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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,
Sincerely,
F.C

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…

Fed Scared to Death of Causing Global Financial Crash – Nomi Prins

Fed Scared to Death of Causing Global Financial Crash – Nomi Prins

Two time, best-selling author Nomi Prins says central bankers have no idea how to stop the easy money policies that they started after the financial meltdown of 2008. Prins explains, “So, when the Fed says they are going to remove assets from their $4.5 trillion book by not reinvesting the interest payment . . . the reality is they haven’t really done that.  They have reduced their book by about $10 billion off of $4.5 trillion since they mentioned they were going to start ‘tapering.”  The media discusses this as a major tightening move.  Somehow all of our economies have finally worked because of central bank activity.  Growth is real.  It’s all positive.  The markets are evidence of that because of the levels they are at; and, therefore, these central banks, starting with the Fed, are going to reverse course of these last 10 years.  The reality is if you look at the actual activity of the central banks, beyond the Fed raising rates by a little bit, there hasn’t been and there isn’t being a reversal of course because they are scared to death that too much of a reversal is going to cause a major crash throughout the financial system. Everything is connected.  All the banks are connected.  Money flows around the world in less than nanoseconds, and all of it has the propensity to collapse if that carpet the central banks have created is dragged from beneath the floor of all this activity.”Prins, who just finished traveling the globe to research her upcoming book, thinks there is one big thing that can take the entire system down. Prins, a former top Wall Street banker, contends, “There hasn’t been any real growth in the real economy.  That is an indication of the misfire of this entire plan.

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

Gold Only Safe Asset Left – David Stockman

Gold Only Safe Asset Left – David Stockman

Record high stock and bond prices are flashing danger signs to former Reagan White House Budget Director David Stockman. Stockman contends, “I don’t think we are going to have a liquidity crisis.  I think it’s going to be a value reset.  I think there is going to be a jarring downward price adjustment both in the stock market and in the bond market.  This phantom or phony wealth that has been created since the last crisis is going to basically evaporate.”

So, what asset is safe? Stockman says gold and goes onto explain, “I think the time to buy (gold and silver) is ideal.  Gold is the ultimate and only real money.  Gold is the only safe asset when push comes to shove.  They tell you to buy the government bond, that’s a safe asset.  It’s not a safe asset at its current price.  I am not saying the federal government is going to default in the next two or three years.  I am saying the yield on a 10-year bond of 2.4% is way below of where it’s going to end up.  So, the only safe asset left is gold.  This crazy Bitcoin mania has drained off what would otherwise be a demand for gold. . . . When Bitcoin collapses, spectacularly, which it will because it’s sheer mania in the markets right now.  When it collapses, I think a lot of that demand will come back into gold, as well as people fleeing the standard stock and bond markets for the first time in 9 or 10 years.”

What about the so-called Trump tax cuts? Stockman predicts, “I think it’s going to be a fiscal calamity of Biblical proportions.  I want to be clear.  I am always for tax cuts and shrinking the size of government, but you have to earn it.  You have to cut spending and entitlements and this massive defense budget.

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

Doug Noland: There Will Be No Way Out When This Market Bubble Bursts

Doug Noland: There Will Be No Way Out When This Market Bubble Bursts

Financial assets will become toxic to hold

This week Doug Noland joins the podcast to discuss what he refers to as the “granddaddy of all bubbles”.

Noland, a 30-year market analyst and specialist in credit cycles, currently works at McAlvany Wealth Management and is well known for his prior 16-year stint helping manage the Prudent Bear Fund.

He certainly shares our views that prices in nearly every financial asset class have become remarkably distorted due to central bank intervention, first with Greenspan’s actions to backstop the markets in the late-1980’s, and more recently (and more egregiously) with the combined central banking cartel’s massive and sustained liquidity injections in the years following the Great Financial Crisis.

All of which has blown the biggest inter-connected set of asset price bubbles the world has ever seen.

Noland foresees tremendous losses as inevitable, as the central banks lose control of the monstrosity they have created:

This is the granddaddy of all bubbles. We are at the end a long cycle where the bubble has reached the heart of money and credit.

There will be no way out. We’re not going to get enough private credit growth to reflate things when this bubble bursts. It’s going to have to come from central bank credit; it’s going to have to come from sovereign debt.

When this bubble bursts, it will shock people how far the central banks will have to expand their balance sheet just to accommodate the deleveraging in the system. And they won’t really be able to add new liquidity to the market; they’re just going to allow the transfer of leveraged positions from the leveraged players onto the central bank balance sheets.

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

What Could Pop The Everything Bubble?

A crisis that can’t be solved by just printing more dollars

I’ve long held that if a problem can be solved by creating $1 trillion out of thin air and buying a raft of assets with that $1 trillion, then central banks will solve the problem by creating the $1 trillion out of thin air—nothing could be easier.

This is the lesson of the past eight years: if a problem can be solved by creating new money and buying assets, then central banks will solve that problem.

Problem: stock market is declining. Solution: create new money and buy, buy, buy stock index funds. Problem solved! Market stops falling and quickly rebounds as “central banks have our backs.”

Problem: interest rates are inhibiting lending and growth. Solution: create a few trillion units of currency and buy enough sovereign bonds to drop interest rates to near-zero.

Problem: nobody’s left who can afford to buy the new nosebleed-priced flats that underpin China’s miracle-grow economy. Solution: create new currency, lend it to local government agencies who then buy the empty flats.

Problem: stagnant employment and deflation. Solution: create a trillion in new currency, buy a trillion in new government bonds that then fund infrastructure projects, i.e. bridges to nowhere.

And so on. Any problem that can be solved by creating a few trillion out of thin air and buying assets will be solved.  The mechanism to solve these problems—creating currency out of nothing—is like a perpetual motion machine: there are no intrinsic limits on the amount of new money that can created at near-zero interest, as the interest payments can be funded by new money.

Even better, the central bank (the Federal Reserve) buys Treasury bonds with the new currency that generate income, which is then returned to the Treasury: a perpetual-motion money machine!

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

Olduvai IV: Courage
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Olduvai II: Exodus
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