Ever Truly “Normalize”

Last week, I highlighted that since ’00, when the Federal Reserve has ceased adding to its balance sheet or begun “normalizing” (via rolling off assets), equity markets have swooned (detailed HERE).
A simple idea today…that the end of population growth (where it matters) has long been upon us (detailed below).  Absent population growth among the nations that do nearly all the consuming, a debt based economic and financial system (to coerce ever higher levels of debt fueled consumption) can’t ultimately succeed.  That is, without population growth, assets generally don’t appreciate, homes are just shelter rather than “investments”, and debt is generally only a drag on future spending.  Likewise, without population growth, total global energy consumption is on the precipice of secular decline (detailed HERE).

In this reality, the only means of maintaining or lifting asset prices further is ever more central bank monetization (aka, centrally planned and executed counterfeiting).  Of course, this monetization scheme is doomed to fail but while it continues, the gains are privatized while the losses are socialized.  But ultimately markets (and economies, as a means of honest exchange), will get cleared.  So, without further ado, I detail the end of population growth (particularly where it matters):

1- Simply put, topline global population growth (births) ceased increasing almost 30 years ago!  Looking solely at the top-line (dashed black line, chart below), note that from 1950 to 1989, annual global births increased 73% (+57 million).  Conversely, from 1989 to 2018, annual global births have risen just 1% (+1 million).  Based on UN data and UN median (overly optimistic) future estimates.

However, the distribution of those births among the differing groupings of nations (by income) has dramatically changed from 1950 to present…and will shift further by 2050.

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

2019: Zombie Markets Before The Fall

Francis Tattegrain La ramasseuse d’épaves (The Beachcomber) 1880

I haven’t really written about finance since April of this year, and given recent fluctuations in what people persist in calling the markets, maybe it’s time. Then again, nothing has changed since that article in April entitled This Is Not A Market. I was right then, and I still am.

[..] markets need price discovery as much as price discovery needs markets. They are two sides of the same coin. Markets are the mechanism that makes price discovery possible, and vice versa. Functioning markets, that is. Given the interdependence between the two, we must conclude that when there is no price discovery, there are no functioning markets. And a market that doesn’t function is not a market at all.

[..] we must wonder why everyone in the financial world, and the media, is still talking about ‘the markets’ (stocks, bonds et al) as if they still existed. Is it because they think there still is price discovery? Or do they think that even without price discovery, you can still have functioning markets? Or is their idea that a market is still a market even if it doesn’t function?

But perhaps that is confusing, and confusion in and of itself doesn’t lead to better understanding. So maybe I should call what there is out there today ‘zombie markets’. It doesn’t really make much difference. What murdered functioning markets is intervention by central banks, in alleged attempts to save those same markets. Cue your favorite horror movie.

Now Jerome Powell and the Fed he inherited are apparently trying to undo the misery Greenspan, Bernanke and Yellen before him wrought upon the economic system, and people, cue Trump, get into fights about that one. All the while still handing the Fed, the ECB, the BoJ, much more power than they should ever have been granted.

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

For The First Time Ever, Bank Of Japan Total Assets Surpass Japan’s GDP

For the first time in history, a central bank has managed to print enough money to buy enough assets to surpass the nation’s annual GDP.

Under the watchful eye of Kuroda, and the overseeing (but independent) hand of Abe, The Bank of Japan’s balance sheet grew to 553.6 trillion yen as on November 10th – that is larger than Japan’s annualized nominal seasonally-adjusted GDP of 552.8 trillion yen (as of the end of June).

Some context for just how crazy this is, here is The Fed vs US GDP…

And putting it all together…

What happens next?

Getting High on Bubbles

Getting High on Bubbles

Back in the drug-soaked, if not halcyon, days known at the sexual and drug revolution—the 1960’s—many people were on a quest for the “perfect trip”, and the “perfect hit of acid” (the drug lysergic acid diethylamide, LSD). We will no doubt generate some hate mail for saying this, but we don’t believe that anyone ever attained that goal. The perfect drug-induced high does not exist. Even if it seems fun while it lasts, the problem is that the consequences spill over into the real world.

Today, drunk on falling interest rates, people look for the perfect speculation. Good speculations generally begin with a story. For example dollar-collapse. And then an asset gets bid up to infinity and beyond (to quote Buzz Lightyear, who is not so close a friend as our buddy Aragorn). It happened in silver in 2010-2011. It happened more recently in bitcoin.

Most speculators don’t care about the economic causes and effects of bubbles. They just want to buy an asset as the bubble begins inflating, and sell just before it pops. But bitcoin and many gold proponents are different. They promise that their favorite asset will cure many social ills, fix many intractable problems, and increase liberty. Oh yeah and get-rich-quick.

We been pounding the table for going on a decade, sometimes even bellowing from the rooftops, that gold does not go up. Even the gold bugs claim that the dollar is collapsing. Our point—which has so far gone unanswered—is that you cannot use something which is collapsing to measure other things. Especially not the economic constant (gold). Either the dollar is collapsing, in which case if gold is going up then the dollar could not be used to measure this. Or else it’s not collapsing, in which case maybe it could measure gold—but then remind us why these folks are buying gold.

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

Playing for All the Marbles

Playing for All the Marbles

Global Plunge Protection Teams must be ordering take-out food; every night is a long one now.

The current stocks/bonds game is for all the marbles, by which I mean the status quo now depends on valuations and interest rates remaining near their current levels for the system to function.

If interest rates soar and/or stocks plummet, the game is over: pension funds collapse, tax revenues drop, debt based on high asset valuations defaults, employment craters and the much-lauded “wealth effect” reverses into a “negative wealth effect” (i.e. everyone looking at their IRA or 401K statement feels poorer every month).

Let’s scan a few relevant charts to understand why this game is for all the marbles. Given the systemic fragility of the global economy, a crash in one asset class or a rise in interest rates trigger defaults, sell-offs, etc. that forcibly revalue other assets.

So the Powers That Be can’t afford to let any asset crash, as a crash will bring down the entire system. Why is this so? The resiliency of the system has been eroded by permanent central bank/central state intervention/stimulus. Withdrawing the stimulus means markets have to go cold turkey, and they’ve lost the ability to do so.

Permanent stimulus creates dependencies and distortions, and both the distortions and the dependencies introduce a host of unintended consequences. What’s the “market price” of assets? You must be joking: the “market” prices assets based on policies of permanent stimulus and asset purchases by central banks.

In effect, markets have been hijacked to function as signaling mechanisms(everything’s great because your IRA account balance keeps going up) and as floors supporting pensions, insurance companies, IRAs/401Ks, etc.: all these financial promises are only plausible if asset valuations keep rising.

Fly in the ointment #1: equity valuations have lost touch with the real economy, as measured (imperfectly) by GDP:


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

Central Bank Musical Chairs

If the last few stock market days are interrupting your sleep, Jim Bianco and CNBC’s Rick Santelli are saying, get used to it.  The total assets of all central banks hit $16.4 trillion plus (an all-time high) and these banks now, collectively, own 33 percent of all the world’s sovereign bonds (someone/something had to buy ‘em).

Santelli’s question to Bianco was, if the aggregate size of the world’s central banks is at an all-time high, and these bank’s have purchased a third of all government paper, will these banks be able to “normalize in size” (shrink) without “going through a lot more stock market anguish?” Bianco’s response was a flat, “no.”

Reversing trillions of dollars worth of securities purchases will create market turmoil.  And now that price inflation has entered the equation, the ride is bound to be bumpy. So, who should 401k investors be worried about and keeping an eye on? Bianco and Santelli agree, that person is ECB head man Mario Draghi. Santelli believes Draghi may be caught without a chair in this game of monetary musical chairs. By the way, it’s not all about the Fed any more. “All central bank stimulus is fungible,” says Bianco, “it doesn’t matter who does it.”

The patron saint of central bankers, John Maynard Keynes, wrote in The General Theory,

For it is, so to speak, a game of Snap, of Old Maid, of Musical Chairs — a  pastime in which he is victor who says Snap neither too soon nor too late, who passed the  Old Maid to his neighbour before the game is over, who secures a chair for himself when  the music stops. These games can be played with zest and enjoyment, though all the players know that it is the Old Maid which is circulating, or that when the music stops  some of the players will find themselves unseated.”

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

The Rowboat (Wages) and the Yacht (Assets)

The Rowboat (Wages) and the Yacht (Assets)

As I keep saying: the status quo has divested the working and middle classes.

The reason why the status quo has failed and is fragmenting is displayed in these three charts of wages, employment and assets: wage earners (labor) are in a rowboat trying to catch the yacht of those who own assets (capital).

Here is a chart of weekly wages of those employed fulltime: up a gargantuan $4/week in the 18 years since 2000. Let’s see, $4 times 52 week a year–by golly, that’s a whole $208 a year. Brand new Ford F-150, here we come!

If we go back 38 years to 1980–an entire lifetime of work–we find real (adjusted for official inflation, which seriously understates big-ticket expenses such as rent, healthcare and college tuition/fees) wages have notched higher by $10/week–a gain of $500 annually.

If we adjusted wages by real-world income, we’d find wages have declined since 1980 and 2000.

Here’s employment by age group since the year 2000. THose who can’t afford to retire are still dragging their tired old bones to work while employment for the under-55 cohort hasn’t even returned to the levels of 2000.

Meanwhile, asset valuations have soared. Those who own capital (assets) have done very, very well, those who trade their labor for dollars–they’ve gone nowhere.

Households with two regular jobs could afford to buy a house in Seattle, Brooklyn, or the San Francisco Bay Area in 1995. By 2005, they were priced out. Can a household with median income ($59,000 annually) afford a crumbling shack in any of the white-hot housing markets? You’re joking, right?

The cold reality is wage-earners are tugging on the oars of a water-logged rowboat, trying to catch up with the sleek yacht of asset owners. The system has been rigged to reward those who own assets (capital) or who can borrow immense sums of nearly-free money (credit) to buy assets.

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

Olduvai IV: Courage
In progress...

Olduvai II: Exodus
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