The Federal Reserve is suggesting that barring a deterioration of economy activity in the coming months, it is preparing a protracted exit to the extraordinary monetary policy pursued since the credit cycle ended. Talking about is part of the Fed's forward guidance and is also part of the exit strategy. Investors, both retail and institutional are adjusting their positions accordingly.
This Great Graphic was published on FT Alphaville, which in turn got them from Credit Suisse. The top chart tracks the flow of funds into three broad categories of mutual funds. The dark red bar is the flows into, and now out, of bond funds. The dark blue bar are the flows into/out of US equity funds. The light blue, (look closely) track the global equity funds. Roughly $60 bln has left the fixed income funds, apparently the most on record.
This has been represented in the popular and business press, but the second chart puts it in a larger context of the stock of investments that have accumulated in various investment vehicles since the late 1990s. For example, the green line, which tracks flows into bond mutual funds, shows that the stock of such investment is near $3.5 trillion. On the eve of the Lehman debacle, there was around $1.7 trillion under management by fixed income mutual funds. There is no compelling reason to think that there is a mean reversion process at work and all the funds that flowed into the bond funds will now flow out.
In addition, the bond mutual funds capture mostly retail interest. Institutional investors have also been selling fixed income We noted that Japanese investors, for example, have been significant sellers of foreign bonds this year and in May appear to have sold about $30 bln of US Treasury bonds and notes. We also know that the Fed's custody holdings of Treasuries has fallen by about $26 bln from late May through early July.
3- Bond Bubble
BOND SCARE - Only An Intermediate Price Bottom. Recession Suggests 0.75% 10UST
I have been very vocal since the beginning of June that now is a great time to be adding bonds to portfolios. (See here and here) There are several fundamental reasons for my belief that the recent rise in interest rates was more related to a short term liquidation cycle rather than a shift in global economic sentiment.
1) Domestic economic strength remains very weak (growing at just 1.8% annually since 2000)
2) Four years into the current "recovery" the economy is already past the average length of most growth cycles. Interest rates fall during down cycles.
3) Geopolitical unrest makes U.S. Treasuries an attractive "safe haven" for foreign capital flows.
4) Global economic weakness (China, Euro-zone and Japan) will likely drive buying of U.S. Treasuries.
5) Upcoming "debt ceiling" and budget debate in September likely to drive inflows into the safety of bonds as we saw in 2011.
6) If the Federal Reserve begins to extract liquidity by slowing bond purchases - financial markets are likely to come under selling pressure pushing money flows from equities into bonds.
7) Declining rates of inflation which are representative of economic weakness.
8) Ultra-low interest rate policies by the Fed continue to push investors to seek yield over cash. The recent rise in rates makes bond yields much more attractive.
However, even if you disagree with the fundamental arguments, it is hard to argue against one of the most compelling reasons for buying bonds which has 35 years of history supporting it. I discussed this particular reason during a Fox Business interview recently stating that:
"Interest rates are now 4-standard deviations above their long term moving average."
As shown in the chart below the driving force behind the long term decline in interest rates has been the ongoing slide in both economic activity and inflationary pressures. Interest rates track the direction, and trend, of economic activity as does inflation. Less demand in the economy leads to declines in prices (deflation) and interest rates.
There are two important things to take away from the chart above. The first is that, as I have notated with blue arrows, is that each time interest rates have spiked it has led to a peak in economic activity. You can already see that economic growth has peaked for the current economic cycle which has led to a subsequent decline in inflationary pressures. Secondly, most of the commentary surrounding the reason that rates are on track to go higher is based on the the similar spike seen in 1994. First, that spike in rates led to a sharp slowdown in economic activity and rates quickly fell. Secondly, the economy was in the midst of a secular growth cycle due to the "Internet/financial boom" which currently does not exist today.
The next chart, however, is the "technical" reason as to why I think now is the time to start acquiring bonds. Again, you can argue the fundamental story, depending on how you want to selectively build your economic "case", however, it is difficult to argue with 35 years of interest rate history. The chart below shows the 10-year treasury rate on a weekly basis with bands set at 4-standard deviations above and below the 50-week moving average. The green shaded area is the current downward trend that has remained intact post the interest rate spike in the late 70's.
What is important to notice is that there have only been a few times in history that rates have gotten to 4-standard deviations above the long-term moving average. Every single time, as noted by the vertical red dashed lines, such extreme movements in rates has been a peak in rates for the intermediate term. Most recently these extreme spikes were witnessed prior to the recession following the "technology bubble" in 2000 and the "housing bubble / financial crisis" in 2008.
The blue shaded area at the bottom of the chart shows the current range of interest rates that are likely to occur given the context of the downtrend. The peak of that range is 3% on the 10-year treasury and the bottom of that downtrend would suggest rates on the 10-year during the next recession to fall below my current estimate of 1%.
There are many reasons to own bonds in portfolios as they have a capital preservation function by returning principal at maturity, creating an income stream and lowering portfolio volatility. However, there are three reasons to add bonds to portfolios currently:
1) As discussed recently investors tend to do the opposite of what they should investment wise by panic selling market bottoms and buying market tops. Currently, unlike the stock market which remains extremely overbought on an intermediate term basis, bonds have had a substantial correction in price which now makes them technically very attractive in the short term for a trading opportunity.
2) The "quest for yield" isn't over as long as the Federal Reserve continues to keep "accommodative rate policies" in place that keep money market rates near zero. With "baby boomers" rapidly heading into retirement, following two nasty bear markets that took away 50% of wealth, the allure of "safety" and "income" are the keys to their current psyche.
3) Money flows into U.S. Treasuries will likely increase as the slowdown in European, and Asian, economies seek safety and stability of the U.S. As pointed out by Jeff Gundlach, manager of Doubleline Total Return Bond Fund, recently reiterated the same call stating: "The liquidation cycle appears to have run its course with emerging market bonds, U.S. junk bonds, muni's and MBS—all of which substantially underperformed Treasuries during the rate rise—now recovering sharply,"
With the reality that the economy has likely peaked for this current economic cycle, deflationary pressures rising and the potential for less monetary interventions in the quarters ahead the catalysts for higher bond prices are tilted in investors favor currently. As I stated previously:
"Investors are panic selling what is likely an intermediate term bottom in bond prices and holding onto to equities in what is clearly one of the most overbought, valued and extended markets since 2000 or 2007. While the mainstream market analysis continues to tout 'buy and hold' strategies - statistical evidence clearly weighs in favor of a rather significant correction at some point in the not so distant future. While timing of such an event is difficult at best, given the extreme amounts of artificial intervention by Central Banks globally, the impact to investors portfolios devastate retirement plans."
For all of these reasons I am bullish on the bond market through the end of this year.
Furthermore, with market volatility rising, economic weakness creeping in and plenty of catalysts to send stocks lower - bonds will continue to hedge long only portfolios against meaningful market declines while providing an income stream.
Will the "bond bull" market eventually come to an end? Yes, it will, eventually. However, the catalysts needed to create the type of economic growth required to drive interest rates substantially higher, as we saw previous to the 1980's, are simply not available currently. This will likely be the case for many years to come as the Fed, and the administration, come to the inevitable conclusion that we are now in a "liquidity trap" along with the bulk of developed countries.
While there is certainly not a tremendous amount of downside left for interest rates to fall in the current environment - there is also not a tremendous amount of room for them to rise until they begin to negatively impact consumption, housing and investment. It is likely that we will remain trapped within the current trading range for quite a while longer as the economy continues to "muddle" along.
Last week TLT, our bond market surrogate, made a new low, then bounced up to the resistance of the declining tops line drawn from the May top. It turned down on Wednesday, we thought beginning a move to test the recent low, but today TLT didn't bother to retest the low. It gapped down below the support and kept heading south.
The situation is more obvious on the weekly chart. A massive top has been forming over the last two years, and price is headed toward support at 105. We are tempted to say that it is all over for bonds, but we can see that bond prices are nothing if not volatile. It is notable that the weekly PMO (Price Momentum Oscillator) has reached a level where it has previously found support.
Conclusion: TLT is near long-term support in price and internally, so a bounce in price is possible; however, the rise to over 125 was excessive in speed and amplitude, and we think that a more extended correction is needed.
China’s banks are now the biggest in the world but fears are growing they are very unstable, writes Harry Wilson.
As Government ministers ponder whether to split Royal Bank of Scotland into a “good bank” and a “bad bank”, it is worth remembering that China did something similar with not one big lender, but four at the turn of the millennium.
In October 1999, a month before Fred Goodwin began his ill-fated reign as chief executive of RBS, the Chinese government created four massive “asset management companies” that would eventually take on toxic loans valued at $480bn (£320bn).
Thirteen years on, these bad banks still exist, operating out of office blocks dotted around Beijing and Hong Kong, and continue to hold non-performing loans worth Rmb1.7 trillion (£180bn), according to credit rating agency Moody’s.
Largely unknown to the outside world, they are a reminder that China’s banking system remains as prone to boom and bust as any Western economy and perhaps more so.
As the rescue showed, the “Big Four” banks were, and are, not just “too big to fail”, but the beating heart of the entire Chinese economic system, controlling nearly half the country’s $19 trillion of financial assets.
Taken together, the four largest lenders,
Industrial and Commercial Bank of China (ICBC),
China Construction Bank,
Agricultural Bank of China and
Bank of China
have a combined market capitalisation of £470bn, about £200bn more than the total value of Britain’s five largest lenders.
Despite paying negative savings rates — the 3.5pc base rate interest on Chinese deposit accounts is generally believed to be well below the real rate of inflation — 70pc of Chinese household wealth is held in cash and bank deposits. Just over a third of India’s private wealth is kept in its banking system.
With this largely captive market, citizens’ savings have been used to fund an infrastructure and property boom on an unprecedented scale and led to warnings of an asset bubble.
While official figures show a 113pc increase in property prices in the past eight years, research by Tsinghua University and the National University of Singapore found prices actually rose by 250pc between 2004 and 2009, a faster increase than was experienced by the US in the lead to the sub-prime crisis.
Carson Block, of Muddy Waters Research, which has laid bare several accounting scandals in Chinese companies, thinks the problems in China’s banking system are more severe than those which kick-started the global crash in 2008. “We believe that the domestic Chinese banking system is a mess, with an enormous amount of bad loans, or loans waiting to go bad. The problems of China’s lenders are greater than those of Western banks on the eve of the financial crisis,” he says.
So, as Chinese lenders take their place at the pinnacle of the world’s banking system, the warning appears to be that things could be about to go very wrong, very quickly.
The risks to the banks come largely from three areas:
loans to local governments,
loans to property developers, and
the shadow banking system.
LOCAL GOVERNMENT LOANS: As of last September, about 14pc of all Chinese bank loans, or Rmb9.3 trillion of debt, was accounted for by local governments. In large part, this money has been used to finance a vast infrastructure spending spree. While detailed information on local government finances is not available, analysts at Nomura believe that much of this investment is unprofitable and is only being financed through land sales, which have stalled in the past two years, and the sale of new debt to repay existing loans.
This process is reaching its limit and local government financing vehicles will need to find Rmb1.8 trillion (£197 billion) this year just to repay their existing debt, according to Nomura — an amount greater than the total amount of urban construction bonds sold in 2012.
PROPERTY DEVELOPER LOANS: Banks also have a direct exposure to property developer loans of Rmb3.9 trillion (£426 bn), giving rise to fears of new non-performing loans as developers struggle to find buyers for their latest projects amid a downturn in demand.#
SHADOW BANKING: Most worrying of all is the shadow banking sector. This amorphous network of
credit guarantee companies and
“wealth management products”
has ballooned in the past five years as the central government has sought to limit the major banks’ lending at the same time as it has attempted to sustain economic growth with a series of stimulus packages.
Back in 2008, the assets managed by trust companies stood at just Rmb1.2 trillion (£130 bn). However, by the end of last year this had grown to Rmb7 trillion, with trusts overtaking the Chinese insurance and mutual fund sectors in terms of the total funds placed with them.
Though Chinese savers might be wary of the trusts, the attraction of a higher interest rate and the perceived backing of the state has helped put the sector in a position to fill the space left by banks. Last year, 50pc of all new credit in China was provided by these shadow banks, according to Bestinvest.
“The authorities have placed increasing restrictions on the mainstream lenders in order to improve capital ratios and stave off further debt delinquency. Despite this, the central government continues to target a long-term growth rate of 7.5pc, effectively driving local governments and private companies alike into the hands of the shadow banking system to provide the necessary funding,” said the fund manager in a recent letter to clients.
One of the greatest problems created by the increased reliance on shadow banks is the maturity mismatch. While most infrastructure and property investments are financed over three to five years, products sold by the shadow banks generally have a maturity of less than one year and often as little as three months. This has effectively created what Bestinvest describes as a nationwide “Ponzi scheme”, whereby existing investors’ returns are paid for from the influx of money gathered from new depositors.
The funding mismatch has echoes of the problems which brought down British lenders, such as Northern Rock and HBOS, where short-term wholesale funding was used to finance an aggressive expansion in lending that led to disaster as lending markets shut in the wake of the credit crunch and the collapse of Lehman Brothers.
Charlene Chu, a credit analyst at Moody’s in Singapore, has been one of the most vociferous critics of this system, and last year the credit agency cut China’s rating from AA- to A-, largely on fears about the potential cost of bailing out trust company depositors if the market collapsed.
Chu pointed out that in the last 10 days of June alone Rmb1.5 trillion (£164 bn) of wealth management products were due to mature, highlighting the scale of the “maturity wall” faced by the shadow banks.
“It is a Wild West atmosphere in many respects and that is one of the reasons why we are so worried,” Chu said of China’s shadow banking sector at a conference in Frankfurt last month.
Trusts have frequently failed in the past and the size of the industry today is several orders of magnitude larger. The risks are clear.
Among the largest sellers of these products have been mid-tier Chinese lenders. The aptly-named Evergrowing Bank had nearly 350 separate wealth management products outstanding as of the end of June and the 15 largest non-rated sellers of the schemes accounted for about half the 3,500 products in existence.
Another potentially worrying sign for the banks has been the increase in pay. Though still well below the amounts paid out on Wall Street or in the City, Chinese financial services sector employees are better paid than workers in any other profession or industry.
Over the past nine years, banking and insurance industry wages have grown by a compound annual average of 17.7pc, according to Credit Suisse. At the Big Four banks, the rise has been even more pronounced with average salaries increasing by 70pc in the past five years to Rmb156,000 (£17,000).
As the banking industry’s problems have become clearer, the banks themselves are on the cusp of becoming less transparent. After opening up about the state of their finances over the past decade, rule changes are likely to make the Chinese banks more opaque again.
Carl Walter and Fraser Howie, the co-authors of Red Capitalism and both financiers with decades of experience in China, pointed out in the Wall Street Journal last week that from 2017 onwards no Chinese bank will be audited by an international accountancy firm. “The fact is that no purely local firm has the experience required to audit some of the largest and most important banks in the world,” they wrote.
The bankers pointed out that the first-ever professional audit of China Construction Bank, the country’s second largest lender, took more than 1.2m man-hours.
The fear is that with non-performing loans at risk of imploding, the rule changes will not just make it easier for lenders to hide their problems, but also it is effectively an officially-sanctioned accounting policy.
“The accounting rules will send China’s financial reform process back to the 1980s — all in the name of creating Ministry of Finance-sponsored 'national champion’ auditors. This is not a sound financial policy,” Walter and Howie said.
With little external investment in China’s banking system, its problems may seem of minimal interest to the global economy. However, any bail-out of a major Chinese lender will be bad news for the rest of the world.
It is true that unlike their Western rivals, Chinese banks have lower global salience, given their size, in the global capital markets. This is in part down to the fact that on average 86pc of the shares in the big four Chinese banks are held by the state, and also a reflection of their infrequent use of the international debt markets where total sales of debt by Chinese lenders since 2007 totalled under $8bn (£5.4bn) — one tenth the amount sold by Russian banks.
However, if the banks and the wider financial system were to require a rescue package it could set in train a process that would cause chaos around the world.
“Because they are state-owned, the government will most likely print money and prop them up. This will of course have dire consequences for China’s economy,” says Block.
“Everyone goes on about the size of China’s reserves, but this will count for very little if they have to mount a rescue of their domestic banking system as most of these assets are denominated in dollars. What people don’t seem to realise is that funds are pretty much useless for this job,” says one senior portfolio manager at a major international bank.
This is not the only problem China will face. Compared with 2000 — the time of the last bank bail-out — the economic and demographic backdrop in 2013 is less forgiving. Thirteen years ago a series of aggressive reforms, combined with entry to the World Trade Organisation and the mass migration of hundreds of millions of people from the country’s interior to booming coastal regions, helped the Chinese economy recover. Today, such routes to growth are no longer open to China, while its working age population has begun to shrink for the first time in two decades. This has heralded the end of the huge pool of cheap labour.
How to deal with the banking sector’s problem is likely to create a civil war among the Chinese financial establishment, with the Ministry of Finance and the China Investment Corporation, the national sovereign wealth fund, expected to push for increased support for lenders, against the more hawkish People’s Bank of China (PBoC), the country’s central bank, and the China Banking Regulatory Commission.
“The PBoC will want commercial banks to recognise non-performing loans on their balance sheets in order to inject more transparency into the financial system and assuage the perception of widening risk. But commercial banks and their owners will push back against such efforts citing the risk of capital flight and weaker assets bases,” says Nicholas Consonery, a senior Asian analyst at Eurasia Group.
Problems in the Chinese banking industry could put it into competition with Asian rivals. The Bank of China is already preparing plans to hoover up more offshore deposits and is expected to increase interest rates on its Taiwanese savings accounts.
This mirrors the short-lived war between banks in Britain and Ireland in 2008, following the Irish government’s offer of a full guarantee on all bank deposits.
Given regional tensions, any suggestion that Chinese banks were attempting to grab more foreign deposits to shore up their domestic financial system would be inflammatory.
The hope remains that the Chinese authorities have spotted the dangers early and will be able to manage the slowdown of the economy without precipitating a crisis. However, given the repeated boom and busts of the past 30 years, it seems likely that today’s highpoint will be seen in hindsight as the ultimate warning signal of a coming crash.
Nothing says 'wealth' like a luxury Swiss watch (or two), and despite the equity markets of developed 'wealthy' nations resurgent in their inflated-asset-based selves, it seems the demand for luxury watches remains subdued at best. While Asia appears to be a big drag (as we noted here), Europe and the US are also plunging; but have no fear as African sales are up 25% (there's the real wealth effect?). The 'wealth effect' plan appeared to be working until the beginning of 2013 when, in spite of the almost unprecedented and inexorable rise in equities, Swiss watch exports collapsed to their worst levels since the great recession. Transitory blip? Doesn't seem that way as the most recent YoY change is the worst in six months.
Spot the diminishing returns of the wealth effect... or can the wealthy have too many luxury watches?
Over the past week there has been some speculation whether the number of Americans who receive food assistance and/or are on disability, outnumber full-time employed workers in the US.
Here is the answer:
There are 116 million Americans with full-time jobs according to the BLS (source), which includes 21.9 million government workers (source).
So far so good. Now the flip side showing how many Americans are reliant on the USDA's Food and Nutrition Services program or on Disability payments, i.e., food assistance in some form:
There are 47.5 million Americans on Foodstamps
There are 30.4 million Americans participating in the National School Lunch Program
There are 13.2 million Americans participating in the School Breakfast Program
There are 8.6 million Americans participating in the Special Supplemental Nutrition - Women, Infants and Children program Participants
There are 3.4 million Americans participating in the Child and Adult Care Food Program and the Food Donation Program
There are 0.6 million Americans participating in the Commodity Supplemental Food Program
There are 0.1 million Americans participating in the Food Donation Program
There are 8.6 million Americans on Disability
For a grand total of 112.5 million Americans on Food assistance (sources here and here).
End result: there are 3.5 million more Americans with full-time jobs than there are Americans who are reliant on the government for their daily bread: a tiny 3% delta.
What this means for the country, we will let readers decide.
The above is notable because Congress just passed a Farm Bill without consideration for Foodstamps funding. From Reuters:
The Republican-controlled U.S. House of Representatives defied a White House veto threat and passed a farm bill on Thursday that expands the taxpayer-subsidized crop insurance system but omitted food stamps for the poor.
Lawmakers passed the 608-page bill, unveiled by Republican leaders late on Wednesday night, on a 216-208, party-line vote after two hours of debate in which no amendments were allowed.
Republican leaders said food stamps, traditionally part of the farm bill, would be handled later and that, for now, they needed a way to start negotiations with the Senate over a compromise bill.
Democrats said the real intent of the action was to isolate food stamps for large cuts in funding.
House Speaker John Boehner declined to say if leaders would allow a vote on a farm bill with larger food stamp spending than his party liked. "We'll get to that later," he told reporters.
Massachusetts Democrat Jim McGovern said he believed conservatives were promised a chance to strive for deeper cuts to food stamps in upcoming legislation. The defeated earlier version of the farm bill would have ended benefits for 2 million people, or about 4 percent of recipients.
"A vote for this bill is a vote to end nutrition programs in America," said Rose DeLauro, a Connecticut Democrat.
Surely not even Congress is stupid enough to not realize that if the free meals of 47.5 million Americans are taken away, the consequences would be severe.
In the U.S., the labor force participation rate — the size of the labor force as a percentage of the national population of the same age range — has been sitting right around 63.5% in recent months.
However, this continues to be well below pre-recession highs. Nevertheless, it continues to be much higher the LFPRs in many other parts of the world. Here's as chart from UBS's Marie Antelme, which offers some global context.
One of the most insightful comments explaining what happened last night, when Bernanke just killed all credibility that the economy may soon be able to stand up on its own two legs, comes from Seth Klarman who crushed the logic (or lack thereof) behind proclaiming any recovery in a world in which the only marginal factor preventing an all out collapse in the stock market and thus economy is, and continues, to be the Federal Reserve which has not only destroyed the market's discounting function, but with every passing day is taking over both the entire US economy (the Fed's balance sheet is now 25% of US GDP) and the US bond market (currently in possession of 30% of all 10 Year equivalents).
If the economy is so fragile that the government cannot allow failure, then we are indeed close to collapse
And the rest of Klarman's sermon, serving as the perfect counter to the voodoo shamans operating their Keynesian religion in the Marriner Eccles building. From Seth Klarman of Baupost:
Is it possible that the average citizen understands our country's fiscal situation better than many of our politicians or prominent economists?
Most people seem to viscerally recognize that the absence of an immediate crisis does not mean we will not eventually face one. They are wary of believing promises by those who failed to predict previous crises in housing and in highly leveraged financial institutions.
They regard with skepticism those who don't accept that we have a debt problem, or insist that inflation will remain under control. (Indeed, they know inflation is not well under control, for they know how far the purchasing power of a dollar has dropped when they go to the supermarket or service station.)
They are pretty sure they are not getting reasonable value from the taxes they pay.
When an economist tells them that growing the nation's debt over the past 12 years from $6 trillion to $16 trillion is not a problem, and that doubling it again will still not be a problem, this simply does not compute. They know the trajectory we are on.
When politicians claim that this tax increase or that spending cut will generate trillions over the next decade, they are properly skeptical over whether anyone can truly know what will happen next year, let alone a decade or more from now.
They are wary of grand bargains that kick in years down the road, knowing that the failure to make hard decisions is how we got into today's mess. They remember that one of the basic principles of economics is scarcity, which is a powerful force in their own lives.
They know that a society's wealth is not unlimited, and that if the economy is so fragile that the government cannot allow failure, then we are indeed close to collapse. For if you must rescue everything, then ultimately you will be able to rescue nothing.
They also know that the only reason paper money, backed not by anything tangible but only a promise, has any value at all is because it is scarce. With all the printing, the credibility of our entire trust-based monetary system will be increasingly called into question.
And when you tell the populace that we can all enjoy a free lunch of extremely low interest rates, massive Fed purchases of mounting treasury issuance, trillions of dollars of expansion in the Fed's balance sheet, and huge deficits far into the future, they are highly skeptical not because they know precisely what will happen but because they are sure that no one else--even, or perhaps especially, the policymakers—does either.
That is all.
RISK & TP
US ECONOMIC REPORTS & ANALYSIS
PUBLIC POLICY - "What is Good for GM is Good for America" is no longer correct
Commenting on the divergence between the bond market's Taper-On reaction and the equity markets Taper-off reaction amid the total lack of clarity from the FOMC, CNBC's Rick Santelli asks the (rhetorical) question that everyone should ask: "[What the Fed minutes said] is, listen, we have to wait for bigger confirmation that the economy is doing better; and for that, we're going to look at the employment side. [At the same time] we have the fewest people working that can work in 30 years, and all-time-record-high profits for corporations. Now, does that strategy sound rational to you?" It seems, now that Bernanke has seemingly promised that it will really never end, that Santelli's question will become increasingly critical in this country.
The mini-rant that should be reflected upon by everyone (investor or not) starts at around 0:45 in the following clip...
Much attention has been given to the recent growth of the U.S. federal debt. This paper examines the growth of federal liabilities that are not included in the officially reported numbers. These take the form of implicit or explicit government guarantees and commitments. The five major categories surveyed include support for housing, other loan guarantees, deposit insurance, actions taken by the Federal Reserve, and government trust funds. The total dollar value of notional off-balance-sheet commitments came to $70 trillion as of 2012, or 6 times the size of the reported on-balance-sheet debt. The paper reviews the potential costs and benefits of these off-balance-sheet commitments and their role in precipitating or mitigating the financial crisis of 2008.
What follows is a brief summary of the paper.
One important category of federal off-balance-sheet commitments involves housing. The government's commitments began in 1934 when Congress established the Federal Housing Administration to insure approved mortgages, an agency that's still going strong today. Last year, the FHA issued $213 B in new guarantees, bringing its total portfolio of insured mortgages to $1.3 trillion.
In 1938, Congress created Fannie Mae as a separate entity to purchase mortgages, and in 1970 chartered Freddie Mac to compete with Fannie. Throughout their history, both entities had features of both public and private enterprises. They were able to issue their own debt at favorable interest rates and offer separate credible guarantees on massive volumes of mortgage-backed securities in part because of the common perception that the government would back them up if they ran into trouble. Any doubts about this were resolved when Fannie and Freddie were taken into conservatorship in 2008. With any profits that the GSEs make currently going to the Treasury, it is reasonable to assume that any losses they currently make would also come out of the Treasury.
As of the end of 2012, the outstanding debt and guarantees issued by Fannie and Freddie (along with those of the Federal Financing Bank, Federal Home Loan Banks, Farm Credit System, Federal Agricultural Mortgage Corporation, FICO, and REFCORP) came to $7.5 trillion, or 2/3 the size of the total Treasury debt held by the public. In my paper I discuss the role of the huge federal involvement in the housing boom and bust of the last decade.
Mortgage debt held by government-sponsored enterprises or in agency- or GSE-backed mortgage pools, 1952:Q1 - 2012:Q3, in billions of dollars, as a percent of GDP, and as a percent of all mortgages. Source: Hamilton (2013).
Another category of federal commitments that we are likely to be hearing more about in the next few years is student loans. I was surprised to discover that most of this federal commitment has recently become an on-balance sheet liability, as the Department of Education has evidently been using funds borrowed by the U.S. Treasury to buy up some of the federally-guaranteed student loans that have now run into trouble. Borrowing by the U.S. Treasury on behalf of the Department of Education came to $714 B as of the end of fiscal year 2012, accounting by itself for 6% of the outstanding publicly-held U.S. debt. The contribution of remaining off-balance-sheet commitments for these and other non-housing federal loan guarantees appears to be relatively modest.
Treasury debt held by public
Student and other loan guarantees
Other government trust funds
Total off-balance-sheet commitments
Treasury debt held by the public and combined federal off-balance sheet liabilities. Source: Hamilton (2013).
A separate category of off-balance-sheet commitments involves deposit insurance. The Federal Deposit Insurance Corporation had issued guarantees on bank deposits worth $7.4 trillion as of the end of 2012. However, this should decline by about $1.5 T with the expiration of some of the Dodd-Frank extensions on guarantees. Moreover, the FDIC ended up with a positive cash flow even through the stress of the financial crisis. In the most recent experience, I would say that deposit insurance worked as intended-- bank runs were avoided at no loss to the taxpayers. On the other hand, Curry and Shibut (2000) estimated that the earlier FSLIC deposit guarantees ended up costing U.S. taxpayers $124 B as a result of problem saving and loans during the 1980s.
In arriving at the figures in the table above, I have added the reserves created by the Fed under its emergency-lending programs and QE1-3 as another off-balance-sheet liability of the federal government, regarding interest-bearing reserves as essentially an overnight loan from banks to the Fed. On the other hand, I also subtract off the Treasury securities and MBS held by the Fed, viewing QE as basically swapping one on- or off-balance-sheet federal liability (Treasury debt or GSE MBS) for another (interest-bearing reserves). Because I treat cash held by the public as imposing no further potential demands on the U.S. Treasury, my conclusion is that the Fed was on balance reducing the federal government's net liabilities by $1.1 T as of the end of 2012.
The biggest category of off-balance-sheet liabilities comes from the additional funds that the trustees of the Social Security and Medicare trust funds believe would need to be found in order to fulfill commitments to current program participants (i.e., those currently aged 15 and older). These are reported to be $26.5 T for Social Security (see Table IV.B7 of the trustees report) and $27.6 T for Medicare (Table V.G2). As I write in my paper:
These numbers are so huge it is hard even to discuss them in a coherent way. As noted above, the calculations that go into them are easily challenged. But although one can quarrel with the specific numbers, there is an undeniable important reality that they reflect-- the U.S. population is aging, and an aging population means fewer people paying in and more people expecting benefits. This reality is unambiguously going to be a key constraint on the sustainability of fiscal policy for the United States. One would think we should be saving as a nation today as preparation for retirement, and if in fact we are not, the current enormous on-balance-sheet federal debt is all the more of a concern.
Adding all these items together, I calculate total off-balance-sheet federal liabilities of around $70 T, or 6 times the size of reported on-balance-sheet liabilities. My paper concludes:
Some may argue that the current off-balance-sheet liabilities of the U.S. federal government are smaller than those tabulated here; others could arrive at larger numbers. These off-balance-sheet concerns may or may not translate into significant on-balance-sheet problems. But one thing seems undeniable-- they are huge. And implicit or explicit commitments of such a huge size have the potential to have huge economic consequences, perhaps for the better, perhaps for the worse.
CENTRAL BANKING MONETARY POLICIES, ACTIONS & ACTIVITIES
EMPLOYMENT - Family Supporting Jobs versus Part Time & HES
THE BORN AGAIN JOBS SCAM AND THE FED’S TERMINAL INCOHERENCE
No, last week’s jobs report was not “strong”. It was just another edition of the “born again” jobs scam that has been fueling the illusion of recovery during the entire post-crisis Bernanke Bubble. In fact, 120,000 or 62 percent of the June payroll gain consisted of part-time jobs in restaurants, bars, hotels, retail and temp agencies. The average pay check in this segment amounts to barely $20,000 per year, which is a sub-poverty level income for a family of four, and compares to upwards of $50,000 per year for goods producing jobs in the BLS survey.
Altogether, the government has reported 2.8 million of these part-time job gains since the Great Recession officially ended in June 2009, accounting for a predominant share of the ballyhooed pick-up of 5.3 million total jobs. It goes without saying, however, that the principal of one-job-one-vote does not apply in economics. What matters are aggregate dollar earnings. On that front, the Commerce Department figures for total private wage and salary income are just plain punk. Nearly six years on from the December 2007 peak, real payroll disbursements are still down by nearly 1 percent. What kind of “recovery” is that about?
Measured on an income equivalent basis, then, a majority of the big rebound in the BLS headline number has consisted of “40 percent jobs”. Granted, these fractional jobs do provide a monthly feed to headline stalking HFT algos and the gist for the moronic jobs number guessing game conducted by unemployable Wall Street executives otherwise known as “street economists”. But not by a long shot do they prove that the Fed’s money printing spree is beginning to bear fruit, as claimed by the cheerleading section of the Wall Street Journal shortly after the BLS release.
Indeed, once upon a time financial journalists actually worked for a living by digging for facts, rather than simply re-posting the spin issued by Washington’s various ministries of truth. In this instance, even a modicum of investigation by the WSJ would have revealed that the 2.8 million part-time jobs “created” since June 2009 reflect the rebirth of the very same 2.8 million jobs that were first generated between 2000 and 2007. That this obvious fact has been completely ignored is not surprising. After all, the reigning doctrine in the Keynesian puzzle palace inhabited by officialdom and financial journalists alike, calls for digging and refilling economic holes as the national policy of first resort.
The BLS data exhibit this syndrome with uncanny exactitude. In early 2000 there were 34.7 million jobs in the part-time economy. In response to the dotcom crash, the Fed ignited the housing and credit bubbles via Greenspan’s 1% money experiment, causing a consumption boom fueled by home ATM withdrawals and other consumer borrowings. Accordingly, activity rates in leisure and hospitality, retail and personal services (think yoga teachers and gardeners) temporarily soared, with the part-time job count climbing by the aforesaid 2.8 million by late 2007. But this peak of 37.2 million part time jobs was pure bubble economics--- attested to by the fact that every single one of these new jobs vanished during the 18 months of bubble liquidation otherwise known as the Great Recession. Indeed, when the NBER declared the bottom in June 2009, the part-time job count stood at 34.5 million, a hair under where it started at the turn of the century.
Now, after four years of money printing madness, the Russell 20000 has been reflated from 350 to 1000, junk bond yields have dropped from 20 percent to 5 percent, bombed-out housing markets like Southern California and Phoenix are on crawling with speculators and deader-than-a-doornail Fannie Mae preferreds are the new bonanza of the month. The con artists who run Fairholme Capital even claim to own $2.5 billion worth (face value) and are suing the Federal government to collect the vast windfall gain on these mummified securities that has been enabled by Uncle Ben’s free money casino. Needless to say, the massive asset reflation catalyzed by the Fed in these instances and throughout the financial markets has caused the affluent classes to start spending again, thereby reflating the part time jobs bubble as well.
Right on taper time eve, in fact, the June jobs report clocked-in at 37.5 million part-time jobs, that is, virtually dead-on the prior bubble peak level of December 2007. As shown below, however, no jobs have been “created” at all. These part-time jobs have simply been born again, courtesy of the Fed’s delusional belief that its frenzied bond-buying is causing the labor market to heal.
Some kind of faith healing, that! Set aside the serial bubble pumping cycles and examine the longer-term trend in the graph. During the last thirteen and one-half years the Fed’s balance sheet has expanded from $500 billion to $3.4 trillion, and the overwhelming rationalization for this 7X gain is that the nation’s central bank needed to prop-up the financial system and “stimulate” the GDP in order to generate new jobs.
But don’t start the drumroll on that score. On an FTE (full-time equivalent) basis, total growth in hospitality and leisure, retail, personal services and temp agencies, that is, the part-time economy, amounts to just 1.1 million job equivalents during the entirety of this century to date. That’s 7,000 per month. It’s a drop in the proverbial bucket.
The self-evident implication of this born again jobs saga is that the nation’s employment problem is structural and an enduring consequence of the end of the 30-year debt super-cycle, not a cyclical shortfall that can be fixed by juicing the speculative classes. Indeed, a brief glance at the horrid trend in “breadwinner” jobs demonstrates in spades that the problem is structural and therefore wholly outside of the Fed’s remit---even granted its spurious claim that it is printing money with reckless abandon because its “dual mandate” requires it.
The “breadwinner jobs” category includes construction, mining, manufacturing, the white collar professions, business management and support services, financial services, information and technology, government service excluding education, wholesale trade, transportation and warehousing and real estate agents, among others. This is the heart of the Main Street economy, where the average pay-rate is upwards of $50,000 annually---just enough to support a family, at least in some lower cost regions. Here the June BLS report clocked-in at 67.56 million jobs (50 percent of the NFP total), and there was nothing whatsoever impressive about the number. As shown below, breadwinner jobs have been shrinking at a stunning rate for the entire duration of the 21st century.
During the second Greenspan Bubble in housing and credit, which was celebrated to the bitter end by Wall Street touts as the “goldilocks economy”, a very telling trend unfolded: On a peak-to-peak basis, not a single new breadwinner job was created, even as the Fed’s measure of household net worth (flow-of-funds report) soared from $43 trillion to $67 trillion over this seven year period. All that gain in bubble wealth, yet the count of breadwinner jobs was static at 71.9 million!
And then the real carnage began. By the bottom of the Great Recession nearly 8 percent, or 5.7 million, of these breadwinner jobs had disappeared. Worse still, most of them are still gone, notwithstanding four years of furious money printing and month-after-month of “encouraging” headline job gains. All told, the 1.3 million pick-up in breadwinner jobs since June 2009 amounts to just 25 percent of the recession period collapse. Stated differently, at the anemic rate of breadwinner jobs recovery during the four-year Bernanke Bubble to date, it would take until 2025 to get back to the level that existed in January 2000---a time when the nightmare of a George W. Bush presidency was only a mote in Karl Rove’s politically myopic eye.
Unfortunately, in the vocabulary of late night TV, that’s not all. About 15 percent or 11.1 million of these breadwinner jobs are accounted for by local, state and Federal payrolls outside of education. And from an income viewpoint, these are the top tier because average government payroll disbursements (excluding benefits) amount to more than $65,000 per year. Yet a funny thing happened on the way to today’s taper-time-turmoil. Through June 2009 government payrolls grew by 10 percent from the turn of the century level. Only after the fiscal stimulus frenzy of 2008-2009 finally exhausted itself did the government job count finally roll-over during the last several years and begin an inexorable long-term decline, as the nation descended into permanent fiscal insolvency.
Thus, the miserable breadwinner job trend shown below actually understates the nation’s structural employment problem---even as that cardinal reality remains virtually unknown to our feckless monetary politburo. To be precise, there were 61.5 million full-time breadwinner jobs in the private sector during January 2000. Setting aside the shrinking government sector jobs embedded in the graph below, there were just 56.5 million private sector breadwinner jobs contained in the allegedly “robust” report for June 2013.
Indeed, we have been losing private sector breadwinner jobs at the rate of 31,000 per months for thirteen and one-half years running. Yet the Keynesian money printers who inhabit the Eccles Building insist that the problem is cyclical and that just a few more months of lunatic bond-buying will bring the labor market back to full employment health. If the Cramer noise machine had a “sell” button, it would be screaming at the top of its lungs.
Of course, it is no mystery as to why we have a structural employment problem and why the Fed’s monetary madness will only produce recurring cycles of boom and bust in both risk assets and born-again jobs. The fact is, two and one-half decades of Greenspan-Bernanke monetary profligacy have resulted in the off-shoring of much of America’s tradable goods sector—so the Main Street economy’s potential growth and productivity have been deeply impaired. Likewise, the Fed fueled an extended run of artificial GDP expansion via the buildup of massive credit market debt (from $10 trillion to $57 trillion during that 26-year period), but the America economy has now exhausted it capacity to take on more leverage. And during all that time the Fed’s interest rate repression and stock market coddling policies were generating countless growth and wealth destroying deformations and malinvestments throughout the nation’s economy.
For instance, the combination of Fed interest rate repression and fiscal subsidies through the tax code and the GSEs caused massive mis-allocation of capital to new housing and the related strip-mall infrastructure. But when the housing bubble finally collapsed and the market attempted to drastically mark-down inflated asset prices and drive capital out of the sector, the Fed crushed the pricing mechanism in mortgage and real estate markets, re-ignited the housing refi machine and caused capital to once again flow up-hill.
The sight of $5,000 suits riding into Scottsdale AZ on the back of John Deere lawnmowers while carrying brief-cases full of 2 percent wholesale money in order to become buy-to-rent-and-flip single family landlords says all that is necessary about the extent of growth and job-destroying resource mis-allocation that have been enabled by the nation’s monetary central planners. Likewise, until the taper scare slightly sobered-up fixed income markets during recent weeks, the LBO strip-mining machines were back at work substituting cheap debt for payrolls, that is, implementing endless rounds of job “restructurings” in order to pay the interest. And the stock buyback machines in the corporate sector were working over-time leveraging up balance sheets, not to acquire productive assets, but to fund record share buybacks---thereby goosing stock prices and the value of executive options.
Indeed, here the myth of deleveraging has reached its apotheosis. Business sector debt, according to the Fed’s Z1 report, is now just shy of $13 trillion. That’s up $2 trillion or nearly 20 percent from the 2007 pre-crisis peak, and represents an all-time record at 81 percent of GDP. By contrast, the fabled cash hoard of American business is up by less than $400 billion since December 2007----hardly evidence that there is massive corporate cash on the sidelines waiting for Bernanke to give the all-clear.
In short, Fed policies are mangling the Main Street economy by disabling the pricing mechanism in all financial markets, diverting capital to unproductive speculation and rent-seeking and leaving genuine entrepreneurs and businessmen adrift in a fog of financial disorder. Needless to say, the result is tepid growth of incomes and jobs----a lamentable condition that the Fed cannot fix with “moar” monetary stimulus because decades of the latter are what has caused the problem.
More importantly, the impossibility of fixing a structural problem with Keynesian cyclical medicine means that the monetary politburo will descend into an ever more incoherent babble as the “incoming data” fail to match its clueless forecasts. In this regard, not only were Wednesday’s minutes an embarrassing exercise in Washington pettifoggery, they were also self-evidently a fraud and lie-----spun well after the meeting in an attempt to undo Bernanke’s original message. It is bad enough that the nation’s vast, infinitely complex $16 trillion economy is being run by an unelected 12-person monetary politburo. But now the commissars have completely lost both their bearings and their credibility.
Under these circumstances healthy capitalist financial markets would be afraid---very afraid. But there are no honest markets left----just a big romper room where the boys and girls and algos endeavor to extract windfalls from central bank word clouds. Still, the magnitude of the deformation that the Fed has wrought in the financial system cannot be under-estimated: there remain even now tens of thousands of punters, fund managers and home gamers who do not see the Fed’s desperate incoherence, believing instead that “the market is cheap” and that buying the dips is a no loose proposition.
Let’s see. At the last bubble peak in early October 2007, the S&P 500 was only 100 points (or 5%) below today’s lofty peak, and it was deemed to be cheap by the 11th hour bulls at that moment because forward earnings were projected to be $110 per share, thereby trading at less than 16X. As it happened, 2008 earnings ex-items came in more than a tad lower---- at $55 per share to be precise and actually at only $15 on the basis of honestly reported GAAP earnings.
In truth, at that moment in time financial bubbles---subprime, CDOs, monster LBOs, a raging Russell 2000--- were evident everywhere in the financial system. So in late 2007 the market was not cheap even on a paint by the numbers basis. At the end of the day, the only honest and reliable earnings number in today’s deformed capital markets is 12 month trailing GAAP EPS. The billions that Washington wastes on financial cops each year policing corporate SEC filings at least accomplish that much. At the 2007 peak, therefore, the market was actually trading at 19X earnings on an honestly accounted basis.
So here we are again, and the LTM earnings number on a GAAP basis for the S&P 500 is $87.50 per share. We are back at 19X trailing profits. Too be sure, forward earnings ex-items are exactly as before---once again at $110 per share. So the market is purportedly “cheap” but here’s the skunk in the woodpile: honest LTM GAAP earnings have been stuck at $87 per S&P 500 share for seven quarters---since Q3 2011. In short, true earnings are not growing, China and the BRICs are rolling over, Europe is sinking into economic somnolence, Japan is a massive financial train-wreck waiting to happen, and based on the latest data it would appear that US GDP growth will average hardly 1% during the three-quarters thru June. That’s stall speed, yet the gambling machines which occupy Wall Street rage on because they believe that Bernanke has their back, that this business cycle will never end and that this latest and greatest financial bubble will never be allowed to collapse.
Why would they believe Bernanke when he has become so lost in his own intellectual fog that he can’t even give an honest number for the inflation rate, which he spuriously claimed to be 1 percent and therefore below target during yesterday’s conference in Boston. Even on the preposterous assumption that PCE less food and energy actually measures the cost of living for carbon-unit inhabitants of America, there is no 1% number to be found except on a fleeting short-term basis. The inflation rate under Bubbles Ben’s preferred measure, has been 1.7 percent, 2.1 percent and 1.9 percent on a two-, seven- and thirteen-year basis. The Fed is thus not furiously running the printing presses because it is under-shooting inflation. It is printing because it is scared to death of the raging gambling machines it has unleashed throughout the financial system.
So Bernanke promises to keep the money market and repo rates----that is, the poker chips for the casino----at zero until “well after” the unemployment rate drops below 6.5 percent. But it will never get there because the jobs market and Main Street economy are structurally broken. Indeed, measured on a consistent basis, the unemployment rate is still over 11 percent based in the labor force participation rate of late 2008 and is over 13 percent based on the labor force participation rate at the turn of the century.
And no, that can’t be explained away by the baby boomers going on Social Security. During January 2000 there were 75 million Americans over age 16 that did not hold a job. Today there are 102 million in that category---about 27 million more. Yet the number of participants in OASI (old age social security) is up by just 6 million during the same period. Moreover, there is no doubt about what happened the other 21 million citizens: they are on disability, food stamps, welfare or have moved in with friends and relatives or landed on the streets in destitution.
In short, the US economy is failing and the welfare state safety net is exploding. And that means that the true headwind in front of the allegedly “cheap” stock market is an insuperable fiscal crisis that will bring steadily higher taxes, lower spending and a gale-force of permanent anti-Keynesian austerity in the GDP accounts. And for that reason, the Fed’s strategy of printing money until the jobs market has returned to effective “full employment” is completely lunatic.
As shown in the graph below, the remaining jobs in the NFP report for June are accounted for by the HES Complex----that is, health, education and social services where the June job count clocked in at 30.8 million. The self-evident headwind here is that the HES complex is effectively a ward of our bankrupt state. Nearly all of the funding is attributable to massive tax subsidies for employer provided health insurance, the ballooning cost of Medicaid and Medicare, soaring subsidies which will soon be arriving under the Obamacare health exchanges, and the near total dependence of the education system on the public purse, most especially the runaway student loan program.
There are two powerful trends embedded in the graph that make a mockery of the labor market obsession of Fed governors like Evans, Dudley, Yellen and Rosengreen, to say nothing of the money-printer-in-chief. First, as the fiscal vice tightens, the rate of job growth even in this long-time bastion of employment gains has slowed sharply. The pick-up averaged 49,000 per month during the Greenspan Bubble, fell to 40,000 per month during the Great Recession and has cooled to only 24,000 per month during the Bernanke Bubble of the last four years.
But should job growth in the HES Complex grind even lower, which is a near fiscal certainty, the proverbial naked swimmers will get full exposure. That is to say, outside of the HES Complex, the count of non-farm payroll jobs has been shrinking on a net basis for this entire century! There were 106.5 million non-HES Complex jobs in January 2000 but more than 13 years later last month’s “strong” report sported only 105 million!
So what is happening at bottom is that Bernanke is printing money so that Uncle Sam can keep massively borrowing, and thereby fund a simulacrum of job growth in the HES Complex. Call it the Bed Pan Economy.
When it finally crashes, Ben Bernanke will be more reviled than Herbert Hoover. And deservedly so.
Just over a month ago, global earnings revisions were on the upswing (admittedly off markedly low levels); since then they have turned sharply lower to the worst levels in a year (based on Citi's Global Earnings Revision index - ERI). Critically though, as 'hope' is pinned on a steepening term structure as indicative of 'growth' and happy times ahead for stocks, the ERI has dramatically diverged from the yield curve. As Citi notes, it is evident that analysts are not at all convinced about the improvement in the growth outlook that this steeper curve has historically suggested. What is perhaps more worrisome for the "it's different this time" crowd is that the last time we saw this kind of dramatic divergence between global earnings and the US term structure was in the run-up to Lehman - and that did not end well...
Global earnings revisions typically track the US Treasury term structure very closely - both implicitly suggesting growth or no growth expectations...
But in recent weeks, the steepening of the US Treasury curve (growth - whether due to Fed Taper discussions explicitly reducing the flow or implicitly by the Taper meaning the Fed is more optimistic about the future - which has never ended well) has been entirely dismissed by the analyst community globally as earnings revisions have been slashed to their lowest in a year!
The last time we saw this kind of divergence was in September 2008...
And that did not end well...
TECHNICALS & MARKET ANALYTICS
CASHFLOW - When Corporate Cashflow Slows& Goes Negative Bad Things Happen
CORRECTIONS: are typically defined as declines of 10% or more.
BEAR MARKETS: are defined as declines of 20% or more.
There have been three corrections in the S&P 500 so far during the current bull market,
in 2010 (-16.0% lasting 69 days),
in 2011 (-19.4% lasting 154 days), and
in 2012 (-9.9% lasting 59 days).
That means that since the start of the bull market, there have been four relief rallies that more than offset the corrections along the way, with the S&P 500 still up a whopping 144%. Last year’s correction troughed on June 1. There have been a few downdrafts since then, but no corrections.
During bull markets, corrections aren't necessarily frequent occurrences. Indeed, there was only one correction during the previous bull market, but only if the start date is pegged at October 9, 2002 rather than March 11, 2003. Between the bear market of 1987 and 2000-2003, there were just two corrections. Between the bear markets of 1980-1982 and 1987, there was only one. (See our Bear Markets & Corrections Since 1929 and the companion table.)
Today's Morning Briefing: The Latest Relief Rally.
(1) Despite three corrections totaling 45%, bull is up 144%.
(2) No correction since June 1, 2012.
(3) The latest mini-correction was a drop of 5.8%, followed by a gain of 5.0%.
(4) If phasing out QE is our only problem, then life is good.
(5) Backup in bond yields almost over thanks to NZIRP.
(6) Obamacare may be in intensive care.
(7) Insurance exchanges not ready for show time?
(8) Fears allayed again.
VALUATIONS - CAPE currently stands at 23.6, higher than 90% of comparable readings since the 1870s.
Are stocks overvalued right now, relative to earnings? That’s an important question to ask anytime, but especially now as we kick off earnings season. Unfortunately — probably because many don’t like the answer — too few are asking it. No matter how you slice it, however, stocks are either moderately or significantly overvalued currently, relative to historical norms.
Based on trailing 12-month earnings, the S&P 500’scurrent P/E ratio is 18.8. Even if we assume that all 500 companies in the index will report earnings over the next few weeks that match analyst estimates, the S&P’s P/E drops only modestly, to 17.9. Even that lower level is higher than 77% of comparable readings over the last 140 years, according to data compiled by Yale University finance professor Robert Shiller. The average P/E for the S&P 500 since 1871 is 15.5 and the median P/E is 14.5.
By the way, don’t try to wriggle out from underneath this sobering comparison by focusing on what analysts expect S&P 500 companies to earn over the next 12 months. Since analysts are almost always bullish, P/Es based on forward earnings are almost always lower than ones based on trailing earnings. Comparing a forward-based P/E to historical P/Es based on trailing earnings is little more than a sleight of hand.
How much does this sleight of hand skew your conclusion? Quite a bit, though it’s hard to know for sure since we don’t know what Wall Street analysts’ earnings estimates were in 1871. But a study conducted several years ago by Cliff Asness, co-founder of AQR Capital Management, and Anne Casscells, a managing director of Aetos Capital, estimated that, historically, the median forward-looking P/E has been around 11.
Since the current forward-looking P/E for the S&P 500 is around 15, according to S&P estimates, a true apples-to-apples comparison continues to show the current stock market to be significantly overvalued.
What about the famous cyclically-adjusted price-earnings (CAPE) ratio made famous 15 years ago by Shiller and Harvard economist John Campbell? This is the ratio, you might recall, in which the denominator is average inflation-adjusted earnings over the trailing 10 years. The CAPE has a far better forecasting record than the traditional P/E.
The CAPE currently stands at 23.6, according to Shiller. That is higher than 90% of comparable readings since the 1870s.
The good news here, if there is any, is that valuations exert only a weak gravitational pull over the stock market’s near-term direction. So there is no reason that the bull market couldn’t continue for a lot longer.
But the stock market’s long-term prospects certainly appear bleak: According to an analysis Asness recently conducted, the current CAPE level of 23.6 translates into a forecast that the S&P will produce a 10-year real return — between now and mid 2023, in other words — of just 0.9%.
Each time the S&P 500 has traded more than 12% above its 200-day moving-average, the following correction has not ended until the average itself was breached by price action. Fundamentally, one can tie 'events' to each of these exuberance spikes - in this case, liquidity-turns-into-a-taper - but sometimes historical prices can be a better guide to the human biases for extrapolating trends and building fragility. Given current levels that would mean a 10% drop from current levels to 1516.
EARNINGS - How the "Beat Estimates" Game is PlayedWhen Earnings are a Disaster
Moments ago Alcoa reported adjusted earnings (because the unadjusted earnings were a disaster) of $76 million, or $0.07, on consensus expectations of a $0.06 print. In other words, a beat. So just how did the company beat its forecast?
Presenting the company's Q2 EPS consensus forecast over time in the short term:
And over the longer-term:
Summarizing the above:
A week ago AA was expected to make over $0.07 (or today's result would have been a miss)
A month ago: over $0.10
In January: $0.17
Just over a year ago: $0.30
In January 2011: Q2 2013 EPS was supposed to be almost $0.70 cents
So: from January 2011 to today, the company's "consensus" EPS forecast was revised from just under 70 cents to $0.06 cents. But hey: at least it "beat".
By the way, here is why the EPS number is absolutely meaningless: it "excludes" $244 million in restructuring charges - something which makes a complete mockery of both an apples to apples comparison, and also the company's tax rate. Of course, not excluding the restructuring charge from Net Income would have meant a $148 million loss. But at least Alcoa provisioned $21 million in income taxes in Q2...
As for what actually mattered, here are the highlights:
Revenue of $5.849 billion, down 1.9% Y/Y
CapEx $286 million, down 1.7% Y/Y
Free Cash Flow $228 million, down 7.3% Y/Y
But at least the company still sees a stable and growing China, expecting Chinese aluminum demand to rise 11% in 2013 versus 9% in 2012. Well, it's not like China is undergoing an unprecedented, historic deleveraging or anything so why not...
Ahead of this evening's earnings report (and Alcoa outperforming today), and amid Alcoa's ongoing capacity reduction, the yawning chasm between production (of aluminum) and price continues to suggest significant pain ahead. With China and the Middle East seemingly unwilling to follow the market's signals and reduce production (helped un-economically by their respective governments no doubt), the 'if you produce it, demand will come' view of the world is just not working out (and hasn't for 18 months). As Bloomberg reports, "the market is still looking at over-capacity, over-production and an unprecedented overhang of metal," and furthermore, while prices have plunged 12% in recent weeks, there is doubt that producers will follow-through on planned production cuts. Of course, we are sure the Alcoa CEO will be on CNBC to tell us all how great it is and how the world economy is about to pick up... this chart suggests otherwise...
The US economy continues to fall to pieces, though accounting gimmicks make our employment numbers look better than reality.
Most of the new “jobs” being created are part-time, not full time positions. Indeed, we’ve added over 500,000 part-time jobs to the US economy in 2013 so far. An incredible 360,000 of this came last month. And all in all we’ve now got a record 28+ million people working part-time in the US.
As for full-time jobs, well, we LOST 240,000 last month. And despite all the rhetoric coming out of Washington about a “recovery,” we’ve actually only added 130,000 in 2013 so far. To put this into perspective, we need to create at least 90,000 new full-time jobs PER MONTH to maintain employment levels based on population growth.
This is why the employment population ratio (take the number of people employed and divide it by the number of people who are of working age) hasn’t really moved in the four years since the Great Recession allegedly “ended.”
This is the #1 reason all the talk of “recovery” and “jobs growth” is totally bogus. If you are willing to fudge numbers and adjust measurements, then sure, things look much better. But the reality is that since 2009, there hasn’t been anywhere NEAR the job growth needed to claim we’re in a recovery.
With that in mind, the US stock market has rallied to retest its former trendline. This is a classic breakdown pattern. If we do not reclaim this line and go to new highs then the markets are set for a sharp decline, like to 1,550 if not more. And if you account for where stocks should be based on bonds, the S&P 500 should be down near 1,200.
Q2 EARNINGS - Revenues Flat with Rising Earnings??
Wondering how the blow out in interest rates is impacting commercial banks, which just happen to have substantial duration exposure in the form of various Treasury and MBS securities, not to mention loans, structured products and of course, trillions in IR swap, derivatives and futures? Wonder no more: the Fed's weekly H.8 statement, and specifically the "Net unrealized gains (losses) on available-for-sale securities" of commercial banks in the US gives a glimpse into the pounding that banks are currently experiencing. In short: a bloodbath.
After crashing from $15 billion to just $6 billion, the reported balance of net unrealized gains is barely positive for just the first time since April 2011. And to think this number had topped out at over $43 billion in December 2012. But the worst is that monthly drop in "gains" of $24 billion is the biggest by a wide margin since the Lehman collapse.
Note the crash in the long-term chart:
And zoomed in:
The skeptics will say: $6 billion? Big deal. The Fed did almost that much in its POMO last Wednesday. The issue, however, is that the AFS line, which runs through the Accumulated Other Comprehensive Income line as the last thing banks want is for MTM to crush their reported bottom line is merely a proxy for how rising rates impact on a snapshot basis the consolidated bank balance sheet of US banks, which at last check had $7.3 trillion in loans and leases (still below pre-Lehman levels) not to mention countless other undisclosed instruments that represent their "London Whale" equivalent prop positions, funded with customer deposits.
In other words, the shorthand is to look at the massacre that is going on in the AFS line and extrapolate it to all other levered commercial bank (and hedge fund) rate exposure. Expect math PhD-programmed GETCO algos that determine the marginal momentum of the S&P to figure this out some time over the next 2-3 weeks once banks begin reporting results that are not quite in line with expectations.
EARNINGS - Negative Guidance Worst Since Early 2012
As we head into earnings season in the US (amid hopeful margin expansion), the big picture for earnings remains bleak. Markets are back close to highs as negative guidance is piling up and as Citi notes, their global earnings revision index is at its worst since early July 2012. If the Fed is heading towards a Taper then this fundamental fear may once again become relevant - or hope-fueled multiple expansion will fill that gap.
Kyle Bass goes to Japan and finds all as expected...
After traveling through Japan for the past couple of weeks and with their economic experiment at the forefront of the financial press, it is an appropriate time to give an update on Hayman’s current thoughts regarding the island nation. My travels took me from Kyoto, the cultural heart of Japan to Tokyo, Japan’s financial epicenter. I met with all kinds of thoughtful and wonderful people throughout my trip – from tea service with Zen priests in Kyoto to the metaphorical Zen priests of finance in Tokyo. The Japanese people are some of the most inviting, respectful, and thoughtful people with whom I have ever had the opportunity to spend time. There is no doubt that culturally and historically, Japan is one of the richest countries in the world.
Unfortunately, I had this overriding feeling of sorrow and empathy for most of the people with whom I met because my conclusions regarding their potential financial fate were reinforced on this trip. Most large and complex problems do not have a single cause, and there are countless decisions and circumstances that have led Japan to its current situation. While there is no formulaic determination for the solvency of a sovereign balance sheet (despite many attempts to develop one), the inescapability of economic gravity remains constant. Japan and its leadership face an unsolvable equation in my opinion. The structural problems in Japan have existed for years and were evident during our original analysis of the situation in late 2009, but it is fascinating to observe the progression of the decline over time and the recent broad acknowledgement of their plight.
And also learns something new, if not unexpected...
Despite the abundant quantitative data indicating the fragility of the financial system and the risks posed by further indebtedness, very few individuals in Tokyo have expressed a willingness to embrace the difficult choices required to resolve this looming crisis. During my trip to Kyoto, I was introduced to a Japanese phrase that encapsulated the strangely fatalistic viewpoint that many local Japanese market participants have toward the twin threats of debt and deflation. This concept explains a resignation to the unfolding of events and a willingness to submit to this unfortunate reality rather than to fight a seemingly inevitable or impossible challenge. It seems apposite to reprint it here as we watch the beginning of this endgame in the Japanese debt markets unfold:
“Shikata ga nai”
It cannot be helped.
But perhaps most interesting are Bass' thoughts on China:
The speed and depth of the Chinese policy response will help determine the severity and duration of this crisis. If the Chinese address the issue quickly and move decisively to rein in credit expansion and accept a period of much lower growth, they may be able to use the government and People’s Bank of China’s balance sheet to cushion the adjustment in the economy. If, however, they continue on the current path and allow this deterioration to reach its natural and logical limit, we will likely see a full?scale recession as well as a collapse in asset and real estate prices sometime next year.
China’s direct contribution to global growth is enormous, but perhaps equally as important is its role in generating growth in developed and emerging economies. A slowdown, whether significant or extreme, in the Chinese economy heralds very bad news for asset prices around the world. A growth crisis centered in Asia will further exacerbate the instability and volatility in Japan and have a devastating impact on second derivative marketplaces such as Australia, Brazil and developing markets in South East Asia. The combination of rich valuations and further threats to growth has led us to dramatically reduce risk in the portfolio and actively position ourselves to withstand the uncertainty and instability ahead.
In short, Bass is once again hunkering down.
Full Hayman Capital investor letter below, courtesy of Valuewalk:
One wonders: at what price does the squeeze of the collateral-scarce (as per today's ongoing negative GOFO) yellow metal begin, now that Bernanke has made it clear (supposedly) that the new gameplan is just more of the same old?
Source: CFTC CEI Gold Non-Commercial Short Contracts/Combined, CMXOGNCS
2013 - STATISM
STATISM - The Militarization of America's Police Forces
The last days of colonialism taught America’s revolutionaries that soldiers in the streets bring conflict and tyranny. As a result, our country has generally worked to keep the military out of law enforcement. But according to investigative reporter Radley Balko, over the last several decades, America’s cops have increasingly come to resemble ground troops. The consequences have been dire: the home is no longer a place of sanctuary, the Fourth Amendment has been gutted, and police today have been conditioned to see the citizens they serve as an other—an enemy.
Today’s armored-up policemen are a far cry from the constables of early America. The unrest of the 1960s brought about the invention of the SWAT unit—which in turn led to the debut of military tactics in the ranks of police officers. Nixon’s War on Drugs, Reagan’s War on Poverty, Clinton’s COPS program, the post–9/11 security state under Bush and Obama: by degrees, each of these innovations expanded and empowered police forces, always at the expense of civil liberties. And these are just four among a slew of reckless programs.
In Rise of the Warrior Cop, Balko shows how politicians’ ill-considered policies and relentless declarations of war against vague enemies like crime, drugs, and terror have blurred the distinction between cop and soldier. His fascinating, frightening narrative shows how over a generation, a creeping battlefield mentality has isolated and alienated American police officers and put them on a collision course with the values of a free society.
Americans have long maintained that a man's home is his castle and that he has the right to defend it from unlawful intruders. Unfortunately, that right may be disappearing. Over the last 25 years, America has seen a disturbing militarization of its civilian law enforcement, along with a dramatic and unsettling rise in the use of paramilitary police units (most commonly called Special Weapons and Tactics, or SWAT) for routine police work. The most common use of SWAT teams today is to serve narcotics warrants, usually with forced, unannounced entry into the home. These increasingly frequent raids, 40,000 per year by one estimate, are needlessly subjecting nonviolent drug offenders, bystanders, and wrongly targeted civilians to the terror of having their homes invaded while they're sleeping, usually by teams of heavily armed paramilitary units dressed not as police officers but as soldiers. These raids bring unnecessary violence and provocation to nonviolent drug offenders, many of whom were guilty of only misdemeanors. The raids terrorize innocents when police mistakenly target the wrong residence. And they have resulted in dozens of needless deaths and injuries, not only of drug offenders, but also of police officers, children, bystanders, and innocent suspects. This paper presents a history and overview of the issue of paramilitary drug raids, provides an extensive catalogue of abuses and mistaken raids, and offers recommendations for reform.
Let me be blunt: Our capitalist system is approaching failure.
Or, perhaps better said: Our marginally capitalist, partly-free market systems are approaching a massive collapse.
Not because of what capitalism is, mind you, but because the powers that be have bastardized it.
Capitalism can bear many distortions and abuses, but it is not indestructible.
And, make no mistake, the ‘capitalist’ system we have today has been massively corrupted, so much so that it’s sagging under the load... and will continue to do so until the proverbial straw breaks its back.
The 9 Plagues
1. The average producer is being stripped bare. In the US, for example, the total take of taxes has not risen dramatically, but fewer and fewer people actually pay them. There was a big uproar during the last election cycle over the fact that 47% of working-aged Americans paid no income tax. That means that the half who do work (read suckers) are paying the whole. And more than that, they are also paying for the many millions who are on food stamps and disability. Producers are being punished and abused, made into chumps.
2. Thrift is essentially impossible. I’ve explained this in detail previously, but a hundred years ago, it was possible for an average person to accumulate money. Mechanics, carpenters, and shop owners slowly filled their bank accounts with gold and silver. It was common for them to make business loans and to retire comfortably. But now, all of our surplus is drained away to capital cities, where it is poured down the drains of welfare, warfare, and political lunacy. Money has been removed from the hands that made it, and moved into the hands of non-producers, liars, and destroyers.
3. In 2008, US federal government regulations cost an estimated $1.75 trillion, an amount equal to 14 percent of US national income. Let me restate: Simply complying with regulations costs American businesses more than $1,750,000,000,000 (that’s $1.75 Trillion) every year. This, again, is money taken out of production and wasted on political lunacy.
4. Small businesses are being squeezed out. Take a look at the two graphs below, and understand that as small businesses are squeezed out, only the large corporations remain. These days, only the largest and best-connected entities are able to get their concerns dealt with (by the politicians they fund). Small operations are cut off from the redress of their grievances and are crushed by taxes and regulation. And don’t forget the comments of Mussolini:
Fascism should more properly be called corporatism, since it is the merger of state and corporate power.
While there may be no dictator, state/corporate partnerships are taking over commerce in the West.
5. The military industrial complex is out of control. Their lobbying, fear-mongering, and spending can only be characterized as obscene. Dwight Eisenhower was right when he warned us about this in 1960. It is sad beyond measure that so few Americans took him seriously. Trillions of dollars and millions of productive lives are being spent on the war machines of the West. Never forget that wars destroy massively and produce nothing.
6. All the Western nations now feature large enforcer classes, composed of bureaucrats, law enforcement units, inspectors, and so on. In the US alone this amounts to several million people – none of whom produce anything, and all of whom restrain producers from producing. Millions of people are paid to restrain commerce.
7. We now have a very large financial class in which blindly aggressive people make millions of dollars. The problem is that finance is not productive. It may allocate money in beneficial ways (though it often allocates mainly to itself), but it doesn’t actually produce anything. At present, the allocators get the big bucks, and the producers get scraps.
8. The modern business ethic has become about acquisition only. In more enlightened times, it was also about creating benefit in the world, or at least creating newer and better things. Mere grasping is an insufficient philosophy for capitalism; it leads to dark places.
9. Every nation on the planet is using play money and forcing their inhabitants to use their play money. Moreover, they have super-empowered a small class of Central Banking Elites, who make fortunes on their currency monopolies, and who are entirely unknown to the producers who unwillingly (and unknowingly) purchase jets and yachts for them. Our money systems have brought back aristocracies; a class that is both hidden and immensely powerful.
So What’s Next?
That’s up to the producers. Everything hinges upon them. The game, as it is, depends entirely on them being willing to accept abuse.
All that is necessary to fix this is for the producers to stop being willing victims. Simple, I know, but there is a problem with such a sensible idea:
The producers are convinced that their role in life is only to struggle and obey.
Modern producers believe that the ruling classes have a legitimate right to tell them how much of their money they are entitled to keep, which charity causes they’ll be forced to contribute to, which features their car is required to have, and much, much more. Why? Simply because those other people are in “high positions,” and they (the producers) are in “low positions.” An evil assumption has been planted in their minds:
It is right for important people to order me around.
The productive class holds all the real power, but they are nearly devoid of moral confidence. So, they are abused without end.
Right now, a parasitic ethic rules the West and will continue to rule so long as producers play the part of the suckers. If this continues, what remains of capitalism will grind to a halt and will be overrun by a Neo-Fascist arrangement – not the dictator and swastika variety – but one where the state and powerful business interests merge into one unstoppable and insatiable force.
On the other hand, if ever the producers wake up from their moral coma and reject the role of doormat, they will build a society embodying the ethics of production. It almost sounds impossible, I know. But it is has happened before and could happen again.
It’s up to us.
GLOBAL FINANCIAL IMBALANCE
SOCIAL UNREST - Dead Ahead from the New Middle Class
Commentary: Neither governments nor capitalists can stop these 12 forces
SAN LUIS OBISPO, Calif. (MarketWatch) — Early in the Iraq war the Bush Pentagon predicted that
“by 2020 there is little doubt something drastic is happening,” reported Fortune. “As the planet’s carrying capacity shrinks, an ancient pattern of desperate, all-out wars over food, water, and energy supplies would emerge. ... [W]arfare is defining human life.”
The ticking gets louder ... the time bomb grows bigger ... the explosive fuel goes global ... and 2020 is dead ahead.
Recently the tick-tick-ticking became louder in “The Middle-Class Revolution,” a Wall Street Journal feature by the conservative Stanford University political scientist Francis Fukuyama, author of 1992’s “The End of History and the Last Man”: “All over the world,” he writes in the Journal,
“today’s political turmoil has a common theme: the failure of governments to meet the rising expectations of the newly prosperous and educated.”
Failure of government? Since when is it the government’s job to “meet the rising expectations” of the middle class? What happened to capitalism? Isn’t this the America where free-market capitalism is the engine of economic growth and prosperity? A new age where government is, at best, a tool helping capitalism to thrive? And, at worst, an anchor slowing capitalists?
The ‘Pentagon 2020’ battle plan
Yes, there is a “middle-class revolution.” Yes, it is spreading worldwide, putting in place a network of ticking time bombs. But not only is government failing. Not only is capitalism failing. But Fukuyama is ignoring the real bomb, buried deep inside this new global revolution, the new age of global warfare that the Bush Pentagon warned of a decade ago:
“By 2020 there is little doubt something drastic is happening. ... As the planet’s carrying capacity shrinks, an ancient pattern of desperate, all-out wars over food, water, and energy supplies would emerge ... warfare is defining human life.”
Fukuyama does a great job of analyzing “the theme that connects recent events in Turkey and Brazil to each other, as well as to the 2011 Arab Spring and continuing protests in China, is the rise of a new global middle class. Everywhere it has emerged, a modern middle class causes political ferment.”
The middle-class revolutionaries
But the protests have “been led not by the poor” as in many revolutions throughout history, “but by young people with higher-than-average levels of education and income,” states Fukuyama. “They are technology-savvy and use social media like Facebook and Twitter.”
"Even in countries that hold regular democratic elections,they feel alienated from the ruling political elite.”
This is gaining critical mass worldwide, and, yes, that may be great news for capitalism — in the short term — but it is also bad news for the long-term survival of the planet and for capitalism, because this angry middle class is adding fuel to the Pentagon 2020 war plans.
Why? Five years ago Goldman Sachs predicted the middle class would grow by some 2 billion people by 2030. Fukuyama also cites a European Union Institute for Security Studies prediction that membership in the global middle class would increase “from 1.8 billion in 2009 to 3.2 billion in 2020 and 4.9 billion in 2030 ... mostly in China, India and a few hundred million in Africa.”
Billions of new consumers: “Corporations are salivating at the prospect of this emerging middle class because it represents a vast pool of new consumers,” says Fukuyama. Unfortunately, not only corporations and their CEOs, economists, marketers and analysts, but the entire capitalist world tends “to define middle-class status simply in monetary terms.”
They are wrong.
Middle-class success is breeding anti-government activists
The Pew Research Center and the University of Michigan’s World Values Survey have found that
“middle-class status is better defined by education, occupation and the ownership of assets, which are far more consequential in predicting political behavior.”
So, today, the new middle class is “much more likely to engage in political activism to get their way.” Not just protests and civil unrest but revolutions — the kind predicted by the Pentagon a decade ago.
Even among China’s billion-plus. Fukuyama says the Chinese middle class “now numbers in the hundreds of millions and constitutes perhaps a third of the total.” But the risks are accelerating. China’s “industrial job machine,” built by the regime beginning in 1978, “will no longer serve the aspirations of [a] population” that’s graduating as many as 7 million college graduates each year, who face job prospects “dimmer than those of their working-class parents.”
This “threatening gap between rapidly rising expectations and a disappointing reality” will have enormous implications for China’s stability. Reading “Middle-Class Revolution” and other Fukuyama works, it is obvious that the “Pentagon 2020” war scenario is accelerating everywhere — across Asia, India, Africa, Europe, South America and the United States — fueled by capitalists who only see population growth as an opportunity for new consumer markets.
Capitalism vs. Planet Earth
So let’s take a closer look at the Pentagon 2020 scenario, the ticking time bomb hiding in Fukuyama’s analysis.
But don’t wait too long. Next the chaos will spread to America. Yes, the same kind of middle-class revolution as in Egypt, Brazil, Turkey, et al. From China, accelerating globally, as more and more people, in more and more nations, wake up to the failures of governments and capitalists, and the “threatening gap between rapidly rising expectations and a disappointing reality” just keeps widening.
These are not new predictions. History tells us the minds of political, financial and business leaders are too often biased toward short-term optimism, while minimizing the long-term warnings of long-term thinkers like Fukuyama. Unfortunately for the masses trapped in denial, the day of reckoning is rapidly approaching, the day when reality overwhelms all the happy talk.
War scenario, with no winners
For several years we’ve been developing a working model for innovation, investing and survival based on the 12-part formula in Jared Diamond’s “Collapse: How Societies Choose to Fail or Succeed.” Diamond discovered that throughout history a dozen economic factors have defined the reasons civilizations self-destruct or survive. “What really counts,” says Diamond, “is not the number of people alone, but their impact on the environment,” the “per-capita impact.”
In addition to population growth, lifestyle demands increase with “third-world inhabitants adopting first-world standards,” their own versions of the American Dream. Diamond details 12 macrotrends that impacted collapse for earlier civilizations: loss of agricultural lands, low food production, loss of forests, energy resources, alternative energies, solar resources, ozone layer, toxic minerals mining and species diversity.
Diamond’s alarm bells parallel Fukuyama’s, and it’s a blunt warning about short-term capitalism: “More people require more food, space, water, energy, and other resources.” As a result, the growing demands of these new consumers will also trigger more wars, more famine, more pandemics, more floods and fires, no-growth economics, and, worst of all, more miscalculations by overoptimistic politicians and profit excesses of capitalists.
Yes, the Pentagon 2020 war scenario was amazingly prescient, with a resigned sense of inevitability toward this clash of the titans: on one side, a myopic cartel of Wall Street, Big Oil, Big Pharma, big-money lobbyists like the U.S. Chamber of Commerce and Forbes 400 billionaires like the Koch brothers, all of them aligned against a ragtag bunch of well-meaning foes like Diamond, Bill McKibben’s 350.org and the many believers in climate science. But the betting odds heavily favor the super-rich cartels.
Consumers sucking life from the planet
Yes, the pressure becomes ever more intense as more and more nations increase consumption of natural resources toward America’s rate. Warning: Americans consume 32 times more resources, and dump 32 times more waste than do undeveloped nations. As a result, if all 7 billion inhabitants of Planet Earth consumed resources at America’s level, we’d need the resources of six Earths to survive.
And, actually, it’s much worse: Today Planet Earth’s resources cannot support even 5 billion people, says Jeff Sachs, director of Columbia University’s Earth Institute, a U.N. adviser and the author of several books, including “Common Wealth: Economics for a Crowded Planet.” So by 2030, with a projected global population of 8 billion, it’s game over.
Why? Politicians and capitalists are in a state of denial. Their failings fuel more middle-class anger ... as our leaders focus narrowly on more power and more profits ... and keep blowing a toxic bubble ... building to a critical mass ... pushing the world ever closer to a point of no return ... adding jet fuel to the Pentagon 2020 war scenario where, indeed, “there is little doubt something drastic is happening.”
And where, as “the planet’s carrying capacity shrinks ... an ancient pattern of desperate, all-out wars over food, water, and energy supplies would emerge.” Where “warfare is defining human life.”
STANDARD OF LIVING
EMPLOYMENT - It is as Much the Quality, as the Quatity of Jobs
Trying to find a job in America today can be an incredibly frustrating experience. Most of the jobs that are available seem to pay very little, and there is intense competition for just about any job that is open. But it wasn't always like this. When I was in high school, I was immediately hired when I applied for a job at McDonalds because they were so desperate for workers that they would hire just about anyone that could flip a burger. But in this economic environment, a single nationwide hiring event conducted by McDonalds resulted in a million job applications, and only a small percentage of those applicants were actually hired. Our economy simply does not produce enough jobs for everyone anymore, and the percentage of "good jobs" continues to decline. That means that it is getting really hard to find a job that will enable you to support a family, and a lot of people end up doing jobs that they are massively overqualified for. But when times are tough, people are going to do what they have to do in order to survive.
One thing that we have seen in recent years is an explosion in the number of "temp workers" in America. Even some of the largest companies in America are using them. They like the flexibility of being able to bring in workers when they need them and of being able to dump them the moment they don't need them anymore. Sadly, those that work in the "temp industry" often work in deplorable conditions for very little pay. The following is a brief excerpt from an absolutely outstanding Pro Publica article...
In cities all across the country, workers stand on street corners, line up in alleys or wait in a neon-lit beauty salon for rickety vans to whisk them off to warehouses miles away. Some vans are so packed that to get to work, people must squat on milk crates, sit on the laps of passengers they do not know or sometimes lie on the floor, the other workers’ feet on top of them.
This is not Mexico. It is not Guatemala or Honduras. This is Chicago, New Jersey, Boston.
The people here are not day laborers looking for an odd job from a passing contractor. They are regular employees of temp agencies working in the supply chain of many of America’s largest companies – Walmart, Macy’s, Nike, Frito-Lay. They make our frozen pizzas, sort the recycling from our trash, cut our vegetables and clean our imported fish. They unload clothing and toys made overseas and pack them to fill our store shelves. They are as important to the global economy as shipping containers and Asian garment workers.
Many get by on minimum wage, renting rooms in rundown houses, eating dinners of beans and potatoes, and surviving on food banks and taxpayer-funded health care. They almost never get benefits and have little opportunity for advancement.
But these are the types of jobs the U.S. economy is "creating" these days. Low paying part-time jobs are continually becoming a bigger part of the economy. This is one of the primary reasons why the middle class in America is shrinking.
You can't support a family on what most of these part-time jobs pay. But our economy is not producing many high quality full-time jobs these days. The average quality of American jobs just continues to sink.
The following are 15 signs that the quality of jobs in America is going downhill really fast...
#10 High paying manufacturing jobs continue to be shipped overseas. Sadly, there are fewer Americans employed in manufacturing now than there was in 1950 even though the population of the country has more than doubled since then.
#11 Today, the United States actually has a higher percentage of workers doing low wage work than any other major industrialized nation does.
#12 The U.S. economy continues to trade good paying jobs for low paying jobs. 60 percent of the jobs lost during the last recession were mid-wage jobs, but 58 percent of the jobs created since then have been low wage jobs.
#13 Back in 1980, less than 30% of all jobs in the United States were low income jobs. Today, more than 40% of all jobs in the United States are low income jobs.
#14 At this point, an astounding 53 percent of all American workers make less than $30,000 a year.
#15 According to a study that was released by the Center for Economic and Policy Research, only 24.6 percent of all jobs in the United States qualify as "good jobs" at this point. In a previous article, I detailed the three criteria that they used to define what a "good job" is….
#1 The job must pay at least $18.50 an hour. According to the authors, that is the equivalent of the median hourly pay for American workers back in 1979 after you adjust for inflation.
#2 The job must provide access to employer-sponsored health insurance, and the employer must pay at least some portion of the cost of that insurance.
#3 The job must provide access to an employer-sponsored retirement plan.
All of this is absolutely heartbreaking.
Once upon a time, just about any adult that was willing to work hard in America could go out and find a good paying job that would support a middle class lifestyle.
Now those days are gone forever.
But different conditions exist in different parts of the country.
What are you seeing in your area?
Are good jobs difficult to find?
STANDARD OF LIVING
CORRUPTION & MALFEASANCE
NATURE OF WORK
CATALYSTS - FEAR & GREED
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with these complimentary educational materials
Tipping Points Life Cycle - Explained Click on image to enlarge
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