Thoughts on the Yield Curve

I've been thinking today about the shape of the yield curve for both nominal treasuries and ones with inflation protection. I would like to know why the shapes of the yield curves are generally so similar.

As seen in the following chart, the deflationary event caused the shapes to diverge wildly. The bond market was caught completely by surprise.



So let's go through the risks and try to figure out why the shapes would be the same.

Investopedia: 6 Biggest Bond Risks

1. Interest Rate Risk

The US debt could fall out of favor. We saw this during the dotcom bubble. Interest rates were much higher because investors felt more money could be made elsewhere.

2. Reinvestment Risk

None of this debt is callable. This risk therefore does not apply to treasuries.

3. Inflation Risk

This is not a trivial risk, as last seen during the 1970s.

4. Credit/Default Risk

There's a risk the government simply does not pay its debts. I don't think this risk is trivial, but inflation would seem to be the more likely mechanism. The government has promised to pay paper dollars to its creditors. It can meet that obligation. It has not promised what the paper dollars will be worth though.

5. Rating Downgrades

This is already covered in the credit/default risk.

6. Liquidity Risk

There is some extra liquidity risk in TIPS perhaps, but unless you are trying to move hundreds of billions of dollars or more in bonds within a single day the markets are fairly liquid.

I'm going to offer my own version of these risks.

A. Default Risk

There are two ways the US could default.

A1. Inflation could rise significantly. I would argue that nearly none of this risk is being priced in. If it was then the yield curves would not match so closely. If inflation was the reason investors need a higher yield in order to justify owning long-term treasuries, then why do they also require that same higher yield for treasuries that have inflation protection?

Here is another way to make the same point. The bond market expects the CPI to increase by 2.6% per year on average over the next 20 years. You get this figure simply by subtracting the 20-year TIPS yield from the 20-year nominal treasury yield.

Here's the really amusing part. Guess what the average annual inflation rate has been over the last 20 years. Try 2.5%. No joke. The bond market is simply predicting more of the same. That's all it is doing. At best, it has priced in a measly 0.1% premium.

A2. The US could decide not to pay its debts. The long-term risk would be very similar for both treasuries without inflation protection and for those with inflation protection. This would explain the similarity in shapes between the two yield curves.

Now let's try to figure out if this makes sense. In my opinion, the most likely way for the US to default on its debt is through inflation. I just made the case that this risk is most likely not priced in. If the most obvious form of default isn't priced in then what are the odds that this other form of default is priced in?

If I am right to think that way then what risk is being priced in? Why do investors require higher yields for longer durations?

B. Opportunity Risk

If you lock your money up for 20 years then you are taking a risk that you could have done better elsewhere. This would explain the shapes of the two yield curves and why they might directly match each other. It would not matter if you locked your money away in nominal treasuries or TIPS. The end result would be the same. The shapes of the yield curves would be similar.

This would also explain why real yields have generally been falling over the last decade. Some investors have realized that the biggest opportunities have been in losing money, not making it. First came the disappointing dotcom bubble and it was followed up by yet another stock bubble and housing bubble. Now that the stock market has nearly doubled off of its lows, we may get another losing money opportunity. Who really knows? I would certainly not rule it out.

As a side note, I will point out that the deflation risk was clearly not priced in. As seen in my second chart, the bond market was completely blindsided by it. It therefore doesn't take a huge leap of faith to think that the bond market could be blindsided again (either by deflation or inflation). In my opinion, the bond market is no more omniscient than the stock market is. Both markets stare blindly into the rear view mirror. I would not rely on either to make accurate predictions.

Source Data:
FRB: Selected Interest Rates

Wages, PPI, & CPI

The following chart compares the average annual growth in wages over the previous 5 years to the average annual growth in the CPI over the past 5 years.



I'm using "All Employees: Total Private Industries" times "Average Hourly Earnings: Total Private Industries" as an indicator of total wages. It isn't perfect but it is probably close enough.

As seen in the chart, there's fairly good correlation here.

The following chart compares the average annual growth in the "Producer Price Index: All Commodities" over the previous 5 years to the average annual growth in the CPI over the past 5 years.



Once again, there's fairly good correlation here.

Now let's combine the two charts.



The correlation has improved significantly.

Both wages and commodity prices matter when trying to figure out what the CPI will do.

In case you are curious, the optimal correlation was actually 0.825. It was a mix of 47% commodities and 53% wages.

You will note that the CPI has been running cooler than we might normally expect and has been doing so for 15 years. I think much of that can be explained by our willingness to outsource our jobs overseas (in exchange for cheaper goods) and head down an unsustainable trade deficit path. This trend cannot continue forever.

Of course, shadowstats argues that consumer prices are rising much, much faster than the CPI shows. Why people seem to believe it is another matter altogether.

Source Data:
St. Louis Fed: CPI
St. Louis Fed: PPI: All Commmodities
St. Louis Fed: All Employees: Total Private Industries
St. Louis Fed: Average Hourly Earnings: Total Private Industries

Gold vs. Land

We'll start with the total value of United States real estate.



We'll remove the replacement-cost value of structures.



There are three items of note here.

1. The bubble concentrated on the one thing that was supposed to hold its value. We were told time and time again that the value is/was in the land. They aren't making any more of it.

2. The value of the land has seen two lost decades so far. Isn't that something? I can't stress this enough.

3. The bounce off the bottom looks a lot like a dead cat bounce. Look closely at how it is starting to fall again. The last data point is from the end of the third quarter of 2010. Oh oh.

Now let's turn our attention to gold.



That's a hefty price tag. It goes well beyond the $52 billion sitting in GLD. It doesn't even count the value of gold mined before 1900 (perhaps 20% more).

Now let's compare the value of all the gold mined since 1900 to the total value of residential land in America.



At today's $1,409.60 per ounce, gold has risen roughly 15% since the last data point on that chart.

I continue to believe that gold is in a bubble. All the gold mined since 1900 can now buy all the residential land (but not the structures) of the United States nearly two times over.

I suppose we can joke about how we should all move to China in order to avoid our financial mess. In reality, I have absolutely no desire to move to China. The average person in China would not be allowed to read a blog such as this one, much less write one. I'll pass on modern authoritarianism thank you very much.

My interest in owning gold at these prices is similar to my interest in moving to China. I'd need to be forced to do either. I just don't see the value.

Source Data:
USGS: Historical Mineral Statistics
Kitco: Gold
FRB: Flow of Funds Accounts

Gasoline Price Crisis Averted

This is an update to an earlier post.

Thanks to the quick actions by our Federal Reserve to fend off deflation, the crisis of cheap gasoline has been averted.

February 23, 2011
Analysts: Gas may soar to $5 per gallon soon

LOS ANGELES (KABC) -- The economic recovery is still new, but experts say that the prices we pay at the pump could derail it.

The following chart compares the price action in regular unleaded gasoline over the previous 2 years to the change in nonfarm payrolls over the previous two years.



Note that there's now a bonus blue "Wow!" arrow in the chart pointing to the gas price shock we're experiencing right now. Gasoline prices rose 77% from December 2008 to December 2010 and 73% from January 2009 to January 2011. Wow!

If you look closely at the first chart you'll see that there is a lag between the peaks in black and the troughs in red. Generally speaking, the party is just about over when the peaks in black start showing up. How long investors keep dancing is anyone's guess.

The next chart attempts to predict what employment will do in the next two years based on what the price of gasoline has done in the past two years.



It's not perfect, but there is some correlation here.

It seems very unlikely to me that there will be robust employment growth over the next two years. Let's just put it that way.

Have I mentioned lately that I'm not a believer in commodity driven stock markets?

Source Data:
EIA: Petroleum
St. Louis Fed: Total Nonfarm Payrolls: All Employees

1979 Style Hoarding

June 18, 1979
Behavior: Hoarding Days

One key ingredient in all hoarding, explains U.C.L.A. Sociologist Ralph Turner, is public distrust. Says he: "The ordinary human being knows that Government authorities and business leaders give a lot higher priority to keeping the populace calm than to telling the truth."

Factors other than a loss of faith in government may also be at work: a competitive culture, high anxiety about the economy and conflicting reports on which shortages are long-term or temporary. Says Sociologist Jackie Boles of Georgia State University: "At times like this we need strong leadership to jolt people out of this competitive behavior. Unfortunately, our leadership has said, 'Yes, we have an energy shortage,' and 'No, we don't have an energy shortage.' People are operating in a vacuum of leadership." Adds Brenner: "The public will try to get the facts themselves, and when no reliable facts are available, they will create their own drama."

And they say history never repeats? The drama is mighty intense these days.

February 24, 2011
David Rosenberg: Forget Oil And Inflation, The Real Story Is In The Bond Market

In his daily note, David Rosenberg expands on a point we just made, that if you dig beneath the oil spike and its knock-on effect on inflation, the real story right now is deflation:

For what it is worth, prices don't generally crash without rising first. Commodity prices certainly have risen. I continue to lean deflationary and have been doing so since November 9, 2009. I said the following then and I still believe it.

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.

We're now in theory-being-tested mode.

Nearly my entire nest egg sits in inflation protected treasuries and I-Bonds. I'm simply trying to maintain my purchasing power. That's all. Inflation will not help my purchasing power though. The more inflation there is the worse I will be doing (as I pay tax on the inflationary gains). Although I have inflation protection as a saver, I can therefore still root for deflation and/or the lack of inflation.

The same cannot be said of those who are exposed directly to highly leveraged "sure thing" commodities. There's potential for a great loss in purchasing power. The easy gains on the way up can become hard losses on the way down. Just something to think about.

Silver Bubble Construction Set

The following chart compares how much the price of silver is above its long-term inflation adjusted average price to the total amount of purchasing power lost owning 3-month treasury bills over the previous 5 years.

I'm assuming a tax rate of 30% on the t-bills and I'm also adjusting for inflation. I'm not adjusting the price of silver for taxes though (mainly because those taxes can be deferred).



The following chart attempts to find the correlation.



There's almost no correlation here. R-squared is just 0.04. Let's eliminate World War II from the analysis though. For a variety of reasons, silver was not an important metal of the war. If nothing else, there was a distinct lack of werewolves involved in the fighting. ;)



The correlation is pretty good now. R-squared comes in at 0.41.

As seen in the chart, silver isn't exactly cheap. It is well above the level we would expect to see based on the pain dished out to savers over the past 5 years.

Gaining 200% to avoid a 3% loss in purchasing power is a lot of fun.

Here's the main concern. We live in an overleveraged society and that chart screams leverage to me. Note that the scale on the y-axis is roughly 20x what it is on the x-axis. It can easily play out in reverse someday. Those who bought silver in 1980 and held for 5 years found that out the hard way.

If these charts have any merit, then silver is either in a bubble or silver has priced in a great deal of future pain for savers. Perhaps hindsight will show that it was a bit of both? It's just one more reason I've been willing to buy 30-year TIPS.

No easy answers here. I'm worried about stagflation, deflation, commodity bubbles, debt, trade deficits, budget deficits, unemployment, taxes, leverage, and so on. I'm just trying to navigate the minefield.

The most merciful thing in the world... is the inability of the human mind to correlate all its contents. - H.P. Lovecraft

It really doesn't feel all that merciful right now. I'd really like to know, or so I think. Nobody knows though. Maybe ignorance really is bliss. Sigh.

The financial markets generally are unpredictable. So that one has to have different scenarios... The idea that you can actually predict what's going to happen contradicts my way of looking at the market. - George Soros

Source Data:
FRB: Selected Interest Rates
USGS: Historical Mineral Statistics
Kitco: Silver
BLS: CPI-U

The Sarcasm Report v.92

401k balances reach 10-year high

Fidelity Investment's analysis of 11 million accounts shows the average balance the highest in a decade.

Who would have guessed that continuously adding money to 401ks for an entire decade would have worked out almost as well as just hiding the cash under mattresses? Shocking.

Do you know what would be really shocking though? Picture where investors would be if the Nasdaq had simply kept up with the 26% rise in the consumer price index over the last decade.

To put the numbers in perspective, however, keep in mind baby boomers between 46 and 54 should have about 14.6 times their final salary saved in order maintain a similar lifestyle in retirement, according to calculations by human resources consultant Aon Hewitt.

Hey! I'm 46 and I've got to tell you that I love the precision. Not 14.5 times. Not 14.7 times. 14.6 times will do it once I factor in a ton of other assumptions about expected returns, risk tolerances, and inflation rates using the trusty rear view mirror.

As I see it, this is fantastic news for those planning to die 14.6 years into retirement and their investments somehow manage to keep up with inflation and taxes long-term though. No doubt about it.

A Saver's Nightmare v.2

Click to enlarge.

We're keeping the dream alive. Woohoo.

According to Bloomberg, 5-Year TIPS are now yielding -0.41%. Pathetic.

If the 1970s are any indicator, then real rates could actually fall further. Here's what Bill Gross had to say recently.

February 23, 2011
Investors Chronicle: Default by stealth

"And, on the short end of the yield curve, we are looking at creditors receiving negative real interest rates for a long, long time. That is, in effect, a default."

As a saver, that is truly a nightmare scenario. It is the primary reason I was willing to lock in a positive real yield on 30-year TIPS.

See Also:
A Saver's Nightmare
Real Yield Infection (Musical Tributes)

Source Data:
I-Bond Rates
TreasuryDirect: Auction Results
U.S. Treasury: Daily Real Yield

The Sarcasm Report v.91

February 22, 2011
5 funds that could kill your nest egg

Fidelity Freedom Income (FFFAX) is an interesting retirement fund. The problem is that no more than 20% can be invested in equities. While this may appear to be safe, it limits investors' upside. And as the average lifespan increases, the retirement savings that many baby boomers expect to see them through old age are falling short in many cases.

1. There's no better way to kill your nest egg than to limit your exposure to equities *after* they have doubled in price in just 2 years.

2. If you know you are a net seller of equities to fuel your retirement, as most baby boomers will be, then hold onto equities as long as possible. That way you can sell *after* everyone else does. Somebody needs to be the bag holder. Might just as well be you.

3. If you know your lifespan will increase past the point at which your retirement savings aren't enough, then you'll need to gamble in order to have any hope at all. Baby boomer needs new shoes! What could possibly go wrong?

Domestic Financial Profits and the Trade Deficit

The following chart shows the domestic financial profits as a percent of the total domestic profits.



I have added a median value in red using the data from 1952 to 1984. Why 1984? As seen in my last post, that's the year we first started to embrace an unsustainable trade deficit.



How much do you currently trust domestic financial profits? Before answering, you might want to read the following quote.

January 26, 2011
Retreat on 'Marking To Market'

Accounting rule makers, bowing to an intense lobbying campaign, took a key step Tuesday to reverse a controversial proposal that would have required banks to use market prices rather than cost in order to value the loans they hold on their balance sheets.

For what it is worth, I think the cumulative trade deficit made us feel wealthier at first and is now having the opposite effect. It makes sense if you think of the cumulative trade deficit as an exponentially growing debt. Going into debt to buy cheap goods is a lot easier and emotionally satisfying than getting out of debt once it has piled up.

Here's the worst part. We've exported dollars to the rest of the world in exchange for cheap goods. There was no free lunch here. The rest of the world is now using our dollars to buy oil. That's pushed the price of oil up. A higher oil price only adds to our trade deficit though. We need to somehow stop this cycle before it is too late.

This post inspired by Jazzbumpa in the comments of the previous post.

Source Data:
FRB: Flow of Funds Accounts

Dividends, Wages, and the Trade Deficit (Musical Tribute)

The following chart shows the "net dividends" of corporations divided by the "wages and other labor income" paid to employees.



That's not the only place that shape appears.

September 7, 2010
Home Equity vs. The Trade Deficit



These charts are certainly well correlated and I do not believe it is a coincidence.

We know for a fact that the trade deficit is unsustainable long-term. So what might that say about Jeremy Siegel's much-loved dividends long-term?

If and when things fall apart again we'll be told all about the black swans. We'll be told how nobody could have seen them coming again. What swans? All I see are crows!



Cheat the odds that made you
Brave to try to gamble at times
Well I feel like dirty laundry
Sending sickness on down the line

Source Data:
FRB: Flow of Funds Accounts

Great News!

Fed’s illusion of prosperity bound to vanish

We have all seen how Fed-induced speculative bull markets end. We either end up with another cycle of wealth destruction down the road or higher inflation. I see no other outcome.

My primary competition is in serious trouble. That means the profits I am enjoying by writing this "Illusion of Prosperity" blog will most likely double soon.

I just wish I hadn't used a deflationary dotcom business model, lol.

2 x $0 = $0

A reader told me through a private email that I might want to check out David Rosenberg today. Thanks for that!

The Safety of the Bears Is Dead and Bankrupt

When you read my headline you might be tempted to ponder the near doubling of the stock market off of its lows or perhaps think of the following story. Who could blame you?

World economy can survive oil price surge: IMF

The world economy can withstand the surge in oil prices sparked by unrest in the Middle East and North Africa so long as the increase proves short-lived, said the International Monetary Fund's number official, echoing Deutsche Bank AG and Bank of America Merrill Lynch.

The world economy will survive. Thanks to Modern monetary technology which is keeping the life-blood flowing, the world economy isn't terminal. Isn't that great news? There's clearly no safety in being bearish any longer.

Perhaps my headline was meant to be taken a bit more literally though. Maybe I meant gummy bears?



Gummy Bears. Everyone loves them. But what everyone doesn't know is how easy and fun they are to make at home. This is the perfect project on a rainy day for the kids and the end result is just as good as anything you'd buy in the store.

There you have it. Homemade gummy bears are as good as *anything* we could buy in the store. If the price of oil continues to climb, we can just shut the malls down and all stay home. Win win!

Of course, we can also still buy 6 pounds of gummy bears at Costco for just $5.99. Some might have you believe that it makes the perfect addition to an Apocalypse Pantry. Some might.

What if you were to think *way* outside the box though? Perhaps my headline was meant to be taken completely literally? Then what?

Duerson recently filed for bankruptcy

Former Chicago Bears safety Dave Duerson, who killed himself Thursday, had filed for bankruptcy last September, the Chicago Tribune reported Tuesday.

Ouch.

Counterfeit Wealth

February 6, 2007
Cost of Piracy

Up to 10% of car parts sold in the European Union are thought to be counterfeit.

I have a personal anecdote to share on this topic.

I was a research assistant for a physics professor doing a short-range gravitation experiment in college.

There was a vacuum chamber with a small viewing window. The viewing window was held in place with 6 carbon steel engine mount bolts. My job was to replace the plexiglass window with a glass window.

He left the room. I had a small wrench and I began to tighten the first bolt. I turned and turned. It never tightened. All it did was stretch.

I took the first bolt to his office and handed it to him. He looked at me like I was superman. I told him that it wasn't me, it was the bolt!

He had me take the next bolt down to the shop and test it with a torque wrench. I tested it. I was able to stretch that bolt without even seeing a reading on the torque wrench. That's how easily it stretched.

He took the bolts back to the auto shop and got replacements. I tested those too. The difference was night and day. The first set felt like lead. This second set felt like the carbon steel it was advertised to be.

Somebody, somewhere, is driving a car with at least one engine mount bolt made out of lead. I truly believe that.

I offer this story as a warning to those buying precious metals. If engine mount bolts can be faked, then anything can. To this day, I would not be able to tell the difference between the bolts without testing them. That's how good the fakes were.

Silver to Wheat Ratio

Click to enlarge.

February 20, 2011
Increases in commodities, stocks may have run course

The "fat lady is clearing her throat". The recent price gains in equities and commodities may soon have run their course on the psychological influences of rhetorical expectations of a global economic recovery. I fully expect her to break out into "song" in the near future and that could spell the end of the meteorical rise in prices for equities and commodities.

I am a believer in the theory. If true, I will take some short-term damage in TIPS but I should be okay over the long-term. Those with direct exposure to equities and commodities may not be so fortunate.

March Wheat closed at $8.22 ¼ per bushel, down 28 1/2c and near a five week low on profittaking in front of the holiday weekend. We could see renewed buying on Tuesday as the reality that people "must heat" and shortages persist takes hold once again.

Wheat is certainly a bargain relative to silver if history is any indicator. I find the "must heat" pun particularly amusing from a gallows humor perspective. Sigh.

Source Data:
Kitco: Silver
USGS: Historical Mineral Prices
USDA: Historical Wheat Prices

China's Cranking Out the US Silver Coins

Inside a Chinese Coin Counterfeiting Ring

The sheer size, scope, and professionalism of this counterfeiting ring will astonish you. Although the working conditions often appear dirty and the minting equipment is old, this is obviously a well-funded enterprise that is run like a legal business in China. There is no law in China against making these "replicas" as long as they are sold as such.



Just to show how few people have a clue about how much gold is worth, Mark Dice tried to sell some for dirt cheap, but nobody wanted it.

I was shocked that nobody would buy a gold coin from a stranger on the street for $50. Shocked I tell you!

Retail Treasury Buyers

Treasury Direct: Auctions

Both TreasuryDirect and Legacy Treasury Direct allow noncompetitive bidding only.

We can use this information to get an idea what the individual retail investor is doing in the auctions by comparing noncompetitive bids to competitive bids.

In the chart that follows, I'm showing the results of the first auction in each year.


Click to enlarge.

Note that the typical individual retail treasury investor does not seem even remotely concerned about Japanese style deflation. There was concern in 2002 (as seen in nominal treasuries) but that concern has vanished. The "buy everything" mindset seems firmly established.

Also note that the typical individual retail TIPS investor apparently prefers to stampede into TIPS after the stock market crashes (both times). Who knew?

How to Close the Barn Door After the Horse Has Bolted

A panicked horse will do absolutely anything to escape.

The S&P 500 has doubled in the last 2 years. Copper recently hit a record high. Silver is trading at 4x its average inflation adjusted price (over the last century). Peak everything! What could possibly go wrong?

Source Data:
Treasury Direct: Announcement & Results Press Releases

The Sarcasm Report v.90

February 17, 2011
Lessons for Retirees From the Bear Market Decade

If that sounds to you like a fancy way of saying "tighten your belt," you're be right. Our economy and markets are struggling to recover from the worst financial meltdown since the Great Depression, and there really are no magic bullet solutions. The answers all require sacrifice, adjustments and hard work.

Despair.com: Sacrifice
Despair.com: Sacrifice (Temple)

Perhaps I "are be right" to be bearish? ;)

Satiric Buying Trends

April 16, 1997
The Onion: 'Everything's $10,000' Chain Goes Out Of Business

WHEELING, WV—Citing "phenomenally poor sales," the retail chain Everything's $10,000 filed for Chapter 11 bankruptcy Monday.

September 6, 2000
The Onion: Parents' Record Collection Deemed Hilarious

"We figured since we had this nice new stereophonic hi-fi, we should have some records to play on it," Donald said. "I've always been a real music lover, and I just started buying everything from Henry Mancini to Mitch Miller."

August 6, 2003
The Onion: Everything On Menu So Tempting

CHILLICOTHE, OH—Absolutely everything—everything—on the Cedar Tree Family Restaurant menu is so tempting that diners are going to be hard-pressed to stay on their diets, customers reported Monday.

February 18, 2011
Reuters: "Buy everything" sentiment continues on Wall Street

"I'm showing, by every technical and quantitative standard I have, this market is at extreme levels. But no matter where we start out in the morning, buyers come in."

Oops. That last one isn't satiric! Sorry about that.

Investment Idea

What if we combine stagflation, horse technology, the Internet, and the very best of retail?

Stag-E-Coach

Is it a safe investment? You bet!*

Not only will we have the same ticker symbol as the SEC, we will also have the same mission statement.

SEC

The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.

We'll be concentrating on that capital formation part.

The world of investing is fascinating and complex, and it can be very fruitful.

As founder, I pledge that Stag-E-Coach will promise to be one of the most fascinating and complex investments ever devised by man!

Stag-E-Coaches are the ultimate investment vehicles!



Just add warm water and it comes back again instantly.

* We accept bets only during stock market hours. We cannot assume liability for bets that are unsuccessfully entered during stock market hours. Only bets confirmed are accepted. To bet on margin, you must first deposit enough cash to meet the initial margin requirement. If your balance falls below the maintenance requirement, we can issue a margin call requiring you to deposit more cash.

Stagecoach Technology!

I've been thinking that maybe we could get in on the transportation infrastructure subsidy gravy train.

My unemployed girlfriend has two horses and history shows that horses can haul goods if given the opportunity. Win win!

We'd probably need some banking advice to get us started though. That's where Wells Fargo comes in.

Stagecoach

Passengers crowded into coaches caused conditions that prompted Wells Fargo to post these rules in each coach for passenger behavior:

• Abstinence from liquor is requested, but if you must drink share the bottle. To do otherwise makes you appear selfish and unneighborly.
• If ladies are present, gentlemen are urged to forego smoking cigars and pipes as the odor of same is repugnant to the gentler sex.
• Chewing tobacco is permitted, but spit with the wind, not against it.
• Gentlemen must refrain from the use of rough language in the presence of ladies and children.
• Buffalo robes are provided for your comfort in cold weather. Hogging robes will not be tolerated and the offender will be made to ride with the driver.
• Don't snore loudly while sleeping or use your fellow passenger's shoulder for a pillow; he or she may not understand and friction may result.
• Firearms may be kept on your person for use in emergencies. Do not fire them for pleasure or shoot at wild animals as the sound riles the horses.
• In the event of runaway horses remain calm. Leaping from the coach in panic will leave you injured, at the mercy of the elements, hostile Indians and hungry coyotes.
• Forbidden topics of conversation are: stagecoach robberies and Indian uprisings.
• Gents guilty of unchivalrous behavior toward lady passengers will be put off the stage. It's a long walk back. A word to the wise is sufficient.

That's some fantastic advice. We might even be able to think up some advice to offer in exchange.

February 17, 2011
Homeowner Forecloses on Wells Fargo

Eventually Wells got around to cutting Rodgers two checks—but still didn't respond in writing, as required by law.

So Rodgers, at this point plainly annoyed, "turned to the Philadelphia sheriff's office to initiate a sale of the Wells Fargo Home Mortgage office in Philadelphia."

As a consequence of the action, Wells owed him another 50 dollars—for the cost of initiating the sale.

Debt? That's Amore! (Musical Tribute)

Giordano's to continue operating despite bankruptcy filing

Giordano's is the latest big Chicago restaurant chain to declare bankruptcy in the last 14 months. Boston Blackie's filed for Chapter 11 protection in December 2009. It initially kept the burger joints open, but many later closed.

In January 2010, the parent company of pizzeria chain Uno Chicago Grill filed for Chapter 11 bankruptcy. It emerged in July with a plan to cut its debt from $176.3 million to about $40 million.

More Hospital Automation

This video shows the pneumatic tube system (Europe), automated guided vehicles, and PillPick pharmacy automation system installed at St. Olavs Hospital in Norway.



The pharmacy robot at St Mary's Hospital. Isle of Wight.

Video Game Automation

The video game Gran Turismo 5 has two play modes. One allows you to drive the car and the other allows you to manage the drivers.

I have been advancing with both play modes and I've reached the point where I can now do the 24 hours of Le Mans race as a manager.

I'm using the same car that's shown in the following video. The car is so fast that I don't have to do anything. My car's been running for 13 hours so far unattended. The car has completed 250 laps and has a 68 lap lead, lol.



This is beyond surreal. I've been outsourced to my Playstation 3!

I will soon be doing this race as the driver and not the manager. I suspect that I'll wish I was outsourced while doing that one. What a bear! There is a way to pause thankfully, but there is no way to save progress until the race is over. That means I will be under pressure to wrap that race up ASAP lest my girlfriend summons the Gods of Netflix!

30-Year TIPS Auction Results

TREASURY AUCTION RESULTS

High Yield: 2.190%

It was a very lonely auction for me as a retail investor. I represented 0.17% of the noncompetitive bids (1/584th).

You won't see me complaining though.

Here's a chart comparing the current real yield (adjusted for inflation) of the 30-Year TIPS to the historical real yield of 3-month treasury bills held for 1 year (reinvested 3 times). I've also added the average real yield on the treasury bills and a 5-year moving average.


Click to enlarge.

I'm basically locking in a relatively good long-term rate. Over the next 30 years I expect to significantly outperform money parked in 3-month treasury bills. I don't claim this is safe. I might be wrong. I don't think anything is safe these days. With that in mind, look what World War II did to real yields though.

See Also:
30-Year TIPS Auction Announced

Source Data:
FRB: Selected Interest Rates
St. Louis Fed: CPI-U

"Nobody Wants to Work Any More"

January/February 2009
Automation Solves Modern Problems

“We’ve found that the main driver for these companies to invest in automation is the cost of labor,” says Benny Rokni, senior consultant, food and beverage, HK Systems Inc., Milwaukee. “Competition is high and the labor pool is shrinking. Our customers are telling us that nobody wants to work any more. And if they’re in a cold storage environment, that’s even more physically demanding.”



An example of a Self Guided Vehicle (SGV) system currently in use in a French Hospital.



IKEA's automated warehouse in Germany



...a fully automated picking solution for retail.

More Thoughts on Structural Unemployment

Structural unemployment

Martin Ford, in The Lights in the Tunnel: Automation, Accelerating Technology and the Economy of the Future, argues that most jobs in the economy will ultimately be automated via advancing technologies such as robotics and artificial intelligence. In Ford's view, this process is likely to begin not in the far distant future (which most humans don't care about), but sooner than conventional wisdom thinks, because many skilled jobs that people tell themselves are "safe" from a combination of offshoring and automation are actually no "safer" than factory jobs (the book explains the details of why). Ford's analysis shows this creating first naggingly high chronic unemployment levels (8-15%) and sluggish consumer demand and confidence, and later possibly precipitating a major economic crisis.

The Lights in the Tunnel

Without government intervention of this type, free market forces, together with increasing automation, will drive our society toward an unsustainable concentration of income. Imagine a modern, industrialized society in which 95 percent of the population is impoverished and leads a subsistence level existence with little or no discretionary income, while the remaining 5 percent receives nearly all the income. In such a scenario, the majority of industries now in existence would collapse. The businesses from which most wealthy people derive their incomes would fail.

While this is obviously an extreme example, the reality is that economic decline would occur long before such an extreme concentration of income was achieved, and that decline would be accompanied by the deflation of nearly all asset values. The wealthy will not be able to maintain their high incomes by selling things exclusively to each other. The days of the feudal economy are gone. We now have a mass market economy.

You will note that the book is free to download. I guess he's trying to make a point on the deflationary aspects of his theory.

I'm going to give it a read. I'm clearly partial to his theory as seen in one of my first posts on this blog.

September 25, 2007
Automation and Inequality

The extrapolator in me has always wondered what would happen if we could automate all of our jobs away. Now I think I might know. As it relates to farm labor, wages are simply redistributed. The total amount of real wages (wages adjusted by the CPI) has held fairly constant over the years. If you are lucky enough to keep your job, you'll be worth more. You'll be happy. If you aren't, well, sorry about that.

If one was to keep extrapolating this trend to its logical conclusion, at some point there will be just one farmer. He'll have all the wages and will simply press the "harvest" button on his desk.

Update:

I'm about half way through The Lights in the Tunnel. Here's another quote to ponder.

The conventional view is echoed strongly by former Federal Reserve Chairman Alan Greenspan in his book, The Age of Turbulence. Greenspan’s book includes an entire chapter devoted to the growing problem of income inequality. Greenspan tells us that income in the United States is now more concentrated that at any time since the late 1920s.34 He correctly attributes this to globalization and, especially, technological advance, pointing out that many of the jobs previously held by “moderately skilled workers” are now handled by computers. What Greenspan apparently fails to see is that technological progress will never stop, and in fact, may well accelerate.

One more quote.

The reality is that the idea of this tremendous new market resulting from an exploding Chinese middle class is something of a mirage. The Chinese middle class is not an independent market. These people are essentially standing on the shoulders of American and European consumers. And as we have noted again and again in this book, those Western consumers all depend on jobs. If automation begins to dramatically impact employment in China, while at the same time demand dwindles in the West—and certainly if the catastrophic event described at the beginning of this chapter occurs—then this economic perpetual motion machine is going to collapse.

I'm a believer.

Viet Frahd!

I saw this story on our local news and thought I'd share it here. Be sure to check out the video.

February 14, 2011
Feds leave, fraud returns to Seattle neighborhood

For several weeks, KING 5 crews watched the activity in and around the Viet Wah Supermarket.

...

“No, I don’t give. I don’t give,” Pham said in broken English when KING 5 asked her why she was giving people cash for their food stamps.

When asked why she was doing the same things that people up the street had just been arrested for Pham answered, “I don’t know. I go home now.”

Copper vs. Unemployment

Here's a chart comparing the inflation adjusted price of copper to the unemployment rate from 1948 to 2009.



There's no point even trying to put a trend line on that data. There's no correlation.

Copper trades today at $4.47 per pound. It is well above its long-term inflation adjusted average and is also well off the chart.

What does Bernanke hope to achieve by driving the price of copper into bubble territory? Prosperity?

September 7, 2010
The Failed Keynesian Phillips Curve



Rorschach economics for the win!

October 27, 2010
QE 2 could spawn a commodity boom, hurt recovery

The U.S. Federal Reserve is all set to launch a fresh round of monetary easing at its policy meeting early next month, but a boom in commodity prices triggered by such a move will eventually derail global economic recovery, according to a senior official at the International Energy Agency (IEA).

Source Data:
USGS: Historical Mineral Statistics
BLS: CPI
St. Louis Fed: Unemployment Rate

Bankruptcies Per Capita

Felix Salmon: Bankruptcy charts of the day

What’s more, in both of my charts it’s clear that the number of filings is more or less “back to normal” after the artificial interruption of BAPCPA.

I wish I could see his charts. They aren't posted.

Here's my version. Some of these increases in bankruptcy filings might simply be due to population growth. Let's try to factor that in.


Click to enlarge.

Felix Salmon claims bankruptcies are more or less "back to normal". The red trend line is flat. He sees a reason to cheer long-term.

I'm looking at the blue and the purple trend lines. They both slope up. I see a reason to despair long-term. Some of the steepness of the purple trend line was due to filers trying to get in before the Act. Some of it was due to our weakened economy.

The act was meant to decrease the rate of filings; it doesn’t seem to have worked very well in that regard, although admittedly we’re still painfully emerging from a particularly nasty recession.

In my opinion, it did work. I strongly suspect that the red trend line wouldn't be nearly so flat if not for the Act. If I am right, then bankruptcy is still a long-term growth industry in America.

I should point out that I am a crisis blogging doomsayer though. Felix Salmon pointed that out shortly after I started this blog.

November 21, 2007
Crisis Blogging: Beware of the Doomsayers

A system-wide financial crisis isn't impossible, of course: almost nothing is impossible. Almost any financial downturn, taken to its logical conclusion, can become a crisis. But in practice, in the developed world, that doesn't seem to happen.

Score one for system-wide financial crisis doomsayers.

Source Data:
Growth in Bankruptcy Filings Slows In Calendar Year 2010
St. Louis Fed: Popluation

Eating Out vs. Eating at Home v.4

Click to enlarge.

Ouch.

BLS: Chefs, Head Cooks, and Food Preparation and Serving Supervisors

As more people opt for the time-saving ease of letting others do the cooking, the need for workers to oversee food preparation and serving will increase.

I'm not a believer.

See Also:
Eating Out vs. Eating at Home v.3

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

Structural Unemployment

Calculated Risk posted the following today.

February 14, 2011
SF Fed: What Is the New Normal Unemployment Rate?

The key is most of the increase in the unemployment rate is cyclical.

I'm willing to go on the record and disagree.


Click to enlarge.

It took a dotcom bubble and a housing bubble to keep the unemployment rate in the yellow zone.

Who really thinks a gold bubble has a chance of repeating that level of success?

Source Data:
St. Louis Fed: Unemployment Rate

Nogistics (Musical Tribute)

MaxedOutMama is attempting to make my "nogic" something more than just a jumble of word verification letters. Who am I to argue?

Everyone already knows that nogic and nogistics make the world work better.



When the wind fuels our cars
Because it's cheaper than tar
That's nogistics

When we subsidize corn
So we aren't so forlorn
That's nogistics

A continuous debt
It's a safe long-term bet
That's nogistics

Carbon footprint reduced
By importing more juice
That's nogistics

With new ways to consume
There'll be less doom and gloom
That's nogistics

When it's clear Al Gore knows
Right where all the warmth goes
That's nogistics

Krugman praises QE,
"Inflation is free,
there's no fee,
can't you see?"
That's nogistics

There will be no more stress
Because we borrowed the rest
That's nogistics

We May Need to Close Our Borders

Borders poised for bankruptcy in US

Bookshops have found trading tough as readers shun high-street stores in favour of buying online or purchasing digital books for handheld readers such as Amazon's Kindle or Apple's iPad.

Sorry. Just couldn't pass up the headline.

The Allure of False Competitiveness

February 4, 2011
Canadian-made games and the question of outsourcing

In the mid-1990s, the Irish government began enticing multinational corporations with offers of big tax cuts. Major tech companies including IBM, Google and HP took up the offer, which led to rapid economic growth and Ireland’s transformation into a “Celtic Tiger.” Over the course of a decade, the country went from one of Western Europe’s poorest economies to one of its wealthiest.

But critics warned that the incentives were creating a false competitiveness – that Ireland’s high-tech economy couldn’t really hack it if things got tough. To some extent, they were right.

2008–2011 Irish financial crisis

The costs of the bank rescues, NAMA and government deficits over the period look set to push Irish National Debt up to a ratio of 125% of GDP by 2015.

The Sarcasm Report v.89

Now that the stock market has nearly doubled from its lows, it is time to get aggressive and make some serious money. The lowest lying fruit is gone. We need to reach up high in the upper branches for the good stuff now.

Shorting Inflation Protection with TPS

ProShares UltraShort TIPS (TPS) seeks daily investment results that correspond to twice (200%) the inverse (opposite) of the daily performance of the Barclays Capital U.S. Treasury Inflation Protected Securities Index Series-L.

The 0.95% expense ratio...

Yes, it is time to double short an investment that holds individual bonds that are *guaranteed* to grow faster than the inflation rate (if held until maturity).

And it only costs about 1% per year to invest!

What's not to like? Don't be shy. Invest for 30 years. Make it a long-term plan.

It won't come cheap though. You'll lose 25% in purchasing power over 30 years due to the compounding of the expense ratio. You'll be looking to make up that difference as investors overall seek to lose purchasing power though.

Would investors someday lose interest in purchasing power? Well, there is the dotcom bubble and real estate bubble to factor in I suppose. Anything can happen.

If you missed the great opportunity to lose money shorting treasuries without inflation protection when TBT was first introduced, then this is your chance to try again by shorting something that actually has inflation protection. How can you lose?

And let's not forget, baby needs new shoes!

M3 vs. CPI (A Rorschach Test)

Let's look at the growth in M3 over the previous 5 years and compare that to the growth in the CPI over the following 5 years.


Click to enlarge.

From a Rorschach test perspective, what do you see when you look at the chart? I probably shouldn't tell you that I see satan's kite, lol. D'oh! ;)

The M3 data goes from 1959 through 2005. The CPI data goes from 1964 through 2010.

We'd expect some correlation here because as the money supply grows we would generally expect to see more inflation in the future. There isn't as much correlation as some would have you believe though. A growing money supply isn't enough to know what inflation will do. We also need to know how much actual stuff is being produced or has been produced.

Self Storage Acquisitions Too Hot to Handle?

In the second half of 2010 investors swarmed to the self storage industry, buying up businesses like they were on the clearance rack. And the 2011 outlook for the domestic self storage market has “bullish” written all over it.

Investors "swarmed" into an investment that has done amazingly well over the previous 15 years? We've certainly never seen that behavior before. *sarcasm*

The self storage market has a long and impressive 15-year history with an average of 16.52 percent return on investment.

There's been so much stuff produced that we don't even know where to put it all. We also produced an abundance of credit as seen here and here. In my opinion, too much stuff bought on too much credit makes deflation a valid ongoing concern.

If past history was all there was to the game, the richest people would be librarians. - Warren Buffett

Source Data:
St. Louis Fed: M3
St. Louis Fed: CPI

Investors Embrace Even Riskier Assets?

February 10, 2011
Investors shift money from gold to riskier assets

Investors who bought gold for $850 in January 1980 and sold gold for $256 in April 2001 lost 87% of their purchasing power (once inflation was factored in).

What could be more risky than that? I'm almost afraid to ask.

Stocks, which are considered riskier assets than gold, have been rising since the beginning of the year.

Who considers it? Even Japanese stock market investors buying at the peak in 1990 didn't lose that much purchasing power. In fact, they lost less than half as much.

Civilian Labor Force

Energycon has a few charts of the civilian labor force here and here.

Here's my take.



I've included an exponential trend line in red. Here's a closeup of the most recent activity.



In order to be in the labor force, you must be working or you must be seeking a job. So what are the 7 million missing people doing with their free time if they are doing neither?

Here's my tongue-in-cheek theory. They are busy making E-Trade babies to fund their future expenses. Everyone knows that day trading has become a sure thing. You simply cannot lose when competing against other day traders and high frequency trading algorithms located within investment banks while simultaneously paying a fee on each transaction.



I've never seen so many E-Trade babies. It's a bit scary.

Source Data:
St. Louis Fed: Civilian Labor Force