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Observations on Wealth-Income Inequality (from Federal Reserve Reports)

Observations on Wealth-Income Inequality (from Federal Reserve Reports)

There’s a profound difference between assets that produce no income and those that produce net income.

To those of us nutty enough to pore over dozens of pages of data on wealth and income in the U.S., the Federal Reserve’s quarterly Z.1 reports and annual Survey of Consumer Finances (SCF) are treasure troves, as are I.R.S. tax and income reports.

Allow me to share a few observations on family wealth and income drawn from my review of these documents:

Changes in U.S. Family Finances from 2013 to 2016 (42 pages)

Financial Accounts of the United States (198 pages)

Corporate profits clock in at $2.135 trillion annually, around 11% of the nation’s GDP (gross domestic product). (Page 10 of Z.1) This has changed very little over the past few years; corporate profits totaled $2.140 trillion in 2014.

Most people who follow financial matters closely probably know corporate profits have been around $2 trillion annually for awhile.

But how many know that proprietors’ income from small businesses ($1.375 trillion) and rental income of persons–i.e. not corporations–($740 billion) together equal corporate profits? ($2.115 trillion for small biz/rentals, $2.135 trillion for corporate profits.

How many financially savvy people know that proprietors’ income and private rental income rose by $189 billion since 2014, while corporate profits flatlined?

Clearly, the families that own the proprietorships and rentals pulling down $2.1 trillion in annual profits are doing a bit better than OK.

As the charts below reveal, most of this profitable business equity is owned by the top 10% of families. There are a few clues that suggest that family-owned business equity is distributed along a power-law curve, i.e. the majority of wealth and income is held by the top and the rest is distributed over the rest of the owners.

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

Stagnation Nation: Middle Class Wealth Is Locked Up in Housing and Retirement Funds

Stagnation Nation: Middle Class Wealth Is Locked Up in Housing and Retirement Funds

The majority of middle class wealth is locked up in unproductive assets or assets that only become available upon retirement or death.

One of my points in Why Governments Will Not Ban Bitcoin was to highlight how few families had the financial wherewithal to invest in bitcoinor an alternative hedge such as precious metals.

The limitation on middle class wealth isn’t just the total net worth of each family; it’s also how their wealth is allocated: the vast majority of most middle class family wealth is locked up in the family home or retirement funds.

This chart provides key insights into the differences between middle class and upper-class wealth. The majority of the wealth held by the bottom 90% of households is in the family home, i.e. the principal residence. Other major assets held include life insurance policies, pension accounts and deposits (savings).

What characterizes the family home, insurance policies and pension/retirement accounts? The wealth is largely locked up in these asset classes.

Yes, the family can borrow against these assets, but then interest accrues and the wealth is siphoned off by the loans. Early withdrawals from retirement funds trigger punishing penalties.

In effect, this wealth is in a lockbox and unavailable for deployment in other assets.

IRAs and 401K retirement accounts can be invested, but company plans come with limitations on where and how the funds can be invested, and the gains (if any) can’t be accessed until retirement.

Compare these lockboxes and limitations with the top 1%, which owns the bulk of business equity assets. Business equity means ownership of businesses; ownership of shares in corporations (stocks) is classified as ownership of financial securities.

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

Stagnation Nation: Middle Class Wealth Is Locked Up in Housing and Retirement Funds

Stagnation Nation: Middle Class Wealth Is Locked Up in Housing and Retirement Funds

The majority of middle class wealth is locked up in unproductive assets or assets that only become available upon retirement or death.

One of my points in Why Governments Will Not Ban Bitcoin was to highlight how few families had the financial wherewithal to invest in bitcoin or an alternative hedge such as precious metals.

The limitation on middle class wealth isn’t just the total net worth of each family; it’s also how their wealth is allocated: the vast majority of most middle class family wealth is locked up in the family home or retirement funds.

This chart provides key insights into the differences between middle class and upper-class wealth. The majority of the wealth held by the bottom 90% of households is in the family home, i.e. the principal residence. Other major assets held include life insurance policies, pension accounts and deposits (savings).

What characterizes the family home, insurance policies and pension/retirement accounts? The wealth is largely locked up in these asset classes.

Yes, the family can borrow against these assets, but then interest accrues and the wealth is siphoned off by the loans. Early withdrawals from retirement funds trigger punishing penalties.

In effect, this wealth is in a lockbox and unavailable for deployment in other assets.

IRAs and 401K retirement accounts can be invested, but company plans come with limitations on where and how the funds can be invested, and the gains (if any) can’t be accessed until retirement.

Compare these lockboxes and limitations with the top 1%, which owns the bulk of business equity assets. Business equity means ownership of businesses; ownership of shares in corporations (stocks) is classified as ownership of financial securities.

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

Volatility and the Alchemy of Risk

Volatility and the Alchemy of Risk

Reflexivity in the Shadows of Black Monday 1987

The Ouroboros, a Greek word meaning ‘tail devourer’, is the ancient symbol of a snake consuming its own body in perfect symmetry. The imagery of the Ouroboros evokes the infinite nature of creation from destruction. The sign appears across cultures and is an important icon in the esoteric tradition of Alchemy. Egyptian mystics first derived the symbol from a real phenomenon in nature. In extreme heat a snake, unable to self-regulate its body temperature, will experience an out-of- control spike in its metabolism. In a state of mania, the snake is unable to differentiate its own tail from its prey, and will attack itself, self-cannibalizing until it perishes. In nature and markets, when randomness self-organizes into too perfect symmetry, order becomes the source of chaos (1).

The Ouroboros is a metaphor for the financial alchemy driving the modern Bear Market in Fear. Volatility across asset classes is at multi-generational lows. A dangerous feedback loop now exists between ultra-low interest rates, debt expansion, asset volatility, and financial engineering that allocates risk based on that volatility. In this self-reflexive loop volatility can reinforce itself both lower and higher. In a market where stocks and bonds are both overvalued, financial alchemy is the only way to feed our global hunger for yield, until it kills the very system it is nourishing.

The Global Short Volatility trade now represents an estimated $2+ trillion in financial engineering strategies that simultaneously exert influence over, and are influenced by, stock market volatility(2). We broadly define the short volatility trade as any financial strategy that relies on the assumption of market stability to generate returns, while using volatility itself as an input for risk taking. Many popular institutional investment strategies, even if they are not explicitly shorting derivatives, generate excess returns from the same implicit risk factors as a portfolio of short optionality, and contain hidden fragility.

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

Bubble-nomics

Bubble-nomics

Question: What is a bubble?
Answer: A bubble is trade in an asset at a price range that strongly exceeds the asset’s intrinsic value.  Or it could also be described as a situation in which asset prices appear to be based on implausible or inconsistent views about the future.

Question: How do you know when you are in a bubble?
Answer: Gauge asset prices against a standard, foundational premise to determine if the price appreciation is warranted.

Lucky for us, the Federal Reserve provides exactly what is needed to show how unjustifiable current prices are against households disposable income.  The chart below is all US household’s net worth (current value of all real estate, stocks, bonds, etc.) as a percentage of their disposable personal income (disposable income is what they have left to spend or save after paying their taxes).  To round out the picture, I’ve added in the net growth in full time workers during each period, dramatically decelerating.

Since 1970, every time asset values have risen above 520% of households disposable income (the dashed line in the chart) then the US has been in a bubble and a subsequent crash has followed.  This has simply meant asset values growing much faster than households income or households capability to sustain those price increases.  The depth of each crash has been relative to the overshoot of asset values on the upside.

Why???

I hear much discussion that the millennials are the largest age group in US history and are expected to drive growth in demand.  However, most people fail to understand what this truly means.  The millennials are just marginally larger than the boomers but what this truly means is zero growth.  The millennials are just meeting the previous high water mark the boomers set.  When the boomers came through, they nearly doubled the previous high water mark.

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

The Endgame of Financialization: Stealth Nationalization

The Endgame of Financialization: Stealth Nationalization

This is the new model of nationalization: central banks control the valuation of private-sector assets without actually having to own them lock, stock and barrel.

As you no doubt know, central banks don’t actually print money and toss it out of helicopters; they create a digital liability and use this new currency to buy assets such as bonds and stocks. Central banks have found that they can take control of the stock and bond markets by buying up as much as these markets as is necessary to force price and yield to do the central banks’ bidding.

Central Banks Have Purchased $2 Trillion In Assets In 2017. This increases their combined asset purchases above $15 trillion. A trillion here, a trillion there, and pretty soon you’re talking real money–especially if you add in assets purchased by sovereign wealth funds, dark pools acting on behalf of monetary authorities, etc.

Gordon Long and I discuss this stealth nationalization in our latest video program, The Results of Financialization: “Nationalization” (35 min):

In the old model of nationalization, governments expropriated/seized privately owned assets lock, stock and barrel. When a central state nationalized an enterprise, it took total ownership of the asset.

In today’s globalized financial world, such crude expropriation is avoided for two reasons:

1. The entire point of the dominant neoliberal / neofeudal /neocolonial model is to maintain private ownership as a means of transferring the wealth to the New Aristocracy, i.e. the financier class. Government ownership certainly conveys benefits to the some are more equal than others functionaries atop the state’s wealth-power pyramid, but it doesn’t transfer the assets’ income streams to private hands.

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

3 Uncommon Signs that an Economic Collapse Could Happen Soon

3 uncommon signs of economic collapse

As stocks continue to climb and the U.S. economy sustains its third longest period of expansion in history, market forecasters are seeking clues for when our next crisis may strike. So far, three uncommon signals have them worried.

Here’s an explanation of the three uncommon signs causing alarm, and what they mean for your savings…

Sign #1: Resurgence of Synthetic CDOs

The riskiest plays on Wall Street are made using financial instruments known as derivatives.

Derivatives are named for how they “derive” their value from the underlying assets on which they’re based. They give investors the ability to leverage assets — that is, control large quantities of an asset without actually buying or selling it.

Depending on how the underlying asset performs, derivatives can generate either massive gains or crushing losses.

But it’s when big banks and financial institutions start gambling in derivatives that things become especially dangerous. And that’s exactly what happened in the case of our last crisis: A slew of “too big to fail” organizations took on excessive risk through derivatives (mortgage-backed securities and others), and they couldn’t shoulder their losses when the bets went bad.

Now one of the most potentially destructive derivatives is regaining popularity after being shunned by Wall Street for years because of its role in the 2008 collapse.

The derivative is called a synthetic collateralized debt obligation (CDO), and Citigroup is spearheading its resurgence.

Granted, post-2008 regulations do make the market for these kinds of derivatives less liable to spark another collapse, and Citigroup executives claim to be pursuing this endeavor responsibly (we can trust them, right?). But Bloomberg reports the positive trend toward CDOs is still a negative sign (emphasis ours):

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

Bubble Fortunes


Wynn Bullock Child on a Forest Road 1958
 

A few days ago, former Reagan Budget Director and -apparently- permabear (aka perennial bear) David Stockman did an interview (see below) with Stuart Varney at Fox -a permabull?!-, who started off with ‘the stock rally goes on’ despite a London terror attack and the North Korea missile situation. His first statement to Stockman was something in the vein of “if I had listened to you at any time after the past 2-3 years, I’d have lost a fortune..” Stockman shot back with (paraphrased): “if you’d have listened to me in 2000, 2004, you’d have dodged a bullet”, and at some point later “get out of bonds, get out of stocks, it’s a dangerous casino.” Familiar territory for most of you.

I happen to think Stockman is right, and if anything, he doesn’t go far enough, strong enough. What that makes me I don’t know, what’s deeper and longer than perennial or perma? But it’s Varney’s assumption that he would have lost a fortune that triggered me this time around. Because it’s an assumption built on an assumption, and pretty soon it’s assumptions all the way down.

First, that fortune is not real, unless and until he sells the stocks and bonds he made it with. If he has, that would indicate that he doesn’t believe in the market anymore, which is not very likely for a permabull to do. So Varney probably still has his paper ‘fortune’. I’m using him as an example, of course, of all the permabulls and others who hold such paper.

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

The 5 Steps to World Domination

The 5 Steps to World Domination

You don’t need an army to achieve World Domination; all you need is enough cheap credit to buy up everything that generates the highest value and/or income.
World Domination–it has a nice ring, doesn’t it? Here’s how to achieve it in 5 steps:
1. Turn everything into a commodity that can be traded on the global market:land, leases on land, options to purchase land, houses, buildings, rooms in slums, labor, tools, robots, water, water rights, mineral rights, rights to air routes, ships, aircraft, political power, shares in corporations, government bonds, municipal bonds, corporate bonds, student loans that have been bundled into debt-based instruments, the income from city parking meters, electricity, software, advertising, marketing, media, social media, food, energy, insurance, gold, metals, credit, interest-rate swaps and last but not least, financial instruments that control and/or pyramid all the real-world goods and assets that have been commoditized (i.e. almost everything).
Why is this the essential first step in World Domination? Once something has been commoditized, it can be bought and sold in the global marketplace in fiat currencies–currencies that are not backed by any real-world asset and that can be created out of thin air by central and private banks.
You see the dynamic, right? Create credit-currency out of thin air, and then use this “free money” to buy up the real world. Quite a trick, isn’t it? Get a means of exchange for essentially nothing (i.e. money at near-zero interest rates) and then trade this for assets that produce goods and services everyone else needs or wants.
Now we understand steps 2 and 3:

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

Governments to Control Large Cash Transactions

I have been pointing out the crisis we face moving forward. The gist of this is the total fiscal mismanagement of government for which we, the people, are always blamed. This hunt for taxes has led down the path of arguments for eliminating currency. While people think Bitcoin is an answer, they do not understand government’s hunt for taxes no less the lack of a true rule of law. The government need only pass a law that anyone who fails to report what they have in Bitcoin is criminal and they get to confiscate all your assets.

Switzerland has its “wealth tax” which they argue is nothing just 0.02%. However, it requires you to report all assets worldwide. They then know precisely what you have and it is merely one vote away at anytime to raise the tax or impose criminal penalties for failure to report everything. Yet, once Switzerland has that info, under G20 they must share it with all other governments.

We have stood by and watched India cancel all high denomination notes. Try walking around with €500 notes in Europe and they look at you funny or won’t accept them. ATM machines have been reduced in Europe to taking a maximum of €200 in cash at best. This is all th hunt for taxes because government cannot function ethically no less morally.

Now the German Federal Minister of Finance, Wolfgang Schäuble, is proposing to control all large cash transactions claiming this will prevent black money transactions and money laundering. Of course, they see these two issues not as typical crime like drugs, but tax avoidance.

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

A Problem Emerges: Central Banks Injected A Record $1 Trillion In 2017… It’s Not Enough

A Problem Emerges: Central Banks Injected A Record $1 Trillion In 2017… It’s Not Enough

Two weeks ago Bank of America caused a stir when it calculated that central banks (mostly the ECB & BoJ) have bought $1 trillion of financial assets just in the first four months of 2017, which amounts to $3.6 trillion annualized, “the largest CB buying on record.” 

 

BofA’s Michael Hartnett noted that supersized central bank intervention which he dubbed a “liquidity supernova” is “the best explanation why global stocks & bonds both annualizing double-digit gains YTD despite Trump, Le Pen, China, macro…”

To be sure, Hartnett’s “discovery” did not come as a surprise to regular readers: back in October 2014, Citi’s Matt King calculated that it costs central banks $200 billion per quarter to avoid a market crash, or as he put it:

For over a year now, central banks have quietly being reducing their support. As Figure 7 shows, much of this is down to the Fed, but the contraction in the ECB’s balance sheet has also been significant. Seen from this perspective, a negative reaction in markets was long overdue: very roughly, the charts suggest that zero stimulus would be consistent with 50bp widening in investment grade, or a little over a ten percent quarterly drop in equities. Put differently, it takes around $200bn per quarter just to keep markets from selling off.

Today we showed just what central bank buying looks like in practical terms when we demonstrated that the Swiss national Bank had purchased a record $17 billion in US equities in just the first quarter, bringing its total US equity long holdings to an all time high above $80 billion…

… in the process soaking up nearly 4 million AAPL shares in the first 3 months of the year.

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

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…

When Assets (Such as Real Estate) Become Liabilities

When Assets (Such as Real Estate) Become Liabilities

December 27, 2016

It will be the middle class that accepted the notion that “real estate is the foundation of family wealth” that will be stripmined by higher taxes on immobile assets such as real estate.

Correspondent Joel M. submitted an article that struck me as a harbinger of the future: In Greece, Property Is Debt:

“At law courts throughout Greece, people are lining up to file papers renouncing their inheritance. Not necessarily because some feckless uncle left them with a pile of debt at the end of his revels; they are turning their backs on what used to be a pillar of Greece’s economy and society: real estate. 

Growing personal debt, declining incomes and ever higher taxes as Greece’s depression grinds on have turned property and the dream of easy money into dread of a catastrophic burden.

After many years in which only very valuable properties were taxed, many Greeks went from paying almost no taxes on real estate to not having enough money to pay. 

In 2010, property taxes accounted for 0.26 percent of gross domestic product, while this year they are around 2 percent, according to state budget figures. ‘Suddenly, the state treated the Greeks as if they were rich, at the precise moment that they ceased to be rich.’

Among the many disruptions of the past few years, this one shows how traditional conceptions — and a sense of security — can be shattered. With a history full of wars, bankruptcies and rampant inflation, Greeks had always seen land as a haven.

But it is private debt — at 222 billion euros last year — that may prove an even greater danger. This shows in government revenues. With the unified tax, ownership of every kind of property is now subject to taxation.

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

The Coming Breakdown of U.S. & Global Markets Explained… What Most Analysts Miss

THE COMING BREAKDOWN OF U.S. & GLOBAL MARKETS EXPLAINED… What Most Analysts Miss

The U.S. and world are heading toward an accelerated breakdown of their economic and financial markets.  Unfortunately, the overwhelming majority of analysts fail to understand the root cause of this impending calamity.  This is also true for the majority of precious metals analysts.

The reason for this upcoming systemic collapse of the U.S. and Global markets is quite simple when you understand the information and are able to CONNECT THE DOTS.  While it has taken me years of research to be able to finally put it all together, new information really put it all into perspective.

Yes… a HUGE LIGHT BULB went off, but unfortunately the realization is much worse than anything I imagined before.  I briefly discussed this in my last article, The Coming Global Silver Production Collapse & Skyrocketing Silver Value.

The information discussed in this article makes it abundantly clear that the precious metals will be the GO TO ASSETS in the future.  The standard financial practice of investing most of one’s assets in stocks, bonds and real estate will no longer be true.  What little investment strategies are left in the future will turn to PROTECTING WEALTH, rather than building wealth.  The days of acquiring wealth are coming to and end… and fast.

So, now I will try to lay out all the details in a way that will make this easy to understand.  However, I have a word of warning.  Those who are able to connect the dots… it’s like taking the RED PILL, you can’t unlearn what you now realize.

The Collapsing EROI Is Destroying Everything In Its Path & Quickly

Americans used to enjoy a much better standard of living when it only took one person in the family to provide the income.  This was during the late 1940’s, 1950’s and early 1960’s.  However, the situation started to change in the 1970’s.

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

If Geography and Demographics Are Destiny, Who Will Be the Winners and Losers in 2025?

If Geography and Demographics Are Destiny, Who Will Be the Winners and Losers in 2025?

Owning any asset in poorly positioned nations is an inherently risky bet going forward.

The dictum “demographics is destiny” proposes that all the complexities of finance, society and politics are ultimately guided by demographics: the relative size of each generation, birth rates, death rates, etc.

For example, an oversized generation of retirees and an undersized generation of workers to support them has far-reaching consequences that can’t be legislated away.

The influence of demographics isn’t limited to pension costs. Some analysts have made the case that oversized generations of young men align all too well with the launching of wars.

The point is that birth/death rates—low and high–have consequences that impact national destinies for decades.

Another school holds that geography is destiny: if a nation’s geography is favorable, the barriers to prosperity and stability are low, while the barrier is high for nations with unfavorable geography.

Peter Zeihan, author of the 2014 book, The Accidental Superpower: The Next Generation of American Preeminence and the Coming Global Disorder, lists the core geographic attributes that are either favorable or unfavorable in ways that influence a nation’s long-term prosperity and built-in geopolitical challenges.

What does geography have to do with prosperity, stability and geopolitical risks?

Navigable rivers that reach deep into productive interior regions lower costs of transport dramatically, while natural harbors enable low-cost access to international markets via ships.

Natural barriers to invasion such as oceans, deserts and mountain ranges dictate whether a nation must spend heavily on military defense of the homeland or whether the cost of defense is lightened by favorable geography.

Zeihan extends geography into the political realm, noting that nations with difficult-to-defend borders require a strong central government to organize taxation and defense, while nations with few contiguous threats (for example,  the U.S.) can be governed in a more decentralized fashion.

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

Olduvai IV: Courage
In progress...

Olduvai II: Exodus
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