FedUpUSA

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

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?

Zero Hedge

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