Archive for May 13th, 2012
Illustrated in one chart:
Answer: It now takes $2.52 in new debt to “buy” $1 of economic “growth” or GDP. Let that sink in.
It reminds me of what this chart predicted more than 2 years ago.
I’d say that chart was accurately prescient, no? Two years ago, each dollar of debt destroyed 40 cents in productivity. Now however, $1.52 is being sucked out of YOUR pockets and is destroying your jobs for each $1 in production or growth created. Debt has long ago ceased to truly ‘create’ anything worthwhile and is now a massive force of destruction in our economy.
TrimTabs noted in their weekly forecast:
The surprising observation prompted us to examine the relationship between growth in debt and growth in GDP from 1975 through 2012. What we found is both astonishing and frightening. From 1974 to 1980, each $1 increase in GDP was accompanied by an increase in debt of between 20 and 47 cents. Since 2009, however, each $1 increase in GDP has been accompanied by a whopping $2.50 increase in debt. At some point, the amount of debt required to generate $1 of GDP will suffocate the economy and trigger another financial shock.
This is going to end well. </sarcasm>
The wrecking ball of hidden inflation and Fed based strategies – food inflation far outpacing overall inflation and eating away at the purchasing power of 46,000,000 Americans on food stamps.
The Federal Reserve has openly called for a steady growth of inflation. This almost dogmatic view on inflation is problematic because it is detached to the lack of wage growth being experienced by working andmiddle class families. What you do not hear articulated from the Fed is that they would like to encourage wage inflation as well. The inflation growth is really a shadow bailout of the banking sector in our economy that still requires billions and billions of dollars for horrible bets and poorly placed gambles. If the beat of inflation marches on, these debts can be washed away simply because purchasing power is lost moving forward. Yet this is bad policy for the vast majority of Americans. Inflation has crept into the daily lives of Americans because of this policy. Food prices have increased steadily while energy remains expensive. The cost to go to college still continues to increase in spite of a bubble in student debt. Inflation is a double-edged sword and the Fed is aggressively pursuing this option largely to aid their banking allies.
Inflation is already here for working and middle class Americans
Inflation is already hitting the wallets of most Americans. After the liquidity crisis and trillions of dollars infused into the system, inflation is now on an upward march:
The inflation rate for nearly 1.5 years is now running between 3 and 4 percent. So the Fed is getting a desired result by also putting the US dollar at risk. While the inflation rate inches along the wages of Americans are going sideways. So a 3 to 4 percent rate might seem modest if we were also seeing a similar rate of increase in overall wages. But with the unemployment rate above 8 percent and the underemployment rate around 15 percent, slack in the workforce makes this an employer’s market and they are seeking out low wage employees.
Read the rest at My Budget 360
On today, Sunday 5/13, I pray: Please God, make the stupid stop!
With traditional safety nets such as company pensions and Social Security dwindling, many of the 78 million baby boomers are left trying to answer one question: “Who’s going to pay my retirement paycheck?”
Annuities are one investment that more and more prospective retirees are considering. These financial products are created by the insurance industry, and offer a lot more flexibility and advantages than other investments. Here are a few reasons why you should think about adding them to your retirement plan…..
And the article continues…..
There’s a very serious missing element however: There is no discussion of the risk of business failure and the losses you may suffer if it happens.
Annuities are insurance products. You need to put very large amounts of money into them in order to obtain reasonable monthly payouts. That would be ok if you knew the money was safe.
The problem is that you don’t.
There is no national program to guarantee annuities. There are, however, state-by-state “guarantee” funds of various sorts, most of which have similar limits and provisions.
Annuity Cash Surrender: $250,000 for deferred annuity contracts per contract owner
Annuity in Benefit: $300,000 per contract owner
Incidentally, Florida recently increased the limit through House Bill 159 in 2010 — it was formerly $100,000 (as was FDIC insurance.)
That sounds like a lot, especially with the increase. It isn’t. To receive $2,000 a month, for example, the typical fixed annuity will require $500,000 of contribution.
You’re only covered for half on cash value and if your expected payout period is 20 years (65-85) you’re only covered for about 60% of the benefit payout amount as well!
Are you a State agency?
No. The guaranty association is a private entity, with its membership made up of all the life and health insurers licensed in the state (in fact, under state law an insurer must be a member of the association to be licensed to do business). The association was created by the legislature to serve as a safety net (subject to statutory limits) for residents should their life or health insurer fail. By creating the association, the legislature was able to ensure continued coverage to residents affected by their insurer’s failure. The association does work in cooperation with the Insurance Department in fulfilling its role of protecting residents whose insurance company is being liquidated.
So what happens if there’s no money in the guarantee association? For example, let’s assume for the sake of argument that a whole bunch of insurance companies go under, and the reserves available to pay the claims are insufficient.
Well, it’s a state-created agency, so you’d assume they’d have taxing power (although they call them “assessments”) and they more or less do. However, there are limits on the assessment power in the statute, which means that it’s entirely possible for enough insurance companies to be able to fail and the fund to not only be unable to pay but also unable to assess in sufficient amount to cover the deficiency.
And if this happens because reserves are inadequate, even if the fund knew it and under-reserved with knowledge of the deficiency, they’re immune:
631.727 Immunity.—There shall be no liability on the part of, and no cause of action of any nature shall arise against, any member insurer or its agents or employees, the association or its agents or employees, members of the board of directors, the Chief Financial Officer, or the department or office or their representatives for any action taken by them in the performance of their powers and duties under this part. Such immunity shall extend to the participation in any organization of one or more other state associations of similar purposes and to any such organization and its agents or employees.
Isn’t that special?
This is contrast to the FDIC which, at least in theory, has the backing of the Treasury on a “full faith and credit” basis, and in addition has the Prompt Correction Action Law which (again, in theory) should prevent the insolvency of the FDIC.
Oh, and as for the powers on prevention, the Florida agency’s enabling statute doesn’t use the word “shall” when it comes to examinations — they instead use the word “may” — so they’re off the hook for any potential malfeasance (despite their statutory immunity) anyway before it occurs.
Be careful folks. Annuities have their place in a retirement planning scenario but remember that you are in effect betting on the continued solvency of a private company to make the payments, and that any “government backstop” is both state (rather than federally) operated and has no resort, generally, to the treasury of the state itself.
These products are frequently touted as having more return than a long-term CD or similar, and in today’s ZIRP market that’s true.
But there is no such thing as a free lunch, and these products are not an exception. There are risks, they tend to be under-discussed and not well-disclosed, and diving into such a product without carefully considering what happens if the firm fails and the guarantee fund is insufficient, either because you have purchased more than limit of coverage or the fund is short and cannot pay, could result in an ugly surprise when you are least able to afford it.
There’s nothing controversial about the claim— reported on bySlate, Bloombergand Harvard Magazine — that in the last 20 years Wall Street has moved away from an investment-led model, to a gambling-led model.
This was exemplified by the failure of LTCM which blew up unsuccessfully making huge interest rate bets for tiny profits, or “picking up nickels in front of a streamroller”, and by Jon Corzine’s MF Global doing practically the same thing with European debt (while at the same time stealing from clients).
As Nassim Taleb described in The Black Swan these kinds of trades — betting large amounts for small frequent profits — is extremely fragile because eventually (and probably sooner in the real world than in a model) losses will happen (and of course if you are betting big, losses will be big). If you are running your business on the basis of leverage, this is especially dangerous, because facing a margin call or a downgrade you may be left in a fire sale to raise collateral.
This fragile business model is in fact descended from the Martingale roulette betting system. Martingale is the perfect example of the failure of theory, because in theory, Martingale is a system of guaranteed profit, which I think is probably what makes these kinds of practices so attractive to the arbitrageurs of Wall Street (and of course Wall Street often selects for this by recruiting and promoting the most wild-eyed and risk-hungry). Martingale works by betting, and then doubling your bet until you win. This — in theory, and given enough capital — delivers a profit of your initial stake every time. Historically, the problem has been that bettors run out of capital eventually, simply because they don’t have an infinite stock (of course, thanks to Ben Bernanke, that is no longer a problem). The key feature of this system— and the attribute which many institutions have copied — is that it delivers frequent small-to-moderate profits, and occasional huge losses (when the bettor runs out of money).
The key difference between modern business models, and the traditional roulette betting system is that today the focus is on betting multiple times on a single outcome. By this method (and given enough capital) it is in theory possible to win whichever way an event goes. If things are going your way, it is possible to insure your position by betting against your initial bet, and so produce a position that profits no matter what the eventual outcome. If things are not going your way, it is possible to throw larger and larger chunks of capital into a position or counter-position again and again and again —mirroring the Martingale strategy — to try to compensate for earlier bets that have gone awry (this, of course, is so often the downfall of rogue traders like Nick Leeson and Kweku Adoboli).
This brings up a key issue: there is a second problem with the Martingale strategy in the real world beyond the obvious problem of running out of capital. You can have all the capital in the world (and thanks to the Fed, the TBTF banks now have a printing-press backstop) but if you do not have a counter-party to take your bets (and as your bets and counter-bets get bigger and bigger it by definition becomes harder and harder to find suitable counter-parties) then you are Corzined, and you will be left sitting on top of a very large load of pain (sound familiar, Bruno Iksil?)
The obvious real world example takes us back to the casino table — if you are trying to execute a Martingale strategy starting at $100, and have lost 10 times in a row, your 11th bet would have to be for $204,800 to win back your initial stake of $100. That might well exceed the casino table limits — in other words you have lost your counter-party, and are left facing a loss far huger than any expected gains.
Similarly (as Jamie Dimon and Bruno Iksil have now learned to their discredit) if you have built up a whale-sized market-dominating gross position of bets and counter-bets on the CDX IG9 index (or any such market) which turns heavily negative, it is exceedingly difficult to find a counter-party to continue increasing your bets against, and your Martingale game will probably be over, and you will be forced to face up to the (now exceedingly huge) loss. (And this recklessness, is what Dimon refers to as “hedging portfolio risk“?)
The really sickening thing is that I know that these kinds of activities are going on far more than is widely recognised; every time a Wall Street bank announces aperfect trading quarter it sets off an alarm bell ringing in my head, because it means that the arbitrageurs are chasing losses and picking up nickels in front of streamrollers again, and emboldened by confidence will eventually will get crushed under the wheel, and our hyper-connected hyper-leveraged system will be thrown into shock once again by downgrades, margin calls and fire sales.
The obvious conclusion is that if the loss-chasing Martingale traders cannot resist blowing up even with the zero-interest rate policy and an unfettered fiat liquidity backstop, then perhaps this system is fundamentally weak. Alas, no. I think that the conclusion that the clueless schmucks at the Fed have reached is that poor Wall Street needs not only a lender-of-last-resort, but a counter-party-of-last-resort. If you broke your trading book doubling or quadrupling down on horseshit and are sitting on top of a colossal mark-to-market loss, why not have the Fed step in and take it off your hands at a price floor in exchange for newly “printed” digital currency? That’s what the 2008 bailouts did.
Only one problem: eventually, this approach will destroy the currency. Would you want your wealth stored in dollars that Bernanke can just duplicate and pony up to the latest TBTF Martingale catastrophe artist? I thought not: that’s one reason why Eurasian creditor nations are all quickly and purposefully going about ditching the dollar for bilateral trade.
The bottom line for Wall Street is that either the bailouts will stop and anyone practising this crazy behaviour will end up bust — ending the moral hazard of adrenaline junkie coke-and-hookers traders and 21-year-old PhD-wielding quants playing the Martingale game risk free thanks to the Fed — or the Fed will destroy the currency. I don’t know how long that will take, but the fact that the dollar is effectively no longer the global reserve currency says everything I need to know about where we are going.
The bigger point here is whatever happened to banking as banking, instead of banking as a game of roulette? You know, where investment banks make the majority of their profits and spend the majority of their efforts lending to people who need to the money to create products and make ideas reality?
We can debate the “social issues” all we want, but if we do so we’re being diverted.
What we must talk about as a nation and as a people lies in HR. 5652, which was the substitute to Ryan’s game-playing on the sequester — and which passed yesterday in The House.
Of note to Florida voters in the 1st District is that both Miller and Southerland (FL 1 and 2) voted Aye on passage. So what’s in there?
First, SNAP (food stamp) benefit expansion from the ARRA of 2009 is being rescinded effective June 30th. Other technical changes are also made to restrict eligibility as well.
State bonuses for SNAP are ended, indexing is removed, and most of the changes are made effective (other than those with specific dates) October 1st (new Fiscal year.)
Funding for medical insurance exchanges to the states is revoked.
A number of other changes are made that directly impact funding of Medicaid transfer payments to the states as well, including the state “bribes” in the form of “bonus payments.”
But then things get interesting.
Dodd-Frank contained a liquidation authority for banks. This authority is repealed by this bill, leaving the government in the same place it was before 2008 — that is, subject to the same sort of blackmail that was run by Paulson and Bernanke with the “tanks in the streets” threats before Congress!
HAMP is terminated. This was a bogus plan that led to more harm than good, in my opinion, and should have never been enacted in the first place. Good riddance.
Consumer protection (the new bureau) is brought under appropriations (arguably good) and FEMA flood insurance authority is extended. In addition the maximum coverage limits for NFIP insurance become indexable to inflation.
The Consumer Research Office in Dodd-Frank is struck in its entirety (I didn’t like this one originally as it appeared duplicative.)
Then there are some “fun” provisions.
One of them is a $250,000 statutory limit on non-economic damages in health-related lawsuits. This one came out of left field — I had no idea it was being proposed. Actual economic damages remain uncapped but things like pain and suffering.
I have a strenuous objection to this law in that it codifies actual and constructive fraud upon juries — the act specifically provides:
The jury shall not be informed about the maximum award for noneconomic damages. An award for noneconomic damages in excess of $250,000 shall be reduced either before the entry of judgment, or by amendment of the judgment after entry of judgment, and such reduction shall be made before accounting for any other reduction in damages required by law. If separate awards are rendered for past and future noneconomic damages and the combined awards exceed $250,000, the future noneconomic damages shall be reduced first.
Isn’t that special?
In addition the law limits contingency fees collected by attorneys. Are the limits reasonable? You decide — they start at 40% for the first $50,000 (the part that counts for most smaller cases!) and drops to 15% over $600,000. Isn’t that special — you can give up nearly half, but as the award grows (you really got reamed) and the case gets more complex and harder to prosecute the lawyers get less. Just, unjust, you decide.
There are also substantive limits on punitive damages. Actual malice or “substantial certainty” of knowledge of unnecessary injury is required. That’s a tough standard — is it just? You decide.
But what’s not arguable is that again there is a cap of two times the economic damages or $250,000, whichever is greater, and again the jury is barred from being informed of the limits.
So we’re actively concealing the truth from juries again. The limits may be just but active concealment and fraud upon a jury is not.
In addition there’s another nasty sop to the pharmaceutical and device industry: Anything that conforms to FDA standards is exempt from punitive damage awards. Isn’t that nice? So if the FDA approved it and it was later shown to be intentionally defective, tough crap — you can’t sue for punitive damages.
It gets worse — a health provider who dispenses or provides an FDA approved product cannot be named in such a suit even if they have actual or constructive knowledge of the dangerous nature of the product.
There is only one exception: If the FDA itself was bribed or information was intentionally fabricated or withheld from the FDA’s processes.
This is a literal “screw the patient” license for dangerous procedures and drugs that the government is free to hand out at will! If you can get it through government approval through anything short of felonious conduct then that’s tough crap for you as a patient.
There are some changes for civil service retirement income contributions.
Block grants to the states for social services under 42 USC (Social Security Act), sections 2001 – 2007, are struck entirely.
Oh, and Ryan’s original bill I reported on? It’s attached to this thing, in full, as Title VII, and as I reported previously not only blocks all cuts in defense but also eliminates all PAYGO considerations.
These issues are important folks. They’re tough to understand and go through, and contrary to what Huffington Post “reported” yesterday the bill is not at all clear nor is it all bad.
But there are several serious ”poison pills” in there that are outrageous destructions of individual rights and liberty. Among them are more special protections from banksters which is especially outrageous in light of JP Morgans’ disclosure last night and the outrage committed by so-called “budget hawks” that then turn around and find ways to spend the same money on defense that they agreed would be cut if they could not reach a deal with Democrats.
There are no honest representatives in the Republican or Democrat parties — all are simply looking for new and innovative ways to throw you under the bus.
Vote Libertarian; at least this way you have an honest shot at getting what you actually voted for!
The conventional pathways in the job market aren’t working any longer; the alternative is to exit the no-win scenario.
The Kobayashi Maru test of Star Trek fame is a classic no-win situation. Star Fleet Academy students are given command in a no-win scenario: either ignore a distress call of a Federation ship inside the Klingon (enemy) zone or enter the zone on a doomed rescue mission and lose your own ship in a hopeless battle against vastly superior forces.
Captain Kirk evaded the no-win choices by reprogramming the computers to enable him to win. I think the job market can be profitably viewed as a Kobayashi Maru test: the conventional either/or choice–do something you dislike for job security or go to grad/law school for an advanced degree–is a false choice.
Let’s start with some sobering facts. Although what classifies as “essential” is open to interpretation, the secure jobs will likely be the essential ones that maintain the core infrastructures of everyday modern life: water, sewage and electrical systems, the energy complex, public safety and health, agriculture, railways, network security, etc.
How many jobs are essential is anyone’s guess, but it is certainly less than 100% of the 140 million jobs that currently comprise the job market. My own guess is 20%, based on the Pareto Distribution (the 80/20 rule). Even if we stipulate 50%, that still leaves a lot of surplus jobs.
Some essential jobs are supposedly going begging, but in general supply exceeds demand. Certain skilled blue-collar trades are apparently short-staffed: pipefitters in oil refineries, for example. It may be a misalignment of people who want the work and the location of the work, or a dearth of apprenticeships in these trades, or some other factor.
This shortage of qualified workers is the exception, I think. In general, supply and demand works like this: when demand exceeds supply, costs/wages rise. Then people respond by entering the lucrative field until supply exceeds demand, and prices/wages decline.
A lot of people are assuming the healthcare field will be permanently short of workers, but if enough people reach this conclusion then qualified labor will be in oversupply. The same can be said of MBAs and a number of other degrees that are widely viewed as “meal tickets” to a secure job. Since millions of other people are pursuing the same path, there is now a glut of MBAs and lawyers.
The problem is that the job market is not causally aligned with education. If we encourage a million students to get PhDs in physics and biochemistry, that doesn’t mean the economy will magically create 1 million jobs in these fields. These fields are small not because there is a shortage of qualified labor, but for other reasons: the limitations of Research and Development funding, the limited market for products in these fields, and so on.
While a highly educated workforce can do a wider range of work, it doesn’t necessarily follow that the economy has more higher-level jobs. One of the key reasons for the confidence that higher degrees were secure “meal tickets” was their relative scarcity: there are relatively few PhDs in math, relatively few physicians, etc.
But this belief is implicitly based on unlimited funding. When funding goes away, then there is suddenly a surplus of once-scarce “knowledge” workers. As more people get college educations and advanced degrees, the scarcity value of those degrees declines. In many fields, the scarcity value is zero: there is an abundance of people with degrees and a shortage of paid jobs.
That which is unsustainable will go away. As I noted yesterday, devoting 17% of our GDP to healthcare is so wildly out of line with what other nations devote to healthcare and with the surplus generated by our economy that we can safely conclude that U.S. “healthcare” costs (a.k.a. sickcare) will shrink by about 50% in the decade ahead. Either wages will be cut or people will be laid off, or some combination of both.
The only other alternative is to print money with such abandon that it loses most or all of its value. In that case, someone may earn $100,000 but that will at best cover a month’s groceries.
That which is unsustainable will go away, and so basing career choices on unsustainable systems is like reckoning you can beat five Kingon warships with your single vessel.
If security is the goal, there will be stiff competition for “essential” jobs, as everyone else sees these as secure, too. This is where graft and corruption come in handy; in corrupt locales, the few plum secure positions are passed on to family members or those who paid a hefty bribe.
If you want to make a lot of money in the Status Quo, the competition will also be fierce. Although various people reach somewhat different numbers, it is generally agreed that the top 1% of earners garner about 20% of the nation’s total income, the top 5% pull down about 33% of total income, and the top 10% harvest around 40%-50%. The top 25% skims about 65%.
The top 25% of taxpayers–34 million workers out of a workforce of 160 million and 140 million wage earners–pay almost 90% of all Federal income taxes. Where Do You Rank as a Taxpayer?
An adjusted gross income (AGI) of $66,193 or more puts you in the top 25% of earners. The top-earning 25% of taxpayers reported 65.81% of all AGI and paid 87.30% of total federal income taxes ( $755.9 billion).
If we look at wealth, the top 20% own 85% of the nation’s private wealth.
What is striking is how concentrated the earnings are in the top of the pyramid. Those between 11% and 20% earn between 15% and 20% of total income, less than half what the top 10% earn.
That means almost half the national income flows to the top 10%–14 million earners out of 140 million. (As noted here recently, 38 Million Workers Made Less Than $10,000 in 2010– Equal to California’s Population The Atlantic magazine).
Most of the top 10% are those you’d expect to be there: corporate managers, physicans, attorneys, business owners and high-level knowledge workers such as researchers and professors. But the pool of people with these credentials and training is far larger than the top 10%: competition is fierce.
When competition is fierce, you not only have to possess the requisite drive and perseverance, you also have to love the trade. If you’re just hoping for a secure job but could care less (or even actively dislike) the work itself, you will probably lose out at some point to someone who wakes up excited to go to work.
I am not in the top 10% nor am I in an essential field. I am one of the other 70%. For me, it’s enough to be useful and avoid being a burden to others. In my view, life can be very good indeed in the bottom 70% if you have a very low-cost lifestyle that enables you to live on a modest income.
I recently received a request from a young man for my two cents on a career choice he faces. He explained that he has two opportunities: Option 1, gaining acceptance to the local nursing school, and Option 2 an exciting new MBA program that focuses on sustainability and the green economy that cost $55,000, to be funded by student loans. The goal of this option would be a career in clean tech. Since he already has a bachelor’s degree, the nursing school’s cost would be considerably less.
My two cents of advice was to seek a third path. Since I have started and operated small businesses and hired a lot of people, my perspective is that of an employer as well as that of a potential employee:
I suppose this may sound like cheating, but I view the choice you present as a bit like the Kobayashi Maru test in Star Trek-–a no-win situation.It seems clear you are not attracted to the day-to-day work of nursing, so you would be unlikely to feel fulfilled in that career.
You seem enthusiastic about the MBA but $55K in debt for a program whose practical impact in the real-world job market is unknown is risky. I would find out as much as possible about the curriculum of this MBA program and then set about learning it all on my own. No credential will be issued, but if you can actually do the work, then somebody who has moxie will hire you over the person with the credential.
Perhaps you can apprentice with some real clean-tech company in the real world based on what you learned on your own. I personally would be much more impressed with someone who learned a curriculum on their own and avoided debt entirely than with someone who loaded up with debt in a conventional fashion. If someone can creatively solve the problem of learning without acquiring a mountain of debt, then they will probably be pretty good at solving whatever problems I have in my business.
Or I would start a dialog with the school and say you’d like to take the program but can’t borrow any money—are there any jobs on campus they could give you? I would email the professors directly and start a dialog with them—how can I do this without debt? People rarely ask outside-the-box questions or make outside-the-box suggestions, and as a result alternatives don’t get explored.
You already have a B.A., so that is sufficient evidence of your academic ability. Having hired people myself, I am always looking for the self-motivated person who can do the work, regardless of their credentials or lack thereof.
In general, the conventional pathways aren’t working any longer. They may seem to be working, but that’s a temporary illusion. The most important skill is to be able to get the work done in a competent manner without imposing needless difficulties on your colleagues and those who are paying you.
Here’s what you get if you play the Kobayashi Maru test as programmed: a $200,000 education and a $700/month job I’ve Got A $200,000 Education, A Great Resume And An Empty Inbox, or a PhD and a $700/month job The Ph.D. Now Comes With Food Stamps.
Will an unconventional approach succeed? There are no guarantees that any approach will work; security is always contingent, and all we really have is opportunity. Failure is an integral part of how we learn.
Nobody knows what the future holds, so in my view the most secure strategy is not to look in the rear view mirror for an elusive security but acquire a broad spectrum of skills. This quote from Charles Darwin embodies this perspective: “It is not the strongest of the species that survives, nor the most intelligent, but the ones most adaptable to change.”
Charles Hugh Smith – Of Two Minds