Advancing Time: The Nature Of Government Bureaucracies Is To Expand

Advancing Time: The Nature Of Government Bureaucracies Is To Expand: Across the world governments are broke and they won't stop spending. Expansion into all sectors of the economy has become a thing. Addin...

The Nature Of Government Bureaucracies Is To Expand

Across the world governments are broke and they won't stop spending. Expansion into all sectors of the economy has become a thing. Adding regulations to the private sector is a Trojan horse that weakens the private sector that drives economic growth. All in all the expansion of governments brings with it a fair amount of negative ramifications. One of the biggest is corruption, another is the concentration of wealth, and with this, the concentration of power. 

To fulfill the promises they make, governments often get involved in things that harm people, these include war, subsidizing parts of the economy, or steering things, by hook or crook. During the pandemic and years of low-interest rates, this trend accelerated. Still, the cost of fulfilling these promises is outrunning their ability to pay for them, this is evident in the rapid growth of sovereign debt.  

With interest rates moving higher the cost for a government to carry its national debt has exploded. The idea we are looking at higher rates for longer as central banks move us to a more sustainable return to normal does not lessen the pain taxpayers face. It also lessens the options governments face to finance their programs going forward.

The role of Government in America has changed, over many years we have seen a shift away from Adam Smith’s idea of limited government. This has occurred on federal, state, and local levels. Much of this has been in the form of mandates. Often unfunded they are fostered upon businesses, organizations, and private citizens. Governments also mask their expansion by outsourcing functions, this reduces the image of growth.

There is a new dance that officials have developed over the years, politicians and bureaucrats, deterred from expanding or funding programs by a few vigilant citizens, wait and find creative ways to reach their objective at a later date. By creating special bonds, attaching fees to needed services, or narrow taxes governments fund new authorities, commissions, and districts. These often unneeded quasi-government organizations then reach out to expand the influence and power of their directors. 

Another way governments push forward their expansion is through public–private partnerships. these are long-term arrangements between a government and private sector institutions to perform what is spun to be beneficial to the populace. This area is ripe with both cronyism and corruption. Typically, it involves private capital financing government projects and services up-front often with government guarantees and promises from taxpayers that users will create a profit for the project over time. These often become boondoggles or white elephants.

Instead of focusing on the business of government and simplicity, this proactive movement consisting of “cuteness” cloaked in a veil of flexibility and diversity continually expanding. Make no mistake, those in government are proud of their pet projects. They allow bureaucrats to experiment and try new things without the personal financial risk that a businessman must take. The problem is that they are being creative on our dime.

Nowhere is the expansion of government more apparent than in the area of social services. By replacing the word "want" with the word "need" those seeking a larger and stronger safety net have created a hammock. Many non-working Americans exist under the notion that they have a right to things like a car, free food, cell phones, internet, and free or supper low healthcare coverage and society must supply these items. 

The fact is, the government can't be everything to everyone.  At what level should we supply those who choose not, to or claim they are unable to carry their share of the burden? Those choosing to describe themselves as victims need to take more personal responsibility. Waiting for the government or someone to do things for you is a recipe for disaster. Claiming entitlements is a form of theft, those who take them do so at the expense of others.

Politicians do have a way of distancing themselves from responsibilities. Former Senator Tom Dashel claimed that business "lobbyists in Washington often blocked change." Someone should remind our elected officials that at the end of the day unless the Constitution has been changed that lobbyists are still not allowed to vote!

I should remind those who are less cynical about government that the House and Senate have placed themselves in the enviable position to receive automatic pay raises unless they specifically vote against the increase. This seldom occurs. Is it any wonder that government grows unchecked in such an environment? The big problem is that spending by governments has a poor history of creating solid economic growth.

So I ask, what is fair? This transfer of wealth from those who work to those who wish to take continues to grow in a political system where a vocal minority has great sway over legislation. If unchecked government grows - it is the nature of bureaucracy to expand. The use of sun-set legislation is underused or the bar set far too low when it comes to extending and renewing government bodies. The best time to kill a monster is when it's small and that time has passed.

 

(Republishing this article is permitted with reference to Bruce Wilds/AdvancingTime Blog)

Advancing Time: Market Crosscurrents Pose Massive Danger

Advancing Time: Market Crosscurrents Pose Massive Danger: The recent rally in the stock market flowing from what almost appeared to be a victory lap on the part of Fed Chair Jerome Powell gives the ...

Market Crosscurrents Pose Massive Danger

The recent rally in the stock market flowing from what almost appeared to be a victory lap on the part of Fed Chair Jerome Powell gives the impression inflation has been vanquished. Many market pundits have taken this to mean upward momentum is not ready to abate. Still, market crosscurrents pose massive danger, in short, things could go several different ways. 

Adding to the recent confusion of why the markets are moving up is whether liquidity is, or is not being added to the financial system. It appears bank lending is contracting but other things are happening behind the scenes in swap rates and yield curves. While some of us point to the Fed saying it is tightening and reducing its balance sheet some economists point to a back channel inflow of liquidity juicing the system.   

A case can be made that recent market action remains more about liquidity than interest rates. A lack of liquidity can be poisonous. When you need money, whether the amount is small or large, not being able to get it can lead to a life-changing or grave outcome.  Interestingly, as noted above, the liquidity issue remains unresolved. Central banks are well aware that contagion from one area can spill over into other sectors of the economy and markets. This is why China continues to inject liquidity into its market. How much of that money is getting out of China is an issue. 

So, here we sit, new market highs at a time when many economy watchers are voicing concerns the economy is rapidly slowing and the Fed is already behind the curve in dropping rates. The counterargument being floated is that all is well and we are in the midst of a soft landing or no landing. The latter is the optimistic view that we have entered a Goldilocks moment and the markets are set to go ever higher. 

Those taking the stand a quick reversal of Fed policy and looking at rapidly falling rates may be failing to consider trees don't grow to the sky. It could be argued a major pullback is necessary to avoid a much more severe problem or bigger disaster in the future. Inflation is a key component in assessing where things go from here.  Again, I point to The Hard Asset Inflation / Paper Asset Deflation Theory

Much of the current market danger stems from the fact the fluid financial and economic situation is highly leveraged. If something breaks, the amount of money needed to backstop and halt a collapse of the system will be far larger than anything we have seen in the past. Remember a massive drop in asset prices and the value of bonds directly impacts pension funds and many other aspects of our financial structure.

A great deal of what we call growth has been, or is now financially engineered by companies buying back their own shares and other companies rather than growing organically. This risk is constantly being downplayed as more and more of the concentration of wealth pushes takes place, into just a few companies. A case and point often raised is the huge market capitalization of what is known as the "magnificent seven."

As usual or maybe even more than usual, we should continue to factor in the idea things could be shaken by another pandemic, massive war including the use of nuclear weapons. The whole idea that stocks climb a wall of worry and fall like a stone underlines the fact that markets are non-linear and do not move in a straight line. People tend to slip into a generally optimistic feeling of complacency and discount this reality.  

Lower inflation figures strongly into the euphoria we see in the market. Much of this has been driven by lower gasoline prices which are likely to prove temporary and the idea the costs of "shelter" or keeping a roof over your head will soon decline. These notions brush aside several important facts such as the rising cost of labor and other factors feeding into housing. These include insurance, soaring maintenance costs, and rising taxes. All of these are expected to move higher in the future.

A bond fella recently recently made the case that yields would drop as inflation falls. Several pundits have speculated the Fed must "know something, or be spooked" to have changed course. Pulling on this thread could lead us back to the notion China's economy is in free-fall and it is the main reason rates will be falling everywhere. This has resulted in the notion we will see super strong demand for bonds during a recession even if the supply is huge. 

Still, buying long-term bonds to hold is far different than buying them to hold. Long term we have to look at the future of fiat money and inflation from currency debasement. I'm not convinced it is wise for investors to lock themselves into any fiat currency long-term as things could change rapidly.

Consider the possibility that the Fed is yielding to pressure rather than making a policy change based on choice. By prematurely declaring inflation as no longer an issue it takes pressure off government bonds and banks. When we look back at how this plays out it is likely the importance of liquidity and the money supply will prove far more important than minor changes in interest rates.

In a recent video delving into inflation in commodities, Daniel Lacalle claimed there are only three ways to halt inflation and inflation is fueled by monetary conditions. Lacalle says the only way to stop inflation is raise interest rates, reduce the amount of money in the system, or to create an aggregate demand reduction of credit.

The public sector, or to qualify, governments are busy thwarting all these factors. As long as governments and central banks continue to overspend and print money the inflation beast will remain a ferocious creature.

 

 (Republishing this article welcomed with reference to Bruce Wilds/AdvancingTime Blog)

Advancing Time: The Devastating Impact Of Reverse Wealth Effect

Advancing Time: The Devastating Impact Of Reverse Wealth Effect: Most people find the pain of losing wealth exceeds the joy they get from gaining. While consumers feel more financially secure and confident...

The Devastating Impact Of Reverse Wealth Effect

Most people find the pain of losing wealth exceeds the joy they get from gaining. While consumers feel more financially secure and confident they spend more freely, the reverse is also true. Get ready for the "reverse wealth effect" to kick in. If this happens it will be a real ball breaker. The wealth effect is a behavioral economic theory based on people spending more as the value of their assets rise. Even decades after its economic bubble popped, Japan stands as a monument to the devastation the reverse wealth effect can unleash.

The complacency that has developed from years of markets moving ever higher has insulated huge numbers of investors from the reality bad times may be in the cards. In addition to complacency the market is being supported by the idea the moment any bad thing happens the Fed will pivot. In such a situation the expectation is the Fed put will kick in. This translates into it might be better to tough out a drop because it may not be possible to get back in when the market V bottoms out of the drop. 

Higher for longer is a force that has yet to play out. The bond markets scream caution. The mixed signals flowing from the debt market have left open the possibility the bond markets could become a wrecking ball. This would result in the FED being forced to intervene and the potential for a debt death spiral. We must not forget that for over a decade, super low or negative interest rates forced people to invest in stock markets in search of yield. As this money is pulled out of stocks and returns to safer alternatives stocks may decline striping people of their paper gains.

Circling back to the crux of this post, much of the rationale behind QE has been that it creates what the Fed calls a “Wealth Effect.” For years this has been a key driver of central bank policy. This view is firmly embedded in the macro-econometric models used by the Fed. The notion, widely adopted by central bankers, is that by inflating asset prices to make the wealthy (the asset holders) even wealthier, these people will spend more of what they see as free money from asset price inflation. The premise is that this additional spending will create additional demand for goods and services thus providing jobs for the masses. 

Sadly, several times over the years the wealth effect formula has slid off the tracks and most likely will again. Consumption does not create wealth, it creates debt. The example that stands out in the minds of most people is from back in 2008. By loaning money against homes with little scrutiny as to the borrower's ability to repay them the Fed created a financial bubble with broad implications. It could be argued that since 2008, Fed policy has never really addressed that mess but attempted to paper over it by printing money and expanding debt through quantitative easing.

In a world where optimism and hope have dominated the investment landscape for over a decade, we should be prepared for reality to raise its ugly head. This time is not different and debt does matter. As pointed out by many economists over the years, low-interest rates and easy money, do not always result in a strong vibrant economy. Japan's failure to recover from its bubble bursting decades ago remains proof of this.

The problem is that the policy track we have been on may of driven consumer buying, but it also created a lot of debt and waste. This has been great for certain sectors of the economy such as the financial sector but it has failed to generate the kind of growth that makes an economy strong.

Wealth Effect Policies Have Failed To Generate Enough "Real Growth"

Looking back throughout history we see the policies that breed the Wealth Effect can slide off track or lose their effectiveness while creating risk. At some point, the combination of easy-to-borrow money at low-interest rates tends to morph into a high-risk environment of increased speculation and leverage. In short, savers and investors seeking a return on their savings are forced out of traditional accounts because such investments get ravaged by inflation.

Many Consumers Bought Into This

We must not forget the 2008 financial crisis resulted in the worst economic disaster since the great depression of 1930. It is also referred to as the global financial crisis (GFC). It should be noted the Fed's response to the GFC has gotten a great deal of well-deserved bad press for driving inequality and fracturing society. Since 2008 it has become apparent the Fed has created an unfair system that is broken, unfair, and corrupt. This has affected different generations in rather specific ways.

The amount of debt generated since 2008 screams that wealth effect policies are not working. Not only have they failed to create a healthy economy but they feeding into a self-feeding loop of more debt. Following the GFC the Federal Reserve and the Bush administration spent hundreds of billions of dollars to add liquidity to the financial markets. They worked hard to avoid a complete collapse. They almost didn't succeed. Today we are spending not billions, but trillions of dollars to keep the same corrupt policy moving forward. 

Investors should treat the wealth effect with caution because it is susceptible to harsh reversals. Since the GFC, attempt after attempt has been put forth to change the tide, but still, we have watched the middle class shrink. The elephant in the room when it comes to growing the economy is how "the broken window theory" is spun and interpreted. The gist of this theory is that if a window is broken, the subsequent repair expenditure will have no net benefits for the economy. Still, it is not uncommon to see destruction touted as a good thing because it promotes spending. 

In truth, the broken window idea of destruction is good discounts several facts. One has to do with where the money is coming from but whether it is from an insurance company or someplace else, it still means the money is diverted from being used on another purchase. Repairing a broken window is maintenance spending which doesn’t improve growth because it doesn’t improve productivity. This expenditure would have occurred anyway. The only thing a broken window does is  cause maintenance spending to occur earlier and lower the useful life of the window. Maintenance spending may keep the economy going it doesn’t provide a boost. Instead, it is better to invest the money in something which creates wealth by increasing productivity.

Many people and even economists have real misconceptions as to how the economy works. Where money flows and who it enriches is a key component of economics. This is a blind spot many people have. Years of being told everything revolves around spending has diminished the important role savings plays in the scheme of a balanced economy. Fans of Keynesian economics that encourage government spending to stabilize the economy during a downturn tend to discount the importance that where and how money is spent matters a great deal. 

Wealth Effect Policy Has Flaws

In the end, this all comes back to the fact current policies are presenting us with diminishing returns while increasing risk. Sadly, financial corruption has played a huge role in getting us here. Never before in our history have Presidents, Fed Chairs, and politicians in general been able to exploit their power and gain massive wealth following their time as so-called public servants. A big part of our current problems is the elite top-down efforts to control our society has created a permanent government. Today an army of government workers, most un-elected have been empowered to nibble away at our rights.  

Bubbling up to the surface is the recognition the Fed has to shoulder a huge responsibility in pushing inequality higher. Powell has even gone so far as to claim there was little demand for loans below $1 million. Sadly, the same policies that dump huge money into larger businesses because it is an easier and faster way to bolster the economy give these concerns a huge advantage that devastates its smaller competitors.

The long-term ramifications of destroying smaller businesses hurts America in the long run. It eliminates competition, reduces opportunity, and over time fuels inflation. This drives my angst directed at companies such as Amazon and big tech. The policy of making people feel better so they spend more than they can afford is part of voodoo economics.  It has sent jobs abroad and increased our consumption of imported goods resulting in massive trade deficits. Good economic policy encourages personal responsibility and is rooted in saving not spending. Consumption does not create wealth, it creates debt.

 

(Republishing this article is permitted with reference to Bruce Wilds/AdvancingTime Blog)

Advancing Time: Japan's Future Remains An Issue Of Debate

Advancing Time: Japan's Future Remains An Issue Of Debate: The debate over the future of Japan continues. This is a complicated and interesting issue. Because of its small footprint, we often forget ...

Japan's Future Remains An Issue Of Debate

The debate over the future of Japan continues. This is a complicated and interesting issue. Because of its small footprint, we often forget the oversized role Japan plays in the global economy. Japan is the fourth largest economy in the world and a major exporter of finished goods. This makes it a big player in the global markets and for many years some investors have considered the yen a safe harbor in times of turmoil. 

In a post last Sunday here at AdvancingTime it was pointed out that the effects of higher rates will not end until they do. It could be argued that Powell has gotten a large part of his job done if he can simply hold the course. This means staying high for longer. This has the power to end the era of zero and negative interest rates across the world. The implications of ending this forty-plus-year trend are enormous. 

While I appreciate the opinions of Tom Luongo, I strongly disagree with him on the future of Japan. This is not personal, he does not know me, and we have never met. It should be noted that we both agree on the idea the euro is toast, he even talks about how much he expects it to fall. About 32 minutes into a video Luongo makes his take on Japan and the yen perfectly clear. 

Another issue is just how fast a fall in the yen or any currency could unfold. Today with all the ways to convert wealth to another currency or move it out of a country it could happen very very fast. If and when a currency falls out of favor and wealth is shifted across borders it seldom returns. When faith in a fiat currency is lost it is difficult to regain premier status.

One of the reasons I disagree with Luongo's stand on the yen is because it is possible to short the yen while at the same time buying Japan's stock market. The moderator goes on to say this. You can be bullish on the Japanese stock market while at the same time be bearish on Japan's currency. Stock markets can rise as a result of inflation and a falling currency is good for exports. The problem of course is that if the yen falls faster than the stock market sector you invest in rises, you lose.

Below are seven key reasons the yen is about to fall.

• Japan faces more inflation ahead and wealth has been exiting the country for years
• Japan imports a lot and the cost of them is soaring
  
• China's slowdown has hurt Japan's economy
  
• Japan has too much debt
• Japan has horrible demographics
• The BoJ owns much of the stock market through ETFs selling them would affect its market
  
• History shows that when under attack, a country cannot save both its bond market and currency
  

The idea that when investors in Japan's government bonds begin to believe inflation is not going away it would be logical for owners of  JGBs to move out of low-yielding securities and buy foreign bonds or equities. The moment the Japanese stock market fails to rise enough to offset a falling yen and inflation this will turn into a tsunami of money fleeing Japan and constitute the end of the line for those left holding both JGBs and the yen.

 Around 39 minutes into the video Luongo sort of concedes the yen could swing into problems. Of course, this is my interpretation of his words.  Going into 1 hour and 28 minutes Luongo mentions that when currencies slip, they often drop fast. Only time will tell how this unfolds. Still, until we see some clarity as to how Japan will deal with its debt problem, expect the debate over the future of Japan and its currency to garner attention.   

(Republishing this article is permitted with reference to Bruce Wilds/AdvancingTime Blog)

Advancing Time: Stocks Soar On Slowing Fundamentals, An Overreaction

Advancing Time: Stocks Soar On Slowing Fundamentals, An Overreaction: Stocks soaring on slowing fundamentals is an overreaction that can be explained in several ways. This recent market reaction reflects a huge...

Stocks Soar On Slowing Fundamentals, An Overreaction

Stocks soaring on slowing fundamentals is an overreaction that can be explained in several ways. This recent market reaction reflects a huge overreaction on the part of investors and computers hunting out shorts. This is seen in both stocks and the currency market. Big market moves like we just saw do not always make a trend or confirm a turning point but they do take a lot of pressure off markets being overbought or oversold. 

At this point, it is difficult to think the Fed wants to see these markets move further and undo the work it has achieved during the last eighteen months. Inflation has slowed but it is not dead and the seeds for a new wave have already been sowed. A peek at the National Debt Clock this morning shows that after hitting 32.5 trillion dollars just recently, we are already about to hit 33.7 which signifies we are moving far fast in the wrong direction.

The fact is, little changed last week and the game and effects of higher rates will not end until they do. It could be argued that Powell has gotten a large part of the job done if he can simply hold the course. This means staying high for longer. This has the power to an end the era of zero and negative interest rates across the world. The implications of ending this forty-plus-year trend are enormous. 

True price discovery has been lost during the debt explosion. What we are seeing is not about interest rates rising to slow a magnificent economy. What we are seeing is higher interest rates being used as a tool to get debt under control. When the debt collapses and defaults soar bad things happen. Bad news is not good news.

Too much debt and even worse, the expansion of it, is a problem. For as far as the eye can see unsustainable government deficits scream devaluations of fiat currencies. This only raises the issue of which currency falls fastest and hardest. An increase in the risk of defaults is in place, this includes not only individuals going bankrupt but companies and even nations. 

Yes, the markets may be celebrating a bit early. When all is said and done, little has changed. The dangerous game of accumulating wealth has more to do with avoiding huge losses while salting away gains than with markets violently swinging sideways. Wealth accumulation is a marathon and not a fifty-yard dash.

(Republishing this article is permitted with reference to Bruce Wilds/AdvancingTime Blog)

Advancing Time: Could The Fed Lower Interest Rates And Print Away?

Advancing Time: Could The Fed Lower Interest Rates And Print Away?: Interestingly, economists continue to reference the Great Financial Crisis of 2008 as if it were a depression. It is also important to note ...

Could The Fed Lower Interest Rates And Print Away?

Interestingly, economists continue to reference the Great Financial Crisis of 2008 as if it were a depression. It is also important to note that most of the issues causing the crisis have never really been addressed. By printing our way out of that mess, shifting and creating debt we have merely kicked the can down the road. It seems the endgame theory has been redefined and the game never ends, it just changes. 

It often seems the bubble is "always popping" but after two weeks it is back to business as usual. This is evident in the fact ideas of debt reduction now include talk of a debt jubilee and it is becoming more normal for people to advocate guaranteed basic income as the answer to society's woes. Universal basic income or UBI is a direct cash benefit from the government that provides people with money to support their basic needs regardless of their employment status.

 

While unlikely, we must consider that at any time the Fed could lower interest rates and take us down the same path as Japan. Yes, the Fed could lower interest rates and print away as an answer to our problems. The problem with this is it results in a slew of new problems. While this seems unlikely as long as Powell remains in power, if he would be removed from the equation, things could rapidly change. 

 

Beware Things Can Get Twisted!

The system that we live under is essentially closed and such systems are generally more rigged versus open systems. Closed systems are in a way a trap that is very difficult to get out of. An example of this is that gold ETFs act more as a derivative for gold, and fiat currencies across the world act as a derivative for the dollar. These derivatives are not as valuable as the real thing when you get right down to their bottom-line. Derivatives are more of a promise or a link to the real thing.  

The idea of higher for longer has not crashed the economy. We can only hope it will result in a re-balancing over time. This does not mean the bears are wrong or the bulls are right, it sort of means we will putter along. An article came out after the last Fed meeting touting how Powell was essentially saying the Fed is done raising rates.  

 

Is the story of the 2022 and 2023 rate hikes behind us? Not by a long shot. What some market watchers may be forgetting is that the duration factor, or how long they are kept at this level is as important as the rate itself. Also, the full effect of these rate hikes has yet to work its way through the economy.

 

The interest rate story intersects with several other important stories and factors that will shape our future. For example, many people in the inflation camp see at least 5% inflation will stay with us for most of the next ten years. Taxation is another, direct or indirect, life is full of hidden taxes. Governments, banks, and businesses all benefit from taking advantage of us by shifting costs and then nibbling away at us. 

Also, we would be naive to discount soaring labor costs. several agreements with huge unions have resulted in raises in the 30% area. This jump makes it difficult to think the nearly 25 million government and public sector workers across America will not be soon banging on the drums for huge wage increases. then there is the issue of geo-political problems everywhere, but that is a subject for another time.

Even if the rate hiking cycle is coming to an end, the fact that if inflation does not remain contained, new issues will emerge. The glorious idea capital controls will bring about a glorious future should be viewed with suspicion. As the world reserve currency, the dollar still carries a lot of weight in this never-ending game. We can only hope that weight is not squandered and that more is done to correct the unsustainable economic path of piling on debt upon debt the world has taken.

 

 

(Republishing this article is permitted with reference to Bruce Wilds/AdvancingTime Blog)

Advancing Time: Lulled Into Complacency Again? Yes It Happens

Advancing Time: Lulled Into Complacency Again? Yes It Happens: The majority of people have allowed themselves to be lulled into complacency, the fact it hasn't happened yet does not mean it won't...

Lulled Into Complacency Again? Yes It Happens

The majority of people have allowed themselves to be lulled into complacency, the fact it hasn't happened yet does not mean it won't. With all the problems that currently exist, we still find that many investors are adopting the notion a soft landing may be in our economic future. They didn't see it coming in 2008 and it could be argued we have a lot more to worry about today.

So are the markets merely resilient or is it a question of simply ignoring reality? It may be massive government spending or the lag effect has not yet hit us in the face. Risk management is a big part of successfully building wealth. Still, most of  us are not as good at this as we would like to think. Even the smartest and most savvy investors on occasion fail to adequately protect themselves from downside risk.

The fact that central banks have the ability in our modern financial system to add liquidity to rapidly reliquefy a market is something that did not exist in the past. This adds a whole new dimension to both the financial system and the economy. It increases the ability to reverse a falling economy before it can devastate the financial system. Still, the idea you can end the boom-bust cycle has generated a slew of new problems.

This has created a situation that makes it extremely difficult to predict what will occur down the road.  Today we are dealing with numbers and debt much higher than we had in the past. Part of this is because of inflation and some stems from society making it easier for the average person to take on debt. We cannot deny that an evolution is occurring in the currency market and how people view both money and wealth. The price of money and the quality of markets are two totally different animals that react to each other. True price discovery can be masked over but tends to reappear at some point or other.                     

Fed Chairman Bernanke Was Very Wrong

The old Chinese curse, "may you live in interesting times" refers to and, in a tongue-in-cheek way, downplays times of danger and uncertainty. Nothing is as permanent as a temporary government program" is another humorous or sarcastic statement expressed in a serious manner. Today, we face both uncertainty and a slew of untested government programs that will most likely stay around for far too long.

You Don't Want To End Up Like This

When we are young and know it all the road often appears more clear and defined. It is likely the fella pictured to the right never inspired or thought he would resort to begging for money on a street corner. There are a lot of ways to lose your wealth. The new normal is nothing like the normal we have grown used to in the past. 

Still, macro concerns floating around higher interest rates have been brushed aside. Some market watchers are even talking about a "Goldilocks economy" or no landing, Both describe reaching the ideal state where an economy is not expanding or contracting by too much and growth is steady. After being protected from devastating and long-lasting setbacks in markets for decades with policies such as the Fed put, the fear of missing out has become strong. This is clearly demonstrated in the "buy the dip" style of investing where fear is put on the backburner.

There Is No Free Lunch!

Cutting to the chase, investing is risky and you can lose everything. Even good companies can implode and become worthless. At this point, it seems the only thing that will tamp down the enthusiasm of many investors is a long-lasting hard reversion to the mean. This remains possible in many markets and exists somewhere between the lag effect and efforts to curb some of the forces driving debt ever higher.  

How we view the world matters. If you accept the argument that we are, more or less, at the mercy of those in power, you have to be dubious. I find it difficult to think they will be fair or put our interest in front of theirs. In short, we should expect to be "played" or thrown under the bus when it benefits them.

If veteran investors such as Jeremy Grantham, the "Bubble Historian" are correct, we are currently in a big one. Grantham claims, that nobody could of logically or really predicted this when referring to the market's action over the last decade or so. While being diversified may help, in the case of major market disruptions, it is no panacea or guarantee you will not get crushed. It has been pointed out by many chart-loving aficionados that a chart pattern exists where a market falls hard, rallies strongly, and then falls to much farther lows. This has happened in the past but history shows the real problem occurs when the economy goes with it and does not snap back.

 

(Republishing this article is permitted with reference to Bruce Wilds/AdvancingTime Blog)

Advancing Time: "Buyer Beware" Tax Sale Bidders Often Discount Risk

Advancing Time: "Buyer Beware" Tax Sale Bidders Often Discount Risk: Last week the county where I live had its annual tax sale. Basically, this consists of an auction-type sale of all the properties that owne...

"Buyer Beware" Tax Sale Bidders Often Discount Risk

Last week the county where I live had its annual tax sale. Basically, this consists of an auction-type sale of all the properties that owners had failed to pay property taxes on or those that had fallen delinquent. One thing is very clear, the combination of too much money chasing too few properties is continuing to keep prices strong in this market. People entering this area of investing would be well to remember a fair degree of risk is involved when a person bids on such properties. When you are the high bidder you must immediately pay the amount you bid and then wait for a year while the current owner has total ownership rights to the property. During that time if the owner brings the taxes current including penalties and interest they get to keep the property and the buyer or bidder gets a hefty amount of interest on what amounts to a loan.

While prices have soared at local tax sales several issues exist relating to the learning curve that new bidders may be unaware of, most of this deals with the risk they may be overlooking in their enthusiasm for a good return on their investment. Increasing the risk is the fact that seminars are being held telling people this is a fast and easy way to increase the yield they receive on investments and that if the person is unable or simply does not redeem the property they may get a very valuable property for a fraction of what it is worth on the open market. Unfortunately, this means you will be bidding against people coming from a seminar or investment workshop loaded with fresh knowledge and who are so eager to "get a bargain" that they go plum crazy when it comes to price.

Buyers Seeking Yield Often Throw Caution To The Wind

Of course, the animal spirits at play vary from auction to auction. Sometimes they are driven by a good turnout, sometimes too much money in the economy, the fact people think they stand a good chance at getting a good return on their money, or just greed. While I will not argue that a buyer may get lucky and pick up a gem for below market price it is just as possible they may get far more than they bargained for in the way of grief. 

It is important to remember rules vary from area to area. Today many of these sales are held online. The days of crowding into a courthouse are slipping into the past. Many areas are moving to a format such as that offered by GovEase with the idea they increase efficiency. Years ago, I remember leaving a sale when it became very apparent the bidding was sky-high from the get-go. The combination of QE and low interest rates drove bidders into a frenzy. Their search for higher yield resulted in them tossing caution to the wind.   

It could be argued that an increasing number of these sales taking place online has resulted in speculators with a slew of money, both their own and that of investors, placing high-risk bets in markets they know little about and have had little time to research. With many of these buyers not being real estate savvy and lacking the time to even drive by the property as well as an inability to do the due diligence required they often find that they wind up buying a pig in a poke. In short, many of these people really have no idea what they are buying. Adding to their risk is they often forget just how much prices can vary in different areas, even within a city, location is everything.

Are You Moving That House? Wait, Please Bring It Back

Properties placed in a tax sale often suffer from a number of problems such as pollution issues, flooding, or sewer problems. Also, properties put on the sales block because of unpaid taxes often have a great deal of deferred maintenance. It is important to remember the owner of these properties receives all monies bid in excess of the minimum bid if they do not redeem the property. This means if only 1,500 dollars of tax and penalties are owed on a house and it sells for 40,000 dollars at the tax sale the owner whether the person living in the house or even the mortgage holder has a claim on the overage. 

If the property has enough issues, the owner of title often takes the money rather than redeeming the property. The flaw in bidding too much is that you may not get your ten to fifteen percent interest as promised but may indeed get the property and rather than a gem it might turn out to be a lump of coal. This can be a real problem for buyers from outside the area who can live hundreds or even thousands of miles away. While "Buyer Beware" warnings are issued, complicating the situation is a note that the IRS may also have a lien against the property. My county does not know how this might play out but indicates the IRS may not be in a hurry to sign off and release it.

Most Properties Are In Very Bad Condition

Owners of property that are struggling to pay taxes often have bad credit and other financial problems leaving them stretched to the limit, with this in mind many who cannot come up with a thousand dollars have little ability to raise a great deal more. When a person knows they are going to lose their property, that does not mean they will go gently into the night. Anyone thinking a person having a property taken from them will turn it over clean swept and in good condition may be proven a bit over-optimistic.

As I stated earlier in this article, in the state where I live, the current owner has total ownership rights to the property and a year to redeem the property. During the time a bidder must wait for a Tax deed to be granted some rather ugly events can take place. If it is rented this means they can squirrel away the rents, they can remove or sell off key components of the building such as the heating and cooling system. If a fire occurs if insured by the current owner he or she would receive the money and most likely not repair the property if they were about to lose it. In some cases, a house or building is condemned and demolished by the government and a lien for the cost put on the property meaning the bidder would get an empty lot and a rather large bill. 

Using the example above the property owner behind roughly a thousand dollars in taxes sees five hundred dollars of penalties and auction fees added on are told they will be given a full year to come up with the money plus fifteen percent of the bid. Normally this would add another two hundred twenty-five dollars bringing the total to seventeen hundred and fifty. The problem for such an owner is that if  it brings forty thousand dollars at the sale. Fifteen percent of forty thousand dollars comes to six thousand dollars. This brings the amount needed to redeem the property to seventy-five hundred dollars, an amount totally out of the reach for many of these people. In this high-risk game it would be wise for both bidders and those watching their property being put up for sale to ask, "Do I feel lucky?"

 

(Republishing this article is permitted with reference to Bruce Wilds/AdvancingTime Blog)

Advancing Time: China Could Derail Japan's Fragile Recovery

Advancing Time: China Could Derail Japan's Fragile Recovery: The IMF, the World Bank, and the United Nations all rank China and Japan as the second and third largest economies on the planet. Together ...

China Could Derail Japan's Fragile Recovery

The IMF, the World Bank, and the United Nations all rank China and Japan as the second and third largest economies on the planet. Together they are responsible for around 21% of global GDP. Cutting to the chase, more of what is occurring in the markets should reflect what is happening in China and Japan which are strongly linked economically. It has become clear that China has huge economic problems and many of us feel it is in a full-blown financial crisis. 

China And Japan As Part Of Global GDP 

A matter that has not garnered enough attention is how economic problems that develop in China will spill over and directly impact Japan. While a strong distrust possibly even a dislike between the people and cultures exists, years ago the two countries joined together in an effort to maximize profits from exporting to America. 

Over the years this relationship has morphed into an almost full-blown interdependence. This has intensified as China and Japan became major trading partners with Japanese direct investments surging and Japanese technology playing a critical role in the development and competitiveness of China’s global supply chains. In some ways, the two have become joined at the hip.

It is difficult to envision how Japan can decouple from the mess now occurring in China. Flowing out of my last posting is an important and unanswered question. how much would the Japanese yen have to fall to put Japan into a good place, or even a reasonable place? This means putting Japan in a position where it could get its budget in order and have the possibility to stabilize its national debt. There is no way to answer such a question. A huge number of variables feed into this issue, the largest are centered around which fiscal pathway Japan chooses going forward. 

Reuters recently pointed out that Japanese policymakers were very concerned about China's deepening economic woes. If Beijing fails to rapidly bolster its economy with more stimulus. Looming large is the fact that China's downturn will have a huge effect on Japan's export-reliant economy. This is a double whammy since it comes just as an aggressive Federal Reserve raises interest rates to slow growth in the United States to lower inflation.

• China's downturn has weakened Japan's external support
• The China risks will be debated and are already hitting the yen
• Japanese investments in China are at risk
• The darkening global outlook complicates a BOJ exit path

The latest available country-specific data shows the two biggest customers of products exported from Japan were bought by mainland China (19.4% of Japan’s global total), and the United States with (18.7%). A major concern for Japan is that across the world we are seeing economic momentum fade. As stated in another AdvancingTime article, we should never discount the American consumer's role as a key driver of the global economy. Many people simply don't understand the dire implications America's slowing economy will have on the world. 

Other countries manufacture the goods Americans buy, which makes America a key component in their economies. When the American consumer pulls back, factories across the world see orders fall. Japan's economy is struggling, its recovery remains fragile. Core inflation which has been in the range of 3.0-3.5 percent. The BOJ is well aware that developments in financial and foreign exchange markets have a direct impact on Japan's economic activity and prices.

The Yen Is In A Precarious Position

Governor Ueda has indicated that its position on ending negative rates has not changed but he wants to avoid ruling anything out and limiting its options. He also made it clear that when the goal of sustained 2% inflation is in sight, the BOJ will consider ending its YCC policy as well as raising interest rates. The fact is, the BOJ can never stop yield curve control and it is costing the BOJ a fortune. In reality, the BOJ is Japan's long-term bond market. The bank's ownership of the 368th series of 10-year Japanese government bonds is near total, at 97.0% on Jan. 10, This is up from 86.4% on Dec. 22, according to reports by a fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.

As pointed out in my last article; Japan's Yen, Where It Goes From Here, the main factor currently supporting the yen are comments from Japanese government officials that they are ready to support the currency if it moves lower. While a country's currency and economy are not the same animals, one does affect the other. Considering the close ties noted above, it is not unreasonable to think that debt defaults in China could take a toll on Japan. Also, Japan's automotive sector, the 3rd largest in the world, with 78 factories in 22 regions & employing over 5.5 Mn people, is under pressure. Sure a lower yen helps exports but it increases the costs of imports. With the price of imports continuing to rise and huge investments in China, what could go wrong?

(Republishing this article is permitted with reference to Bruce Wilds/AdvancingTime Blog)

Advancing Time: Japan's Yen, Where It Goes From Here

Advancing Time: Japan's Yen, Where It Goes From Here: Betting the yen will collapse in value against the dollar because of Japan's massive debt has over the years become known as a widow mak...

Japan's Yen, Where It Goes From Here

Betting the yen will collapse in value against the dollar because of Japan's massive debt has over the years become known as a widow makers trade. This is because so many of those speculating on this have lost a fortune over the years. Yes, the yen has dropped a lot over the last few years but there is a great deal of speculation as to where the value of the Japanese yen goes from here. Due to Japan's position in the game of world finance, this matters a great deal. 

Several factors feed into this complex issue. One geopolitical pundit recently voiced the opinion / commented that the Japanese would not abandon the yen based on the idea of loyalty and pointed out that the culture of Japan is different from that of other countries. I beg to differ with his assessment and stand by a statement I wrote years ago:

When investors in Japan's government bonds begin to believe that Abenomics will be successful in bringing back inflation it would be logical for owners of  JGBs to move out of low-yielding securities and buy foreign bonds or equities. The moment the Japanese stock market fails to rise enough to offset a falling yen and inflation this will turn into a tsunami of money fleeing Japan and constitute the end of the line for those left holding both JGBs and the yen.

It is very likely that the yen will only fail once, and it is impossible to predict when or how fast it will occur once it starts. Japan must move on. Japanese Prime Minister Shinzo Abe is gone, and the long-time Governor of the Bank of Japan (BOJ) Kuroda Haruhiko has stepped down. Japan is in a situation where the BOJ may view ending its easing cycle remains too terrifying to even start. The BOJ can never stop yield curve control and it is costing the BOJ a fortune. The BOJ has become Japan's long-term bond market.

During his press conference following a recent policy announcement, the new BOJ governor Kazuo Ueda,  clarified that the “distance to ending negative rates” hasn’t really changed. He explained he had simply wanted to avoid ruling anything out and limiting the BOJ’s options. Ueda reiterated that when the goal of sustained 2% inflation is in sight, the BOJ will consider ending its YCC policy as well as raising interest rates. Kuroda's successor said that the BOJ has long placed a greater emphasis on the risk of tightening too soon over the possibility of being behind the curve in raising rates. 

Ueda says there’s no change to this “risk management” tendency. Speaking of the currency, Ueda said it’s desirable for currency rates to reflect economic fundamentals and to move in a stable fashion. Udea declined to comment on "short-term" currency moves, which have seen the yen plunge. The yen has been the Developed World's Turkish lira this year. It has cratered from 130 to 148, weakened even more on what was widely seen as a dovish BOJ stance. This drop has been restrained by comments from government officials that they are ready to act on sharp moves.

Of course, in the end, intervention to support the yen will be the call of Japan's Minister of finance and not the BOJ. Still, the BOJ has no other choice than to be "fully aboard" such a decision. This is a political call that has market watchers thinking a burst of FX intervention will occur here around the 150 level. This has created the notion that risk-reward doesn’t favor being long USD/JPY at current levels.

Japan's long-suffering population can sustain only so much inflation and will demand a different PM if the current one is willing to risk currency collapse just to preserve fake bond market stability for a little longer. History has proven this does not work. Soaring inflation has been above the 2% inflation target since April 2022, and even above US CPI at times.

The Yen Is Nearing What Some Currency Traders View As The Critical 150 Mark

A country can always drive its currency downward, however, supporting it is much more difficult. To drive a currency lower a country only needs to print and sell its currency using it to buy one or more of the other three reserve currencies. With this in mind, remember in recent years, part of the yen's strength seen may be attributed to the fact Japan had strong economic ties to the strong Chinese economy. Today, the collapsing economy in China has become a drag unless you are factoring in the idea wealthy Chinese are using business ties to move wealth out of China. This tight relationship can be seen each time trouble surfaces in China's economy. When this happens the yen rises in value as wealth exits China through business back-channels.

Returning to the idea the Japanese people may at sometime bolt and throw the yen under the bus, add into this mix is Japan's huge carry trade in which many citizens are now participating. Planet Finance, recently posted a video focused on the growing number of retail traders in Japan. Knowing they won't get interest on their savings for decades creates a low threshold for the one-and-a-half million Japanese individuals in this dangerous and volatile market.  

 

The story of the yen is a long one. Japan remains the glaring monetary policy outlier it has been for the past 30 years. This has been a long time coming. As stated previously: It is very likely that the yen will only fail once, and it is impossible to predict when or how fast it will occur once it starts. The fact is, Japan is now looking at a currency collapse just to preserve fake bond market stability for a few months longer. I contend the cross-border flow of money leaving Japan is why some other stock markets have remained so resilient in our slow global economy. When Japan crumbles the ramifications will be felt across the world.

 

Footnote; The next post will focus on how China's deepening economic woes are likely to impact Japan's fragile economic recovery.

 

(Republishing this article is permitted with reference to Bruce Wilds/AdvancingTime Blog)

Advancing Time: National Debt Now More Than 33 Trillion And Soaring

Advancing Time: National Debt Now More Than 33 Trillion And Soaring: The emergence and acceptance of Modern Monetary Theory have turned our economic system upside down. Skeptics of its substance and sustaina...

National Debt Now More Than 33 Trillion And Soaring

The emergence and acceptance of Modern Monetary Theory have turned our economic system upside down. Skeptics of its substance and sustainability have been brushed aside. Still, most expect the MMT experiment to collapse and end in ruin. To us that believe in old-school economics, debt matters and is tied directly to interest rates and inflation. For years central banks across the world claimed a lack of inflation as the key that allowed their QE policy to continue, however, the moment inflation started taking root much of their flexibility was lost. Not only have central banks had to slow the flow of new money and the creation of debt, but governments have been forced to pay higher interest rates on their debt as monetary policy has tightened. 

In short, the chart below shows, that our future is filled with huge ugly deficits.

Total Deficits, Primary Deficits, and Net Interest Outlays

Data source: Congressional Budget Office. See www.cbo.gov/publication/58848#data.

Nothing is as sobering as looking at future budgets. With America's national debt now blowing past 33 trillion dollars, it is important to keep the numbers in perspective. A Trillion Dollars Is Roughly $3,300 Per Person In America. Not every taxpayer, but every man, woman, and child. It is important to remember most of these people don't pay taxes. 

 

Today we are looking at an America that is running a wartime deficit at a time of peace. Considering how the GDP numbers are figured this gives the impression all is well. When we think about the definition of a recession, two consecutive quarters of negative GDP, government spending makes it almost impossible to get there.

 

Those of us rooted in the tried and true economics relied upon in the past are worried.  For years the argument that "This Time Is Different" has flourished but history shows that periods of rapid credit expansion always end the same way and that is in default. This also underlines the reality that any claims Washington makes about the budget deficit being under control is a total lie.

Click (Here) To View The National Debt Clock

 

America is not alone in spending far more than it takes in and running a deficit. This does not make it right or mean that it is sustainable. Much of our so-called economic growth is the result of government spending feeding into the GDP. This has created a false economic script and like a Ponzi scheme, it has a deep relationship to fraud.

Global debt has surged since 2008. Throughout history, debt has always had consequences. Much of the massive debt load hanging above our heads in 2008 has not gone away it has merely been transferred to the public sector where those in charge of such things feel it is more benign. A series of off-book and backdoor transactions has transferred the burden of loss from the banks onto the shoulders of the people, however, shifting the liability from one sector to another does not alleviate the problem.

When the 2018 financial year budget was first  unveiled it was projected to be $440 billion. An under-reported and unnoticed report painted a far bleaker picture. The report titled the “Mid-Session Review” forecast the deficit much higher than originally predicted. The newer report predicted the deficit would come in at $890 billion which is more than double what they predicted in March of 2017. 

 

We should remember that not many years ago, some Washington optimists were forecasting that deficits would begin to decline in 2020 and that we would even have a small surplus of 16 billion in 2026. Since then, the wild spending those in charge have justified due to Covid-19 has blown the lid off that glimmer of hope and replaced it with more trillion-dollar deficits going forward.

Back then, the summary that began on page one of the Mid-Session Review came across as a promotional piece using terms like MAGAnomicics. It praised and touted the Trump administration for its vision and great work. This is a time when it would be wise to remember numbers don't lie but the people using them do. That report is an example of how to re-frame a colossal train wreck into something more palatable. The report even went so far as to assure us that the deficit would fall to 1.4 percent of the GDP in 2028, from what was then 4.4 percent.  

 

As a result of the American economy having survived with little effect what was years ago was described as a "financial cliff" the American people have become emboldened and now enjoy a false sense of security. Today instead of dire warnings we hear news from Washington and the media that this is simply another situation that we will have to navigate through, in short, it is business as usual.

In 2019, National Debt Hit 23 Not 12 Trillion dollars

The chart to the right predicted that by 2019 the national debt would top 12 trillion dollars, instead it hit 23 trillion. 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 predictions and not facts. This means that such numbers are totally unreliable. The ugly truth many people ignore is that starting in 2018 entitlements became the major force carrying the deficit higher into nosebleed territory.

It is very disturbing that so many people have forgotten or never taken the time to learn recent financial history. By recent, I'm referring to the last fifty to one hundred years. The path that Fed Chairman Paul Volcker set right decades ago has again become unsustainable and many people will be shocked when this reality hits. Do not underestimate the value of insight gained from decades of economic perspective. It tells us the economy of today is far different from the way things have always been.

 

Back in September of 2012, I wrote an article reflecting on how the economy of today had been greatly shaped by the actions that took place starting around 1979. Interest rates, inflation, and debt do matter and are more significant than most people realize. Rewarding savers and placing a value on the allocation of financial assets is important. It should be noted that many Americans living today were not even born or too young to appreciate the historical importance and ramifications of the events that took place back then. The impact of higher interest rates had a massive positive impact on corralling the growth of both credit and debt. It acted as a crucial reset to the economy which lasted for decades. Below is a copy of that article. 

                       A Time For Action, 1980?

In his book "A Time For Action" written in 1980 William Simon, a former Secretary of the Treasury tells how he was "frightened and angry".  In short, he sounded the trumpet about how he saw the country was heading down the wrong path. William Simon (1927 – 2000) was a businessman and a philanthropist. He became the Secretary of the Treasury on May 8, 1974, during the Nixon administration, and was reappointed by President Ford and served until 1977.

I recently picked up a copy of the book that I had read decades ago and while re-reading it I reflected on and tried to evaluate the events that brought us to today. As often the future is unpredictable, looking back, it is hard to imagine how we have made it this long without finding long-term solutions and addressing the concerns that Simon wrote about so many years ago. Back then it was about billions of dollars of debt, today it is about trillions of dollars. It appears that something has gone very wrong.

Do Not Underestimate The Importance Of The Reset By Paul Volcker In 1980

By the end of the 70s inflation started to soar. Only by taking interest rates to nosebleed levels was then-Fed Chairman Paul Volcker able to bring inflation back under control. Paul Volcker, a Democrat was appointed as Federal Reserve chairman by President Carter and reappointed by President Reagan. Volcker is widely credited with ending the stagflation crisis where inflation peaked at 13.5% in 1981. He did this by raising the fed fund rate which averaged 11.2% in 1979 to 20% in June of 1981.  This caused the prime rate to hit 21.5% and slammed the economy into a brick wall. This also affected and shaped the level of interest rates for decades.

Rates Today Are Ready To Fall Off The Chart!

This action and the increased interest rates in the following years are credited by many to have caused  Congress and the President to eventually balance the budget and bring back some sense of fiscal integrity and price stability to America.  As the debt from the Vietnam War and soaring oil prices became institutionalized we moved on. Interest rates slowly dropped and the budget came under control. In recent years spending has again started to grow and at the same time, taxes have been cut. This has slowly occurred over the years and has been ingrained in the system.

In 2012, with our debt at 23 trillion and growing the path has again become unsustainable and many people will be shocked when reality hits. As our debt climbs some Americans feel just as frightened and angry as Simon did so many years ago. America has kicked the can down the road, failing time and time again to face tough decisions. Part of the problem is the amount of debt has grown so large that we can no longer imagine or put a face on it. Until now, a series of different events have delayed the day of reckoning that will eventually arrive. Many of us see it coming, but the one thing we can bank on is that when it arrives most people will be caught totally off guard. 

 

Summary of the current situation; Today we stand at the abyss, yet no one sees or feels threatened by a "financial cliff." Insane spending has become the new normal. Who would have thought it would come to this? The updated revisions of the past have been washed away and replaced with more numbers, larger numbers. What we are witnessing today is insane. It is time to revisit the issue of how interest rates, inflation, and debt all come together. While this is not what those in charge want, it will happen. Simply put, there will be a reckoning, this time is not different. 

 

 (Republishing this article is permitted with reference to Bruce Wilds/AdvancingTime Blog)