Monday, June 17, 2013

Forecasting is Failure Prone

I have to admit that the U.S. Federal Reserve and the various central banks have pulled off what I thought was darn near impossible – they have been able to re-inflate the credit system and with it financial asset prices - and it only cost about $5 Trillion in increased debt and several Trillion (I am not committing to the amount of Fed Bond purchases – but it is well over $2 Trillion) on the Federal Reserve Bank's balance sheet to increase the equity market assets by $9 Trillion or so.

See, that’s the thing you never hear anything about – the “cost” of the “cost/benefit” analysis that should be done every time government agencies put the 99% further on the hook.

Remember, that $9 Trillion in increased U.S. equity market value went onto the asset side of the 1%’s balance sheet. That $5 Trillion of Debt? Well, over 90% of it went onto the liability side of the 99%’s balance sheet, and over 90% of it went onto the Asset side of the 1%’s balance sheet. That's how it works. In order to increase the Money Supply the Fed and the U.S. Treasury inflated equity prices to enable the 1% to borrow against their equity holdings (and to allow others to borrow in order to buy equities from the 1%). All that is required is steadily increasing asset prices and that system works like clockwork.

So… the Fed/Central Banks have kept the world safe for capitalism, and in the process have enslaved the 99% to the 1% more powerfully than any Constitutional amendment could have ever done. This is the power of the Federal Reserve Act and the U.S. Federal Income Tax.


So what to do if you are an investor and you missed the rally in the U.S. equity markets? 

Well, that depends on a number of factors. If you are over 50, this is no time to be a hero. If you were not invited to the wedding, don’t go to the funeral. Yes, bond yields stink. Yes, bonds (paper maturing over 10 years) could blow up. Precious metals are not done killing people. Japan is no longer a bargain. China is an enigma. India looks pricey. Russia is too lawless for my tastes, and Brazil is the country of the future – and always will be.

So what to do? Rule 1: Don’t lose money. If you are going to trade, fine. But if you are wrong, you must be gone. I had the hottest run from 2000 to 2008 that a trader could have – and have been ice cold since  – but always I kept my personal motto in replay mode on my shoulder: “If you can’t be right, be liquid. If you can’t be right, be liquid. If you can’t be right, be liquid”, repeat ad nauseum... That means even when you are absolutely, positively “sure” you are right (snicker) you close out your positions when they are losing money. It is OK to miss the mother of all rallies - there are dozens of markets around the world, you are allowed to miss one. But losing capital defeats the purpose. So don’t do that.

And what about the US$? Well, if you are rich you should diversify. Dollars, yen, pesos, pounds, gold… but the inflationistas have been dead wrong. I don’t see them being right anytime soon.  So, if you are a “middle-class millionaire”, you know, those regular Joe’s with $2 to $10 million in assets, it is simply far more important to work on the cost side of your life.

More on that soon.


According to the media Americans are facing a “retirement” crisis. This, despite the most gargantuan social program/transfer payment system in the history of civilization - so what’s up?

It is the very program itself that is responsible for half of the issue.

The other half is the unfortunate fact that while “we” have extended the human lifespan “we” have not expanded the human healthspan/productive span. People still living at the age of 50 can expect to live past 80 in the U.S. Unfortunately, people living at the age of 50 can expect to be limited in their activities from the age of 59 (at the latest) on. That makes for 25+ years for women and 20+ years for men of consumption without production. Given that people are starting to work later and later this works out such that people are productive for just a little over half of their “adult” lifespan (and are not productive for a little under 50% of their adult lifespan).  It is impossible in this tax environment to accumulate enough savings to fund either your personal needs or the program. The implications for the financial system, taxes, our mental health, et al, are impressive. Some writers and bloggers try to get this into the debate but they are shouted out by those that benefit from the current system.

Going back to my earlier assertion, that a large part of the problem is the program itself, let us go back to the late 70’s early 80’s. Social Security/Medicare finances were on the rocks financially. The policy response was to increase the percentage of income subject to the “tax” (really insurance premiums) and to increase the percentage of “tax” itself  - and from that moment onward U.S. savings plummeted and never recovered – even though corporate pensions were eliminated for the most part and replaced with saving incentive vehicles like the 401k and 403b plans.

Coincidence? Not even a little bit. And while any implied causation on the decline in the U.S. fertility rate is a bit more tenuous than the link to the savings rate I have to point out that the correlation is uncanny.


So what about Oil?

The slow grind of Peak Oil/Peak Oil Light/Peak Oil Imports/whatever… is doing its thing. The U.S. increased domestic production by a couple of million barrels of Oil and ethanol since 2005. So why is Oil in the international markets over $100 per barrel?

The fact is that the late Matt Simmons and the Doomers got it wrong. Daniel Yergin and the Optimists got it wrong. The EIA and the IEA got it wrong (and my bet is that they will continue to get it wrong). That’s just par for the course. The international Oil marketplace is the mother of all markets. "Huge and complex" does not begin to do it justice. For myself I will always respect the opinions of markets in their totality over any individual. The Oil market tells me that we are close to a Peak in production but that market confidence is not what it was in the summer of 2008. In a 2.5 trillion barrel eventual resource recovery (+ or – 350 Billion barrels), with 30 Billion barrels per year being consumed, being off by 10 years either way is highly likely, but being off  by 20 years is not. We are 8 years into the bumpy plateau. As it turned out, there was a great deal more $100 per barrel Oil than many people thought. My bet is that there will be a heck of a lot more $200 per Oil than was contemplated... and that we will find that out in the not too distant future.

In the meantime, the "Tyranny of Distance" is already doing its thing to every American in the bottom half of median income. Driving 30 miles each way to a job that does not pay at least $X per hour/day is just not an option anymore. Hence the peak in per capita vehicle miles traveled. Some very smart people think "the Machines" are the reason that the labor participation rate is so low, and perhaps that is part of it, but I think the Tyranny of Distance is the larger contributor.

More soon!


Anonymous said...


You are definitely right about the "Tyranny of Distance" wrecking havoc on the middle class. About 8 months I realized there was a bike river trail that ran from my house all the way to my work office. So I decided to ditch my car and got myself a road bike and now I'm saving money on gas, car insurance and car maintenance. Since I still live with my parents I'm able to save on rent and they have a spare car that I can borrow for when it rains. I haven't driven a car in the last 2 months since I either walk or bike to places.

I was wondering what are your thoughts on US bank equities? Specifically Wells Fargo and US Bancorp. The culture and management at these companies are superior compared to Citi and Bank of America and the cash flow multiples at these banks are low considering they are earning 15% on equity and are able to reinvest at these same rates. I'm thinking the magic of interest compounding can do wonders if one started to build a position in these stocks for the long run.


Greg T. Jeffers said...

I don't have a public opinion on specific equities... but I am "constructive" on the U.S. banking/financial space.

Greg T. Jeffers said...

But more importantly is what you are already doing. Cutting down on car expenses, sharing living space, etc... and saving and investing the money that might have gone down to those expense items (after all, if you cut down on those expenses and then spend that money on wine, women, and song you will be just as broke at 50 as everyone else).

tweell said...

It hasn't made sense to have money in 'savings accounts' for thirty years now, and our savings rate shows that Americans know this. It's come to the point where I'm more secure with cash and such in my home rather than in the bank. The miniscule interest available is outweighed by the uncertainty and confiscation possibilities.

Alas, my crystal ball isn't any more forthcoming than yours. There's only so much food and such I can store, and I've reduced debt to zero. My need to care for mother and uncle stops me from selling my house and going off-grid. Sigh.

PioneerPreppy said...

Don't place too much faith in saving all that much money from downsizing in the long run. This government will tax everything and it won't be long until the cyclist need to pitch in. With bikes costing more than used cars in many cases I can see it coming. If for no other reason than a road use tax.

Also how does one eliminate paying insurance altogether if they still drive "on rainy days"? Someone is paying that insurance or someone is breaking the law.

The beast will not be starved willingly. I agree with what Jeffers has predicted although I think the 100 dollar a barrel oil is doing more damage under the hood than he maybe giving it credit for. We are just now beginning to see the real creative tyranny of taxation truly come into play. The taxation to keep feeding the government coupled with the higher energy costs will add up until things snap.

Anonymous said...

Hi Greg,

Personally, I'm waiting for the next major dislocation before moving back to equities. I think it will be sooner rather than later. I've missed 50% of the latest run. While the Fed has managed to reflate the housing market somewhat, people still buy a house based on the monthly payment. It will be very hard to maintain prices in the face of stagnant wages and rising interest rates. If rates keep inching up, the market will be crushed again.

It looks like there is a big liquidity crunch in China, as well as defaults in Europe sucking money into the abyss. Interest rates here are beginning to climb in spite of QE3 at a trillion per year rate. I think the money is going out of the country to lube foreign markets. I don't have a good feeling about this. But, being out of equities, mostly, it's OK by me!


Coal Guy

Stephen B. said...

I am especially in tune with what Coal Guy has said.

After the late 2008 fiasco, I had a lot of trouble getting motivated to get my IRA account back in to the market as I was simply disgusted with what the fed was attempting to do via inflation/printing, to bail out the idiots. It left such a bad taste in my mouth that I just couldn't participate fully there. I had gone to mainly cash in the summer of 2008 - thank goodness for that! It's just that I didn't get much long again after the flush.

I did have some work-directed 403b stuff that has bounced back nicely.

Then too, I bought my Maine home away from home in 2010 when the market there was still pretty much in the dumps and used mainly cash for the purchase - some cash that had been in equities, so I cannot feel bad about that investment timing either as I still managed to catch some of the fed's re-inflation, albeit a little bit.

I am looking to move the IRA back into things, but it's hard to get excited about making much of a move in at these lofty market levels, generally speaking. Sometimes I think we're overbought, but shorting is, at best, for those that are pretty much full-time into the market and the only way IRAs can short pretty much is with inverse funds, which generally suffer time decay, rebalancing slippage, and whatnot that makes them generally horrible things for people such as myself to hold except in certain, very specialized cases and times.

One thing I would like to do is reenter the railroad sector....I was in it before the fall of 2008 and will enter again, but as I say, not at these levels. I especially liked the Canadian railroads, but they all need a good correction before I reenter, now that I've missed a hell of a run on them here.

Anonymous said...

Read "Welcome to Saudi America" from the Financial Times to get a clearer picture of what is going on in the oil markets. The United States has become a major oil producer and exporter with crude output at 7.37 million barrels per day, and the largest non-OPEC oil supply contributor in the world in 2013. There is no American energy crisis. There may be a global energy crisis, but it might very well be oil which saves the US and turns the country from a debt ridden kleptocracy to a prosperous free nation again.