Illusion of Prosperity

Is It Too Much to Ask?

2012-02-01T16:54:00.000-08:00

Here's my wish list for 2012.

1. Sustainable World Peace
2. The Next Presidential Election Will Solve All of Our Problems
3. Real Gold Painlessly Appears Out of My Ass

I'm feeling pretty good about my list. I think there's a good chance that one of them may come true.

I should probably mention that I had dental work done earlier today. I managed to swallow half of a gold crown. It has sharp edges since it was cut in half as part of the removal process. Seriously.

I feel really selfish for saying this but...

If just one thing on the list can come true in 2012 then please let it be the last one!

The Goose That Laid the Golden Eggs

"A cottager and his wife had a Hen that laid a golden egg every day. They supposed that the Hen must contain a great lump of gold in its inside, and in order to get the gold they killed it. Having done so, they found to their surprise that the Hen differed in no respect from their other hens. The foolish pair, thus hoping to become rich all at once, deprived themselves of the gain of which they were assured day by day."

I don't want anyone getting any crazy ideas! At best, this is just a one time event and not the source of everlasting prosperity, lol.

The "Free Lunch" Weight Loss Plan v.008

2012-01-31T15:08:00.001-08:00

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The Santa Claus rally is over. Is it time to short me? Let's see what the stock strategists would say.

April 27, 2011
Sell in May and go away? Stock strategists not so sure

Some reasons behind this theory: People tend to feed their retirement accounts and invest bonuses early in the year.

This winter was a feeding frenzy. What could possibly go wrong? As always, the government wants big fat money flowing into riskier asses. It will no doubt end well again.

Oops. Did I say asses? I meant assets! Freudian slip I assure you. ;)

See Also:
The "Free Lunch" Weight Loss Plan v.000

Nobody Expects a Goat Rodeo

2012-01-29T18:48:00.000-08:00

January 30, 2012
Hussman Funds - Weekly Market Commentary

Given the strong and rather obvious relationship between the most recent year-over-year rate of GDP growth and the prospect of oncoming recession, it's difficult to understand why Wall Street so completely rejects the likelihood of an economic downturn. Then again, that's exactly why we're expecting a Goat Rodeo.

The Sarcasm Report v.149

2012-01-28T13:35:00.000-08:00

January 27, 2012
The Key To High Returns Is A Disciplined Strategy

This article has been a real eye opener for me. Until today, I thought the key to high returns was investing in a truly prosperous economy.

For example, a balanced portfolio of 60% equity and 40% fixed income could become 70% equity and 30% fixed income after a strong stock market.

I'll start with a 1% guaranteed annual loss in 5-year inflation protected treasuries as my 40% fixed income portion. Better safe than sorry. I'll add on a 60% exposure to overpriced stocks. I'll then relax on the beach while awaiting my "high returns". Perfect!

Sounds crazy? Not at all! Livin' the dream!

On the off chance this doesn't work then the article does offer additional disciplined strategies. Using a shotgun approach, one of them is bound to hit my target.

As an example, if an investor believes that over the next year the U.S. equities market will be weak, the investor might decide to underweight his exposure to equities and overweight cash or bonds.

Yeah! Now that's what I call disciplined. The typical investor is generally known for his/her ability to time the markets. Genius!

Unlike a rebalancing strategy, which is mechanical, tactical asset allocation requires some forecasting ability to make the correct decisions.

Absolutely. That's why I refer to professionally trained economists such as Ben "There Is No Housing Bubble to Go Bust" Bernanke or Mark "I Caught the Falling Knife" Zandi for tactical asset allocation advice. Their forecasting ability is top notch. Don't go it alone!

Each type of strategy will have its proponents, but any logical, rational strategy that is followed consistently is always better than no strategy at all. The value is in the disciplined approach a strategy provides.

For example, "The Less I Play, The Less I Lose" strategy is one I would use in casinos. Great strategy. I highly recommend it. That said, the strategy does not exactly meet the "high returns" promise the article makes in the headline. Perhaps that's just an oversight.

The biggest challenge as an investor is to be able to filter out truly useful information from the needless noise.

I hear that. In fact, I was thinking this very thought as I continued to read the article. Amazing! I kept reading anyway though. I can't explain it. Perhaps I'm a glutton for punishment. In fact, I am wasting your time as well. Sorry about that! It isn't too late to stop. Seriously.

It is important to stick to your strengths and interests and delegate out the asset classes in which you have a limited expertise.

The typical investor no doubt considers his/her trading skills to be superior to the advanced automated trading systems over at Goldman Sachs. I think that's a given. The trick is to figure out where the typical investor has limited expertise. That's a tough one.

When delegating make sure you find an expert that has the following four traits. First, he/she must be at least as smart as the market overall. Second, he/she is willing to spend time talking to you instead of making the big bucks going it alone. Third, he/she must be willing to do this with little compensation from you. You don't want your "high returns" eaten up by expenses. And lastly, you want to find someone who would not lie to you about the first three traits they supposedly have. You don't want to end up being Bernie Madoff'd.

That person is a rare breed. Look hard! The mirror might be a good place to start. You could certainly do worse.

Having an investment strategy for both asset mix and security selection is important to ensure consistent success as an investor.

Indeed. If you have generic cookie cutter investment strategy found within many of the most popular investment books then you can't help but make "high returns" in this economy. As for consistency, I can't think of one disciplined typical investor who lost so much as a penny in the last downturn. Then again, I don't really get out much. I was probably too busy hoarding toilet paper.

Having the discipline to follow an investment strategy is more important than the actual strategy chosen.

Just pick one at random and stick with it. If that doesn't give you the "high returns" promised in the headline, what will?

Certainty vs. Uncertainty Update

2012-01-28T12:16:00.000-08:00

Here's where we were in October.

October 27, 2011
Certainty vs. Uncertainty Update

Click to enlarge.

Here's where we are now.

Click to enlarge.

There are a few noteworthy items here.

1. The current distance from the blue trend line is small. That means we are very near the level that the Fed would prefer.

2. The distance from the blue trend line is roughly the same as it was back in October. This means that over the past few months inflation expectations have been extremely well anchored (at a level slightly below what the Fed would prefer).

3. There has been a large move along the blue line down and to the left just as the "Monetary Policy Trend" I offered in the chart would imply. Real yields fell. This is not an inflation story. It is not a deflation story. It is a real yield dying story. It has become harder to make money off of money. Big shocker.

4. The yields on the 10-year TIPS and 10-year nominal treasuries are currently at or near record lows. Welcome to ZIRP. I hope you enjoyed the ride.

Speaking of rides, here's your mileage update. (See this link for a description of the chart.)

Click to enlarge.

As seen in the chart, the road is a bit less bumpy now as we become more and more certain of ZIRPing along for the long-term. I'd tell you to fasten your seat belts but the car is in the parking garage, it is out of fuel, and all the exits are closed. What's the point?

Source Data:
FRB: Selected Interest Rates
US Treasury: Interest Rates

The Interest Rate Policy Wall

2012-01-27T16:16:00.000-08:00

Click to enlarge.

Today's interest rate on the 10-year treasury is 1.93%.

Let's use the formula for the trend line to see what happens.

y = 0.6903x + 0.0264

0.0193 = 0.6903x + 0.0264

x = (0.0193 - 0.0264) / 0.6903

x = -0.0103

If all we knew was that today's 10-year treasury yield was 1.93% then we could make an educated guess that the fed funds rate would be somewhere in the ballpark of -1%.

The fed fund rate isn't -1%. It hit the 0% wall and can go no lower. That said, I'm reasonably confident that Bernanke would set it at -1% if he could. The seasonally adjusted CPI has flatlined for the last three months.

January 27, 2012
Bernanke to Income-Starved Retirees: Tough Luck

If it wasn’t clear already, it is now: securing decent retirement income in a low-yield environment is going to be a problem for a long time.

It certainly wasn't clear to Jeremy Siegel back in February. He seemed to think that the economy would generate ample biscuits and gravy for us all, just like it had done for 200+ years.

In August, Bernanke said the Fed would keep rates down through the middle of 2013. Now, in his most recent remarks he has extended that pledge to late 2014.

Let's put this another way.

In August 2011, Bernanke said that the Fed would keep rates down for roughly two years.

In January 2012, Bernanke said that the Fed would keep rates down for roughly two years.

Bernanke is consistent with his two year predictions. I'll give him that. Perhaps rate hikes will be two years away for many, many years. That's the way it worked out in Japan after their housing bubble popped in the 1990s. As a saver, that is and was my primary concern.

That's why I locked in a real yield at the very time Jeremy Siegel was advising the opposite. Unlike Japan, I opted for the inflation protection. That's neither here nor there though. The added inflation protection has neither helped nor hurt me. Inflation expectations haven't budged. The only thing that's moved are the real yields and in the direction that I feared.

It is becoming increasingly difficult to make money off of money. This has been a central theme of my blog since the very beginning. Expecting future investment returns to mimic past investment returns is a symptom of the illusion of prosperity. Economists like Jeremy Siegel continue to cling to the prosperity dream in spite of all concrete evidence to the contrary.

Update:

My bad. Bernanke actually went from 2 years to 3 years. In order to be consistent his next prediction will be that he raises rates in 4 years. You know, if the trend is our friend. Sigh.

Source Data:
St. Louis Fed: 10-Year Treasury
St. Louis Fed: Federal Funds Rate

The End Times Are Here (Musical Tribute)

2012-01-27T15:20:00.000-08:00

This must be proof. Right?

Special thanks to The Dori Monson Show for drawing my attention to this rare gem.

As a side note, our pet bird is currently going ballistic on her toys after listening to just part of that song. I kid you not.

TIPS Yields (Musical Tribute)

2012-01-26T15:08:00.001-08:00

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Source Data:
FRB: Interest Rates
US Treasury: Interest Rates

Continued Port Traffic Stagnation

2012-01-25T19:11:00.000-08:00

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Welcome to the new economy.

See Also:
LA Area Port Traffic Is Rolling Over

Source Data:
Port of Long Beach: Statistics
Port of Los Angeles: Statistics
The X-12-ARIMA Seasonal Adjustment Program

We Are Living in Exponential Trend Failure Times (Musical Tribute)

2012-01-25T14:00:00.000-08:00

February 8, 2007 (uploaded)

We are living in exponential times.

January 6, 2012
39.5 Million Missing Jobs (Musical Tribute)

November 17, 2011
LA Area Port Traffic Is Rolling Over

October 1, 2011
New Home Price Trend Failure

September 26, 2011
Pension Fund Reserves

September 13, 2011
Long-Term Restaurant Sales Prediction

August 28, 2010
George Soros vs. Jeremy Siegel

March 12, 2010
Peak Prosperity?

3+ More Years (Musical Tribute)

2012-01-25T12:37:00.001-08:00

January 25, 2012
Fed: Benchmark Rate Will Stay Low Until Late 2014

Federal Reserve officials said their benchmark interest rate will stay low until at least late 2014 and anticipate that unemployment will remain high and inflation “subdued.”

No economist could have possibly seen this coming.

Good News for Savings Bond Investors

2012-01-15T17:03:00.000-08:00

July 13, 2011
Treasury to End Over-the-Counter Sales of Paper U.S. Savings Bonds; Action will save $70 million over first five years

WASHINGTON – The Bureau of the Public Debt announced today that as of January 1, 2012, paper savings bonds will no longer be sold at financial institutions.

In 2011, we could buy $5,000 in electronic I bonds and $5,000 in paper I bonds. Fortunately, they have increased the amount of electronic bonds we can buy. The $10,000 limit therefore still applies. We're not being shafted! Hurray!

FAQs Concerning the Change in the Annual Purchase Limit for Savings Bonds

What is the annual purchase limit for U.S. Savings Bonds?

Effective January 4, 2012, the annual (calendar year) purchase limit applying to electronic Series EE and Series I savings bonds is $10,000 for each series.

I was just about to make a small purchase in the 10-year TIPS auction that was announced last Thursday. I shall instead buy more I bonds and EE bonds with that money.

I'm generally not a fan of the EE bonds (due to the added risk of fixed interest rates in an inflationary world) but the government is currently running a special. That should partially compensate me for some of that added risk.

EE bonds held 20 years should offer an average rate of 3.53% (since the bonds are currently guaranteed to double if held 20 years). Meanwhile, the 20-year nominal treasury yields just 2.59%. I can't say that EE bonds are an absolute bargain (inflation could get out of control), but they are a relative bargain. In other words, long-term savers could certainly do worse.

Special thanks to fried (in the comments of the last post) for drawing my attention to the update on the new savings bond purchase limits. This is yet another reason why I like to blog!

5 Year Treasury Yields

2012-01-13T13:30:00.000-08:00

Click to enlarge.

The black line represents 5 year nominal treasury yields adjusted for the inflation over the following 5 years. Note that the line stops 5 years ago. We do not yet know what the real yield of a 5 year nominal bond bought recently is. It depends on what inflation does before the bond matures.

The blue line represents 5 year TIPS yields. They have the inflation adjustment built in so we do know what the real yield will be at the time of purchase.

If the 1965 to 1980 time period is any indicator, real yields can stay low for a very long time. All it would take is a weak economy (an economy where money cannot be easily be made off of money).

For what it is worth, I am firmly in the weak economy over the long-term camp. Unlike some supposed experts, I believe that a 1980s and/or 1990s economy will *never* miraculously reappear. As seen in the following chart, there are too many headwinds. Those drawing on historical data to predict the future seem to ignore what the chart is clearly saying.

This time is different.

Click to enlarge.

Source Data:
St. Louis Fed: 5-Year Treasury
St. Louis Fed: 5-Year TIPS
St. Louis Fed: CPI

Twinkie Prosperity Deja Vu

2012-01-10T13:37:00.000-08:00

First the bad news.

January 10, 2012
Twinkies Maker Preparing for Chapter 11 Filing

The privately held Irving, Texas, company, which employs roughly 19,000 people and carries more than $860 million in debt, has been facing a cash squeeze amid high labor costs and rising prices for sugar, flour and other ingredients, according to people familiar with the matter.

...

Sales of Hostess's signature Twinkies have recently declined a bit while the overall bakery snacks category has been about flat.

Declining sales? Rising costs? How very stagflationary of them.

November 4, 2007
Twinkie Prosperity

Declining sales? Rising costs? How very stagflationary of them.

Here's the good news. We weren't in a recession in November 2007 and we aren't now!

December 1, 2008
It's official: Recession since Dec. '07

NEW YORK (CNNMoney.com) -- The National Bureau of Economic Research said Monday that the U.S. has been in a recession since December 2007, making official what most Americans have already believed about the state of the economy.

Using Government Debt to Create Jobs (Musical Tribute)

2012-01-07T14:31:00.000-08:00

Sounds like a great idea. Right?

Let's use hindsight to see how well it is working.

All Employees: Total nonfarm (PAYEMS)

December 2001: 130,723,000
December 2011: 131,900,000

1,177,000 total nonfarm payroll jobs were added over the previous 10 years.

The Debt to the Penny and Who Holds It

December 14, 2001: $5,875,869,812,211.80
December 14, 2011: $15,051,286,197,149.79

That's a $9,175,416,384,937.99 increase in total public debt outstanding over the previous 10 years.

How much government debt was added per created nonfarm payroll job?

$9,175,416,384,937.99 / 1,177,000 = $7,795,595.91

January 6, 2012
Economists React: ‘Step in the Right Direction’ for Jobs

– December’s employment report was better than expected across the board. You don’t have to be a rocket scientist to interpret today’s number, just check off the boxes: a pick-up in nonfarm payrolls, another drop in the unemployment rate, a tick up in hours worked, and a mild gain in hourly earnings. Today’s report extends the steady diet of solid economic data, and suggests the US economy built up momentum as we closed out the year. –Neil Dutta, Bank of America Merrill Lynch

There you have it. We don't have to be rocket scientists.

July 1, 2011
As shuttle program winds down, NASA layoffs loom

But for many shuttle workers, the very last flight of the 30-year shuttle program will truly be the beginning of the end. NASA expects to undergo a big round of layoffs that will significantly reduce the shuttle workforce, which currently stands at about 6,700 people, said John Shannon, NASA's shuttle program officer.

September 23, 2011
Neil Armstrong: US space program 'embarrassing'

Armstrong decried NASA's downward spiral. "We will have no American access to, and return from, low Earth orbit and the International Space Station for an unpredictable length of time in the future," he said. "For a country that has invested so much for so long to achieve a leadership position in space exploration and exploitation, this condition is viewed by many as lamentably embarrassing and unacceptable."

39.5 Million Missing Jobs (Musical Tribute)

2012-01-06T14:35:00.000-08:00

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See Also:
39.4 Million Missing Jobs (Musical Tribute)

Source Data:
St. Louis Fed: Total Nonfarm Payrolls

The Sarcasm Report v.148

2012-01-04T13:23:00.000-08:00

Buy Kodak now or forever be priced out.

Eastman Kodak Co. (EK)

Last Trade: 0.47
Trade Time: 4:01PM EST
Change: Down 0.1845 (28.19%)

January 4, 2012
Kodak prepares for Chapter 11 filing: report

Kodak warned in November that it might not survive 2012 if it was unable to secure $500 million in new debt or sell its patents. The company's cash had been shrinking as sales of its consumer products have failed to keep up with its heavy cost base, which includes employees and offices around the globe.

The Sarcasm Report v.147

2012-01-01T16:40:00.000-08:00

January 1, 2012
Euro Leaders Aim to Buy Time to Save Currency

Knowledge = Power
Time = Money
Power = Work / Time

Since we know this to be true, we can therefore derive a few more formulas from it.

Currency = Money = Time

That's pretty much self evident. Now let us substitute knowledge for power.

Knowledge = Work / Time

This implies that if you work overtime then you and/or your boss will gain knowledge and/or power. Makes sense. Now let us substitute currency for time.

Knowledge = Work / Currency

Now let us rearrange the formula and solve for currency.

Currency = Work / Knowledge

Yes! This makes perfect sense. You can get rich if you either work harder or have less knowledge.

And finally, let us use what we've learned to adjust the first article's headline and make sense of it.

Euro leaders are buying currency to save work (over knowledge).

Who would doubt that? It's crystal clear. That's what the math shows!

What a joke this has become.

Update:

From the article:

“It is vital that eurozone policymakers get a real grip on matters quickly.”

I understand the theory here, but surely a fake grip on matters drawn out over many months would be good enough as long as nobody spills the bea... Um, oops.

Real grip! Of course! In no way am I attempting to imply a sarcastic unjustified eye roll here.

The Sarcasm Report v.146 (Musical Tribute)

2012-01-01T14:11:00.000-08:00

January 1, 2012
Family's teriyaki restaurant is feelin' the love

"Opening a restaurant is like having a baby; it's a big commitment," said Soo Yim.

Closing a restaurant is like having a nearly endless supply of babies; it's a big commitment.

LA County Department of Public Health - Weekly Restaurant Closures

BACIAMI, 139 1/2 N LARCHMONT BLVD, LOS ANGELES, CA, 90004

Date Closed: September 14, 2011
Date Reopened: September 16, 2011
Reason for Closure:
Vermin Harborage
Vermin infestation
Vermin infestation

Date Closed: November 30, 2011
Date Reopened: December 02, 2011
Reason for Closure:
Vermin Harborage
Vermin infestation

Z GARDEN, 2350 PICO BLVD, SANTA MONICA, CA, 90405

Date Closed: September 26, 2011
Date Reopened: September 28, 2011
Reason for Closure:
Vermin infestation

Date Closed: September 29, 2011
Date Reopened: October 12, 2011
Reason for Closure:
Vermin Harborage
Vermin infestation

Behold the combined power of public records and the Internet.

The "Free Lunch" Weight Loss Plan v.007

2012-01-01T11:56:00.000-08:00

Click to enlarge.

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I've risen above the 90-day moving average. Time to buy the dip?

Trust me on this one. 212 pounds is not a good entry point for long-term buy and hold investors. There's no value here. The chart is luring you in. Don't fall for the technical analysis!

In all seriousness, I climb 20 additional flights of stairs each and every day and will continue to do so well into the distant future. The holiday season is now in the rear view mirror. The days are starting to get longer again. I think the long-term weight trend can therefore still be safely assumed to be down. It is only a matter of time.

I've never tracked my weight like this before. The seasonal effects are more than I would have guessed. December wasn't as bad as November. I'm fascinated to see what January brings.

In any event, this plan is simply a lazy person's attempt to do the absolute least needed to attain and maintain a healthy weight. From where I sit, there's a fine line between the sin of laziness and the virtue of patience. As always, I intend to ride that line! ;)

See Also:
The "Free Lunch" Weight Loss Plan v.000

A Brigade of Lawyers (Musical Tribute)

2011-12-31T10:40:00.000-08:00

December 31, 2011
Jefferson bankruptcy suit attracts brigade of lawyers

John Carroll, dean of the Cumberland School of Law at Samford University, said the number of lawyers doesn't surprise him. "It's because of the complexity of the case that there are that many lawyers in it," Carroll said. "It's a complex case involving so many moving parts."

Gasoline vs. Oil

2011-12-30T17:39:00.000-08:00

Click to enlarge.

Click to enlarge.

I created the charts out of curiosity.

What would it take to see $5 gasoline at the pumps? It looks to me like a sustained $160 oil level could do it.

If I had to guess (and I assure you that's pretty much all it is), I'd say the global economy can't even handle $100 oil though. Time will tell.

November 9, 2009
I'm Deflationary

That doesn't mean that I think oil can't make it to $100. Who knows? I don't think it will stay there if it does though, any more than it could stay at $140 the last time.

It's certainly trying to stick at $100. I'll give it that.

Keep in mind that although I have been leaning deflationary, the bulk of my nest egg continues to sit in long-term TIPS and I-Bonds.

This is certainly not investment advice. I think you can see my level of certainty here. I continue to lean short-term deflationary but want the long-term inflation protection just the same.

Source Data:
EIA: Petroleum

What's Worse than a Casino?

2011-12-29T14:12:00.000-08:00

December 29, 2011
A wealth terminator for small investors

Ten years ago, top economist Wu Jinglian criticized China's stock market as a place worse than a casino because of its excessive insider trading and market manipulation.

"At least there are rules in a casino," he said.

Not much has changed in terms of protecting small investors' rights. As wealthier people quit stocks to buy property instead, the stock market has become a casino only for the poor, who cannot afford to speculate in real estate, as Andy Xie says.

See Also:
Savvy Chinese Find Market Top!

Sears: The Joke that Keeps on Giving

2011-12-27T14:28:00.000-08:00

December 27, 2011
Sears closing more stores as holiday sales slide

(Reuters) - Sears Holdings Corp will close as many as 120 of its Kmart and Sears discount and department stores after its holiday sales slumped, sending its shares sliding more than 27 percent to their lowest level in three years.

May 8, 2008
Our Pillars of Retail Strength

What's a CEO to do these days if he can't report financial information and he can't hide financial information? That's sure some conundrum!

In the comments, Anonymous felt that we were joking. I can understand the confusion. We often joke in the comments.

I can't believe the previous comments are supposed to be taken seriously. First off, Eddie Lampert was recognized as a whiz a decade before buying Kmart. Second of Lampert is still a whiz his return on Kmart and on Sears even with the recent decline beats the market hand over fist.

Either you guys are joking or you like to buy high and sell low. Not my style. Lampert and Sears will prove to be fantastic investments over the next 10 years. Over the next 10 minutes? who knows and who cares? - Anonymous

SHLD price on May 8, 2008: 93.45
SHLD price on December 27, 2011: 33.38

Net Gain/Loss: 64% loss

In all fairness, there's still 6 1/2 years to go on that fantastic investment. If it triples from here, then hindsight will will show that it was every bit as good as buried cash. Woohoo!

Special thanks to Credit Bubble Stocks for posting about Sears today. I would have missed today's 27% decline without it.

Source Data:
Yahoo: SHLD Historical Prices

The Sarcasm Report v.145

2011-12-27T13:58:00.000-08:00

Industry experts forecast 2012 trends

There’s no economic rebound to prosperity, but it will continue to be a better environment than it was in 2008, 2009 and 2010.

The economic rebound to prosperity theory is an illusion? Shocking!

Restaurants will benefit from pent-up demand. Two out of five American adults said in a recent survey that they are not using restaurants as often as they would like.

Similarly, the ice water business will benefit from pent-up demand. Five out of five dwellers of hell said in a recent survey that they are not drinking ice water as often as they would like.

I tease. Let's try this again. How many Americans are using restaurants more than they would like? I don't mean to be alarmist, but it could be as many as three out of five. Holy @#$%!

Food costs will remain a huge challenge, with wholesale food price inflation running at 8 percent — the highest it’s been in three decades. Operators won’t be able to pass on high input costs on a one-to-one basis...

Never a better time to invest in restaurants or start your own!

“Miniaturization,” or the continued growth of small plates, snacks and downsized portion options, which have been driven by price sensitivity, consumer interest in sampling, grazing or sharing, and health concerns.

Less is more!

Merry Christmas (Musical Tribute)

2011-12-24T15:01:00.000-08:00

I am addicted to Rocksmith. It fully explains my lack of posts lately. It also explains a few calluses on my fingertips, lol.

Since I wasn't that clear in my last post, you actually use a *real* electric guitar to play this game. It comes with a cable to hook your own electric guitar directly into the Playstation 3. How cool is that?

I'm not as good as the person playing in this video but I'm getting better every day. Baby steps!

Technology is a wonderful thing and this game is nothing short of miraculous. In my opinion, this is what real prosperity looks like. It has made learning the guitar very enjoyable.

Merry Christmas everyone. May you all find real prosperity this season and well into the future.

The Illusion of Spin

2011-12-21T15:20:00.001-08:00

1. The hands and feet are symmetrical.
2. The head is asymmetrical.

If you look at the heads, the figures must spin. Your brain will force the issue no matter how hard you try. If you cover up the heads, the bodies can either spin or move back and forth. Your choice.

This is the part that I find interesting. When looking at the heads, the brain knows they must spin. When the heads are "covered up", the brain clearly still knows they must spin but no longer cares.

Cover-up

The expression is usually applied to people in positions of authority who abuse their power to avoid or silence criticism or to deflect guilt of wrongdoing. Those who initiate a cover up (or their allies) may be responsible for a misdeed, a breach of trust or duty or a crime.

No wonder we are such easy targets for the spin doctors.

The Sarcasm Report v.144

2011-12-21T14:07:00.001-08:00

December 21, 2011
Calculated Risk: Existing Home Sales Revisions

The NAR has characterized this as "drift", but this shows a fairly sharp downward revision to 2007 data.

Since we know the National Association of Realtors is completely unbiased and made up of only the most ethically responsible business professionals, we can only assume that the odds were split evenly between being a downward revision and an upward one.

Further, let's turn 5 years worth of 14.6% inadvertent mistakes into opportunities!

Buy 6 homes at the regular price and we'll count a 7th home as being sold for free! Just pay separate commissions. Ask your realtor about a special bonus offer if you complete the purchases within one year from today.*

Fine Print Disclaimer: If I seem biased, it is only because I don't want to ever ruin my chances of becoming the next Chief Economist at the NAR. David Lereah and Lawrence Yun are my heroes!

* Double your intelligence or no money back! - Gary Larson

Money Tree (Musical Tribute)

2011-12-21T11:11:00.000-08:00

December 21, 2011
Money Tree Inc. files for bankruptcy protection

The company said in its bankruptcy filings that Hurricane Katrina and the economic downturn that began in 2007 were significant setbacks for its business.

The Sarcasm Report v.143

2011-12-17T15:17:00.000-08:00

December 16, 2011
5 Ways to Afford Early Retirement

1.Work a Second Job

Sounds crazy but it might just work.

2. Work a Part-Time Job

Is this compatible with #1? What if someone works a second part-time job? Show the math! I need proof!

3. Early Retirement Distributions

Whew! I was starting to think I was wasting my time by reading this article.

If you have the money to afford early retirement then you can afford early retirement? Genius!

4. Living Low

If less money is spent in retirement then less retirement money is needed? Who would have guessed?

5. Increase Your Retirement Contributions

If more money is saved then the sooner one can retire? Is this compatible with #4? What if one saves more *and* spends less? Sounds confusing.

Is there some place I can turn for even more details?

For more information on how to retire early consult your financial advisor.

I do have a few questions.

1. How can the financial advisor retire early when there is so much awesome free financial advice being generated on the Internet?

2. Has the financial advisor given any thought to doubling fees in lieu of finding a second job? Talk about win win!

3. Other than paying a modest fee each time I ask a question and/or offering him/her a small percentage of my nest egg, what else can I personally do to help the financial advisor retire early?

CPI and EE Savings Bond Thoughts

2011-12-16T12:22:00.000-08:00

The following chart shows the month over month change in the seasonally adjusted consumer price index over the last 5 years.

Click to enlarge.

Hyperinflation theories are being poned yet again.

A consistent 0.2 on the chart would yield 2.43% annual inflation. That's pretty much what we've been getting, give or take.

November 2006: 202.000
November 2011: 226.720

(226.720 / 202.000)^(1/5) = 1.0234

Average annual inflation rate over the last 5 years has been 2.34%.

Other than the deflationary event in 2008, there's really not much to see here. Further, three of the last six months were below 0.2% and three were above it.

So what does this mean? Holding EE Savings Bonds still seems okay to me. The mispricing may be worth the risk. I've been a reluctant buyer for the past two years and will probably be so again in 2012. No complaints so far.

I consider this to be a one-time opportunity based solely on relative value. I will be a buyer this month before rates reset on November 1st. I do not expect to make an EE Savings Bond ladder part of my nest egg. - October 9, 2010

I'm thinking that three purchases in three years qualifies as the beginnings of a bond ladder. Go figure. That said, I still prefer TIPS and I Bonds for their inflation protection. EE Savings Bonds are a very small part of my nest egg.

Source Data:
St. Louis Fed: Custom Chart

Real Yield Curve Thoughts

2011-12-14T15:40:00.000-08:00

Daily Treasury Real Yield Curve Rates

December 14, 2011

5-Year: -0.74%
7-Year: -0.42%
10-Year: -0.04%
20-Year: 0.53%
30-Year: 0.73%

Here's the premise. Let's say that you are a saver and wish to own inflation protected treasuries for 30 years. What's the optimal way to play the yield curve?

1. You could buy the 30-year TIPS and just lock in the 0.73% real yield. Little math needed. You know what you get.

1.0073^30 = 1.244

2. You could buy the 20-year TIPS and earn 0.53% for the next 20 years. You'd need to earn 1.14% per year for the remaining 10 years to match the return of the 30-year TIPS.

(1.0053^20) * (1.0114^10) = 1.245

3. You could buy the 10-year TIPS and earn -0.04% for the next 10 years. You'd need to earn 1.12% per year for the remaining 20 years to match the return of the 30-year TIPS.

(0.9996^10) * (1.0112^20) = 1.245

4. You could buy the 7-year TIPS and earn -0.42% for the next 7 years. You'd need to earn 1.09% per year for the remaining 23 years to match the return of the 30-year TIPS.

(0.9958^7) * (1.0109^23) = 1.246

5. You could buy the 5-year TIPS and earn -0.74% for the next 5 years. You'd need to earn 1.03% per year for the remaining 25 years to match the return of the 30-year TIPS.

(0.9926^5) * (1.0103^25) = 1.245

Only hindsight will tell us which option was best. Options 2-5 do require higher real yields in the future (between 1.03% and 1.14%). They may come. They may not.

So what does this really mean?

Not only is the bond market suggesting that the next 5 years will treat savers poorly, it isn't exactly predicting great things for the 25 years that follow either.

I think the bond market is pretty much in line with my own predictions at this point. For what it is worth, I think the death of real yields has probably run its course. For all intents and purposes, real yields are now dead. That doesn't mean that I expect rates to move higher from here. I don't. If I had to guess, I'd say rates will stagnate (to match our economy). Could be wrong of course. It is just a guess.

And lastly, let's go back in time to when Jeremy Siegel warned us not to buy TIPS.

February 2, 2011

5-Year: 0.09%
7-Year: 0.68%
10-Year: 1.16%
20-Year: 1.82%
30-Year: 2.10%

Oops. In hindsight, 2.10% in the hand was worth more than today's 0.73% in the ivory tower. Who knew? Now savers (and pension funds?) are praying for 1% real yields. Well, there's always hope.

S&P 500 vs. Nikkei 225

2011-12-14T09:46:00.001-08:00

Click to enlarge.

Any questions?

Source Data:
Yahoo: S&P 500
Yahoo: Nikkei 225
St. Louis Fed: CPI
Official Statistics of Japan: CPI

Refining the Rubicon

2011-12-14T08:05:00.001-08:00

It dawned on me this morning that I was doing a terrible disservice to my readers. The ongoing Rubicon joke is very nearly back in play but there is a serious issue with my methodology.

The Rubicon joke was based on a number pulled directly out of thin air. I aim to rectify that situation today by offering a solid objective estimate of the true Rubicon level using daily S&P 500 data from 1998 to present.

Click to enlarge.

Will wonders ever cease?

Hindsight shows that the Rubcion was 1197.8 on January 3, 1998. It is currently 1186.7. That's roughly a 1 point decline per year. It is also 1% less than the 1200 level I have been actively heckling. Shame on me! I clearly did not factor in its degradation over time.

When one is using 20x to 30x leverage in order to make easy money, a 1% discrepancy could mean billions of dollars in lost profit potential. I apologize for any inconvenience that my earlier ballpark Rubicon estimate may have caused.

In my defense, how could I have possibly known that the S&P 500 wouldn't return to 1500 and therefore pull the trend line up again? All we'd need is another bubble to replace the recent housing bubble and the earlier dotcom bubble. How hard could that be?

Sarcasm!

See Also:
Crossing the S&P 500's Rubicon v.30 (Musical Tribute)

Source Data:
Yahoo: S&P 500 Historical Prices

Hyperinflation Theories Poned Again

2011-12-12T13:30:00.000-08:00

Urban Dictionary: Pone

Poser lingo for the internet slang word 'pwned' as in being owned or disgraced by someone else.

Contrary to the opinion of shadowstats and as seen in the following link, hyperinflation is not yet upon us.

December 11, 2011
Tips for Wringing More From Your Cash Holdings

'Ziploc Bags Do Well'
In response to my query, several posters discussed the sad state of affairs for cash holders. Konodrum quipped, "I bury cash or stuff it in the mattress. Ziploc bags do well."

FidlStix is also keeping his sense of humor, even as he acknowledges that the landscape has become a challenge for retirees and anyone else attempting to wring a return from low-risk assets. "I recently went to my local hardware store to buy two stainless-steel buckets for my shorter-term retirement needs. I prefer stainless because it's practically corrosion proof and stays shiny longer. Sadly, all they had were cheerless, gray galvanized buckets with holes in the bottom."

Think about this for a moment. People are joking about buying containers to store money. That's not what one would expect to see during hyperinflation.

I'm a fan of Ziploc bags. I hoard them. It isn't because I'm all that worried about hyperinflation. I just think they will perform better than buried cash and/or short-term treasury bills over the long-term.

Ben Bernanke has encouraged my hoarding/saving behavior by keeping short-term rates at 0%. I have therefore brought future purchases of basic necessities into the present. If the goal is to make the current economy better and the economy of the future worse, then mission accomplished. It's not like I will be buying more Ziploc bags overall. I have simply altered the timing of my purchases. That's all.

I'm pretty much done buying Ziploc bags. I have about all I will ever need. I'd like to think that I am at least as smart as a squirrel but I will admit that it is open for debate. I'm serious. As seen in the link, I have not scattered my hoard. But hey, at least I have a hoard. In the eyes of a squirrel, surely that's better than doing nothing.

So why aren't more people doing it?

Compulsive hoarding

Compulsive hoarding (or pathological collecting) is a pattern of behavior that is characterized by the excessive acquisition and inability or unwillingness to discard large quantities of objects that would seemingly qualify as useless or without value.

That's just nuts! Is it any wonder that hoarding got a bad name?

November 2, 2009
8.6% Return on Investment!

Do the items in the picture look useless or without value? The return on garbage bag investment is now 35.8%. Fortunately, nothing else in the picture is even close. Inflation has been mostly tame. It's almost like garbage bags are special (made of petroleum products). Come to think of it, so are Ziploc bags.

See Also:
A Wheelbarrow of Food to Buy Cash

Siegel's Island (Musical Tribute)

2011-12-12T00:53:00.000-08:00

Click to enlarge.

See Also:
More Dangerous Advice from Jeremy Siegel

Source Data:
St. Louis Fed: 30-Year TIPS, Constant Maturity

The Sarcasm Report v.142 (Musical Tribute)

2011-12-10T06:05:00.000-08:00

December 10, 2011
Start Your Restaurant with an Experienced Restaurant Industry Lawyer, Says Restaurant Expert Witness

Restaurant Expert Witness, Restaurant Consultant, and CEO, Howard Cannon, says, "Hire the best lawyers and accountants you can afford. They are out there and the great ones are worth every penny. A lot of people are trying to save money when they start a restaurant, but many make the mistake of choosing to use no lawyer at all because they think they can get what they need from some sort of website."

I've been giving some thought to opening a new restaurant. This article really sealed the deal for me. I am going to hire a plethora of the "best lawyers and accountants" that money can buy and use any remaining nest egg to secure a loan to partially fund my new business.

I figure if I come up a bit short, I can always just sell my house and live right on the premises of my new restaurant business.

Prosperity, baby! That's what I'm talking about!

Fine Print Disclaimer: Please note that this *is* a sarcasm report.

Bringin' on the Net Worth Heartbreak (Musical Tribute)

2011-12-08T13:01:00.001-08:00

Click to enlarge.

Here's an explanation of the chart.

I've taken the net worth as seen in "B.100 Balance Sheet of Households and Nonprofit Organizations" and subtracted the state and local government debt and the federal government debt as seen in "L.1 Credit Market Debt Outstanding". I then adjusted that amount for inflation and population growth.

As seen in the red trend line, hello exponential trend failure.

Click to enlarge.

This chart shows the quarterly change as a percentage.

We were hit by inflation, a declining net worth, and increased government debt all at the same time. This wicked combination made the 3rd quarter of 2011 the 2nd worst quarter of the last 50 years. So much for that sustainable recovery theory.

Can't you see?

Source Data:
Federal Reserve: Z.1
St. Louis Fed: CPI
St. Louis Fed: Population

Rocksmith Review

2011-12-06T19:02:00.000-08:00

In my opinion, it is the best game of the decade so far.

Something's Wrong (Musical Tribute)

2011-12-02T17:51:00.000-08:00

July 7, 2011
The Sarcasm Report v.111

"Really, the recovery that's now 3 years old is just too young to die," Mirhaydari says.

S&P 500 on July 7, 2011: 1,353.22

December 2, 2011
Something's wrong with the economy

Maybe I'm digging my own grave here, but the clouds on the horizon are too dark to justify anything else. - Anthony Mirhaydari

S&P 500 on December 2, 2011: 1,244.28

Source Data:
Yahoo: S&P 500 Historical Prices

39.4 Million Missing Jobs (Musical Tribute)

2011-12-02T16:58:00.001-08:00

Click to enlarge.

Click to enlarge.

Click to enlarge.

See Also:
39.1 Million Missing Jobs

Source Data:
St. Louis Fed: Total Nonfarm Payrolls

The "Free Lunch" Weight Loss Plan v.006

2011-11-30T22:04:00.000-08:00

Six months down, a lifetime to go.

Click to enlarge.

It might just be me, but I think I might see some leftover Halloween candy, Thanksgiving dinner, and Thanksgiving leftovers in the chart.

Click to enlarge.

I said from the beginning that I would not be consciously altering my eating habits. I will not deprive myself of pumpkin pie. Let's just put it that way. :)

The charts therefore are what they are. Winter is brutal (no yard work, fewer outdoor activities, and multiple food related holidays).

Now for the good news.

1. November is probably my worst month for weight loss. It's officially over. Further, I strongly suspect that this year's November wasn't as bad as last year's November. It will be interesting to me to see the seasonal variations as more data is collected.

2. I continue to climb the extra 20 flights of stairs each day. It adds up. That's roughly 36,000 feet of additional climbing since the beginning of June. It is a firmly entrenched permanent habit. I will eventually make progress in the right direction again. It is simply a matter of patience. I originally thought it might take 3-4 years to get down to my goal. Perhaps that's still true.

3. The time needed to comfortably do the 20 flights of stairs continues to fall. I'm generally only taking 4-5 minutes per day now. I can always find time for that. It's no big deal at all (which is important since I am generally a lazy person looking to do the minimum necessary to meet my long-term goals).

4. I've also been doing some additional stair climbing on the side from time to time (although I never feel compelled to do so). On the 7th of November I climbed 200 flights of stairs all out (in addition to the 20 flights I always do). It took me 48 minutes and 47 seconds. That's actually fairly close to a personal best (done many years ago when I was younger and lighter).

See Also:
The "Free Lunch" Weight Loss Plan v.000

Crossing the S&P 500's Rubicon v.30 (Musical Tribute)

2011-11-30T20:46:00.000-08:00

Here's a list of dates when the S&P 500 crossed above the 1200 level (at the close compared to the previous trading day's close).

1. 12/21/1998
2. 4/18/2001
3. 7/12/2001
4. 7/26/2001
5. 12/14/2004
6. 12/21/2004
7. 2/4/2005
8. 2/11/2005
9. 2/24/2005
10. 6/1/2005
11. 6/9/2005
12. 6/13/2005
13. 6/28/2005
14. 7/5/2005
15. 7/8/2005
16. 10/31/2005
17. 9/16/2008
18. 9/18/2008
19. 9/25/2008
20. 4/14/2010
21. 4/20/2010
22. 4/29/2010
23. 5/3/2010
24. 11/4/2010
25. 12/1/2010
26. 8/15/2011
27. 8/29/2011
28. 9/15/2011
29. 10/12/2011
30. 11/30/2011

Wake me up
(Wake me up inside)
I can't wake up
(Wake me up inside)
Save me
(Call my name and save me from the dark)

Wake me up
(Bid my blood to run)
I can't wake up
(Before I come undone)
Save me
(Save me from the nothing I've become)

See Also:
Crossing the S&P 500's Rubicon
Crossing the S&P 500's Rubicon v.22
Crossing the S&P 500's Rubicon v.23
Crossing the S&P 500's Rubicon v.24 (Musical Tribute)
Crossing the S&P 500's Rubicon v.25
Crossing the S&P 500's Rubicon v.26
Crossing the S&P 500's Rubicon v.27
Crossing the S&P 500's Rubicon v.28 (Musical Tribute)
Crossing the S&P 500's Rubicon v.29 (Musical Tribute)
Sarcasm Disclaimer

Source Data:
Yahoo: S&P 500 Historical Prices

The Path of Least Political Resistance (Musical Tribute)

2011-11-29T20:19:00.001-08:00

Click to enlarge.

Source Data:
St. Louis Fed: Custom Chart

Black Friday Thoughts

2011-11-27T22:22:00.000-08:00

November 27, 2011
Black Friday Sales Advance 6.6% to Record, ShopperTrak Says

"This is the largest year-over-year gain in ShopperTrak's National Retail Sales Estimate for Black Friday since the 8.3 percent increase we saw between 2007 and 2006," ShopperTrak founder Bill Martin said in the statement."

There was an 8.3% year-over-year increase on Black Friday in 2007.
The WTI crude oil price was $98.24 on Black Friday in 2007.

The Great Recession began in December 2007.

There was a 6.6% year-over-year increase on Black Friday in 2011.
The WTI crude oil futures price is currently $98.48.

What could possibly go wrong?

TIPS Tips

2011-11-26T19:45:00.000-08:00

November 15, 2011
How Much Should Retirees Stake in TIPS?

So assuming you've decided you'd like to include inflation-protected investments in your portfolio, what's the right amount? At first blush it might appear that you'd want all of your fixed-income portfolio in TIPS; that's the tack embraced by some academics and other investment theorists.

At first blush I determined that I wanted my entire investment portfolio (not just the fixed-income part) in TIPS heading into the great recession (with some cash for liquidity on the side). I guess that puts me in the "other investment theorist" camp.

After all, if there's a bond investment that helps offset the corrosive effects of inflation, why would you want to forgo it for one that doesn't offer that protection?

In my opinion, the article should have ended right there (unless it was willing to explore the risks of owning bonds in general, which it was not).

The key reason is diversification. While some corporate, foreign, and municipal bonds carry inflation protection, TIPS are the most widely available and liquid type of inflation-linked bonds, and most inflation-protected bond funds skew heavily or even entirely toward TIPS. That means an investor in search of an all-inflation-protected fixed-income portfolio would have to go out of his way to avoid a heavy emphasis on government bonds; at the same time, he'd hold relatively less in corporate, asset-backed, and other bond types, which will outperform Treasuries and other government-backed bonds at various points in time.

It has been my intent to go out of my way to embrace government bonds. No diversification was needed nor desired. That's not entirely true I guess. I very nearly backed up the truck on "asset-backed" bonds heading into the great asset crash but I flipped a coin and it came up tails. Whew! Crisis averted, lol.

In all seriousness, I'm a retiree. I don't really care how the other bonds perform relative to TIPS (either better or worse). All I care about is that my investments keep up with inflation if bought in an auction and held to maturity. That's it. In the bond world, only TIPS can offer me that assurance (at least before taxes anyway).

Put another way, if I was looking to maximize gains then I could always just drop the fire insurance on my home and hope for the best. Chances are good that I would be wealthier over the long-term. Unfortunately, hindsight could show that my house burned to the ground instead. The loss of my house through fire is not a risk I am willing to take.

I would also point out that buying government bonds directly from the government means I don't have to pay excessive Wall Street middlemen fees and annual expenses. That really appeals to me.

So the answer to the question about how much retirees should hold in TIPS falls somewhere between 0 and 100%. But where?

Here's another way to put that.

So the answer to the question about how much extra risk retirees should expose themselves to in order to potentially gain some extra reward is somewhere between 100% and 0%.

As a retiree, I have chosen to expose myself to 0% extra risk and am willing to forgo any additional rewards and/or pain. I'm not suggesting that TIPS are completely safe. I'm simply arguing that they are most likely safer than the other options that Christine Benz is pushing.

And finally, this is where the real fun begins.

A version of this article appeared on July 21, 2011.

On July 21, 2011 the 30-year TIPS rate was 1.64%. I put my entire IRA into one non-diversified 29-year TIPS bond at an even higher rate earlier this year. It is money I will be needing about 29 years from now. I wanted to lock in that rate. I did not want to take the extra risk that the rate would drop. I avoided diversification not out of greed, but rather out of safety.

The 30-year TIPS now yields a mere 0.79%. Hindsight has not been at all kind to well-diversified second blushes.

This is not investment advice. I'm simply offering up my thoughts as they relate to my particular portfolio and risk tolerances. Embracing risk in retirement just doesn't seem like a great plan to me (especially given the name of my blog).

Quote of the Day (Musical Tribute)

2011-11-25T21:08:00.000-08:00

November 25, 2011
Violence, pepper spray mar Black Friday shopping

The instant classic of the day was a video of an Arkansas melee over a $2 waffle iron. The shaky, 48-second clip shows a mass of squealing and shouting men, women and children climbing over each other, grabbing and tossing boxes, with one woman seemingly unaware that her pants were sliding down her backside.

"Oh my God!" a woman screamed in the only sentence discernible among the high-pitched shrieks. One person commenting on the video wrote: "The pinnacle of Western Civilization has arrived."

Stimulus Physics Update #5 (Musical Tribute)

2011-11-25T20:21:00.000-08:00

Here's the original chart and the reasoning behind it.

February 8, 2010
Stimulus Physics

Click to enlarge.

Stimulus was applied. Stocks rose into the air. Many seem convinced that stocks will keep going up. Who knows?

Please don't read too much into this. Almost anything can happen in a world filled with cartoon stimulus and/or cartoon physics.

Here's where we are now (with a new projected trajectory).

Click to enlarge.

The following is an alternate path and one I would prefer if forced to make a prediction.

August 22, 2011
Stagnationary Prediction Update?

Click to enlarge.

A flatlining outcome is fully consistent with a permanent Rubicon environment. You can pretty much guess that it is my personal favorite, if only to keep the ongoing Rubicon joke alive.

The future's so bright, I gotta wear [rose-colored] shades.

This update was requested by Fritz_O in the comments of the last post.

See Also:
Stimulus Physics
Stimulus Physics Update #1
Stimulus Physics Update #2
Stimulus Physics Update #3
Stimulus Physics Update #4
Trend Line Disclaimer

Source Data:
Yahoo: Historical Prices for Dow Jones Industrial Average

The Sarcasm Report v.141

2011-11-23T23:31:00.000-08:00

The following economic theory comes from Bermuda Commercial Bank's treasurer Dan Commissiong. I've got to tell you. It's a whopper.

November 19, 2011
‘Prosperity was illusion created by global credit bubble'

Part 1 The Illusion of Prosperity

To even the casual observer of the global economy it is painfully obvious that all is not well economically, both here in Bermuda and abroad.

Daily economic headlines in our local newspapers and websites read almost verbatim with headlines found in overseas publications. News reports of economic dysfunction are rife, with almost daily reports of layoffs, bankruptcies, business relocations to other jurisdictions, intractable government budget deficits, falling asset prices, high levels of private indebtedness, and highly volatile capital markets.

Throughout the western developed economies average middle class people are at a loss to explain what is happening to their living standards (in Greece especially I imagine), having never experienced this level of economic fallout before in their lives.

Even elected political leaders and senior government finance officials in these countries are at loss to explain how their economies have managed to arrive at the precarious position they find themselves at today.

I believe that the best explanation is simply that a great deal of the prosperity experienced since the early 1980s was an economic illusion created by a global credit bubble that burst in 2008. The fallout from that burst is what's driving today's headlines of economic dysfunction.

There's not a rational creature on this planet who would believe this illusion of prosperity theory. It's just crazy talk!

Stagflationary Mark's Dog - Believer Since 2004

That's not proof. My dog Honey irrationally believes everything I tell her. She's overflowing with magical thinking.

We use ritual acts most often when there is little cost to them, when an outcome is uncertain or beyond our control, and when the stakes are high—hence my communion with the fuselage. People who truly trust in their rituals exhibit a phenomenon known as "illusion of control," the belief that they have more influence over the world than they actually do. And it's not a bad delusion to have—a sense of control encourages people to work harder than they might otherwise. In fact, a fully accurate assessment of your powers, a state known as "depressive realism," haunts people with clinical depression, who in general show less magical thinking.

Fortunately, the public has access to advanced ritualistic free trading tools that help us in these uncertain times. It gives us a sense of control. It makes the average investor smarter than the average investor. And let's be perfectly clear here. We're talking tens of millions of retail investors doing hundreds of millions of online trades generating billions in revenue for tens of thousands of highly compensated financial executives. The stakes don't get much higher than that.

I searched for "free trading tools" in Google and only got 2.34 million hits. It's one of Wall Street's most closely guarded magical thinking secrets. Everyone can be a trend line master! It doesn't even require any information on the economy. How cool is that?

It's not a coincidence that man's best friend has mastered the art of magical thinking. We stick with what works! Without magical thinking, we'd all be victims of a clinical great depression by now. There's nothing worse than depressive realism to ruin a perfectly good party.

Happy Thanksgiving! (Musical Tribute)

2011-11-23T20:02:00.000-08:00

We're all thankful for this day.

November 21, 2007
Happy Thanksgiving!

Three More Years of Goldilocks? - Larry Kudlow

Except for the turkey! (The S&P 500 closed at 1,416.77.)

October 27, 2011
No Economic Armageddon — But No Victory Yet, Either

In response, stocks are soaring. We’ll live to see another day. - Larry Kudlow

Except for the turkey! (The S&P 500 closed at 1,284.59.)

Except for the turkey! (The S&P 500 closed today at 1,161.79.)

La la la la la la la la. Except for the turkey!

Sorry! I could not resist. Happy Thanksgiving everyone! :)

Source Data:
Yahoo Finance: S&P 500 Historical Prices

The Sarcasm Report v.140

2011-11-22T20:57:00.000-08:00

November 22, 2011
Restaurant Industry Stock Review – Nov. 2011

The U.S. economy is improving, albeit at a lower rate, but a sluggish labor market, over-supply of restaurants in the industry, higher gasoline prices, food cost inflation, a still-elevated unemployment level and weak income growth may weigh on industry profitability.

These factors may weigh on industry profitability? How can we know for sure!

That got me to thinking. What actually would hurt industry profitability? Here's a list I just thought up.

1. A slowing economy
2. A sluggish labor market (with high unemployment)
3. A restaurant glut
4. Higher gasoline prices
5. Food cost inflation
6. Weak income growth

The list just sort of popped into my head. There's no explaining the vision that came to me with crystal clarity. I didn't even hold a séance.

I only wish there was a way to match up my list with the Zacks Equity Research's list of current economic conditions which may (or may not) affect industry profitability. Only then could I know if my money was safe parked in a heavily weighted restaurant stock portfolio. Lacking that, I'm not about to do something impulsive based on seemingly well-grounded common sense conjecture though. You know why that is too. It's not like I really need to tell you.

Restaurant stocks for the long run! Double the profits or bust!

Séance

Scientific skeptics and atheists generally consider both religious and secular séances to be scams, or at least a form of pious fraud, citing a lack of empirical evidence.

Nonsense! If there is one thing I know for sure, it is that there has been no fraud in America for at least as long as I have been alive.

The subprime mortgage fiasco played out exactly as nature intended. Money was loaned to people with "no income, no job and no assets" and then we the taxpayers bailed out the banks to support the excessive bonus structure of well-compensated high-level financial executives. See? No fraud. That's just good old fashioned American business.

Our Slumbering Economy (Musical Tribute)

2011-11-22T20:32:00.000-08:00

Click to enlarge.

A zero value for the index indicates that the national economy is expanding at its historical trend rate of growth; negative values indicate below-average growth; and positive values indicate above-average growth.

See Also:
The Echo Boom Bomb: National Activity Remains Below 0

Source Data:
St. Louis Fed: Chicago Fed National Activity Index

Superbunker Mentality

2011-11-22T18:35:00.000-08:00

I should have never allowed our dog Honey to study the European debt crisis. She entered the superbunker and there's just no getting her out.

See Also:
The Economic Cycle (Theatrical Version)

The Great Rubicon Reset of November 2011

2011-11-21T17:27:00.000-08:00

The S&P 500 closed below 1200? Again? How is this possible?

Operation Rubicon

November 21, 2011. A date which will live in infamy. The United States of America was repeatedly and deliberately attacked by the same deflationary debt forces as the Empire of Japan.

There is some good news though.

We've also got $97 oil and a massive trade deficit with the world. Unlike Japan, we're therefore in a much better position to achieve sustainable growth and prosperity over the long-term.

Sarcasm!

Rubicon = Con the Rubes

See Also:
Crossing the S&P 500's Rubicon v.29 (Musical Tribute)

Our New Carbonated Drink Economy

2011-11-18T18:34:00.001-08:00

Click to enlarge.

I've taken the consumer price index for carbonated drinks and adjusted it by the overall CPI. The chart shows the average real price increases over the previous 5 years.

Here's why I was curious.

I moved to Seattle in 1988. I remember thinking it was a really good sale if I could buy a 6-pack of Coca Cola for $1. When it reached that price, I backed up the truck.

As recently as 2004, I remember thinking it was a really good sale if I could buy a 12-pack of Coca Cola for $2. When it reached that price, I backed up the truck.

16 years had passed but I was still buying Coca Cola at that same price. You can see the effect of that in the chart. Carbonated beverages were not keeping up with inflation.

As seen in the chart, those days are over. My Coca Cola supplies have dwindled to nothing. It might very well stay that way. This week's sale is $3 for a 12-pack. I'll pass. We do have an ample supply of Dr. Pepper though (purchased at Costco recently with one of their in-store coupons).

Coca Cola is really pushing their luck, at least with us.

The company hopes its smaller, cheaper packages will appeal to consumers on tight budgets.

Yeah, well, good luck on that one. Everyone on a tight budget should be thinking in terms of dollars per ounce. Smaller packages are generally not the way to save money.

Stubborn people on tight budgets should look at Coca Cola's 27.59% profit margin during a period of high unemployment and decide for themselves if that is something they wish to support.

I find myself drinking more Gatorade lately (Pepsi product). The container costs about $10 (at Costco and/or Sam's Club) and makes 9 gallons (the equivalent of eight 12-packs). It doesn't pack the calories and high-fructose corn syrup rush of a soft drink, but that's actually a good thing.

Source Data:
BLS: Consumer Prices
St. Louis Fed: CPI

The Good Times Roll Over (Musical Tribute)

2011-11-18T01:32:00.001-08:00

It turns out that inflation-indexed TIPS are highly correlated with the stock market and the economy. Declining investment returns, sinking stocks, and falling economic growth are all captured in declining real TIPS yields. - Larry Kudlow, October 1, 2001

Hey, at least we've got that going for us.

Source Data:
St. Louis Fed: 20-Year TIPS Yield

The Sarcasm Report v.139

2011-11-17T20:00:00.000-08:00

November 17, 2011
Bloomberg Businessweek: U.S. TIPS Demand Wanes as Europe Crisis Pares Inflation Outlook

The Treasury Inflation Protected Securities, or TIPS, were sold at a yield of 0.99 percent, compared with a forecast of 0.060 percent, the average estimate in a Bloomberg News survey of seven of the Federal Reserve’s 21 primary dealers that are required to bid on U.S. debt auctions.

November 17, 2011
TREASURY AUCTION RESULTS

High Yield 0.099%

0.99%? 0.099%? It's all good. At least it wasn't reported as 99% in honor of the Wharton School of Business.

Students at the Wharton School for Business at the University of Pennsylvania mocked Occupy Wall Street protesters...

As for Wharton School of Business mocking, I'm reserving that for Jeremy Siegel of the Wharton School of Business and Mark Zandi who got his Ph.D. at the Wharton School of Business.

Maybe that's just me though.

See Also:
Does Jeremy Siegel Live in a Cave?

LA Area Port Traffic Is Rolling Over

2011-11-17T18:55:00.000-08:00

Click to enlarge.

Do not pass Go. Do not collect $200.

Click to enlarge.

Exports have been stagnating for more than a year.

Click to enlarge.

Exponentially increasing global trade? Game over.

Click to enlarge.

There is no meaningful dent in our unsustainable trade situation.

See Also:
More Port Traffic Stagnation

Source Data:
Port of Long Beach: Statistics
Port of Los Angeles: Statistics
The X-12-ARIMA Seasonal Adjustment Program

Food Stamps Heat Map

2011-11-17T18:14:00.000-08:00

Click to enlarge.

The data represents August 2011 participation rates (people participating divided by the state's population).

It's a smooth scale from green to yellow to red.

Pure green represents Wyoming's 6.3% participation rate.
Pure red represents Mississippi's 20.0% participation rate.

So here's the question of the day. What's up with Oregon's 19.2% participation rate?

Source Data:
USDA: SNAP
List of U.S. states and territories by population
St. Louis Fed: Unemployment Rate in Oregon

Who Puts the Ultimate Fun in the Funplex?

2011-11-16T17:00:00.000-08:00

Texas does!

Ultimate Fun Birthday Package

PLEASE BRING CAKE AND CANDLES.
NO OUTSIDE FOOD ALLOWED

The ultimate fun birthday cake is inedible? It makes sense if you think it through. Nothing says fun like a diamond encrusted birthday cake with solid gold filling!

ALL PACKAGES MINIMUM OF 8 KIDS

It is common knowledge that the ultimate fun can only be achieved by outgoing extroverted kids who have many friends. The staff at the funplex are not miracle workers. If your child is a shy introverted book reading type, sorry about that!

$15.99 PLUS TAX PER CHILD*
$25 DEPOSIT (NON REFUNDABLE)
GRATITUDE/TIPS ARE WELCOME & APPRECIATED BY SERVING STAFF

The fun sure adds up!

Florida too!

The Funplex of Gulf Breeze

Party Central
Let us do the work for you and
please remember
EVERYONE must wear SOCKS on inflatables!!

Must remember to wear socks! Ultimate fun!

Gymnastics Party
Let us do the work for you and
please remember
Bare feet are required

Must remember not to wear socks! Ultimate fun!

This post was inspired by the ultimate fun. It is an ongoing joke that never gets old to me.

June 3, 2009
Innovation Danger!

The first quote comes from the president of the division where I once worked. I saw it in a magazine. It needs a bit of back-story first though. We'd just gone through one of the biggest frauds in the history of the stock market (it was before Enron and Worldcom). It was on the front page of the Wall Street Journal for a good month. There had been layoffs. Morale was in the toilet. So what was the quote?

We have a fun environment with creativity and fun.

I don't think I have ever laughed so hard. What the heck was "fun" doing in there once, much less twice? Hahaha!

On to the second quote. I'm reminded of it quite often, especially when watching the financial news on TV.

You can discover what your enemy fears most by observing the means he uses to frighten you. - Eric Hoffer

Fun! Creativity and fun! The lack of "fun" is clearly what the president of my division feared most, and for good reason. Dark gallows humor was the only fun we had. I'm reminded of one team walking by my door. They'd just been laid off. One said, "Dead men walking." We all laughed, but nervously.

Audrey's Story (Musical Tribute)

2011-11-15T17:02:00.000-08:00

As seen in the comments...

Report on my local mall:
For the holidays, they had some vacancies. They filled two of them with what look like flea market venders. No decorations - cheap jewelry and cheap handbags. Otherwise we have a JCP, Belk's, Beall's and a couple of jewelry stores. Can you spell desperate?

And I had noticed that JCP didn't seem to have anything new since about August in the windows - And just this week I saw that the new CEO is planning to turn the company around by creating an environment where employees are creative and engaged. Please. I've been around the block a time or two - not happening. That is just nonsense. Not that I know what is going to happen.

The JCP CEO also said that sales of basic goods were weak this quarter because of less demand. Not exactly. I bought one item the last quarter - socks for my hubby. They cost the same as the previous socks but were half the quality. I was going to buy him pants too, but when I realized the fabric was half the thickness for the same price(he wears heavy duty cargo pants - construction work), I passed. So if it weren't for customer loyalty/ stupidity/ or something, sales of basic goods wouldn't have even been as high as they were.

I am confident you'll post an appropriate video.
Audrey

It would seem that JC Penney's plan is a "cheap" trick. Consumers neither "want" nor "need" overpriced socks at half the quality? Who knew?

May 2, 2009
"Good Enough" Revolution

I am a complete believer in the "good enough" revolution. I'm a former lead software engineer but I'm running a computer that was built seven years ago. It is still running Windows 2000! How's it working for me? Good enough!

It doesn't just apply to computers though. I'm not seeing much improvement in aluminum foil, ziplock bags, garbage bags, toilet paper, paper towels, t-shirts, sweat pants, underwear, socks, sneakers, bath towels, and anything else I've bothered to hoard based on my ongoing concerns about future prosperity. I figured they are all "good enough", so why risk having to pay more for them in the future if inflation actually does pick up at some point?

For what it is worth, I hoarded a lifetime supply of Gold Toe socks purchased at Wal-Mart a few years ago at prices far, far below what the JC Penneys of the world once charged me for the same product. My local Wal-Mart now no longer carries them. It was definitely one of my better purchases!

Viva la revolución lo suficientemente buena!

(Long live the good enough revolution!)

The Sarcasm Report v.138

2011-11-15T16:35:00.000-08:00

May 27, 2010
Pros See Opportunities in Battered European Stocks

Italy has a smaller fiscal deficit than either Ireland or Spain, for example, so it will probably have less cost-cutting—with a less pronounced impact on economic growth.

Here's a chart of Italy's stock market since the opportunities appeared.

With the Lights Out (Musical Tribute)

2011-11-15T15:56:00.001-08:00

Click to enlarge.

Eating out less and shopping in more?

And we wonder why employment growth is weak?

Source Data:
U.S. Census Bureau: Monthly & Annual Retail Trade

Restaurant Painkiller (Musical Tribute)

2011-11-15T15:07:00.001-08:00

Click to enlarge.

Source Data:
U.S. Census Bureau: Monthly & Annual Retail Trade

Extreme EE Savings Bond Mispricing

2011-11-14T17:32:00.000-08:00

The government is officially asleep at the EE Savings Bond wheel.

Although the government has set the short-term interest rate of EE Savings Bonds at just 0.6% it has not altered the original term (the time needed for the bond to double in price). That's still set at 20 years and if held that long the bond will yield 3.53% per year.

2^(1/20) = 1.0353

Click to enlarge.

The chart above compares the EE Savings Bond rate if held to original term (the time needed for the bond to double in price) to the rate of a treasury bond with the same duration (using interpolation on the treasury yield curve where needed).

Click to enlarge.

The chart above shows the rate markdown of the EE Savings Bond compared to a treasury bond of the same duration. That tends to be about 30%. Put another way, if the treasury bond yields 10% then the savings bond tends to yield about 7%. If the treasury bond yields 5% then the savings bond tends to yield about 3.5%.

The lower rate is due to the tax advantages that EE Savings Bonds offer (deferral of taxation, tax benefits for education).

As of today, the EE Savings Bond has an original term of 20 years. It therefore yields 3.53%. A 20-year treasury bond currently only yields 2.77%. As seen in the second chart, the mispricing between the two is currently at an extreme. What was once a premium to own EE Savings Bonds is now a discount.

So what does this mean?

In theory, if trading fees and taxes were absent then one could make risk-free money for 20 years by shorting $5,000 in 20-year treasury bonds while simultaneously buying $5,000 in EE Savings Bonds. The government would basically be paying you each and and every year for the next 20 years to do the trade (much like what it is doing for our biggest banks).

Or alternatively, I can't say that EE Savings Bonds are a good value to other things one could invest in, but it is clear that they are a good value relative to treasury bonds in general. Since I am generally a fan of relative value, that means I will probably be a buyer of EE Savings Bonds in 2012. That will make the 3rd year in a row. Go figure.

EE Savings bond rates and terms will not be changed again until May 1, 2012. There's no hurry to make the purchase though. In fact, it would probably be best to wait until April to make the decision. If the mispricing is gone in April it would only mean that interest rates on 20-year treasury bonds have risen dramatically. Who knows? It could happen.

Something will eventually fix this mispricing. That's about all I am sure of. I expected at least some of it to be fixed on November 1, 2011.

October 20, 2011
EE Savings Bond Rate Prediction for November 1, 2011

The government doesn't just set the interest rate. It also has the power to change the time it takes for a given EE savings bond to double in price. Since interest rates have fallen substantially, the odds of a duration change (for new purchases) are increasing substantially.

It would not surprise me to see the original term increase to 22-25 years at some point (perhaps very soon).

Source Data:
Treasury Direct: EE/E Bonds Rates & Terms
U.S. Treasury: Daily Yield Curve
St. Louis Fed: 5-Year Treasury
St. Louis Fed: 7-Year Treasury
St. Louis Fed: 10-Year Treasury
St. Louis Fed: 20-Year Treasury
St. Louis Fed: 30-Year Treasury

Not in Labor Force per Capita (Musical Tribute)

2011-11-12T16:40:00.000-08:00

Click to enlarge.

That chart sure rings a bell.

Click to enlarge.

That leads us to the following chart.

Click to enlarge.

And lastly, the musical tribute.

Source Data:
St. Louis Fed: Not in Labor Force
St. Louis Fed: Population
St. Louis Fed: Spot Oil Price: WTI
St. Louis Fed: CPI

Fast Food vs. Income

2011-11-11T17:24:00.001-08:00

November 7, 2011
As income rises, so does fast-food consumption, study finds

The conventional wisdom goes something like this: Obesity rates are skyrocketing among the poorest Americans, therefore fast-food restaurants must be to blame.

But a new study by a professor at UC Davis' medical school has found that it's Americans with salaries at the higher end of the spectrum -- in some cases as high as $80,000 to $90,000 -- who are driving fast-food consumption at the likes of McDonald's and Burger King.

Too bad conventional wisdom isn't traded publicly. There have certainly been times when I wished to short it.

He also noted that, although fast food has a reputation for being cheap, a steady fast-food diet is largely out of financial reach for the truly impoverished, especially those who need food stamps to get by.

I'm once again reminded of the following insanity.

September 7, 2011
Restaurants want a piece of food stamp pie

Kelly Brownell, director of Yale's Rudd Center for Food Policy and Obesity, says encouraging more fast-food consumption is not good for people's health. "It's preposterous that a company like Yum! Brands would even be considered for inclusion in a program meant for supplemental nutrition."

I'm all in favor of providing food for people who can't afford it, but do we really need to conveniently prepare unhealthy food for them and pad the profits of corporations too? Is that what the food stamp program should really be doing?

I'm a fairly frugal person. I consider fast food to be a bit of a luxury. It is not cheap food. I have cut back on it as I try to conserve my nest egg's purchasing power. Perhaps most people on food stamps should be doing the same?

Some might argue that homeless people on food stamps don't have an option. They need food prepared for them. All I can say is what I would do in their situation. I would get together with other homeless people and pool resources. One could make quite a feast out of a few loaves of bread, a large jar of peanut butter, a large jar of strawberry jam, a few pounds of bananas, and a gallon of milk. It certainly wouldn't be any less healthy and it would cost far, far less per person.

I'd use the money saved to try to get out of the rut I was in so that it did not become permanent. I can't say that in this economy I would be successful, but at least I'd be trying.

It would require some effort on my part. Unfortunately, effort goes against the ultimate policy of the welfare state.

The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. - Alan Greenspan (1966)

Our Ability to Pay Interest v.2

2011-11-09T23:42:00.000-08:00

This is a continuation of a previous post with the data presented in a different way.

Click to enlarge.

The chart compares the yield of the 10-year Treasury to that of the total debt (total credit market debt owed) to GDP ratio.

It would seem to be a good idea to stay below the red trend line whenever possible. We had no problem doing that before the 1980s. It was trivial. It has been more difficult in recent years. Here's some good news. If Japan is any indicator, it is amazing how much we can borrow if the interest rates are low enough. As of today, the 10-year Treasury yields just 2.00% . That's well below the trend line.

It would also seem to be a good idea to stop moving to the right on the chart. We've actually done that and it is giving us some breathing room. Let's just hope we don't have another recession shortly that would undo some of this good work.

September 30, 2011
U.S. Economy Tipping into Recession

It’s important to understand that recession doesn’t mean a bad economy – we’ve had that for years now. It means an economy that keeps worsening, because it’s locked into a vicious cycle. It means that the jobless rate, already above 9%, will go much higher, and the federal budget deficit, already above a trillion dollars, will soar.

Here’s what ECRI’s recession call really says: if you think this is a bad economy, you haven’t seen anything yet. And that has profound implications for both Main Street and Wall Street.

Source Data:
St. Louis Fed: GDP
St. Louis Fed: Total Credit Market Debt Owed
St. Louis Fed: 10-Year Treasury

The Power of Treasury Note Hindsight

2011-11-09T17:19:00.000-08:00

Knowing all we know now about the deflationary events (two major stock market crashes and one major housing market crash) over the past decade which do you think would have been the better investment in 2001? Treasuries with inflation protection or treasuries without?

January 10, 2001
10-Year Inflation Protected Treasury Auction Results

3.522%

January 10, 2001
10-Year Nominal Treasury Rate

5.10%

January 2001 to January 2011

Expected average annual inflation rate: 1.578% (5.10% - 3.522%)
Actual average annual inflation rate: 2.319%

And the winner was... inflation protected treasuries (by a wide margin).

I guess long-term inflation has a way of creeping up on us, even during deflationary times. It also means that TIPS investors were actually paid to take the inflation insurance. Go figure.

That said, I am bracing for more deflation over the short-term and that mindset very nearly enticed me to alter my inflation protected investments. As last seen in August, it's not the first time.

I've been giving some thought to locking in some profits on long-term TIPS but after thinking about these charts (the first two in particular) I'm content to hold them. Even today's 0.93% real rate on 30 year TIPS could look pretty good in hindsight if we experience 2 or more lost decades of real GDP growth. That's my theory and I'm sticking to it.

I thought long and hard about it again this morning. I even went so far as to place a sell order on the one long-term TIPS bond filling my IRA. Rates are down even more since I wrote that (prices are up). I placed the order an hour or so before the markets opened. I had a change of heart and cancelled the order though.

I think it is the first time in my life that I felt greedy for thinking about taking profits (as opposed to feeling greedy for not taking profits). We may get another round of deflation and part of me wants to sell that one bond now and buy that very same one back later. That felt greedy. I decided it was and instead opted to continue with my original plan to hold it to maturity.

Some would argue that moving to cash is the least greedy thing one can do. I'm not sure that is true. If one is moving to cash with anxious anticipation of a market crash while simultaneously having a plan to redeploy capital during the carnage then that would seem to be fairly greedy to me. In my opinion, that's market timing and casino mentality. I had it this morning. No doubt about it.

It eventually all came down to this for me. If I am still willing to buy 0.0% I-Bonds for the long-term (and I am) then I should be willing to hold a long-term TIPS bond of similar maturity within my IRA that has an even higher rate.

What an interesting day this has been.

Our Ability to Pay Interest

2011-11-09T15:53:00.000-08:00

Click to enlarge.

The black line is the GDP to total credit market debt owed ratio. The red line is the yield of the 10-year treasury note.

Who thinks the similar movements in both lines since 1980 are just a coincidence? Check out where the red line was compared to the black line in 2006/2007. How did that work out in hindsight? Oops!

As seen in the chart, there was plenty of untapped ability to pay higher interest rates before 1980. We no longer have that luxury.

If I am correct to think this way then those who expect a renewed bull market in stocks *AND* dramatically higher interest rates must be completely detached from the real world.

November 9, 2011
Dow off 3.2%: Stocks plummet as Italy struggles with debt

"In our view, 7% is a 'tipping point' for any large debt-laden country and is the level at which Greece, Portugal and Ireland were forced to accept assistance," Rod Smyth of Riverfront Investment Group told clients in a note this week titled "Europe's attention turns to Italy."

Source Data:
St. Louis Fed: Custom Chart

Clues in the Yield Curve

2011-11-07T17:27:00.000-08:00

If you told me what the 5-year nominal treasury yield is then I would use the following chart to guess what the 10-year nominal treasury yield is. That said, things will get a bit muddy if we keep trying to fall off of the chart.

Click to enlarge.

For example, if you were to tell me that the 5-year treasury yield was 0.0% then I would guess that the 10-year treasury yield would be 0.78% (see the formula in bright red).

Or would I?

Click to enlarge.

Using only the nominal treasury data from 2003 to today, I might be tempted to guess 1.95% instead (see the formula in bright red).

Let's continue the guessing games. Using similar short-term data on TIPS (as seen in the chart above), if you told me that the real yield of the 5-year TIPS is 0.0% then I might guess that the 10-year TIPS would be 1.0% (see the formula in dark red).

Said mostly tongue-in-cheek, when can we expect to return to such a prosperous era? Can't you just picture a world where a guaranteed 0.0% pre-tax 5-year return on capital was once again possible?

Now let's turn our attention to the spreads directly.

Click to enlarge.

As seen in the chart, the spread between the 10-year treasury and the 5-year treasury is currently extremely high and was recently in record setting territory. Banks love a large spread. Borrow short, lend long. Will it continue? If it does not continue then how will it change?

1. Short-term rates could rise. That's not going to happen any time soon. Bernanke has all but promised that.
2. Long-term rates could fall as investors eventually capitulate and accept lower yields. Think of it as an infection on spreads that spreads. Pun intended. It's a fun game! Think Japan!

For what it is worth, I bet big on the latter earlier this year. No complaints so far.

Here's a closer look at recent years. I've included the TIPS spread as well.

Click to enlarge.

That huge downward spike in the TIPS spread was due to the deflationary event in 2008. It could happen again (perhaps this very Christmas season). If so, I plan to ride it out again.

Please note the nearly perfectly anchored inflation expectations of the red and black lines heading into the deflationary event of 2008. The lines do not directly represent inflation expectations but consider this. If the difference between 5-year TIPS and 10-year TIPS is identical to the difference between 5-year nominal treasuries and 10-year treasuries then none of the extra yield in longer term maturities was probably due to inflation expectations. None of it. It must therefore be other things, such as opportunity cost and liquidity risks.

This chart also proves that the bond market is not omniscient. It was completely and utterly blindsided by deflation, much like the stock market was. Trust it to predict the future inflation rate at your own peril.

Disclosure: The vast majority of my nest egg sits in TIPS and I-Bond ladders bought directly from the government, held to maturity, and with a decidedly long-term bias (to hopefully meet my long-term needs).

Source Data:
St. Louis Fed: 5-Year Treasury
St. Louis Fed: 10-Year Treasury
St. Louis Fed: 5-Year TIPS
St. Louis Fed: 10-Year TIPS
U.S. Treasury: Yield Curve

The Twin Peaks of Prosperity

2011-11-05T17:18:00.001-07:00

The following chart shows how many barrels of oil the typical production and nonsupervisory employee earns per hour.

Click to enlarge.

Source Data:
St. Louis Fed: Custom Chart

Noah's Ark

2011-11-03T18:48:00.000-07:00

It might be best to start building one.

Einstein Noah Restaurant Group Reports Third Quarter 2011 Financial Results

System-wide comparable store sales increased 1.0%.

The CPI averaged 218.254 in 2010:Q3.
The CPI averaged 226.452 in 2011:Q3.

That's an increase of 3.7%.

Inflation adjusted system-wide comparable store sales therefore fell 2.7%.

Don't even get me started on what happened to net income.

Net income available to common stockholders of $2.8 million, or $0.17 per diluted share, compared to $3.6 million, or $0.21 per diluted share.

So what did the shares do today? Up 3.94% of course.

Source Data:
St. Louis Fed: CPI

Record Low 20-Year TIPS Rate

2011-11-02T17:53:00.001-07:00

Click to enlarge.

As economic growth recovers and real rates rise, the price of Tips will fall leaving Tips investors with large losses in the face of accelerating inflation. - Jeremy Siegel, February 2, 2011

October 7, 2011
39.1 Million Missing Jobs

Click to enlarge.

Got economic recovery?

Update:

November 2, 2011
Bernanke: Economic growth to be frustratingly slow

WASHINGTON (AP) -- Federal Reserve Chairman Ben Bernanke on Wednesday acknowledged that the pace of economic growth is likely to be "frustratingly slow," after the Fed downgraded its forecast for the next two years.

See Also:
Jeremy Siegel's Mythic Places
More Dangerous Advice from Jeremy Siegel
Does Jeremy Siegel Live in a Cave?
The Real Math Behind Siegel's Mythical 3.5% Real Yields

Source Data:
FRB: Selected Interest Rates
U.S. Treasury: Real Yield Curve Rates

The Sarcasm Report v.137

2011-11-01T20:20:00.000-07:00

MaxedOutMama found an article that she felt would interest me from a sarcastic perspective. I can't imagine why. It makes perfect sense to me.

November 1, 2011
Bank Fees Are a Credit Union’s Best Friend

Something is wrong when keeping cash in the kitchen cookie jar seems a reasonable substitute for your bank.

Agreed. Something is wrong.

It may feel rebellious -- your own little Occupy Wall Street act of defiance -- and even a bit savvy, given those checking-account fees, ATM fees, and monthly debit-account fees.

Agreed. It does seem a bit rebellious and savvy to avoid fees by cutting out the middleman. In fact, I get that same feeling each time I buy TIPS and I-Bonds directly from the government for free. What a rush!

That little depository institution atop your kitchen counter has big drawbacks, however, including a lack of federal deposit insurance, zero interest, and ease of access that could prove dangerous to your financial health.

Agreed. One must carefully consider the drawbacks. Let's tackle them one at a time.

1. Lack of Federal Deposit Insurance

We absolutely need the deposit insurance because there may come a time when we go to cookie jar and the cash isn't there. Without some sort of insurance, what would happen if we loaned out the money to questionable relatives as part of a "sure thing" get rich quick scheme? What would we do if they can't pay us back?

I'm assuming of course that we are offering NINJA loans based on our love of action movies. Ninjas rock!

I'm also assuming that we aren't too big to fail of course. We clearly wouldn't need the insurance if the money was missing from the cookie jar but the government took it from other peoples' cookie jars to refill ours.

2. Zero Interest

This is a huge deal. My bank currently pays me 0.05% interest on my checking account. That means that if I keep $10,000 in the bank then I will earn a whopping $5 per year. I can use this $5 to fill my gas tank so that I can visit the bank any time I like, presumably to use its drive-through ATM to get some of my cash. How cool is that?

In sharp contrast, my cookie jar pays no interest though. I therefore can't use the money it generates to fill my gas tank. I'm also forced to walk to the cookie jar. Forced I tell you! This is America! At 51 cents per mile, we should be driving everywhere!

And lastly, I have the privilege and right to hoard paper money promises in my bank so I can earn 0.05% interest. It is not something I take lightly. I'm fairly certain it is part of the Constitution, and if it isn't then it should be!

3. Ease of Access

It's just way too easy to get money out of the cookie jar. What I really need are hurdles between me and my money. I've tried rat traps put in there with it but apparently my greedy fingers can outsmart them. That's why I keep money in a bank. What I really need though is the ultimate hurdle. Picture a note affixed to all the branches of my bank. I'm not talking one of those impersonal form-letter bank closure notes. I demand something more cryptic!

`Twas brillig, and the slithy toves
Did gyre and gimble in the wabe:
All mimsy were the borogoves,
And the mome raths outgrabe.

What the @#$% does that mean? Why is it in fine print like that? Is this legal? Is my money okay? Does anyone really care?

Imagine the joy as I push the door of my darkened local branch and it does not budge. The note says it all. Something really good must have happened. I no longer have easy access to my money! O frabjous day! Callooh! Callay! Like the mome raths, I am indeed most outgrabed!

New Savings Bond Rates Announced

2011-11-01T17:56:00.000-07:00

November 1, 2011
Public Debt Announces New Savings Bonds Rates, Series I to Earn 3.06%, Series EE to Earn 0.60%

I-Bond Fixed Rate: 0.0%
I-Bond Composite Rate: 3.06%
EE-Bond Rate: 0.6%

I predicted 0.0% and 3.06% for the I-Bond. 0.0% was an easy prediction and the 3.06% part was just the math to go with that prediction.

I predicted 0.3% for the EE-Bond. This was the far more difficult of the two predictions because it required extrapolating noisy data into uncharted territory.

EE/E Bonds Rates & Terms

EE Bonds issued May 2005 and after earn a fixed rate of interest. The fixed rate is determined by adjusting the market yields of the 10-year Treasury Note by the value of components unique to savings bonds, including early redemption and tax deferral options.

The EE-Bond rate was set at 0.6% on November 1, 2011. The yield of the 10-year Treasury Note was 2.01% on that day (today).

The EE-Bond rate was also set at 0.6% on November 1, 2010. The yield of the 10-year Treasury Note was 2.63% on that day.

Note that the interest rate fell 0.62% on the 10-year Treasury Note but the EE-Bond rate is the same. They clearly have plenty of discretion when setting the rates. Also note the behavior change from pre-crisis to crisis in the following chart. That's clearly a huge discretion.

The 0.6% rate offered today has "twisted" the red trend line to more closely match the slope of the black trend line. It would therefore be hard to argue that this increase in the rate over what I expected is an indication that we are out of crisis mode. In my opinion, it is simply an indication that the data is/was a bit noisy (doesn't stick firmly to the trend lines).

In any event, this new data point should help me make more accurate predictions in the future. I'm even willing to make my first prediction right now. It is my opinion that we will still be in "crisis mode" 6 months from now. In other words, the EE-Bond rate set on May 1, 2012 will be much closer to the red line than the black line.

Why such a bearish mood? Here comes the sarcasm.

The more we borrow, the more we're saved!

Source Data:
U.S. Treasury: Interest Rates
Treasury Direct: I Savings Bonds Rates & Terms
Treasury Direct: EE/E Savings Bonds Rates & Terms

The Sarcasm Report v.136

2011-10-31T21:51:00.000-07:00

October 28, 2011
Week ahead: Doom-and-gloom camp tricked again

Stocks are clearly in a sustainable rally, as the charts show...

October 31, 2011
Sharp Drop for Stocks on Wall Street

Equities fell 2 percent or more, sending the broader market in the United States back into negative territory for the year.

Trading eve of the Hallows, as bulls would confess
Not a creature was bearish, not even the press.
The stock charts were staged by the pumpers with care,
In hopes that more buyers soon would be there.

Investors euphoric with thanks to the Fed,
While sweet dreams of candy in mountains were bred.
With the bears in their bunkers, as I locked the door
The free markets were spooked and they dropped through the floor.

As seen on Wall Street, lifeblood sprays such a splatter,
Was it a test to see which bull was fatter?
Traders out windows! They dropped and they crashed!
The weak hands in the red were vomiting cash.

"To the moon!" cried the bulls for they did not know
The market was drawn by debt down far, far below.
When, what to their greediest "Ayes!" I did sneer,
"It's a very bad day, with nothing but fear."

Corporate Profits vs. Debt

2011-10-31T17:42:00.001-07:00

Click to enlarge.

I've packed a lot of information into this chart. Hopefully you will manage to decipher it all.

Theory #1

Real corporate profits per civilian employed are a constant over the long-term. This theory is shown in the dark green median trend line on the chart.

In 2006:Q1, corporate profits were well above the median ("Epic Bubble #1") and in 2008:Q4 they very nearly reverted to the median. They are now well above the median again ("Epic Bubble #2?").

This theory seemed to hold for 50 years (from 1950 to 2000). Once the economy started to fall apart in 2000 things changed though. That brings us to another theory.

Theory #2

Real corporate profits per civilian employed have grown as debt has grown and will continue to do so. I can't offer much to support this theory, but that's what the data seems to be attempting to show.

The red trend line is based on all of the data. The blue trend line is based on the blue points. The orange trend line is based on the orange points.

One reason I feel that this theory is suspect is because it doesn't pass the common sense smell test. Real corporate profits per civilian employed cannot grow to the sky. At the very least, it would seem impossible that real corporate profits can eventually exceed real civilian wages. Further, surely the drag of excessive debt will eventually also take its toll.

Another reason I feel that this theory is suspect is because of the current direction of movement in the chart. Note that we are sliding down and to the left from the most recent peak in 2010:Q2. If the future is so bright, then why are we trying to move back in time?

I strongly believe that increasing one's debt can make one feel pretty good in the short-term. Over the long-term it has the opposite effect though. As far as corporate profits go, in the short-term they've pretty much never felt better. Epic would be a good word to describe them. One wonders how they will feel over the long-term though. Epic fail? One really wonders that. Seriously.

In any event, both theories support the same conclusion. Real corporate profits per civilian employed are probably not going to be heading up in the intermediate term and are at serious risk of falling substantially. In the first theory, they could fall to the green trend line (or even worse). In the second theory, they could fall to the orange trend line. Either way, the fall could be of similar magnitude.

I was working on this chart yesterday but I did not manage to complete it. I probably should have posted it before today's stock market decline. Sorry about that! On the other hand, it's probably a pretty good chart for Halloween. Trick or treat!

Source Data:
St. Louis Fed: Corporate Profits After Tax
St. Louis Fed: Total Credit Market Debt Owed
St. Louis Fed: Civilian Employment
St. Louis Fed: CPI

The "Free Lunch" Weight Loss Plan v.005

2011-10-31T17:11:00.000-07:00

Another month already? Where does the time go?

I'm well ahead of schedule.

I sprinted on the 28th and managed to climb the 20 flights in 3 minutes and 8 seconds. That's 22 seconds faster than last month's record time of 3 minutes and 30 seconds.

I had a couple of extra marathon sessions this month as well, but I don't think that explains the extra weight loss. I think at least some of it is the realization that I'm nearing my ultimate goal.

There were days when I was definitely glad that I set the daily goal so low. It's a big deal on days when I might not have gotten enough sleep the previous night. Not climbing 20 flights of stairs in a given day is virtually impossible to rationalize. I'm fairly sure this is now a permanent habit.

It's 5 months down and a lifetime to go. :)

See Also:
The "Free Lunch" Weight Loss Plan v.000

Inglorious Wage Basterds (Musical Tribute)

2011-10-27T21:32:00.000-07:00

I suggest you listen to the music while reading this post. It can't hurt, much.

Click to enlarge.

It looks a lot like the cumulative trade deficit chart. Big shocker.

June 25, 2011
Missing Jobs vs. Trade Deficit

Click to enlarge.

The difference seems to be that the boost to the stock market is/was temporary but the cumulative trade deficit lives on. Behold the staying power of endless debts and deficits.

January 14, 2004
NAFTA's Legacy -- Profits and Poverty by David Bacon

Predictions of U.S. job losses were, if anything, underestimated. By November 2002, the U.S. Department of Labor had certified 507,000 workers for extensions of unemployment benefits under the treaty because their employers had moved their jobs south of the border. Most observers believe that is actually a significant undercount, partly because many workers losing jobs don't know they qualify for trade-related benefits. According to the Economic Policy Institute in Washington, NAFTA eliminated 879,000 U.S. jobs because of the rapid growth in the net U.S. export deficit with Mexico and Canada.

While the job picture for U.S. workers was grim, NAFTA's impact on Mexican jobs was devastating. Before leaving office (and Mexico itself, pursued by charges of corruption), President Carlos Salinas de Gortari promised Mexicans they would gain the jobs Americans lost. In the United States, he promised that this job gain would halt the northward flow of Mexican job-seekers.

NAFTA's first year saw instead the loss of more than a million jobs across Mexico. To attract investment, NAFTA-related reforms required the privatization of factories, railroads, airlines and other large enterprises. This led to huge waves of layoffs. Mexican enterprises and farmers, who couldn't compete with U.S. imports, also shed workers, and the subsequent peso devaluation cost even more jobs. Because unemployment and economic desperation in Mexico increased, immigration to the United States has been the only hope for survival for millions of Mexicans.

This was written when the unemployment rate was 5.7%. It now stands at a whopping 9.1%. It's the gift that keeps on giving. Sigh.

Source Data:
DOL: History of Federal Minimum Wage Rates
St. Louis Fed: Dow Jones Industrial Average

Certainty vs. Uncertainty Update

2011-10-27T17:57:00.000-07:00

Based on today's extreme volatility in both the stock and bond markets, I think it would be a good time to visit a previous post.

August 9, 2011
More Certainty vs. Uncertainty

Click to enlarge.

Here's where we are now.

Click to enlarge.

On the one hand, the red line is bending towards the blue line. That's a good thing. On the other hand, we're continuing to make a mess of the canvas. Note the big pile of red data points to the lower left of the "You Are Here" point. That's where we've been recently.

Certainty cannot be measured simply by accurately sticking to the blue trend line. How fast we move along the blue trend line is also important. If one thinks as the above chart as a road map then the following chart can be thought of as watching the speedometer/odometer.

Click to enlarge.

Each data point represents the "distance" the treasury yields have moved on the first chart since the previous day.

D = ((X2-X1)^2 + (Y2-Y1)^2)^0.5

D represents the distance.
X2-X1 represents the amount the 10 year TIPS yield has changed.
Y2-Y1 represents the amount the 10 year nominal treasury yield has changed.

As seen in the chart, we traveled quite the distance today. It could be seen in the bond market and it could also be seen in the stock market. That's not exactly the sort of thing that inspires stability and certainty in me.

Note the 100 day moving average. From 2004 to 2007 the markets were growing increasingly certain to the point of complacency. I don't think that's the issue now though. I sense a lot of day-trading fingers hovering over the buy and sell buttons. In my opinion, today was panic selling out of treasuries and a panic buying into stocks. Who knows what tomorrow may bring?

I'm reminded of a joke.

This is your captain. I have good news and bad news. First the bad news. We're hopelessly lost. Now the good news. We're making good time!

As a side note, while the stock market was rallying I was actually visiting my local bank to purchase an EE Savings Bond (before the new rate most likely falls on November 1st). Go figure.

I welcome the stock market rally and the sell-off in bonds. May it continue. I'll be buying more 10-year TIPS in January to refuel my long-term bond ladder. It's not like I am actually hoping for even lower interest rates.

Somehow I doubt I'll be that fortunate though. Why? As of 2004, I am a permabear. This economy has major problems and about all we're really trying to do is kick the can down the road. Good luck on that one long-term.

Source Data:
FRB: Selected Interest Rates
US Treasury: Interest Rates

A Tiny Flaw in the Plan

2011-10-26T19:13:00.000-07:00

Click to enlarge.

Something tells me that we won't ever make it back to the blue exponential growth trend line.

Click to enlarge.

Note the roughly $3,000 peak in both charts. Coincidence? I can't say for sure but I'm not willing to bet my nest egg that it isn't.

Click to enlarge.

As bad as this chart is, it gets worse. Note the recent resumption of the downtrend.

We've been borrowing a median of $2,105 per person per year (adjusted for inflation) for 6 decades. How many more years did we really think we could keep up the pace?

Captain Blackadder: There was a tiny flaw in the plan.
Lieutenant George: What was that, sir?
Captain Blackadder: It was bollocks.

Source Data:
St. Louis Fed: Personal Dividend Income
St. Louis Fed: CPI
St. Louis Fed: Population
St. Louis Fed: Total Credit Market Debt Owed
St. Louis Fed: Balance on Current Account

Pikers' Peak v.2

2011-10-25T16:09:00.001-07:00

Click to enlarge.

This is what the chart tells me.

As our debt grows, the ability to make real money off of the debt market will continue to decline.

I think that statement more than passes the common sense smell test.

I also believe...

1. The debt market is propping up the stock market. It certainly isn't the stock market that's propping up the debt market. Let's just put it that way.

2. The debt market's ability to prop the stock market up is faltering.

3. The ability to make real money off of the stock market will therefore continue to decline (as it has done for more than a decade so far).

Welcome to pension fund hell.

I've been predicting the death of real yields for years. This may be the first chart I've done that's directly tied to the theory.

I can't say we'll slide into deflationary Japan's mess, but if crude oil is any indicator then we could easily slide into a stagflationary version that's even worse. Or alternatively, we toggle between ongoing deflationary and stagflationary messes? Who can really say for sure?

May we live in interesting times.

May you live in interesting times, often referred to as the Chinese curse...

See Also:
Pikers' Peak

Source Data:
St. Louis Fed: Custom Chart

Pikers' Peak

2011-10-24T18:15:00.001-07:00

The following chart shows personal interest income divided by the liquid money supply (MZM).

Click to enlarge.

Behold the power of ZIRP. It's the gift that keeps on giving.

The Secret Language of Crime: Vocabulum Or the Rogues Lexicon By George W. Matsell

PIKER Is a man who plays very small amounts. Plays a quarter, wins, pockets the winnings, and keeps at quarters; and never, if he can help it, bets on his winnings.

Using that definition, I'm a piker.

Ride on the bumper of a screaming 910hp, Twin-Turbo, All-wheel Drive, 150 mph Suzuki SX4 as it races up one of the world's most dangerous hills.

May 8, 2000
Japan, a Nation of Risk-Takers? (int'l edition)

For savers, switching at least some of this mountain of assets to equities would seem to be a no-brainer. Japanese stock markets are still up 40% from their post-bubble lows in early 1998, despite their recent downward lurches. And even if savers converted their yen into, say, sterling in a 12-month Citibank Japan time deposit, they would get 4.1%--double what the post office offers.

Postal savers, however, are a very conservative bunch--not the sort to leap into high-risk investments in stocks, foreign currencies, or global bond funds. One saver, Hisao Ebihara, a 59-year-old accountant, for instance, said he would likely flip over his postal deposit to a time deposit at his commercial bank next year. ''I don't want anything risky,'' he says. ''I won't invest in the stock market or mutual funds.'' His reaction is typical. Seniors aged 60 years and over own about 70% of Japan's $11 trillion in household financial assets. Only 9% of that is directly invested in stocks and a mere 2% in mutual funds. By contrast, one in two U.S. households has equity investments.

Nikkei Stock 225

Nikkei on May 8, 2000: 18,199.96
Nikkei on October 24, 2011: 8,814.17
Gain/Loss: 52% Loss

So much for the "no-brainer" theory.

Disclosure: I appear to have some Japanese "lifeblood" in me. As of 2004, I think a lot like Hisao Ebihara did back in 2000. The only real difference is that I choose/chose U.S. long-term inflation protected treasuries.

Update:

Click to enlarge.

In theory, the -4.5% annual growth rate in this chart could last infinitely long. ZIRP could eventually push the personal interest income numerator towards zero and/or monetary inflation could eventually push the MZM denominator towards infinity.

Is it really any wonder why I backed up the truck on long-term TIPS and I-Bonds?

Source Data:
St. Louis Fed: MZM
St. Louis Fed: Personal Interest Income

Over the Mountain (Musical Tribute)

2011-10-23T18:57:00.001-07:00

The following chart shows personal interest income divided by wage and salary disbursements.

Click to enlarge.

Alpine Skiing

These trails are even more difficult than Black Diamond, due to exceptionally steep slopes and other hazards such as narrow trails, exposure to wind, and the presence of obstacles such as steep drop-offs or trees. They are intended only for the most experienced skiers.

This trail rating is fairly new; by the 1980s, technological improvements in trail construction and maintenance, coupled with intense marketing competition, led to the creation of a Double Black Diamond rating.

This post inspired by a post on a private blog that I read.

Source Data:
St. Louis Fed: Personal Interest Income
St. Louis Fed: Wage and Salary Disbursements

Turn to Stone (Musical Tribute)

2011-10-23T17:43:00.001-07:00

Dimension Stone

Stone (usually granite) countertops and bathroom vanities both involve a finished slab of stone, usually polished but sometimes with another finish (such as honed or sandblasted). Industry standard thicknesses in the United States are 3/4" (2 cm) and 1.25" (3 cm). Often 2 cm slabs will be laminated at the edge to create the appearance of a thicker edge profile.

Click to enlarge.

The "pent-up demand" for a new bubble was intense once the dotcom bubble popped. Is it any wonder that we turned to stone as a long-term store of value?

Click to enlarge.

Craziest bubble ever!

Think about it. In 2006/2007, consumption of dimension stone was way up but real inflation adjusted prices were way down? That's not exactly typical bubble behavior.

It was like dimension stone was literally popping right up out of the ground.

The city streets are empty now [the lights don't shine no more]
and so the songs are way down low [turning turning]
A sound that flows into my mind [the echoes of the daylight]
of everything that is alive [in my blue world]

I turn to stone when you are gone, I turn to stone
Turn to stone when you comin' home, I can't go on

Source Data:
USGS: Historical Statistics
St. Louis Fed: Population
St. Louis Fed: CPI

Quantum Levitation

2011-10-22T15:39:00.000-07:00

163 people disliked this video? How is that possible?

A special thank you to the person who emailed me a link to this video. I'd credit you but I consider emails private.

Insane Quote of the Day (Musical Tribute)

2011-10-21T19:49:00.000-07:00

October 22, 2011
Better Ways to Fight Inflation

The second problem is that inflation might meow rather than roar in coming years, leaving TIPS investors with meager returns.

This "problem" is a myth that just keeps circulating over and over.

Even as a TIPS investor, higher inflation only hurts me. The reason is that I will have to pay tax on the inflationary gains. In fact, taken at its extreme it is not hard to see that hyperinflation would financially ruin me.

Here's a chart to show what inflation combined with taxation does to the 1.06% 30-year TIPS yield. Note that higher inflation only hurts.

Click to enlarge.

Here's what 30 years of compounding does to the total return.

Click to enlarge.

If inflation averaged 20% over the next 30 years then two things would happen. First, my large nominal returns would push me into the highest tax bracket. Second, I'd stand to lose the vast majority of my nest egg due to the combination of that high taxation and the high inflation rate. Lose lose. Does that really sound like something that would help me?

Shame on the Wall Street Journal for propagating this common myth that higher inflation somehow magically helps TIPS investors. The inflation protection of TIPS is similar to fire protection for my house. I do not hope for higher inflation any more than I hope that my house burns.

If the Wall Street Journal can't even make sense of simple math (as seen in the charts above), then who can?

Of course, a cynical person might suggest that the Wall Street Journal does have knowledge of simple math but also has ulterior motives and/or biases. The Wall Street Journal does have "Wall Street" in its name. Wall Street has a hard time making profits if investors buy TIPS directly from the government and hold them until maturity. The middleman is completely cut out. A cynical person might suggest that anyway. Thank goodness I'm not cynical!

With my patience gone
Someone take me far from here

Yeah
Burning that gasoline
Yeah
Burning that gasoline

Crude Realities

2011-10-21T16:47:00.000-07:00

Click to enlarge.

U.S. crude oil production has been an epic exponential growth trend failure since 1970.

Click to enlarge.

Our reliance on foreign oil currently makes the 1970s look like a picnic by comparison. Was oil the pin that popped the housing bubble or was housing the pin that popped the $145 oil bubble? Does it really matter which was the chicken and which was the [nest] egg?

And what about China?

July 18, 2010
China Tops U.S. in Energy Use

China's ascent marks "a new age in the history of energy," IEA chief economist Fatih Birol said in an interview. The country's surging appetite has transformed global energy markets and propped up prices of oil and coal in recent years, and its continued growth stands to have long-term implications for U.S. energy security.

For what it is worth, I am not and have not been at all convinced that China's miraculous growth theory is compatible with high-priced oil. Savvy investors may think otherwise.

October 21, 2011
China Shares End At Another 31-Month Low; Resources Sector Leads Fall

SHANGHAI (Dow Jones)--China's shares ended at another 31-month low Friday because of concerns over the domestic economy, led by declines in the resources sector due to a dismal demand outlook, but gains in banks pared the losses as worries over the debt levels of local governments eased after Beijing said it would allow some of them to sell bonds directly.

There is a lot to think about. I am a pearmabear since 2004 but in the short-term I often toggle between being a deflationary bear and a stagflationary bear. I don't invest for the short-term though. That's why I like and have liked long-term TIPS. They allow me to be relatively agnostic on both short-term and long-term inflation (barring severe hyperinflation which would ruin me).

Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected. - George Soros

I'm not looking to make money any longer. Capital preservation is my #1 priority in this "Age of Turbulence". Although I have not read his book, I figure Greenspan should know. His "easy money madness" certainly helped get us here. Sigh.

This is not investment advice.

Source Data:
EIA: Crude Oil Production
EIA: Crude Oil Consumption

Debt vs. Profits and Wages

2011-10-20T18:57:00.001-07:00

Click to enlarge.

Source Data:
St. Louis Fed: Total Credit Market Debt Owed
St. Louis Fed: Corporate Profits After Tax
St. Louis Fed: Wage and salary disbursements

EE Savings Bond Rate Prediction for November 1, 2011

2011-10-20T16:26:00.001-07:00

This is an update to last year's post. Read it for more details. The theory is the same. Only the interest rates have changed.

Based on today's 2.2% 10-year treasury yield and a belief that we are now in permanent crisis mode, I'm predicting that the EE savings bond rate set on November 1, 2011 (fixed for the life of the bond) will be 0.3%. That's down from the current rate of 1.1%.

If you are thinking about buying EE savings bonds this year then you might consider buying them before November 1, 2011.

Keep in mind that if you hold them 20 years, they are guaranteed to double in value. That brings the long-term yield up to 3.53% (2^(1/20)=1.0353).

I want to thank Anonymous for asking my thoughts on this in the comments. This is the best part about having a blog. I bought EE savings bonds last year but hadn't considered buying them this year. I didn't realize that the rate had popped back up to 1.1%.

Today's 1.1% rate beats my online savings account and the long-term yield beats comparable 20 year nominal treasuries by a wide margin (3.53% vs. 2.92%).

I'm a reluctant buyer, just like I was last year. I will repeat what I said then.

For what it is worth, I'm a buyer this week. I do not expect to hold it the full 20 years but I'd like to have the option. In the meantime, I'll be earning a better rate than my online savings account.

I still own last year's EE savings bonds. No complaints so far.

As a side note, if the new rate is as low as I predict it will be, then the government will be indirectly confirming that we are still in crisis mode. Actions speak louder than words.

Update:

The government doesn't just set the interest rate. It also has the power to change the time it takes for a given EE savings bond to double in price. Since interest rates have fallen substantially, the odds of a duration change (for new purchases) are increasing substantially.

It would not surprise me to see the original term increase to 22-25 years at some point (perhaps very soon).

Click to enlarge.

Source Data:
Treasury Direct: EE/E Bonds Rates & Terms
U.S. Treasury: Interest Rates

I-Bond Prediction for November 1, 2011

2011-10-19T16:55:00.000-07:00

I'm predicting a fixed rate of 0.0% and a composite rate of 3.06%.

In March 2011 the CPI-U was 223.467.
In September 2011 the CPI-U was 226.889.

That's a 1.53% increase over the six month period. Inflation has been a bit high, but not too bad.

Fixed rate = 0.00%
Semiannual inflation rate = 1.53%

Composite rate = [Fixed rate + (2 x Semiannual inflation rate) + (Fixed rate x Semiannual inflation rate)]
Composite rate = [0.0000 + (2 x 0.0153) + (0.0000 x 0.0153)]
Composite rate = [0.0000 + 0.0306 + 0.0000000]
Composite rate = 0.0306
Composite rate = 3.06%

In my opinion, there is no way that they are going to offer a rate greater than 3.06% on these I-Bonds. I therefore predict that the fixed rate will continue to be 0.0%.

If you are thinking about buying I-Bonds this year then you might wish to consider buying them before November 1st. You'll get a 4.60% rate and lock in a bit more of the inflation that we've seen over the past year.

As for me, my next purchase will be in January. 3.06% seems like a fine alternative to my online savings account.

See Also:
I-Bond Rate Prediction for May 1st

Source Data:
St. Louis Fed: CPI-U
I Savings Bonds Rates & Terms

More Port Traffic Stagnation

2011-10-19T16:15:00.000-07:00

Import traffic does not imply that there will be a stellar Christmas season. That said, it is hardly the "unprecedented drop" that Mish thinks he sees.

Port traffic on the West coast is down significantly. Expected traffic for September is also way lower. Yet analysts have been busy raising expectations for the holiday season. One thing for sure, one group is wrong.

Both groups seem to be wrong! Seasonally adjusted, September's inbound traffic was actually slightly higher than in August.

The export trend appears to be doing okay. There was a definite uptick in September. Will the upward trend continue? Tell me and we'll both know.

Overall port traffic is definitely stagnating. I would say that the high price of oil is once again creating some drag.

Over the past 3 years, we've made no significant dent in closing the unsustainable trade deficit. We continue to bring in far more than we ship out.

On the one hand, we are well off the levels seen in 2004 so there is some hope. On the other hand, I'm not particularly pleased with the fastest growing exports of our supposedly advanced economy.

See Also:
Continued Port Traffic Stagnation

Source Data:
Port of Long Beach: Statistics
Port of Los Angeles: Statistics
The X-12-ARIMA Seasonal Adjustment Program

Corporate Profits vs. Retail Sales (Musical Tribute)

2011-10-19T01:02:00.000-07:00

Click to enlarge.

Turn off your mind, relax and float down stream
It is not dying, it is not dying

Source Data:
St. Louis Fed: Corporate Profits After Tax
St. Louis Fed: Retail Sales (Discontinued Series)
St. Louis Fed: Retail Sales (New Series)

Thomas Friedman's Employment Utopia (Musical Tribute)

2011-10-18T22:14:00.000-07:00

October 18, 2011
Imagined in America

We need to focus on “Imagined in America” and “Orchestrated From America” and “Made in America by a smart worker using a phalanx of smarter robots.”

Nothing says job creation like a single smart worker using a phalanx of smarter robots.

Phalanx formation

The phalanx (Ancient Greek: φάλαγξ, Modern Greek: φάλαγγα, phālanga; plural phalanxes or phalanges; Ancient and Modern Greek: φάλαγγες, phālanges) is a rectangular mass military formation, usually composed entirely of heavy infantry armed with spears, pikes, sarissas, or similar weapons.

Let's not stop there though. Let's give each smarter robot in the phalanx its own phalanx weapon.

If there is one "smart worker" and many "smarter robots" then wouldn't it stand to reason that the human worker has been made obsolete?

Welcome to Corporate America

2011-10-18T16:48:00.001-07:00

Let's start with the premise that there has been a *constant* amount of real prosperity creation per capita and that it can be measured by adding up real government saving, real personal saving, and real corporate profits.

Click to enlarge.

Well, there you go. Just look at that flat trend line.

Now let's look at the saving part.

Click to enlarge.

Ouch. So where did the prosperity go?

Click to enlarge.

Is our country really going broke or is the money just being funneled to Corporate America?

Why are we borrowing so much money?

Click to enlarge.

Corporate America gets what Corporate America wants.

October 4, 2011
Corporate America seeks cover in arms of small business

(Reuters) - Facing talk of "class warfare" in Washington and protest marches on Wall Street, some of the biggest players in corporate America are linking arms with small business in what observers see as moves to bolster their images at a time of rising public anger.

So what caused the dramatic change in 1990 (as seen in the 2nd and 3rd charts above)? Could it partly be a "free lunch" trade dream?

June 25, 2011
Missing Jobs vs. Trade Deficit

Click to enlarge.

Source Data:
St. Louis Fed: Corporate Profits After Tax
St. Louis Fed: Net Government Saving
St. Louis Fed: Personal Saving
St. Louis Fed: CPI
St. Louis Fed: Population

The Sarcasm Report v.135

2011-10-17T18:41:00.000-07:00

October 17, 2011
Calculated Risk: Fed's Evans suggests raising inflation target until unemployment falls below 7%

I think we should consider committing to keep short-term rates at zero until either the unemployment rate goes below 7 percent or the outlook for inflation over the medium term goes above 3 percent. Such policies should enable us to make progress toward our mandated goals.

1. Why not just split the difference? If 2% is too low and 3% seems better, then why not try 2.5% first and see how that goes? Oh wait. Inflation has actually averaged 2.5% over the past decade. Never mind.

2. On average, oil prices have risen 12.7% per year over the last decade. I can't wait to see what raising the inflation target will do. If there is one thing that will bring job creation back to America it is higher oil prices. I can't tell you how many times I think to myself, "Why can't oil prices be higher? It is the only thing holding me back from visiting many of this country's many fine service-based restaurants."

3. We definitely need more inflation to solve our unemployment problem. Just look at what the Phillips Curve shows.

4. If 3% inflation is better than 2%, then surely 4% is better than 3%, and so on, and so on. In fact, if the Fed is willing to compromise on its long-term inflation fighting credibility, then let's swing for the fences and put 39.1 million people to work!

5. Let's adopt Gregory Mankiw's solution too while we are at it. The markets love chaos! If a full-blown currency crisis can't create jobs, then what can?

The Rubicon Line Held

2011-10-17T14:51:00.000-07:00

1200.86 on the S&P 500?

The stock market is such a tease.

Our Top 20 Fastest Growing Exports

2011-10-16T14:32:00.001-07:00

Click to enlarge.

First they came for our jobs, but I did not complain because...

Source Data:
U.S. Census: Foreign Trade

Rentier Capitalism

2011-10-13T19:36:00.000-07:00

Rentier capitalism

Rentier capitalism is a term used in Marxism and sociology which refers to a type of capitalism where a large amount of profit-income generated takes the form of property income, received as interest, intellectual property rights, rents, dividends, fees or capital gains.

The beneficiaries of this income are a property-owning social class who, it is argued, play no productive role in the economy themselves but who monopolise the access to physical assets, financial assets and technologies. They make money not from producing anything new themselves, but purely from their ownership of property (which provides a claim to a revenue stream) and dealing in that property.

Often the term rentier capitalism is used with the connotation that it is a form of parasitism or a decadent form of capitalism.

In general, what happens when parasites become as big as their hosts?

Click to enlarge.

Click to enlarge.

Can't you just feel the prosperity?

Source Data:
St. Louis Fed: Custom Chart #1
St. Louis Fed: Custom Chart #2