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.

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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.

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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.

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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!