PEAK CRISIS is Here! (What to do?)
How It'll Impact Your Portfolio & the Economy at Large
By Brittany Stepniak 2014-01-09
http://www.outsiderclub.com/peak-crisis-is-here-what-to-do/723
It's winter (post-festive holiday fun), the middle of a mundane week, and it's been polar-vortex-cold outside.
I couldn't think of anything I'd rather do after a long day's work
than indulge in a little comedic satire, courtesy of my favorite TV
host.
So I spent the last couple of nights sitting a little uncomfortably
close to my space heater, curled up with a 50-pound puppy in my lap and
catching up on a few missed episodes of The Colbert Report.
Because, let's face it, watching the regular news is just too depressing.
So when Stephen joked about it being harder to get a job at Wal-Mart
than to get into Harvard (statistically-speaking), I lightly chuckled.
But I remember watching broadcasters present that same information on Fox Business back in December, and I didn't chuckle then...
I sighed.
I find myself sighing a lot these days. I'm beyond frustrated with
nearly everything I see in the news and even more frustrated that our
country's leaders are trying to sell our situation as a fortunate one.
Don't get me wrong... I'm fortunate to live here, and I have much to be grateful for. But this isn't a recovery. People aren't getting richer. People aren't better off.
America is getting poorer, fatter, and a whole lot sadder.
Only the rich are getting richer. Our economy is basically stagnant.
Incomes are declining, and 46,700,000 Americans are on food stamps.
The war on poverty has kept poor people poor, and government
intervention has only made matters worse. The "recovery" we keep hearing
politicians take credit for is nothing but clever marketing — a few
distorted statistics with a lot of underlying unmentionables.
Yes, the stock market is improving (and I know many of you have been
profiting from the recent bull market; kudos!). But to call this a "recovery" is a major fallacy.
If applicants looking for work at our nation's largest retailer and top employer
— simply seeking minimum wage, no less — have only a 2.6% chance of
winning that job, while 5.7% of college applicants seeking a position in
one of the nation's most prestigious universities will get in, we might be in a crisis.
If 50% of our friends and neighbors are relying on government benefits to make ends meet, we might be in a crisis.
If 10% of our loved ones, colleagues, and acquaintances are on antidepressants and another 68.8% are overweight or obese, we might be in a crisis.
To say things are going well right now isn't fair to any of those people.
You'll Never Be On The Inside!
So join Outsider Club
today for FREE. You'll learn how to take control of your finances,
manage your own investments, and beat "the system" on your own terms.
Become a member today, and get our latest free report: "An IRA How To."
Too Much Has Accomplished Too Little
The government has done a lot to remedy the aforementioned problems.
Perhaps the government has over-exerted itself in championing efforts to
"help." Good intentions or not, they're not working.
The stock market has been climbing to historic heights, while many of
our community members can't even afford winter coats for their
children.
Cities are bankrupt,
families are increasingly dependent on government assistance, and the
Fed has single-handedly destroyed the purchasing power of the dollar.
As Reagan used to say, America was the "shining city upon a
hill whose beacon light guides freedom-loving people everywhere." Our
free market economy was that light shining on the American Dream in the
distance.
Success came naturally out of healthy competition and ingenious
innovation. No matter where one came from, one could reach for the stars
with a little ambition, a lot of hard work, and a strong commitment to
excellence.
Now, the chains of tyranny are holding us back.
I'm talking about the $1 trillion in student loan debt. The $7.9
trillion in mortgage debt. The eroding middle class income. The
government's lack of fiscal responsibility. The NSA's infringement upon
individual privacy. The market manipulation. The big banksters' schemes.
After decades of foolish decisions, our status as a global power is under threat.
In trying to control everything (with plenty of good and bad ideas
along the way), the government has killed free market capitalism. And
it's well on its way to killing freedom entirely...
Crony Capitalism
Capitalism now is little more than corrupt collusion among key market
players. Special alliances, trade associations, subsidies, and industry
trade groups are of course beneficial to a small group of powerful
entities. However, that web of dominance is bad for the economy when you
get the government too involved.
For those outside of that elite group, it becomes all but impossible
to compete and thrive. The private market becomes unsustainable without
big government buddies already in alliances with the mega-corp guys.
This creates a web of dependability. For those who fail in their own
small businesses or can't get ahead financially because of
school-related debt, health care crises, and the like, many resort to
low-paying jobs and/or government assistance.
But the tide is turning. The world is beginning to rise above the
manipulation schemes, and the mega-corp guys are finally facing
retribution.
Just this week, The Wall Street Journal reported that J.P.
Morgan agreed to a $2.6 billion settlement in response to allegations
that it failed to properly police Madoff's illicit activities. And
further investigation is currently underway at Wall Street banks to
determine whether they deliberately mispriced mortgage bonds in the
aftermath of the 2008 financial meltdown (spoiler alert: they did).
American Turning
Last month, I wrote to you about America's "Unwinding"
— as examined in George Packer's latest bestseller. Packer shows how
the U.S. exudes all the telltale signs of a great superpower in danger
of coming apart at the seams... with old institutions crumbling as a new
America emerges.
A crisis isn't coming; it's already here.
That's the bad news. But the good news is we're starting to see major
shifts in the way the system works. And unless you're already a
billionaire Insider, this is great news.
The growing sense of mistrust in the institutions that used to define
America's excellence (public schools, government, etc.) is about to
peak. In response, the vast majority of the public will come to realize
that the system is failing those who work the hardest and rewarding the
crony plutocrats instead.
As our faulty but dominant institutions lose power, the opportunity
gap will begin to widen, and economic mobility will be restored. And we
want you to be prepared for the major changes coming over the course of
the next decade...
Indeed, these changes will have a ripple effect on your portfolio and the economy at large.
Are you ready for a post-crisis America? I know we are.
Farewell for now,
Brittany Stepniak
Brittany Stepniak is the Project Manager and Editor for the Outsider Club.
Her “big picture” insights have helped guide thousands of investors
towards achieving and maintaining personal and financial liberties while
pursuing their individual dreams in lieu of all the modern-day chaos.
For more on Brittany, take a look at her editor's page.
Related Articles
Crony Capitalism
See how this frightening web of govt. dependability spreads from the poorest city dwellers to the biggest corporations... all the way to YOU.
The Recovery That Wasn't
Does it feel like recovery to you?The only thing "improving" is the stock market. And I put "improving" in quotes, because it's entirely predicated on continued money printing from the Fed...
NSA's Unconstitutional Ruling
In a big setback for the NSA (but a big victory for civil liberties), a judge rules against NSA spying, but propaganda supporting it remains strong. What's next?
See how this frightening web of govt. dependability spreads from the poorest city dwellers to the biggest corporations... all the way to YOU.
The Recovery That Wasn't
Does it feel like recovery to you?The only thing "improving" is the stock market. And I put "improving" in quotes, because it's entirely predicated on continued money printing from the Fed...
NSA's Unconstitutional Ruling
In a big setback for the NSA (but a big victory for civil liberties), a judge rules against NSA spying, but propaganda supporting it remains strong. What's next?
One Lesson from Crisis to Crisis
Repeating the Same Mistake
By Adam English 2014-01-22
http://www.outsiderclub.com/one-lesson-from-two-crises/750
John Thain got a phone call one Friday evening, demanding his presence at the New York Federal Reserve building within the hour.
The chairman of Merrill Lynch ditched his normal contingent of
assistants and employees and went alone. As he was shown into the
meeting room, he saw a collection of the most powerful CEOs from the
largest investment and commercial banks.
As the room quieted, the host had one thing to say: “There will be no
bailout for Lehman... the only possible way out is a private-sector
solution."
At 3 a.m. early one Saturday morning, 120 bank and trust company
officials assembled to hear a full report on the status of failing
companies. After filing into the library, they realized their host had
locked the doors behind them.
If the men wanted to go free, they would have to strike a private
sector deal to contain a domino effect of failing credit and cash
reserves from destroying Wall Street.
There are only three miles between the Fed building and the library... but the events were over a century apart.
What ties them together are unprecedented interventions and economic malaise.
J.P. Morgan and the Panic of 1907
The Panic of 1907 was underway well before J.P. Morgan summoned the heads of prominent companies, banks, and trusts to his library.
It all started with a failed scheme to corner the copper market by Augustus and Otto Heinze, majority owners of United Copper.
In spite of concerns that they didn't have the cash to pull it off,
the brothers pushed ahead with a bold scheme to force investors with
short positions to sell their shares to them for pennies on the dollar.
On October 14, shares of United Copper rose from $39 to $52 per share as the brothers bought up all the shares they could.
But too many others sold their shares. They couldn't set their own price.
The next day, the share price fell to $10, and they were ruined.
The State Savings Bank of Butte, Montana, owned by Otto Heinze,
failed because it held United Copper shares as collateral for many
deals. Contagion and loss of faith spread to the Mercantile National
Bank, of which Augustus was president, and then on to any bank with
business or personal ties to the brothers.
Not knowing who would survive, banks and trust companies froze
short-term lending. Overnight rates hit 70%. The credit crunch hit
brokers in need of cash and led to stock prices falling to seven-year
lows.
Dozens of smaller banks subsequently failed, and New York's largest
trusts were poised to collapse. No one would absorb the Knickerbocker
Trust, and it was forced into liquidation. The Trust Company of America
and the Lincoln Trust Company barely survived.
By the time J.P. Morgan locked 120 bankers in a room, he had already
bought $30 million of bonds to save New York City and strong-armed
bankers into pooling over $40 million for loans to struggling banks.
$100 million in loan certificates was issued by the New York Clearing House. Secretary of the Treasury George Cortelyou was convinced to injected $25 million of taxpayer money into New York banks.
John D. Rockefeller put in $10 million and pledged half his wealth to maintain America's credit.
Yet banks in New York still were reluctant to make short-term loans,
even after over $200 million in orchestrated interventions flowed into
banks and trusts desperate for any reprieve.
Morgan entered the talks demanding another loan of $25 million to
save weaker institutions — otherwise a complete collapse of the banking
system was inevitable. Cowed by Morgan's legendary prominence and
influence, the bankers emerged at 4:45 a.m. with a forced solution.
Morgan had his deal, but one last obstacle stood in his path...
You'll Never Be On The Inside!
So join Outsider Club
today for FREE. You'll learn how to take control of your finances,
manage your own investments, and beat "the system" on your own terms.
Become a member today, and get our latest free report: "The 5 Best Ways to Buy Gold."
President Theodore Roosevelt had made breaking up monopolies a
central focus, and he would have to suspend enforcement of the Sherman
Anti-Trust Law to allow the deal to go forward.
One of the largest brokerage firms was heavily in debt and used
massive amounts of Tennessee Coal, Iron and Railroad Company (TC&I)
stock as collateral.
To prevent the brokerage and TC&I from failing and causing more
panic, Roosevelt was convinced to allow Andrew Carnegie's U.S. Steel to
buy its competitor.
"The relief furnished by this transaction was instant and far-reaching," according to Commercial & Financial Chronicle, and the panic subsided. Yet the U.S. economy and markets continued to languish for another year.
Paulson's Failed Attempt
Henry Paulson, then Secretary of Treasury, had already struggled to
contain the panic and fallout from the subprime mortgage fiasco for
months before summoning the CEOs of the most powerful banks to the
Federal Reserve building in New York City late Friday, September 12,
2008.
A run on investment banks and hedge funds in the shadow banking
sector was rapidly accelerating out of control, although it wasn't
apparent because of overly complex trading and off-the-balance-sheet
positions.
Bear Stearns had already imploded and been sold for a pittance to
J.P. Morgan Chase on the condition that the Fed provide $30 billion in
funds to cover losses.
IndyMac Bank had already failed, marking the fourth-largest bank failure in U.S. history.
Fannie Mae and Freddie Mac, with their $6 trillion exposure to the
tanking mortgage market, had been nationalized already as well.
The next bank to fail was going to be Lehman Brothers. Paulson,
determined to avoid another government bailout that could set a
precedent for others, was the point man for finding a private buyer.
Unfortunately, it wouldn't work. Paulson didn't have the clout or
leverage of J.P. Morgan. That Friday evening, none of the CEOs would
commit. There was no safety net, and it was time to panic.
By the time the Troubled Asset Relief Program bill was signed into
law on October 13, 2008, Lehman Brothers failed, Merrill Lynch was
swallowed by Bank of America, AIG had received $85 billion in Fed loans,
investigations into dozens of banks had begun, and the Dow had shed
3,000 points.
Between Paulson and Bernanke meeting with key members of Congress to
propose the bailout, the Fed had to lend nearly $1 trillion to banks and
$1.3 trillion to non-financial U.S. companies.
By the time the dust settled and the Dow hit a bottom on March 6,
2009, it had shed nearly 5,000 points and 54% of its value from an
October 9, 2007 high. The Fed already held $1.75 trillion of bank debt,
mortgage-backed securities, and Treasury notes by then.
History Repeats Itself
There are plenty of differences between the Great Panic of 1907 and
the run up to the credit crunch and panic that led to the Great
Recession in 2008.
However, there are two key conclusions that tie them together... and one very important lesson to learn.
Whenever there are credit squeezes, bank runs, or market turmoil,
the temptation to let the end justify the means is too great.
Ultimately, this compromises sound policy and erodes the free market.
Roosevelt compromised his adamant anti-trust efforts, and the
Treasury pledged taxpayer funding to banks to keep them afloat. Within
the decade, the monopolies desperately clinging to the coattails of the
gilded age reached their height.
J.P. Morgan whipped bankers with no good reason to loan each other
money into a cabal of financiers for their weakest competitors. He also
convinced the Secretary of the Treasury to put taxpayer money into
private hands.
Ultimately, the Panic of 1907 led to the creation of the Federal
Reserve and a vast expansion of centralized monetary control that was
designed to mirror the pooled liquidity of J.P. Morgan and the bankers
he controlled.
By the time the Great Recession loomed, the Fed provided unilateral
bailouts and wielded influence like J.P. Morgan while pooling money like
the beleaguered bankers and waiving policies like Teddy Roosevelt.
It absorbed an unprecedented $3.5 trillion expansion of
quasi-governmental debt without hesitation, guaranteed $16 trillion of
debt worldwide, and dictated the terms of the government's TARP bailout.
Former investment banks have kept their out-sized, price-rigging
commodity arms intact, and risky derivative trading and murky balance
sheets are still the norm.
Control over interest rates has virtually been given to institutional
investors that dominate the exchanges. Any hint of the Fed moving to
increase interest rates without their blessing results in a punitive
blow to stocks.
The second key conclusion is that it doesn't matter if the money used to shore up banks comes from the private or public sector. All that can be accomplished is an end to panic selling and credit crunches.
After confidence was restored in 1907, unemployment continued to
spike and production continued to lag for a year. That year saw
unemployment rise to 8% from under 3%. Industrial production fell 11%.
From the beginning of 2008 until late 2009, unemployment jumped up 5%
to top 10%. Between the start of the recession and the end, industrial
production fell 16%.
Even with all of the power invested in the Federal Reserve, we're
five years into the weakest, most protracted economic recovery in modern
history.
Too-big-to-fail banks are larger than ever, a resurgence in shadow
banking is gathering speed, and warning calls about asset bubbles are
popping up at an ever-increasing rate.
The lesson to learn is that history will repeat itself, and we will
face similar credit crunches, bank runs, and panics. But the economy
will eventually sort itself out on its own timetable, regardless of how
it is manipulated.
Ultimately, there is no reason to abdicate more power to a select few that will exclusively use it for their own advantage.
At least from what Nick's shown me, there is good reason to believe we're finally starting to learn this lesson.
Take Care,
Adam English
Adam's editorial talents and analysis drew the attention of senior editors at Outsider Club,
which he joined in mid-2012. While he has acquired years of hands-on
experience in the editorial room by working side by side with
ex-brokers, options floor traders, and financial advisors, he is acutely
aware of the challenges faced by retail investors after starting at the
ground floor in the financial publishing field. For more on Adam, check
out his editor's page.
Related Articles
QE Can Only End One Way
The markets and the Fed ended the year on a high-note thanks to QE, but the cost has been too high. Ultimately, we'll all lose because of it.
PEAK CRISIS is Here! (What to do?)
A crisis isn't coming; it's already here. That's the bad news. But the good news is we're starting to see major shifts...
Question the Fed on Big Bank Manipulation
The Fed is about to go in front of a Senate panel to answer for its misguided policies. Here are three questions they should have to answer...
The markets and the Fed ended the year on a high-note thanks to QE, but the cost has been too high. Ultimately, we'll all lose because of it.
PEAK CRISIS is Here! (What to do?)
A crisis isn't coming; it's already here. That's the bad news. But the good news is we're starting to see major shifts...
Question the Fed on Big Bank Manipulation
The Fed is about to go in front of a Senate panel to answer for its misguided policies. Here are three questions they should have to answer...
Op-Ed Contributor
Lessons From a Crisis
By JACOB J. LEW
Published: October 20, 2013
http://www.nytimes.com/2013/10/21/opinion/21iht-edlew21.html?_r=0
WASHINGTON — A few days ago, a bipartisan majority in Congress voted to
reopen the federal government and remove the cloud of uncertainty
hanging over our economy. This put an end to a messy, and at times
downright ugly, political process. But when you look through the noise
of the moment, it showed that America’s leaders are committed, on a
bipartisan basis, to doing the right thing for our economy and our
standing around the world. The dollar is the world’s reserve currency
and, for over 200 years, we have established ourselves as the backbone
of the global financial system. The world now knows we are and will
remain the safest, most reliable place to invest.
Make no mistake: What took place was a political crisis, not an economic
one. When faced with a true economic crisis in 2008 — the worst since
the Great Depression — our economy proved its resilience. Since then,
the American people have painstakingly fought their way back from the
brink. Now businesses are hiring, our economy is growing, and we have
cut our deficits in half. Throughout this period, the United States once
again became a source of strength for the global economy.
But we are not where we want to be. Growth is not strong enough, and job
creation needs to accelerate. And one of the fundamental reasons our
economy is not firing on all cylinders is Washington. Our economy has
been poised to make serious strides over the last few years, but
self-inflicted political wounds have gotten in the way time after time.
Without question, the government shutdown and the debt ceiling impasse
have led to economic hardship in every corner of the country. While we
do not yet know the exact magnitude of the damage, these events have
generated unnecessary headwinds for the economy. We should never again
take this country to the point of near-default in order to exact
political gain.
It is time to put an end to governing by crisis and focus on
accelerating economic growth and job creation. If we are open to what we
can achieve together rather than simply setting our sights on our
divisions, there is a lot we can do to support America’s workers and
businesses. This is what the American people expect from their leaders
in Washington.
We can start by hammering out a budget agreement that builds on the
progress we have already made to lower our budget deficits. This is an
opportunity to improve our nation’s long-term fiscal health, and it
should be achieved through a comprehensive package that shrinks our
deficits, protects Medicare and Social Security for those who rely on
it, and expands our economy well into the future. That means closing
wasteful tax loopholes and making targeted investments to improve our
education system, increase domestic energy production, and expand our
manufacturing base.
We must come together to fix the blunt spending cuts known as
sequestration, once and for all. These indiscriminate, across-the-board
cuts, which went into effect earlier this year, were intended to be so
mutually disagreeable that they would force Congress to find agreement
on a balanced package of deficit reduction measures. But that agreement
was not reached in time. As independent economists and business leaders
will tell you, these cuts have already slowed economic growth, just as
the economy was getting traction. The nonpartisan Congressional Budget
Office has estimated that by the third quarter of next year,
sequestration will have reduced real gross domestic product by as much
as 1.2 percent, which means as many as 1.6 million fewer American jobs.
In addition to tackling our budget challenges, Washington can take several actions to support economic growth.
Congress should pass comprehensive immigration reform. The bipartisan
bill already passed by the Senate would strengthen our borders, provide a
pathway to earned citizenship, and boost growth by more than a trillion
dollars while reducing our deficits.
Another piece of bipartisan legislation that has passed the Senate, but
not the House of Representatives, is the farm bill. Getting this bill
signed into law is not only important for America’s farmers and
protecting America’s most vulnerable children, it is important for our
economy.
Finally, we need to come together soon to complete the bipartisan work
that has already begun to reform our business tax code, modernize our
housing finance system and renew trade promotion authority while
repairing our deteriorating roads, highways and bridges.
As we move past the government shutdown and debt ceiling crisis, it is
important to remember that the foundation of our democracy is the
healthy competition of ideas. It is the lifeblood of our country.
But we must work across party and ideological lines for the good of the
United States. I am once again hopeful that Democrats and Republicans
can come together to accomplish meaningful things to help grow our
economy. The truth is, the sensible center is not out of reach. We
demonstrated that in recent days. And I believe we can demonstrate that
again as we move forward.
Jacob J. Lew is the United States secretary of the Treasury.
INTERNATIONAL NEW YORK TIMES The Government Spent Millions on Pancakes and Penises
Tax Waste Hits a New Low
By Jimmy Mengel 2014-01-17
http://www.outsiderclub.com/the-government-spent-millions-on-pancakes-and-penises/743
We all know that the government wastes a ton of our money...that isn't news. But when you look at individual expenditures, the abuse of our tax dollars becomes all the more enraging.It was just reported that 'penis pumps' for erectile dysfunction cost the U.S. $172 million in taxpayer money. The ethics of government-subsidized penis pumps aside, if the government had paid retail for them in the free market, it would have been half that...
But that's not the only penis-related costs we are bearing...
The National Institute of Health spent $224,863 to test "custom-fitted" condoms.
Bloomberg just released a video that exposes some of the most ridiculous uses of our money. Here are a couple of the most egregious:
- $800,000 for an International House of Pancakes in Washington D.C.?
- A million bucks for a full service astronaut menu on Mars?
- $2.5 BILLION spent in back pay to government employees stiffed during the government shutdown?
Related Articles
Welfare's Twilight ZonePeople are permanently leaving welfare rolls. Good news, right? Think again...
The Cost of the Faulty Obamacare Websites
The Obamacare exchange opened up with a number of glitches. And that glitchy exchanged caused taxpayers a lot of money...
One Bank to Rule Them All
"These thugs think that if they can keep the world ignorant, they can bleed it longer..."
A Terrible Misconception: Capital is "Money"
Something is Very Wrong...
By Adam English 2013-11-05
http://www.outsiderclub.com/misconception-capital-is-money/560
This weekend, a discussion spurred me to uncover something great.Unfortunately, that great thing is about something terrible.
After some lightsaber duels with my six-year-old nephew in his Darth Vader Halloween costume, I retired to the couch to watch the Raven's game and catch up with my cousin, who works for a major investing firm. On these occasions, we inevitably talk shop for a bit. Normally, it is akin to small talk about the weather; sometimes it is far more informative.
My cousin told me that his job is getting more and more stressful. With the Dow and S&P 500 setting all-time highs, his clients are desperately chasing after gains that have come and gone.
But the markets are juiced and are being hyped. They are running on cheap loans and share buy-backs funded by credit. Market performance isn't pegged to company growth as much as it is pegged to the flow of cheap money flooding in from QE and Fed policies.
Yet even as he and his colleagues are trying to give some sound advice, he has an obligation to do what they want — and keep their savings pouring into a bloated, hollow bull market.
They know something is very wrong in the economy. And they know from firsthand experience how it can and will burn their clients, unless they carefully limit their investments to companies with real value.
The problem is it is so darn difficult to define. Neither of us can put a finger on it, even though we are on the same page and it was obviously staring us right in the face.
Apparently, we're not the only people with this problem...
Eloquently Defined
When I got to the office yesterday, the conversation was still lingering in my mind. As it happens, I stumbled upon an article from Dylan Grice later in the day that touches on the root of the problem.
Grice worked for Societe Generale's Global Strategy Alternative Views team before leaving to join Edelweiss Holdings, a private investment company. In the Edelweiss Journal, he discusses how there seems to be a widespread misunderstanding of what "capital" truly is...
You'll Never Be On The Inside!
So join Outsider Club
today for FREE. You'll learn how to take control of your finances,
manage your own investments, and beat "the system" on your own terms.
Become a member today, and get our latest free report: "The Definitive Guide to Buying the Market."
... This is a fundamental error of thought. Capital is not money. One is scarce, the other is infinite. And we might not have thought anything of this sloppy language had we not been talking to an economist a few days earlier who feared for the future of euro.Grice is spot-on here, and I doubt you or I could find anyone that can put it better. Even my cousin and I, with our experience in investing and economic issues, struggled to wrap the proper language around the issue.
The situation remained grave, he said, and there was surely no alternative than for the ECB eventually to "print more capital"...
... Capital comes from savings, and the policy of cheap credit with its inflation of time preference has encouraged spending, not saving. Scarce capital is growing ever scarcer.
One day, the price of capital will reflect its underlying scarcity, because one day it must. But in the meantime we think very carefully about the capital requirements of the businesses we own, growing increasingly wary of those which depend on artificially cheap "financial capital" for their survival. We note in passing that physical gold bullion is the oldest and purest capital there is...
... Success in the long run requires that thought and action be fully independent from the false ideas of the herd. Yet today's language of inflation embeds so many of these false ideas that the full rottenness of what passes for financial thinking today is obscured. One increasingly reads of capital stewards complaining that things seem more difficult today. We think it's because they are. We are also increasingly mindful of conversations with friends, family and colleagues that reveal a widespread perception that something is very wrong, though people can't quite put their finger on what it is. As we have just argued, we think the answer is that the inflation of credit has driven an inflation of asset prices, which has driven an inflation of future expectations, which has driven an inflation of time preference... and that while the consequences of these various inflations are profound, the new language of inflation which it has spawned is shallow.
Therefore, not only is there insufficient capital to ensure future prosperity and insufficient realism to deal with the future this implies, there is insufficient linguistic precision for most people to articulate the problem let alone understand it. And when language itself becomes so grotesquely distorted, how does one go about substituting the customers' unattainable hopes and expectations of never-ending growth with the need for principled and honest action?
He and his colleagues consistently cannot bring their clients to the realization of what is going on, in spite of all the evidence of the problem being covered in the business section of every news service and publication.
Even central bankers and economists don't know, don't remember, or simply don't care about this critical distinction.
The Dilemma
I'm not normally one to lump all the blame on one person or thing, especially in financial markets. There are just far too many variables and players contributing to justify a single scapegoat.For this, though, there is no doubt that the Fed deserves a lion's share of the blame.
It clearly believes it is genuinely creating capital to stimulate the economy. Its easing programs created the credit bubble through easy money. It managed to rig the system so this easy money was considered on par with actual capital, spurring asset price jumps in turn...
The headlines this created heralded the resulting highs in indices as proof that the Fed's engineered recovery was a success.
Since the capital versus money confusion is nearly universal, everything appears fine on the surface. Future expectations surged, along with a desire for immediate results from investments.
Instead of talking about delayed inflationary forces and distortion of the monetary base, traders and the mainstream media worked under the false belief that there has been actual and meaningful growth and capital creation.
The entire situation creates a terrible dilemma for all of us: We know that the market is unsustainable, that the dollar is going to become profoundly weaker in the future, and companies that are using easy money to create the illusion of capital growth will see their stock prices drop... yet we want and need to invest for our future.
Thankfully, we do have some options.
As Grice points out, gold is a great choice. Silver is as well, in my informed opinion.
However, as Jimmy pointed out yesterday, we must diversify to protect ourselves. Depending on precious metals that are often manipulated by institutional traders alone is foolish. Inevitably, it seems like we have to hold our noses and get into bonds or equities and expose ourselves to the bubbles and risks in the distorted markets.
The Right Way to Do It
If you do your research and make careful decisions, you do not have to overly expose yourself to the risks the Fed has created. Although they have become harder to find, there are plenty of unappreciated companies that are not being pumped up by ballooning debt and that aren't on the radar of hype-crazed investors.We're starting to see proof of it, too...
Of the U.S. funds run by active managers, 57% are beating their benchmark indices this year, according to fund-tracker Morningstar. That is the best overall performance for the industry since 2009 — and well above the 37% of all funds beating the market.
Implied correlations — a measure of how closely the performance of individual stocks mirrors that of the index itself — have fallen to their lowest since October 2007 after peaking in 2011. Instead of the returns of most stocks clumping close to the index returns, there is a much broader spread on how individual stocks perform.
Fund managers are turning their focus to well-run companies that have sustainable advantages and may hold their value during a downturn. (That is what my cousin and some of his more altruistic colleagues are trying to convince their clients to do.)
Even the people who are completely gung-ho about equities know something is wrong, and they're starting to get very picky about the companies they invest in...
As the "recovery" ages and the flaws of it become more and more apparent to investors chasing gains, the companies that created the illusion of value purely on credit will be punished, along with anyone left holding their shares.
The only hope for individual investors is to find the few promising companies that are far from the headlines and invisible to the herd. It won't be easy, but it is becoming the safest way to protect yourself in the stock market.
If you are interested in learning more, I suggest you add Dylan Grice's articles to your reading list. They can be found through the Edelweiss Journal webpage.
Take Care,
Adam English
@AdamEnglishOC on TwitterAdam's editorial talents and analysis drew the attention of senior editors at Outsider Club, which he joined in mid-2012. While he has acquired years of hands-on experience in the editorial room by working side by side with ex-brokers, options floor traders, and financial advisors, he is acutely aware of the challenges faced by retail investors after starting at the ground floor in the financial publishing field. For more on Adam, check out his editor's page.
*Follow Outsider Club on Facebook and Twitter.
Related Articles
The Fourth Turning is HereIt's easy to see that something is very wrong. And a lot has gone wrong over the past few years. In fact, many would say America isn't quite what it used to be...
Silver & Gold Junior Miners for 2014: Part 1
$148 Silver, $4,300 Gold? Bear market plateau: What gold and silver investors should do next.
Silver and Gold Junior Miners for 2014: Part II
Real interest rates and the performance of the dollar will be key drivers of gold prices in 2014. Here's how to play it.
No Safe Havens Left?
Bank deposits, bonds, Treasuries AND equities are all vulnerable. Here's how to hedge yourself from financial ruin.
Federal Reserve Distoring Equities With Mission Creep
The Fed's Engaging in a Danergous Mission...
By Adam English 2013-11-08
http://www.outsiderclub.com/federal-reserve-distoring-equities-with-mission-creep/574?lloct=2
When government workers and institutions stop asking what they are allowed to do, and start doing whatever they can get away with that serves their goals... well, that's when you know something is profoundly wrong.The best term for this is mission creep. And once it happens, it's nearly impossible to claw back the powers or privileges and return them to legislatures or the people.
This has been going on for decades.
It has bloated federal agencies into bureaucratic monstrosities, vastly expanded federal overreach beyond legal authorization, and perverted the American free market...
Just look at how bloated the Dept. of Homeland Security has become; watch as revelations about the NSA's unilateral and unconstitutional programs get increasingly worse; and consider how the Fed has expanded over the years, taking on a dangerous level of power that undermines the basis of the modern economy and capitalism itself.
Mission Creep
Back in 1913, as the Federal Reserve Act rose out of a great money panic and bank run in 1907, J.P. Morgan almost single-handedly stopped it with the vast wealth and influence he wielded.It was clear that the patchwork of national banks set up during the Civil War was fatally flawed.
The day before Christmas Eve, creation of the Fed was authorized for 20 years. Eight to 12 private regional Federal Reserve banks were created. A new currency, the United States Federal Reserve Note, was born. And all nationally chartered banks were required to become members by buying non-transferable stock of their regional Federal reserve bank.
Uncle Sam now had a single authority for banks, an elastic currency, and a way to rediscount commercial short-term, unsecured loans.
What happened next was mission creep kicked in...
The 20-year authorization became indefinite.
The main goals of the central bank expanded to support maximum employment, stabilize price changes from inflation or deflation, and controlling interest rates.
Over the last 100 years, 200 changes have been made by law — and many powers assumed with flimsy legal support.
As it assumed new powers and stretched its legal authority further and further, it has become crystal clear that it has abandoned its mandates and is thwarting the free market.
First up is maximum employment. Official unemployment figures are designed to systematically ignore those that are not actively looking for work and those that are severely under-employed.
By combining long-term discouraged workers with marginally-attached workers and people forced to work part-time because they cannot find full-time positions, it is obvious that the Fed has either utterly failed, or has no desire to maximize employment at all.
As for inflation, the official calculation has been changed more than 20 times since 1978. Each time, the equation was changed to lower official numbers.
If we stuck with the system used in 1980, inflation would be over 8%. Even then, cost-of-living increases disproportionately affect the elderly, who will see a paltry 1.5% Social Security benefit increase.
Once again, the Fed has quietly abandoned its duty to control prices.
Both charts courtesy of shadowstats.comBanks and corporations are now dependent on this flow of easy money. It has been used solely to enrich multinational entities, even while the credit market for small businesses and personal loans remains incredibly tight.
It cannot possibly use interest rate changes without making the situation it created worse — though it hardly seems to care...
After all, it has taken on a far larger job, and breaking down interest rates for loans and savings serves this new, self-imposed responsibility.
Perverting the Free Market
The Fed has assumed the duty of instilling market confidence and driving gains in stock prices. Never mind the asset bubble it creates.It is now in charge of making the economy look good, even if it is a complete disconnect from reality. Just look at the disconnect play out whenever government and economic data is released. When the Fed announces the economy is still too weak to risk tapering the endless flow of money into the market, the market reacts by pushing the Dow and S&P 500 to new record highs.
Even hard data that should be the driving factor for the near-term outlook for equities have the opposite effect...
Recently, we've seen a host of negative signs, including vehicle sales, ADP employment, the trade balance, core retail sales and all retail sales, industrial production, non-farm payrolls, housing starts, core capital goods orders and shipments, and the S&P Case Shiller Index.
We're seeing negative outlooks in soft data, too. A good measure for this is the Citigroup Economic Surprise Indices. They compare actual data releases to the average expectations in Bloomberg economic surveys: If you examine the correlation to the S&P 500 returns in this data, you can see how the Fed has perverted and introverted the market...
If the correlation is positive, strong economic data is boosting returns. However, if it becomes negative, it indicates weak U.S. economic data is pushing equity prices higher.
It is a bit complex, but once you put it on a graph, it eloquently captures how the market is behaving when the economy is beating or falling short of the expectations of a broad consensus.
Here is a chart of it from Guggenheim:
This trend will have to reverse itself. It is clearly unsustainable.
The Fed is creating an asset bubble by divorcing market performance from reality as traders binge on the 21% year-to-date returns like pigs at the trough. You have to go back to late 2005 through the end of 2007 to find any period in the last ten years where negative correlation was so pronounced. (Of course, that was the run-up to an implosion in the market and the Great Recession.)
By abandoning its true purpose and taking over the free market through one of the most egregious examples of mission creep in history, the Fed has set us up for another crippling blow.
As bad as things have become with the Fed, the trampling of our rights by the NSA and the police state, and the destruction of the lower and middle classes for the gain of a select few, I do believe we'll be stronger in the end...
It has been a long time since we've had to go through a trial by fire in our society. We may be due.
After reading the research Nick has been doing, I think reasonable minds will prevail in the end. I just hope the hardship won't be too much for many of us to bear.
Take Care,
Adam English
@AdamEnglishOC on TwitterAdam's editorial talents and analysis drew the attention of senior editors at Outsider Club, which he joined in mid-2012. While he has acquired years of hands-on experience in the editorial room by working side by side with ex-brokers, options floor traders, and financial advisors, he is acutely aware of the challenges faced by retail investors after starting at the ground floor in the financial publishing field. For more on Adam, check out his editor's page.
*Follow Outsider Club on Facebook and Twitter.
Related Articles
No Safe Havens Left?Bank deposits, bonds, Treasuries AND equities are all vulnerable. Here's how to hedge yourself from financial ruin.
A Terrible Misconception: Capital is "Money"
The markets are juiced and are being hyped, running on cheap loans and share buy-backs funded by credit. Real capital is scarce while fiat "money" is rampant.
Will Millennials Change the World?
The status quo is being challenged. Millennials are finally fed up...
QE5: The Dollar Will Die, Silver Will Soar
Why silver is the best performing asset since Lehman...
Tidak ada komentar:
Posting Komentar