Sunday, August 23, 2015

China's Massive Capital Outflows

China's Currency Devaluation Shocks The World!
China looks to be in for an extremely bumpy ride as a lot more investors question the risk of holding yuan assets. For years credit has expanded rapidly in China, and now much of the country is mired in debt. A big question is how much of this credit expansion was built on foreign capital flowing into the country as Beijing pursued a strong yuan policy pegged to the U.S. dollar. Since 2005 the yuan has appreciated about 30%  profiting those who put money in China. The  general consensus held by everyone from deposit holders in Hong Kong to high-yield-bond investors in Europe was this would continue. Over the years this has pushed along the misallocation of credit on a grand scale and continued the build-up of bad assets in the banking sector. The county's surprising and bold move to devalue the currency is very important and problems resulting from the unwinding of these capital inflows have the potential to further destabilize China which is already in financial turmoil. 

An estimate by Goldman Sachs has indicated China might be facing credit losses of as much as $3 trillion as defaults ensue from the expansion of the past four years, particularly by non-bank lenders such as trusts, this far exceeds amounts seen in prior credit crises. It is important to note the events unfolding in China and the resulting fallout may continue for some time within the country of  about 1.4 billion people that is responsible for the world's second largest GDP, also a risk of contagion exist that will be felt across the world. A great deal of the hot money that flowed into China is now exiting, this and a slowing economy has resulted in the rapid rise in the ratio of credit to GDP. That measure has moved from 120% in 2007 to around 180% at the end of 2012. Interest owed by borrowers rose to an estimated 12.5 percent of China’s economy from 7 percent in 2008, Fitch Ratings estimated in September. By the end of 2017, it may climb to as much as 22 percent and “ultimately overwhelm borrowers.” It is possible China’s total credit will be pushed to almost 250 percent of GDP then or more than double the 120 percent figure of 2007.

Data released last week for July confirms China is experiencing massive capital outflows. A surge in these monthly outflows made it the biggest since 1998 with foreign-exchange funds held at Chinese banks falling by 249.1 billion yuan ($39 billion). Some sources suggest the capital outflows from China have grown to as high as $190 billion over the last seven weeks forcing the authorities to intervene. Yang Zhao from Nomura claims $90 billion left the country in July with the pace accelerating since the People's Bank Of China (PBOC) shocked the markets by ditching its currency peg to the U.S. dollar. Capital flight for the first three weeks of August is already close to $100 billion despite the draconian use of anti-terrorism and money-laundering laws to curb illicit flows. Another sign of stress is the rise last week in short-term borrowing rates in the inter-bank markets of both China and Hong Kong. This again is a sign investors are fleeing the yuan, the rate jumped 1,380 basis points over the last week to 1.667% reaching near a four month high.

While some explain last week’s surprise yuan devaluation as little more than an overdue step toward a market-determined exchange rate it is more likely China's central bank changed its policy as a last resort. Pressure has mounted recently from several events and the the pain of attempting to hold its currency peg to the U.S. dollar finally became unbearable. We must remember Beijing is being hit by the perfect financial storm as forces from a closed capital account, independent monetary policy, and a tightly managed exchange rate all have decided to plummet the economy at the same time. The capital outflows have  ratcheted up the pain forcing an already beleaguered PBOC to support its currency peg. This is at a time that it removes badly needed liquidity from the economy just as the authorities seek to provide support and a floor under the sagging stock market.

Currently, the PBOC is under tremendous pressure as the responsibility of holding this mess together rest solidly on their shoulders. A massive scheme for the state to buy stock shares to halt a falling market while dealing with near bankrupt municipal authorities is only part of the woes they face. Too many who question the stability China's economic foundation this will only delay the day of reckoning. Only weeks ago they strong armed the state banks into buying over $313 billion dollars worth of debt swap bonds in an effort to keep municipal authorities afloat, this most likely will leave the central government taking the hit down the road. The assault of currency outflows comes on the back of two significant setbacks supporting the worlds confidence in yuan assets. In June Chinese shares failed to be included in the MSCI Emerging Markets benchmark Index, this was followed by news Beijing will need to wait at least another year before the yuan can be considered for inclusion as an International Monetary Fund reserve currency.

All this plays into an overall deterioration that makes it logical for many investors to get out of the yuan and it must be noted as this wealth flees for safety it must go somewhere. I contend that bumps in currencies such as the yen, euro, and pound are indications this "wealth" leaving China and I expect much of it will take the scenic route to America. The smaller the currency the more money flowing into it is noticed and when money moves out of China it must often "leak" out through quiet and well established channels to avoid notice by the authorities. A key factor determining which currency to funnel your money into is which you currently consider most undervalued, but sooner rather than later I suspect it will be placed in the dollar which is the most liquid and by many considered the cleanest dirty shirt in the closet. 




 Footnote; Please feel free to explore the blog archives and as always you comments are encouraged. For more on China see any of the post below,
              http://brucewilds.blogspot.com/2014/03/china-and-great-credit-trap.html
              http://brucewilds.blogspot.com/2013/11/china-land-of-overcapacity-and-debt.html
              http://brucewilds.blogspot.com/2013/04/china-and-corruption.html
              http://brucewilds.blogspot.com/2013/02/china-bubble-yes-it-is.html
              http://brucewilds.blogspot.com/2012/09/china-made-by-america.html

Tuesday, August 18, 2015

Bears Using Tight Stops Easier To Hit Than A Sitting Duck!

 Easier To Hit Than A Sitting Duck!
The markets are broken, or maybe I should use the term 'fixed" as in meaning rigged.  Nobody looks out for the small independent trader if anything a target has been painted on their back. The unholy alliance of the Federal Reserve, the government, and the too big to fail has created an interesting situation that improves their ability to wash timid and weak bears out of their positions in this manipulated market. Insider information, computer trading, and the sophisticated use of computing patterns target stops. Bears using tight stops on trades make them easier to hit than a sitting duck, and much of the markets rise has been from these stops being targeted and hit. 

Many of the bears entering positions on crazy over the top valued stocks like Netflix, Amazon, Tesla, and such do so seeking a home run and not a single. Bears tend to swing for the fences, by this I mean they are not interested in making a few dollars on a trade, but they short a stock with the intention of holding onto to it until it burst in flames, and crashes to the ground. Bears often go into a trade hoping or thinking the top has been put in or little upside remains and protecting the trade with a stop. They understand that money growth world wide has not resulted in rapid economic growth, but rather a sea of money on which current valuations float. It is only prudent we question the true relevant value, but timing a market top is very difficult especially so when those in charge continually intervene and do anything they can to extend and pretend the current market.

To say the market is rigged is an understatement. After over 30 years of trading commodities I will flat out state without any reservations that lies and manipulation run rampant. Over the years we have witnessed the type of market reversal the big banks supported by the Fed can generate with a concerted effort to buy S&P 500 index futures at crucial support points. This has proved more than enough to turn the markets from red to green in the blink of an eye. This has reinforced a "buy the dip" mantra or style or trading that has up until now been rather successful. However, the bottom-line is that the higher the market goes the more vulnerable it becomes to a final major collapse and sudden downward move from which it will not rapidly recover.

With all this in mind it is easy to understand why the bears in particular are jumpy.  Over the last several years a pattern of random statements from the Fed and several other sources have caused crazy and illogical rallies. It seems even a bad report on job creation is twisted and spun as to mean more Federal Reserve support for easy money policies and a reason to rally the market. It seems no suggestion of weakness no matter how subtle can exist because it may begin to unravel the already fragile consumer confidence. Efforts to escape our economic morass will continue and most likely take an interesting route going forward. Now and then warning and words of caution are issued from institutions such as the BIS, IMF, and World Bank, but within hours someone comes out recanting or spinning the words into something not so dire and sometimes even optimistic.
 
Looking back few bears thought the end of QE would be a reason for the market to rally, but it did. Note; this is the reason I caution bears to hold back on their celebrations. While those in power, the politicians, central bankers, and those on Wall Street appear to have painted themselves into a corner more than once, it seems they have super powers that allow the constant creation of new exits. Do not be surprised if they have a few more tricks up their sleeve. Until now printing more money has driven this market, an explosion in carry trades, and the growing number of stock buy backs. Last month I wrote that a lack of short positions will bode poorly for the market if it falls rapidly because in such a situation as shorts take profit and buy back their positions they act as a floor under the market giving it support. In this distorted market we may find the floor is very weak or only an illusion.

I continue to witnessing efforts to justify high stock evaluations that discount the importance of profitability and elevate things like market momentum. I consider this a dangerous situation. When stocks like Amazon that are trading at an astronomical P/E then miss earnings, or actually lose money, it is hard to explain why stocks prices reverse after a sharp drop then close the next day posting huge gains. Recently, we have witnessed massive moves in several speculative stocks such as Tesla and Netflix that are hard to defend by any other reasoning than shorts being squeezed out of the market. May I suggest the market has become so distorted it no longer reflects reality and that those with short positions rushing to the exits are responsible for most of the price action now taking place.

The bottom-line is the higher the market goes the more vulnerable it becomes to a major collapse and sudden downward move. For a long time the wisdom has been to buy market dips and pullbacks. With each new rally I feel a bit of deja vu. Way back in 2007 we saw stocks often ignoring both the news and reality, this is happening again. I awoke yesterday to several articles on how Morgan Stanley raised its price target on Tesla shares by 66% to $465 from $280 because the company is uniquely positioned to dominate in the emerging world of autonomous technology and driving. Yes, if it looks like a Ponzi scheme, sounds like a Ponzi scheme, and feels like a Ponzi scheme, then it is probably a Ponzi scheme. Still it would be wise for those who see this for what it is not to make themselves an easy target.

Saturday, August 15, 2015

Fifteen Things Amazon Won't Tell You!

Because of its massive advertising budget and other ties to the company the media often seems to be in bed with Amazon. This means you seldom hear anything bad about the retail behemoth and stories are always being put before us as free advertising. These so-called news articles are often spun to place Amazon in the most flattering light. The company excels in creating illusions that fail to hold up under scrutiny. Its vision of drone delivery is an example of the kind of pop it can garner with such a strategy. One thing is certain you can count on the media to never tell the truth or the whole truth and nothing but the truth. Below are fifteen things Amazon is not in a hurry to tell you. I tried to stop at ten but found it impossible.

#1.  Amazon is a self promoting hype machine that is far from transparent and while politicians fall over themselves to be in its shadow it is not our friend. It looks to a future where workers are replaced by robots as it goes about putting small companies out of business. The strong ties Amazon has developed with politicians should give us pause. Consumer rights organization Consumer Watchdog.org says tech giants, including Amazon and Facebook, have been spending record-setting amounts in lobbying Washington and while Facebook Inc. spent $2.69 million in the second quarter, a 27 percent increase over the same period last year we saw Amazon's lobbying efforts climbed 103 percent to $2.15 million, a new high this would lead many people to believe its clout in the Washington is on the rise.

#2.  Amazon has pursued a strategy of fast growth. They seem to go to where the fast growth is even if the sector has yet to be proven profitable. This has worked because the myth of future profits around the corner has been dangled before investors like a carrot. It should be noted that a key weakness in their business plan is that new competition can now cheaply and easily replicate the most profitable parts of Amazon and cherry pick much of their future potential.

#3. When government subsidizes groups like Amazon the cost is shifted onto both the tax payer and  its competitors. I contend that only because of its political connections could the money losing United States Postal Service agree to a special deal with Amazon to do Sunday deliveries in two cities? This is wrong on several counts. The first and biggest reason is that the USPS is an extension of the US Government and a money losing one at that. Another problem is this hurts all the smaller mom and pop businesses and brick and mortar stores in a community. While this arrangement may add revenue to the postal service it still is not the job of the government to compete with private delivery companies such as UPS and Fed-X. Claims that the USPS makes money on these deliveries offsetting other loses does not justify such intrusion by government into the private sector.

#4. The company is not a great job creator or even interested in creating jobs. This was highlighted with a positive spin in a press conference where Bezos talked about 1,382 newly deployed Kiva robots, in Amazon’s warehouses, a sign of future intentions to limit "job creation". When Amazon does create jobs we often find the employees are unhappy and have complaints about both pay and the way they are treated and dehumanized. In 2011 it was publicized that at the Breinigsville, Pennsylvania warehouse, workers had to carry out work in 100 °F (38 °C) heat, resulting in employees becoming extremely uncomfortable many suffered from dehydration and collapsed. Loading-bay doors were not opened to allow in fresh air because  "managers were worried about theft". Amazon's initial response was to pay for an ambulance to sit outside on call to cart away overheated employees.

#5.  When he is not smiling on stage the Jeff Bezo the CEO of Amazon is not an easy going fella. Amazon has faced accusations of putting undue pressure on suppliers to maintain and extend its profitability. One effort to squeeze the most vulnerable book publishers was known within the company as the Gazelle Project, after Bezos suggested, "that Amazon should approach these small publishers the way a cheetah would pursue a sickly gazelle."

#6.  A great deal of the sales Amazon has generated have been tied to Amazon’s "no sales tax" advantage. This often makes a big difference with penny-pinching shoppers. This is especially true when it comes to buying big-ticket items such as consumer electronics, the absence of sales tax can be a major motivation to shift the order to Amazon and more appealing than instant gratification.

#7.  Amazon is a tax dodging machine the US online retailer had previously reported that sales in  Britain grew to 6.7 billion dollars in 2013. However, accounts filed at Companies House show sales of just 620 million dollars for Amazon.co.uk. with tax payments of just 6.5 million dollars. The company claims all is on the up and up and it has to do with the point of origin and from where the goods are shipped. Margaret Hodge, chair of the public accounts committee, said that UK shoppers should boycott Amazon over the level of tax it is paying.

#8.  Amazon abuses and exploits the brick and mortar stores that line streets throughout America. These are the stores that employ our family members, support little league teams in the community, and add value to our lives. It could be said that Amazon has the social conscious of a gnat, when we look at the company we see no community give backs that are encouraged by so many brick and mortar retailers. 

#9.  How hard core and nasty the company is to deal with. A while back, Amazon shut down its Texas distribution center after the state sent the company a bill for $269 million. That intimidating figure, according to the state, was the total amount of sales tax due between 2005 and 2009. After a series of lengthy talks Amazon reached an agreement where it will be forced to collect sales tax from Texas residents, but managed to avoid paying millions in back-taxes.

#10.  That hardware sales like Amazon's Kindle and Fire do not hold much promise as a driver of future profit. The company cannot compete in such a crowded field and it is merely a fig leaf  in hopes of wedging its way into a broader but still questionable market of after sale revenue.

#11Like Tesla Motors the stock of Amazon defies logic, but has been propelled forward by an environment of cheap and easy money. Add to this blowing shorts out of the market and momentum trading and you arrive at a bubble ready to burst. While Amazon continues to buy companies, the revenues from these companies add to their sales growth but still no profits exist. If they are a distribution company their stock should be trading at around 18 times earnings. When you look for a P/E ratio on Amazon you find N/A because the company makes no money.

#12   Some time ago Bezos referred to Amazon's victory over IBM in a  legal battle to service the cloud computing needs of the CIA we can only assume this has to be in relationship to the American government collecting more data and in effect spying on the American people. Just how much revenue the company pulls in from the government through veiled web service subsidiaries like "Vadata" seems to be deeply buried away.

#13.  When it comes to AWS (Amazon Web Services) the company is slow to share specific numbers, but tech industry insiders seem to agree that only Microsoft and Google are in the same league. What many people forget is that AWS comprises only a small percentage of their overall revenue. This is an arena where a slew of competition exist and more is coming on line each day as the equipment and facilities become easier and less expensive to build or replicate, but Amazon claims this adds a great deal of value to its stock price.


#14.  Jeff Bezo founder of Amazon has been the person who has benefited the most from this soaring stock market star. Even if the company's stock price comes crashing back to earth while he would most likely lose a lot of money he could sidestep the total devastation many shareholders would endure. Forbes shows Bezo as having a real time net worth on 7/24/15 of just over 43 billion dollars making him the fifth richest man in the world. This means it is conceivable that he will survive, not only could we expect that he would have advanced warning of Amazon's impending doom, but it is logical to think he would be able to shelter assets and hedge in ways the average shareholder could not.


#15.  Amazon should receive the "Job Killer Of The Year Award", The company has positioned itself so it employes a minimum labor force at relatively low pay. This means they will be able to apply massive hurt to small businesses forced to pay workers higher wages as more minimum wage laws come into play across the nation. Amazon can avoid locating in these higher pay areas and ship into them. Meanwhile, small businesses will have to cut hours to reduce overhead making them less convenient to their customer base and inadvertently pushing customers towards more online purchases.

While the people who love and support Amazon might claim the points above show Amazon and its CEO to be clever, cunning, and masters of the game, an argument can be make that an aura of evil hangs over much of what it has created. The low prices many consumers buying from the company claim to enjoy have a hidden price often paid for by others. In playing "hardball" it is difficult to overlook how the company has exploited and targeted concerns working within the established rules that positively affect and add to our society. People should consider what kind of community and society they want in coming years before jumping on the Amazon bandwagon.

Years ago another company whose name started with the letter "A" was also about to take over the world, its name was AOL. Today long after its mega-merger with  Time Warner it is almost forgotten and has been placed in the dustbin of history. When all is said and done, Amazon a company that has not proven itself to be profitable may experience a similar fate. A word to the wise, if you don't want to be left holding shares in a company that has been severely downgraded by both analyst and the public you might think about some of the things above that Amazon is in no hurry to tell you.



Footnote; This is a follow up post to an earlier article about Amazon that debunked the myth they are good for the economy and its role as a major job killer. As politicians tout how they helped Amazon create jobs in a certain area or state they often fail to comprehend the number of jobs destroyed or the damage inflicted from the unfair competition they have endorsed. The sale of goods over the internet has a great deal of merit, but how it is carried out determines its effect on society. More in the article below dispelling  the myth Amazon is a job creator.
 http://brucewilds.blogspot.com/2015/07/amazon-is-job-killer.html

Wednesday, August 12, 2015

Lessons From The Financial World

If Debt Turned Into A Butterfly All Would Be Good!
Central Banks have been expanding the money supply and had their foot to the floor yet economies across the world are not even close to escape velocity. Lessons from the "Financial World" are being doled out rather rapidly these days and it is best to pay close attention. They include new terms like bank bail-ins where you can be given a very expensive "haircut" to "claw-backs" a term referring to how a deal isn't over even after its over. And who among us has not recoiled in amazement to discover the so called free market in China that did not rebound after several massive attempts by the Chinese government to resuscitate it. The last time the market rebounded it was after the government threatened to arrest and imprison short sellers. 
 
Our massive debt load is not receding or going away it is merely being transferred to the public sector where those in charge of such things feel it will be more benign. The most recent solution to Greece's debt crisis stands as a monument to the concept that if creative financing isn't creative then what is it? This question makes sense when positioned with other such deep philosophical questions like, how much wood would a woodchuck chuck if a woodchuck could chuck wood? Returning to the issue of creative financing in many ways it has become mind-boggling crazy. Creative financing can be so out there that it is hard to get your head around and makes absolutely no sense. At times it falls into the same logic of the great movie line from The Field Of Dreams "build it and they will come" a logic soundly rooted in faith and little else. The problem with the build it and they will come is that often they don't come. Those who have made such an investment often come to regret it.

We Have Transferred Dept To The Public Sector
 To anyone with a pulse it should be perfectly clear that nothing normal existed in the recent stock market panic sell-off in China and even less in the methods use by the Chinese government to finally halt its fall. The same should be said about the constant market gyrations taking place. On almost a daily basis Greece is pointed to as being the driving force lurking behind market volatility. In all honesty anyone with half a brain knows Greece is in default and has no way to repay its massive debt. The only question remaining is how the issue of their debt will be resolved. The Greek soap opera continues and even calls for "humanitarian aid" are thrown about as the economy of Greece grinds to a halt.

All this is ratcheting up the cost of this sad production we know as debt restructuring and means if they don't deny responsibility Europeans will have to pony up even more cash to keep the lights on in Greece. Until now the countries of the Euro-zone that hold this debt have been resistant to acknowledging to the world the giant scam that they have enabled. While those in charge appear undaunted by what is occurring the fact is by a series of off-book and backdoor transactions they have transferred this loss from the banks onto the shoulders of the people. All this has been done through actions they can only defend by talking in terms of the "greater good" or to by conjuring up images of a horrible financial Armageddon that might of occurred had they not taken this course. 

Thank God This Chart Ends In 2013!
It appears the world has past the point of no-return when it comes to our experiment in monetary manipulation. Modern Monetary Theory (MMT)  was to be our salvation and a tool to even out economic cycles but instead it has morphed into a massive dept machine that drives the economy forward. We may soon rue the day we started down this path for where it leads to a very bleak place. Those in charge of the economy have made the mistake of thinking markets are like clay that can be molded, this is in conflict with the law of economics where in reality markets are like water and will always seek and find their own level no matter who or what tries to control them.

One lesson should be clear by now is that no limits exist to the length those in charge will go to maintain the appearance of stability. Sadly, debt does matter and we may soon run out of places to hide it. A very strong case could be make that a plethora of new tools added the the central banks' tool boxes over the last decade have masked and distorted the economic landscape. This can be seen in the explosion of derivatives, more debt leveraging, and in the growing carry trade. It is a fact that unproven tools can produce damaging results when not prudently applied still efforts to "extend and pretend" seem almost unlimited. When we see how quickly those in charge are ready to give bank depositors haircuts we should not be reassured, instead we should be frightened and see this as a glimpse of how we might be treated when they turn their sights on us.

This problem is not limited just to western countries. In China debt is also a  problem. “If stocks remain above their fundamental value, then all [the Chinese government] is doing with these kinds of interventions is trapping capital rather than letting investors reallocate it to a higher use,” says Eugene White, an economist at Rutgers University who studies the history of financial booms and busts. Maybe the most important lesson to take away from all of this is that we cannot remain in this no man's land forever. “When a bubble pops, it’s leverage that almost always proves so corrosive and destabilizing on the way down,” says Lawrence White, professor at New York University’s Stern School of Business who specializes in financial regulation. Both these men reinforce my point that we may soon move from the realm of insane denial rounding the corner to find we have arrived at an area of utterly obvious crisis.


Footnote; As always your comments are encouraged and please check out the archives to see if other articles exist that you might find of interest.  Below is a post delving into how we often deal with debt and it reminds us that we should be cautious in placing our money out on loan.
 http://brucewilds.blogspot.com/2014/05/debt-mirage-always-moving-into-distance.html

Tuesday, August 11, 2015

The Final Shakedown Will Be Uncontrolled


Never Have We Made So Many Chips!
Let the chips fall where they may is a figure of speech which means, "What happens happens" or "Let the imminent events unfold." This metaphoric term dates back to the 1800s and alludes to chopping wood,  "chips" refers to chips of wood. This phrase uses the image of a person chopping wood and letting the chips fly everywhere instead of trying to be neat and chop on one side so they'll fall in a pile. It implies the woodcutter should pay attention to the main task of cutting logs and not worry about small chips. It is often joined to a statement that one should do what is right, such as, "No matter what the consequences, I'm going to tell the truth about what happened, and let things and events unfold as they may.  

This phrase is sometimes thought to be a misquote of the phrase "Let the cards fall where they may" which refers to one's fortune being told by a tarot card reader. The card reader generally asks her client if he has any preference in how she would lay the cards out and this was the usual response. At any rate, the idiom meaning "let things happen the way they will" has not applied to, and  may not be an option when it comes to our modern day economy. The ship has already sailed when it comes to a hands off approach because central banks across the world are so deeply involved in manipulating the markets they have become very distorted and no-longer reflect reasonable values.

It has become abundantly clear that when it comes to the "economic chips" the powers to be have no intention of letting them fall where they may. However, several factors determine just how much influence can be applied to the the final outcome of current economic policies. Continuing with the metaphor of "falling chips." Things like the size of the chips, the rate or speed at which they fall, and the number of chips in the air may make them uncontrollable. My point is we could find ourselves up to our neck in chips in a blink of an eye, and in the middle of an economic tsunami all bets are off as to how successful efforts to stem a catastrophe might be. This means during the final stage of the global shakedown events will be uncontrolled and become very wild.

The world might soon witness a major shift in the value of one investment over another as investor seek firmer ground. Derivatives, currencies, plunging stock prices, air rushing out of a bond market bubble, how debts are structured, and the timing or direction from which problems arise are all factors that must be considered. We are constantly reminded that investing involves risk, including possible risk of principle or capital and foreign investing is subject to additional risk including currency fluctuations, but what many people don't realize is no matter what they invest in or how they choose to salt away their wealth or savings risk is always lurking. Values constantly change and the unfortunate situation of having your wealth in the wrong place at the wrong time can be devastating, the inability to access your funds can made the situation even more dire.

The economic overlords will and do have the power to change the rules, when this happens it generally is not to benefit you or me. During times of economic chaos you can only hope you will not be the one thrown under the bus. With much of the world looking down a road paved in promises that are economically unsustainable it is likely many will be broken. Pensions and other payments granted to us in our later years are the kind of promises that are at risk of not materializing or being cut. If indexed to inflation this tie can swiftly be cut or broken and it will not be pretty when we see the buying power of these promises rapidly diminish.

How Will The Dominoes Fall?
Much of this revolves around the issue of debt a subject of great importance to both lenders and borrowers, and again timing can mean everything when determining whether a creditor will totally default or force a lender to suffer a major write-down of their expectations. Debt is generally set to be paid over time and a balloon payment coming due at a time when money is difficult to borrow can be the kiss of doom. Inflation or deflation as well as a big shift in interest rates also determine the true winners or losers in this brutal game. You can't get blood out of a turnip and chasing someone for years through a legal system at great cost often only adds insult to injury.

I contend the amount of money and free currency (able to move around and be deployed) actually standing or remaining after the next major economic meltdown begins will be the determining factor of whether inflation or deflation is indeed the flavor of the day. A person may think they are wealthy or have real wealth, but will they be able to tap into it and move it about? Often "paper wealth" is merely a promise of future value. Many people would be shocked at just how little in the way of tangible assets many very wealthy people own and to find much of the wealth people own is in paper, and this is full of risk. What is often  missing or over looked is tangible fully paid for items and things that are likely to hold their value and in the direct possession of the owner. People tend to avoid tangible assets in their control because they are often inconvenient or need to be insured.

Going forward we find the size of the chips, and the order in which they fall is both unpredictable and does matter in determining how an individuals wealth is affected. The story of the gold miner who labored for years then gave up and walked away set things up for the next young lad who started in to hit gold in days and strike it rich highlights being right is not enough, the value of tenacity should not be underestimated, and timing is crucial. The world has indeed become a giant casino and a game of chance, at stake is just how much of our wealth we as individuals can protect. When we talk about contagion it is easy to imagine the dominoes falling, but have no doubt the direction they fall often determines which if any will remain standing. In my opinion luck and caution will have a lot of impact on our individual fortunes as we move through the financially violent period before us. 


Monday, August 10, 2015

National Debt Is Exploding!

In November of 2014 the national debt was poised to pass the 18 trillion mark. As we approach the middle of August 2015 the National Debt Clock shows more than 340 billion dollars has been added to the total and the amount owed continues to grow. This appears to be raising no red flags as we continue to hear from the media how robust economic growth has helped push the U.S. budget deficit down to the lowest level since 2008. Claims of the sharpest turnaround in the government’s fiscal position in at least 46 years are targeted at reassuring American that Washington has got our back. A trick used to confuse the issue and muddy the waters is which administration or President is used to dump the massive 2009 deficit on. Bush left office with the economy in the sewer but the resulting deficit occurred on Obama's watch.  The the last few years the Obama administration has touted how the deficit is dropping and the economy is on the mend. This has led some Americans into thinking the worst of our problems are now in the rear view mirror.

Charts are often very misleading
Charts can be very deceiving, little things like the scale or how they are colored often blur how we interpret their message. The chart on the right sends a clear signal that Bush was the problem even as it confirms the Obama deficits have been larger. Only upon looking back decades do we see just how large this problem has grown. To the American people the crossing of several red-lines in the sand without dire consequences has given us a false sense of security. One thing is crystal clear, running up debt is far easier than paying it off.

According to figures released by the U.S. Treasury, the federal government has officially run a deficit of 589 billion dollars for the first 11 months of fiscal year 2014.  We should remember this number is for public consumption and it relies on accounting tricks which massively understate how much debt is really being accumulated.  If you want to know what the real budget deficit is, all you have to do is go to a U.S. Treasury website which calculates the U.S. national debt. On November 1, 2013 the U.S. national debt was sitting at  $17,108,598955,343 just a year later on October 31, 2014 the number has risen to $17,937,160,394,872 . That means that the U.S. national debt actually grew by 829 billion in less than 12 months. With the artificially low interest rates of today many people seem to have little desire to cut spending. We are literally gorging on debt, and most Americans seem to think that it is just fine and dandy to wildly run up debt as if there is no tomorrow.

Total Debt Is Leaping The Off Chart   
The myth that  and a scenario of growth coupled with a falling deficit will allow us to outgrow many of the problems we face brings with it a false optimism and hope. I have ran into more than one person who touts the fact the deficit is coming down and interprets this as proof everything will be alright. Negotiating the financial cliff and muddling through what was described as a draconian sequestration has emboldened many Americans and left them feeling immune to economic reality, this is the foundation of a financial  disaster. Sadly, the reality is we continue to run up massive record deficits and are merely kicking the day of reckoning down the road. Projections made by the government or any group predicting budgets based on events that may or may not happen at some future date are simply that, projections or predictions and not fact. This means that such numbers are totally unreliable.

Data compiled by Bloomberg using Commerce Department figures would lead a person to think things are getting better. They tout a shortfall of only $483.4 billion in the 12 months ended Sept. 30th, 2013 noting it was only 2.8 percent of the nation’s gross domestic product of $17.2 trillion. The ratio peaked at 10.1 percent of GDP in December 2009. Data shows the fourth quarter of 2008 was the last time the deficit-to-GDP share reached 2.8 percent was in April 2005. “That’s what happens when the government is holding itself back on spending and the economy is improving,” said George Goncalves, head of  interest-rate strategy at Nomura Holdings Inc. in New York. “The question is, is that as good as it gets or will the deficit continue to shrink?” A major concern for this writer is that in 2017 entitlements are poised to balloon causing a massive spike in government spending. 
 

Some people forget or did not notice the Bureau of Economic Analysis (BEA) has made a significant change on how they calculate the GDP.  They changed how they classified and recorded expenditures for R&D and for entertainment, literary, and artistic originals. An announcement of this change was made by the BEA during February of 2013, this resulted in an increase in the GDP. This kind of "bump" means that a gain of 2% today is in reality less than a gain of 2% years ago. This means we are comparing apples to oranges. The narrowing budget deficit has bought time for lawmakers to solve some of the long-term threats to the economy such as the cost of retirement benefits, but even the "false fiscal relief" before us may be short lived as austerity-weary lawmakers may boost spending on defense and other programs. Some people are concerned that even as the Republicans take over congress we might see the beginnings of a pendulum shift away from fiscal restraint.

The Congressional Budget Office predicted the deficit will shrink further this fiscal year, to 2.6 percent of GDP, before rising to 2.9 percent in the presidential election year of 2016. After that unless entitlements are reformed, spending on Medicare, Medicaid, and Social Security will drive deficits to catastrophic levels. We have seen deficits reach unprecedented levels and the deficits in our future will be dramatically worse. The ugly truth many people choose to ignore is that starting in 2017 entitlements will become the driving force and carry the deficit further into the nosebleed territory. Any claim that the Obama administration has the budget deficit back under control is a total lie. We are mired in the mist of the greatest government debt bubble in the history of the world. By our actions or lack of action we are destroying the future of this nation. Only when we use the massive 2009 deficit as a baseline are we given the impression the budget is back under control, it is clear that 2009 was an unplanned budget disaster and should never be used as our reference point. 



Footnote; If you found this post about how the American government deficit and debt is growing informative please view other related articles that may be found in my blog archive, thanks for reading, your comments are encouraged.

Footnote #2;  If you happen to visit the link to the National Debt Clock that is given in the lead paragraph please note boxes on the top line to access the World  or State Debt clocks plus some other options. 
     

Sunday, August 9, 2015

Backlash Growing Over "Politically Correct!"

Across America a backlash is growing over the need to be politically correct. At some point the demands we tiptoe around under the cover of newly devised catch phrases and shuck away others gets a bit overdone. The media and a slew of self appointed guardians of polite society are constantly presenting to a public new no-nos, banned by their edict. I would like to caution any society going down this path and suggest it leads to "group think" or should I say that it eliminates diversity in thought. Those willing to conform to these politically correct ways to express themselves often surrender their right to original expression and experience a subtle reshaping of their ideas. 

Words, phrases, and even historic symbols have been pulled into this arena. The battle flag of the army led by Confederate General Robert E. Lee which is often confused with the confederate flag is now in the cross-hairs of this media driven barrage. With the declaration that some people are uncomfortable with this symbol of the past a re-framing of history is in the works. This has even gone as far as renaming streets, parks, schools, and other building as well as pulling bodies from the ground and moving them to a new location because of their links to slavery or the Civil War.

I have news for these clowns all a busy and waving their arms demanding we denounce anyone who makes a comment that doesn't meet their approval and that is you could simply ignore them. It is not necessary to get up in someones face and wave your finger at them when you disagree. tolerance also means accepting the views of others even when you have harsh disagreements in opinion. The power of a vocal and passionate minority to foster their opinion over the masses which are often indifferent has been something mankind has seen throughout history. It is a sorry commentary that society has us primed to be easily swayed and fall in line to such pressures. By merely declaring something to be offensive people do not gain the right to control the conversation.

Ironically totally unreasonable general rudeness and incivility are allowed if those engaged in such conduct do it in defense of what they consider a just cause. At a July 19th gathering of Netroots Nation  a vocal group heckled and shouted down speakers. Democratic presidential candidates Martin O’Malley and Bernie Sanders faced shouts of  "black lives matter"  which is something neither candidate disagrees about. Before departing the stage, O’Malley told the convention: "Black lives matter. White lives matter. All lives matter," prompting some heckles and boos in the crowd. O’Malley was immediately met with scrutiny and apologized for his comments. To me his apology took pandering to a new level.

Black Republican presidential candidate Dr. Ben Carson may of said it best while appearing on a Sunday morning talk show on August 2nd, he generically referred to to much of this politically correct talk as "silly". In the more recent Republican Presidential debate Donald Trump said he didn't have time to be politically correct. A great deal of mushy logic appearing in the news, such as articles claiming that even peanut-butter and jelly is racist or has racial overtones pushes this line and is an indication this has gone to far. When Verenice Gutierrez, the principal at Harvey Scott K-8 School, in Portland, Ore. makes the news by declaring that eating or talking about peanut butter sandwiches is probably racist then goes on to institute a separate-but-unequal drum class for "only" minority students all this begins to take the feel of reverse discrimination casting a barrier around and over the free speech of those who hesitate to march along in lockstep.

An interesting anecdote I heard the other day was about how a young person was standing on a corner holding a sign with the words "White Pride" and how people immediately thought he was a KKK supporter part of some far right white supremacist hate group. A flood of negative connotations flowed forth. If the sign had said "Gay Pride" people might of thought the youth courageous or a sign about "Black Pride" would of been greeted with the idea it was good for a young person to be proud of their heritage. This story highlights just how over the top we have traveled. When did being a person of non-color become something we should be ashamed of/?  When five white marines were recently slain by a gunman in Chattanooga the President only got around to ordering flags be lowered after he was faced with a huge batch of criticism.

In a country already politically polarized in is not surprising to see strong reactions from those who feel under pressure or assault and it is not unreasonable they react with annoyance or anger. I'm not writing only about angry old white men, but a lot of women and other people many who are the hard working owners of small businesses that are tired of the growing culture of pandering.  From here in the moderately conservative Midwest where I view myself as somewhat socially liberal I have to admit I think enough is enough. In this world someone is always going to be offended by something. Part of my personal conflict grows from a more traditional and conservative economic view of how things work and an awareness of who is getting stuck with the bill and the cost related to the direction we move.