Archive for the ‘Nature of the Squid’ Category

Housing Bubble Pain Continues for Most Americans

Monday, November 18th, 2013

Here’s a table, compiled by former Fed Governor Larry Lindsey and circulated by Marc Faber, that explains much of the pain from the housing-bubble collapse. The lower 75% of households (by wealth) have still not recovered their peak wealth.

HouseholdNetWorthImpactByWealth-2007-2013-Lindsey

http://www.portphillippublishing.com.au/DR20131118c.jpg

This is exactly what I was getting at in a recent comment on Macroblog; copied below. I’m glad to see more folks are looking into this.

But I fear that now it’s too late; the next bubble is already upon us now, and no one in a position of authority was willing to take away the punchbowl early enough.

 

MacroBlog Comment by Sustainable Gains on 10/24/2013:

Don’t forget the fraudulent nature of the house price increases in much of the country.

In many many places, loans were issued and properties flipped because lenders and/or borrowers were blatantly writing fraudulent loan paperwork. Prices were inflated above sustainable economic value as a result. Those who sold received ill-gotten gains; those who bought and held were forced to pay higher prices than they should have – they were robbed. Those who flipped paper received ill-gotten gains; those who bought the AAA-rated bonds and didn’t get their interest or principal back were robbed. Those who borrowed against the higher, fraudulent prices, thinking that rising prosperity and declining rates would make refinancing later affordable, were tricked too. In fact, never in the course of human events have so many been robbed so badly, by so few.

Wondering why the eventual collapse was so painful is a ludicrous pastime for “economists”. The net worth of the overwhelming majority of Americans is entirely in their home equity. Or was. Many folks lost their entire net worth. Rebuilding that takes time in the best of circumstances, and even more so now, given the structural problems in the economy. Furthermore, many of these folks were burned so badly that they will refuse to partake in a repeat.

The Federal Reserve, among many other institutions, was AWOL when it should have been regulating to prevent all of this. Greenspan is recently on record claiming that fraud is a law-enforcement issue, not a Federal Reserve issue. That is nonfeasance [by Greenspan and the Fed]. The Fed has regulatory powers, and anything that leads to “bezzle” on the balance sheets (to borrow a term from J.K. Galbraith) is also a regulatory issue, because it means banks haven’t got the capital base they claim to have. There was plenty of evidence available to those willing to look for it.

I suspect that 100 years from now, History is not going to look kindly on anything the Fed did from about 2002-present.

 

The Bubble This Time

Tuesday, October 29th, 2013

For those who look, there are many clear signs of credit/housing bubble 2.0:

  1. Extreme levels of student loan debt (and rising rates of delinquency);
  2. NYSE Margin Debt pushing to new extremes;
  3. Covenant-Lite corporate debt issuance (high risk to lenders) hitting new extremes while interest rates remain abnormally low;
  4. Extremely high proportion of houses being bought by investors paying “cash” (aka pre-funded borrowing) rather than resident owners;
  5. House prices pushing back up toward the bubble peak, while affordability metrics drop;
  6. Corporate earnings/GDP well above sustainable levels (at the expense of high trade and government deficits, and low household savings rates;
  7. Rising income and wealth inequality since the newly-minted credit is unevenly distributed.

Taking the list in detail (links only for now; will put up the linked charts later):

(1) Student Loans – U.S. Dept of Education, Sept. 30 press release and FRED Graph of Federal Student Loans

(2) NYSE Margin Debt – Analysis by Doug Short

(3) Covenant-Lite Loans – Bloomberg article on Fed Warning to Lenders

(5) House prices rising in echo of earlier bubble – charts posted by Calculated Risk

(6) Corporate earnings vs. GDP – This is a reflection of unsustainable deficits elsewhere in national income accounting; excess corporate profitability leads to stock price bubbles, since the earnings are not sustainable without genuine median income growth – See the St. Louis Fed’s National Economic Trends report.

Footnote #1:  I haven’t located quality plots for items 4 and 7 at this time.

Footnote #2:  Smart traders can make a lot of money in a bubble.  That’s part of the process by which they happen.  But if the gains aren’t sustainable, the bubble is a net expense to the nation due to malinvestment and maldistribution. And it’s not an ethical time to invest if the outcome is a “negative sum game” (that is, if your gain means someone else loses worse).

 

The real Fiscal Fiasco is the debt per taxpayer

Friday, August 30th, 2013

Over at Capital Gains and Games, Stan Collender reports that the FY14 planning in Washington has gone from “Budget Bedlam to Fiscal Fiasco“.

Although he’s right, I’d like to add that the real fiasco here is that our elected leaders persistently fail to address the fundamental problem: the government’s debt cannot continue to increase forever in real, inflation-adjusted, hours-of-workers-pay terms.

Instead, we have over $100,000 in national debt per taxpayer (not counting state debt, underfunded pensions and so on). And we have neither a rational budgeting process nor a rational debt-limitation plan.  Following the methodology of the “Congressional Budget Office” and adding some sanity per Cyniconomics, we can expect in 20 years to have $300,000 in debt per taxpayer (after adjusting for inflation! in 2013 dollars!), and it just gets worse from there. Something’s gotta give. And screwing over Social Security recipients (who are funded by a dedicated tax) isn’t an option. Neither is taking away grandma’s medical care.

The problems is that people want to apply accounting cuts, when what is needed is a deeper rethinking of the structure of the U.S. economy. How can we make America more efficient and more productive?  What can we do to create a stronger tax base, with lower wasted effort, and maintain a carefully prioritized set of vital government functions?

One proposal: It’s entirely possible to have an effective government that is substantially more affordable than what we currently suffer, but it does require goring some sacred cows, primarily in the medical-waste sector. That sector is normally referred to as “healthcare”. But the cost per outcome is at least twice what other nations pay, and arguably as much as 10 times what is reasonable. So most of the expenditure is indeed wasted. Therefore we must indeed call it the medical-waste sector, pending future reforms.

Now, I’m not talking about cutting Medicare outcomes, or destroying the quality of life of senior citizens. We all know from personal experience that healthcare in this country is a bureaucratic and financial disaster. Hospitals, exempt from antitrust laws and often facing no competition, waste money and overcharge everyone. The insurance system creates deluges of time- and money-wasting paperwork for no benefit other than shifting costs in Byzantine ways.  And medications cost far more here than overseas, even for identical quality.  This has all been thoroughly documented (e.g. by Steven Brill in Time). Furthermore, there is a lot of emerging evidence that many medical procedures, with modern technology, can actually be purchased directly by consumers, from competitive providers for a small fraction of the hospital/insurance system’s sticker price. Given all that, it ought to be possible to deliver the same quality of life at much lower cost.

So I’m proposing that we change the laws regulating the medical sector. The medical industry should eliminate the B.S. pricing, live with the same antitrust laws as the rest of the business world (which need to be properly enforced, but that’s another article). We need to eliminate confidential price-fixing agreements. Pills and procedures of equivalent quality should have only one price worldwide (modulo taxes), and be subject to competition among different providers – not arbitrary “chargemasters”. And the whole structure of “insurance” is wrong, leading to endless, needless paperwork that adds no value to anyone’s life.

If we thoroughly restructured that industry, it would enable (over perhaps a decade) millions of workers to gradually shift into new occupations, ones which actually increase human well-being at reasonable cost, and thus add true economic value rather than merely “GDP”. And we’d have both a more-affordable government and greater overall wealth in society.

This isn’t the only sacred cow that ought to be slaughtered, it’s just the largest.  The Giant Squid has many tentacles, and not all of them are on Wall Street.

It’s not as though there’s a choice here. Our alternative as taxpayers and citizens, if we fail to meet the clear need to reform the government and the economy, is to toil away under that ever-increasing federal mortgage, and pray the bill never comes due. But it will. And even in the meantime, we will all suffer a reduced standard of living, because our nation is run with horrifically low efficiency.

So, do you have a fixed-rate mortage…

Monday, July 9th, 2012

… or one with “adjustable” rates that have been “fixed”?  Eh, Barclays?  And how do YOU plead, Team LIBOR?

Barclays “Fixed” Rates, eh?

Photo found at Gary Kaltbaum’s Site

Why we cannot “borrow our way to prosperity”

Friday, December 2nd, 2011

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Only in the past few decades have we brainwashed ourselves into thinking that debt levels of 40-80% of GDP were normal, or that there could be such a thing as a “sustainable deficit”.  Our forebears were demonstrably wiser than most Boomers today, and I believe we’re about to relearn some very painful historical lessons.

Historically the US, like other nations, has sought very hard to stay out of debt, not to add to it with allegedly “sustainable” deficits.  This is illustrated very dramatically with the historical debt charts.  The ones on Wikipedia are particularly accessible:

US Federal Public Debt, 1800-1999

U.S. pubic debt was only 20% of GDP in the early 1800s, and the debt was all but extinguished from 1830-1860.  The Civil War led to a debt burden of 30-40%, which was again extinguished by 1910.  World War I led to another 30% burden, which had been cut to 20% when the Great Depression hit.  Even in the GD, the debt only went up to 40%.  It was only World War 2 which pushed the debt to 110% of GDP, and once again as soon as the war ended we sensibly reduced the debt burden, reaching about 25% of GDP in 1970-1980.

Throughout all of these periods, rising national prosperity has led to a reduction in debt relative to GDP.  We have never been able to “borrow our way to prosperity”!

As the more recent data below shows, since 1980 we have gone on a debt binge.  We are not alone. The European PIIGS “canaries” are screaming that we now live in an unsafe “coal mine”, a debt trap!

US Debt to GDP, 1940-2010

If we don’t get our debts back into balance, we face horrific declines in our national standard of living, because if we don’t pay the debt off, the alternatives are either default or inflation.  And when debt exceeds 100% of GDP, it’s very hard to pay the debt off.

It is time to bring the Debt-to-GDP ratio back down.  Any incremental debt must therefore have a strong impact on GDP growth.  The current Administration and Congress are unable to deliver.  We need to change, if we are to have hope!

However, I do not currently see, nor do I expect to see, public attitudes shifting quickly enough.  Too many think that we can live with “sustainable deficits”, despite the fact that unexpected events happen every year which force debtors into defaults.  Those who try to “sustain” their deficits find, almost inevitably, that sooner or later they are “unexpectedly” bankrupt.

Unfortunately,  our government (and many others) has accumulated a debt burden which is only sustainable if the bond market chooses to sustain it. The bond market has voted otherwise in Europe, and could easily do so here. These governments, rather than being led by their people’s votes, are now at the mercy of their financiers.

The pattern of accumulating more debt than you can pay off (without rolling or refinancing) needs to be tamed. Because if a nation can pay off its debt without depending on bankers, it has far more freedom. As it is, we have fallen into debt serfdom.  I don’t think the American people will want to stay in that position, so I think we are in for a painful awakening, and a return to more historical attitudes towards debt.

Debtors vs. Bankers: The Only Winning Move Is Not To Play?

Wednesday, June 15th, 2011

De-financialization:  To beat the squid, we may have to quit the game!

It is hard to fathom that during today’s episode of Bankrupt Greeks vs. Bankrupt Bankers, the herd fled into Treasuries, gold and silver, dumping the Euro, stocks and oil.  Given the unsustainable debt levels here, the long-term U.S. economic picture has to include either severe deflation or severe inflation (or both in alternating sequences).  But apparently Greece is on fire now and our own conflagration remains in the future, so the herd has moved here for temporary safe haven.

But isn’t this a bit like hiking to the stern of the Titanic, to avoid going down first with the bow, only to be sunk later?

In an over-financialized world, it’s unlikely that either the debtors or the lenders will win. Deleveraging means de-financialization, and that means less net interest going to the lenders. Some lenders have to lose.

Meanwhile, the lack of new credit means that not only do the ponzi borrowers go broke (those who require fresh loans even to pay interest), but even the speculative ones (who can cover interest but not principal) start to have real trouble rolling over their debts.  And in the maelstrom of inflation, deflation and unemployment, nearly everyone loses something.

It reminds me of the classic line from the movie War Games, when the insane computer finally learns the truth about the nuclear war “game”:  “The only winning move is not to play.

So how does one “invest for sustainable gains” in this environment?  Shakespeare’s line comes to mind next:  “Neither borrower nor lender be.”

In practical terms, that’s not completely possible, but it does provide a sense of direction when considering options and choosing the next path.  The first move is to minimize fees to the financial sector, and to bring loans (bonds) into balance with debts (mortgage and other leverage). Second is to identify low-debt, high-tangible-value stocks and funds, that should hold their real value regardless of inflation or deflation.

Here we now have a portfolio with an overall 0.25% annual average expense ratio, and we’re closing on on zero net debt holdings (while allowing some room to make contrary rate-spread plays as the herd runs back and forth on the Titanic). The challenge of which tangible-value investments to hold is more challenging…

And, as this grows long, more about that later…

Break the Debt Cycle before it breaks us.

Tuesday, June 7th, 2011

The debt ceiling battle qualifies as a “Squid Sighting”.

It’s absolutely time to break the endless-increase-in-debt cycle.  It was time 7 years ago when the economy recovered from the dot-com crash. Several trillion dollars later, more waiting won’t improve the situation. It’s time to stop spending “more” and start spending “smarter”.The rate of debt increase since 2004, compared with the lack of corresponding sustainable GDP increase, strongly indicates that we’ve passed the point where additional debt yields worthwhile benefits to the nation (or world) as a whole. Whatever we’re borrowing for, it’s not worth it!

From a certain point on, more debt primarily helps the lenders (who get secured streams of long-term income), not the borrowers.  I think we passed that point a long time ago.  Now we’re at the point where even the lenders are starting to realize that more debt may not help them, because a loan to someone who can’t repay is money gone. Widespread default and insolvency is bad for everyone, and the banksters can’t shift the bad debts onto Uncle Sam anymore without risking losses.

I think the markets know this, particularly after watching Iceland, Ireland, Greece and Portugal.  The U.S. has the advantage of the reserve currency, but we also have a lot of national obligations not consolidated into the national budget.

What I see is that Wall Street isn’t nearly as worried about the debt ceiling per se, as they are about the total unwillingness of Washington to face reality in terms of eliminating the structural deficits and bringing Uncle Sam’s spending back in line with tax income.

Some examples:
(1) Gold and silver have risen a lot in the past year.  It’s not because those investors are worried that there will be a deflationary government shutdown! It’s because investors are worried that there will be an inflationary spiral, unless we break out of our current print-and-spend and/or borrow-and-spend paradigm.

(2) TIPS yields range from -0.5 to +1.8%, whereas historically TIPS have had yields in the 2-3% range.  The historical TIPS yields reflect the fact that historically bonds yield 3% above long-term inflation.  The current low yields say that the market sees bonds as unlikely to yield as much as inflation (-0.5% TIPS for 5 years) or at most 1.8% above inflation.

(3) In stark contrast to the above, the overall low Treasury yields and hoarding of cash by household and corporations both suggest a strong fear of deflation as well.

Some commentators view the fear of deflation and the fear of inflation as mutually exclusive opposites, but they aren’t. It’s possible to be afraid of both, because our economic circumstances suggest that one or the other are becoming increasingly inevitable. For a nation with its own currency, excess debt must inevitably be defaulted upon, or repaid only in devalued money. The one is deflationary and the other inflationary. At this point, for us to avoid one or the other may no longer be possible.

Some people claim that Uncle Sam can borrow a lot more, since “interest rates are still low now”.  But Greek, Irish and Portuguese rates were low, too — even as they borrowed too much. But the lending markets aren’t omniscient, and can have a change of heart in a heartbeat. For those nations, once the market woke up, the credit markets shut down and the sovereign borrowers were doomed. We have to avoid having that outcome here!
Here in the U.S., we’ve got to take the foot off the gas pedal of manic deficit spending. Ideally we want to coast the budget into balance, rather than having a hard stop (or a crash over the cliff). But the most important thing is to quit accelerating our indebtedness.

To “spend smarter”, we will need a lot of thoughtful reprioritization and structural reform in how the government taxes and spends.  But we absolutely have to stop borrowing money for no good reason.  If we borrow money, squander it, and never repay the principal, all we’re doing is feeding the financial sector a perpetual interest income stream, stripped every year out of our nation’s productive output!  Right now I don’t think there’s much, if anything, on the margins of the federal budget for which we really want to further enslave ourselves to the bondholders!

Stop Feeding The Squid!

Must-Read Article: Breaking the banksters’ framing

Monday, June 6th, 2011

From Michael Hudson by way of Naked Capitalism (also circulating via Mauldin’s newsletter):

Michael Hudson: Will Greece Let EU Central Bankers Destroy Democracy?

The majority of today’s financial discussions use bank-centric framing and terminology to discuss the situations facing the debtor nations (and debtor citizens and corporations).  However, there are two sides to every contract, and it’s clear that the borrowers are not exclusively to blame for their over-indebtedness, as a result of fraudulent inducements, bribes, and all manner of self-serving spin from the financiers.  Moreover, when the bankers’ “solutions” consist of (a) more debt for the over-indebted, and (b) taxpayer bailouts for the bankers when the over-indebted finally stop paying, it’s clear that the bankers are part of the problem, not part of the solution — literally!

So I like the article above because it re-frames the issues (with emphasis on Greece and Iceland) in terms of the more fundamental, classical economic issue:  how do we reorganize to optimize national output?  It most likely does not entail continuing to enable the lenders to live off the labors of others, at least not as much as they do now.

Quick implications for debtor nations and investors therein:  (1) Stop feeding the squid!  Get out of debt if you can, and don’t fund the banksters’ shenanigans with your “investments”.  (2) Prepare for higher interest rates due to defaults and devaluation-driven inflation. Obviously more thought will be needed here, but as in the 1970s, a simple stock-and-bond portfolio may result in serious losses after inflation.  Watch and learn from the other nations, before it comes to our own doorstep…

Do NOT Feed The Squid!

Friday, October 15th, 2010

I’d like to welcome my readers (all 2 of them?) from my other blog, Do Not Feed The Squid!  “DNFTS” was a great idea (and still is, so I’ve put it in the tagline above!) but I do not have time to keep up two blogs.  Also, the idea behind “Do NOT Feed The Squid”, that we’re going to have to take personal actions to stop the large financial corporations from continuing to abuse the legal system and destroy the public trust, is no longer as politically radical as it used to be.  It’s no longer a distraction from the “Ethical Investing” and “Sustainable Gains” themes here.  In fact, it’s pretty clear that investors in the mortgage lending apparatus have failed to invest ethically and are discovering that their fraudulent gains are not sustainable.  (Whether they continue to succeed in ripping off the taxpayers, only time will tell… but hopefully the public will not put up with this any longer!)

The 6 posts from “Do NOT Feed the Squid” have been moved over here verbatim, without any updates to their timestamps.

For those who may not have reviewed the “Do NOT Feed The Squid” site, here’s a list of the 6 posts in, reverse chronological order:

Post-Squid Investing Attitude Shift

Squid-Free Investing (small victories)

Preventing the Next Crisis? Automatic Stabilizers?

Restoring the Federal “Reserve”

A Quick Guide to Squid-Free Banking

What is the Squid?

Will Keeping Interest Rates Low Actually Stimulate the Economy?

Thursday, July 8th, 2010

A post today on CalculatedRisk caught my eye:  What might the Fed do?  There is a lot of anxiety about the future of the economy,  leading to wondering about whether the Fed may extend the current period of low short-term interest rates, or even buy down longer-term Treasury bonds to reduce rates further.

Implicit behind this is the idea that lower interest rates stimulate the economy.  There’s a lot of history behind the approach, but does it still hold true in today’s environment?  I am not so sure.

Low rates stimulate borrowing… but today we have few creditworthy borrowers with an appetite for additional credit. Instead we have debtors scrambling to get out of debt, unemployed people needing to live off savings, and a lot of people in and near retirement who are trying to figure out how they will generate enough income to get by.  I can see lower rates allowing debtors to reduce their interest costs, but savers then need to “save more” in order to maintain their income levels… or they need to cut spending.

Low rates encourage the government to borrow… but is that really the way to generate an economic recovery?  At present that just scares taxpaying consumers into worrying about future taxes… so they save more.

Low rates stimulate tangible investment… but today we have a surplus of capacity in everything: housing, commercial real estate, industrial production capability.

Low rates tend to make stocks more attractive than bonds… but do we want another stock market bubble?

It seems to me that what we need are new industries, new lines of work to employ the current surplus workforce and provide new demand for existing production capability. But we probably want those to be financed primarily out of equity capital rather than debt!

And it seems to me that we want to encourage saving and productive investment, by allowing those actions to generate reasonable rates of return — without frenzied capital-gains bubbles.