I live in the USA and I am concerned about the future. I created this blog to share my thoughts on the economy and anything else that might catch my attention.
This is the End and a New Beginning
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I've been thinking about this for some time.
After 21 years of writing this blog almost daily, I've decided to stop
writing the daily updates on the blog.
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Silver Deep Dive
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Silver had a memorable year (+148%). Some of this can be explained by a
decline in the dollar. I decided to do some ML analysis to look for other
insights....
Let’s leave aside worries of a property bubble and a new crop of bad loans. Forget the specter of protectionism.
Okay. I'm leaving all those worries aside. Let's see what happens.
“The powerful tendency since the 1980s towards increased inequality in income distribution is likely to be reversed,” Mr. Garnaut wrote.
I wonder how high he expects the wages of the following workers to rise?
China
Mr. Garnaut of Australian National University predicts that even richer vistas could open up for the likes of India as China’s comparative advantage shifts to technologically complex goods from simple manufacturing. Think high-speed trains, not plastic toys.
Power supplies sound technologically complex. Should I be thinking about those?
Taiwan
SilverStone Zeus1200W (ZM1200M & ZU1200M) power supplies are made on a fully automated assembly line in Taiwan to achieve quality and precision levels not possible with normal power supply plants that utilize assembly workers.
I stumbled upon a new website in the past week and it has really pulled me in. I've added it to my blog list and would encourage you to check it out. For the most part, I think it is filled with common sense.
Francis X. Curmudgeon is the alter ego of a bitterly unemployed hedge fund manager in the suburbs of Boston, Massachusetts. Surprisingly, he often knows what he is talking about, not that anyone listens.
Are we headed for bad economic times, as in the Japanese experience? I do not have any special insight, but I do not think so. We have had a year of mixed economic news, with much well founded anxiety grabbing the attention away from a background hum of gradually improving confidence. All of which is typical of the start of a recovery. But, for all I know, it also describes the situation in Japan around 1993.
In the big picture, what matters are tax rates now and when retired. And for many, if not most, people that means that an old-school traditional IRA is a better choice, even if it lacks hipness and the frugal appeal of paying more now for a benefit far in the future.
Gold just sits there. If you buy actual coins and bars you can spend your evenings fondling it, but most investors today do not even get to do that. They purchase financial instruments that represent ownership of some gold in a dark vault deep underground somewhere.
The comparatively sophisticated argument in favor of gold is that it is the ultimate hedge against bad things happening to the rest of your portfolio. When it really hits the fan and panic sets in (e.g. fall 2008) gold goes up, and is often just about the only thing that does.
While this is certainly true as an empirical observation of what has happened in the past, it strikes me as a weak investment thesis. It relies too heavily on panicked investors following convention. People consider gold to be a safe haven investment only because they believe that everybody else does. If they start to doubt that and notice that gold is actually comparatively volatile and of marginal economic value, then the whole thing could come crashing down.
The other week I finished up a five part series of posts on Dave Ramsey’s Seven Baby Steps. It seems to have been well received and still gets a steady stream of clicks. But honestly, I was expecting a larger and more Snowball attr Kamyar Adl crop hostile reaction than I got, at least as measured by comments and emails. Ramsey has a very large and devoted following, particularly, it seems, in the blogosphere.
The optimal car strategy is to buy two- or three-year-old used cars and drive them until they are scrap metal. Which is what the experts recommend. But the real benefit is on the back end, not the bargain you get up front. Given the choice, and here is where I part company with the established wisdom, buying new and driving the thing until it stops running makes more sense than buying youngish used cars and selling them again when they are not so young.
I’ve written before on The Black Box Theory of The Stock Market, the idea that what drives the market is unknowable, so all we can do is make simple extrapolations from what it has done in the past. This is another example of this thinking, and a rather extreme one at that. Rather than make reasonable suppositions based on thoughtful analysis of the stock market, we prefer to carry out commercial archaeology.
Yes, the institution now known as the New York Stock Exchange did exist in 1802. It met in a coffee house. New York harbor was then filled with sailboats. The docks were worked by slaves. Business leaders sometimes settled disputes with duels. And yet Zweig, Siegel, and “brokers and financial planners” think that the price movements of the few stocks traded on this proto-market are a legitimate indication of what might happen in the 21st Century?
So I am here announcing that I, Frank Curmudgeon, will guarantee up to $1 Billion in US Treasury Bonds against default for five years, for the low low price of only 1%. That’s right, the first investor to wire me $10M gets the peace of mind that only a guarantee against default can bring.
Cynics amongst you might object that I don’t have $1B to make good if need be. That’s a valid point. But the same problem exists for anybody writing CDSs on Treasuries.
A US Government default would be a financial Armageddon on the scale of, well, the Earth being invaded by robotic aliens. I should have a good analogy here involving Lehman Brothers but I am having trouble coming up with one that really captures the sense of scale. US default is to Lehman bankruptcy as the Hindenburg is to a twenty minute air traffic delay?
Expecting 10% a year from the stock market over the long run is reasonable, but counting on it is foolish.
I think I might be able to swayhis opinion on 10% returns to some degree if given time topresent my case. However, even if I am right to be bearish long-term, he's already won the battle. He understands that 10% returns are not a "sure thing".
More than any one data point, the bet on deflation really depends on pessimism: a glass-half-empty look at sluggish growth, feeble consumer demand and the large swath of American workers, factories and resources that are idle.
Deflation depends on pessimism? That's good to know. You won't find any of that here. If anything, this blog has been too optimistic.
"If you combine the natural resources of Canada with the fiscal and financial capital and knowledge of the United States with the human labor resources of Mexico, it will put us in a very good place to compete."
The human labor resources of Mexico? Sweet! The natural resources of Canada? Fantastic! The fiscal and financial capital and knowledge of the United States? Priceless!
Heavy exposure to troubled mortgages in the form of Collateralized debt obligation (CDO's), compounded by poor risk management led Citigroup into trouble as the subprime mortgage crisis worsened in 2008. The company had used elaborate mathematical risk models which looked at mortgages in particular geographical areas, but never included the possibility of a national housing downturn, or the prospect that millions of mortgage holders would default on their mortgages.
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Over the past several decades, the United States government has engineered at least four different rescues of the institution now known as Citigroup.
We'll be supplying the world with "Citigov" and its elaborate mathematical risk models! How can we possibly lose? Woohoo!
Of the $2.8 trillion, perhaps 25 percent effectively consists of short-term obligations, much of which was purchased based on questionable ratings resting on doubtful guarantees. Even if only a few financially stressed municipal debt issuers default, anxious short-term debt holders could suddenly demand cash and trigger a liquidity crunch.
Here's a chart of 20-Year Treasuries and 20-Year Municipal Bonds.
Here's a chart of their difference.
Note that the bottom fell out in late 2008 and that there is a substantial risk that it will happen again. Here's what Suze Orman had to say in March 2007 though.
What does Orman do with the rest of her money? Solomon asked, and was told: "Save it and build it in municipal bonds. I buy zero-coupon municipal bonds, and all the bonds I buy are triple-A-rated and insured so that even if the city goes under, I get my money. I take a little lower interest rate to make sure my bonds are 100 percent safe and sound."
She was convinced that she could get more reward without taking on any more risk. So much for that theory.
When I first started as a stockbroker, I had been a waitress for seven years in Berkeley, California. And -- how much money do you think I had? Nothing, absolutely nothing. But people would come to me, and I had to pretend that I knew what I was talking about and convince you what to do with your money... - Suze Orman, April 2000
Here's what we can expect to earn on 0.2% I-Bonds purchased today if we hold them the full 30 years.
Even though I-Bonds have inflation protection we really don't want to root for inflation. The higher the average inflation rate over the period, the less purchasing power we will ultimately have. It tends to taper off at higher inflation rates though, since nearly all of the bond's worth is based on the inflationary gains and we are only taxed the one time.
Here's how that works out per year.
Here's what we can expect to earn on today's 1.05% 10-Year TIPS held outside a retirement account (and reinvested at 1.05%). Unlike I-Bonds, TIPS are not tax deferred. This can cause substantial pain for those in high tax brackets if inflation moves higher.
In the 35% tax bracket, annual inflation as little as 2% will create a loss of purchasing power. 20% inflation would create serious pain due to the taxation of the inflationary gains each and every year. For those in the 15% tax bracket, it takes an inflation rate of about 6% before purchasing power is lost though.
Here's how that works out per year.
The following chart shows the break even point between TIPS and I-Bonds based on tax rate and average inflation rate assumptions.
In the 35% tax bracket, 0.2% I-Bonds held 30 years are superior to 1.05% TIPS held outside a retirement account if inflation averages over 4.5%. In the 15% tax bracket, it takes an average inflation rate of roughly 8% before I-Bonds become superior.
To add insult to injury for holders of TIPS, higher inflation rates would also tend to push us into higher tax brackets as we earn more and more inflationary based income. In my opinion, for those worried about future inflation, I-Bonds generally offer better protection for money held outside tax deferred retirement accounts. That's probably one reason that the government clamped down on I-Bond purchases in 2007.
The reduction from the $30,000 annual limit in effect for both series since 2003 was made to refocus the savings bond program on its original purpose of making these non-marketable Treasury securities available to individuals with relatively small sums to invest.
Who is buying that reason? Alan Greenspan stated in 1966 that "The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves." I am fortunate that I was able to get many of my horses out of the burning barn before the doors were closed. Let's just put it that way.
I-Bonds also offer superior deflation protection since they can never drop in value. Any inflationary gains they receive are always locked in place. They can never deflate. The reason is that I-Bonds appreciate each month based on an interest rate tied to the CPI. That interest rate can never be less than 0% though. This effect is not shown in the charts above. It is an added bonus for I-Bonds.
TIPS offer limited deflation protection, as we are only guaranteed to get our original principal back. If TIPS inflate up, then they can deflate back down.
Holders of TIPS and I-Bonds should NEVER root for inflation. It may hurt us less than those without inflation protection, but it does still hurt us.
As a side note, I am still bracing for more deflation. As a saver and holder of TIPS and I-Bonds, deflation does not scare me. The government can't tax inflationary gains that don't exist.
This is not investment advice. I am not a financial adviser. It is something I factor in every time I make a TIPS or I-Bond purchase though. Nearly my entire life savings sits in I-Bonds and TIPS. They are not a safe store of value though. Nothing is. I simply consider them safer than the alternatives.
There is no safe store of value.- Alan Greenspan, 1966
If the "rock solid" 61 year trend from January 1939 to January 2000 was still in place, then we would have 36 million more employed workers right now. That's what the chart shows.
What can the government possibly do to get us back on trend?
Keep in mind that there are roughly 15 million unemployed. Even if theWizards of Wall Streetused powerful arcane magic to put every single one of them to work, then we'd still be 21 million jobs short. Go figure.
Needless to say, we will never return to that red trend line. I don't see how we can even come close. First, we clearly cannot create 36 million jobs when we "only" have 15 million unemployed. Second, we haven't even been able to think up one new job over the last decade. Not one. Third, that exponential trend line continues to grow. The gap continues to widen.
Think about what I just wrote. I am saying that it is different this time. Those are the most dangerous words in all of investing. Unless someone can show me a few million miracles then I will stand by it though. It is different this time.
So now that we've nearly proven that we cannot return to that long-term employment trend, I bet we could find quite a few other long-term trends at risk too. For example, how well has the stock market performed since January 2000? Heck, for that matter how is it doing today?
NEW YORK (AP) -- Stocks and interest rates tumbled Wednesday as investors worldwide grew increasingly concerned about the health of the U.S. economy based on actions by the Federal Reserve.
Did I mention lately that I remain deflationary? Well, I am.
Here is my commentary, or as I like to say my “PPP” (proverbial pebble in the pond): NINETYNINE PERCENT of restaurants are still in business after the worst recession in my entire life and I haven’t been 29 in a while! NINETYNINE PERCENT, that’s what the headline should have said, their facts say that!
In my opinion, we had way too many restaurants heading into the recession and we still have way too many. I suppose we could all be euphoric that we have only lost 1% so far though.
We lost about 5% of our work force but only 1% of our restaurants? That math doesn't work for me. As of July 2010, there were 130.2 million non-farm payroll workers. That's actually less than the 130.5 million we had in December 1999.
Employment in wholesale trade will increase slowly as consolidation into fewer and larger firms occurs, eliminating the jobs of redundant workers, while new technology allows operations to become more efficient.
Check out the last decade.
I now refer you to the government's prediction back in the spring of 2000.
Marketing and sales occupations. Workers in this group sell goods and services, purchase commodities and property for resale, and stimulate consumer interest. This group includes cashiers; demonstrators, product promoters, and models; and real estate agents and brokers.
Overall employment in this group is expected to grow as fast as average because of the increased demand for financial, travel, and other services. However, the rate of growth should be slower from 1998 to 2008 than during the previous decade because these workers are concentrated in wholesale and retail trade, industries that are expected to grow more slowly than in the past.
That prediction was the understatement of the decade. As seen in the charts above, wholesale and retail trade sure grew more slowly than in the past.
Nonetheless, some occupations will experience rapid growth. Securities, commodities, and financial services sales representative should grow much faster than average as investment increases and diversifies and financial institutions offer more complex services.
That rapid growth in complex financial services was sure a big win in hindsight though. Wasn't it?
Forehead. Desk. Whack. Whack. Whack.
Top Chefis in its 7th season and four spinoffs are planned.
I think I'll remain deflationary for a bit longer though. Go figure.
As always, feel free to post off topic comments. It might be another week or so before I post again.
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