On Troublesome Debt

“How did you go bankrupt?
“Two ways. Gradually, then all of a sudden.”

—Hemingway, The Sun also rises

Not long ago, anthropologist David Graeber was moved to write 260,000 words on debt* after a twenty minute conversation with a lady at a cocktail party.

He was describing his efforts as an activist working for debt forgiveness for Third World countries mired in debt that was impossible to repay. In the late seventies, Citibank, Chase, and other large banks, recipients of huge deposits from Middle Eastern oil countries, were looking for a way to put those funds to work. They sent representatives to Third World countries, selling dictators on taking out loans to develop their economies. The original low rates soon skyrocketed as U.S.  tight money policies sent rates up towards twenty percent. The interest piled up on the loans and, despite best efforts, most of the borrowing countries could not make a dent on the principal of the loans.

The IMF, acting as the big banks’ enforcer (leg breaker), insisted that the countries put severe austerity measures into effect in order to restructure their loans. This caused the economies of these nations to collapse (austerity does that).

Graeber explained that his organization had managed to get the IMF to stop imposing structural adjustment policies, which were doing all the direct damage to the economies, but that the long term goal was debt amnesty. Something along the lines of the biblical Jubilee. “As far as we were concerned, thirty years of money flowing from the poorest countries to the richest was quite enough,” he told her.

 “But, they borrowed the money! Surely one has to pay ones debts,” she replied. The comment rocked him. She held fast to this view, even after being told that the unelected dictators of the borrowing countries funneled most of the money into their private Swiss bank accounts.

For weeks, he couldn’t get it out of his mind. Eventually, he realized that throughout history much of the world has regarded paying ones debts as a moral obligation. In most cultures, not to do so is held to be a shameful sin.

In reality, the statement “One has to pay one’s debts,” according to economic theory, is false. The lender takes a risk when making a loan. A bank, risking depositors’ money, is responsible for setting underwriting standards, evaluating the risk, and setting aside reserves for loans that cannot be repaid due to circumstances beyond the risk parameters.

The borrower is responsible for making best efforts to meet the terms, but, in the event of force majeure, should have the bankruptcy laws available to resolve the losses to both parties. This was not so with the Third World loans. International law overwhelmingly favors the lender. If they wish, the banks can hold sovereign nations responsible forever.

Domestically, the situation is almost the same. Individuals who suffer financial reverses go through hell in the bankruptcy courts. Over the past twenty years the powerful banking lobby has managed to get laws enacted that treat the defaulting borrower like a criminal.

At the same time, underwriting standards for loans are almost as weak as at the top of the real estate bubble in ’07, and bankers are aggressively going after all manner of substandard loans from private individuals.

When the market breaks again, the downward pressure on the economy will be greatly exacerbated by millions of low grade loans made to individuals who will not be able to meet the terms. The banks, who have engineered this situation, will extract their pound of flesh from their victims while society, generally, will probably think this is OK.

U. S. banks are extraordinarily powerful politically. Banking has the nation’s largest lobbying presence in Washington (it spent $1.4 billion during the 2013-14 election cycle). No surprise, then, that banking legislation is freighted with the conventional view that the borrower who can’t pay is the deadbeat.

A corporation that goes into bankruptcy has made a good business decision. An individual who can’t pay for falling into hard times is a moral degenerate. It is a hard wired conviction, thousands of years old. Next week is Give Your Son of a Bitch Wall Street Banker a Hug week. Be sure to do your part.

Cheers,

Rod

* DEBT: The First 5,000 Years, David Graeber,
Melville House Publishing: May 2011

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The Truth Problem

Since Plato, Western thought and the theory of knowledge
have focused on the notions of True-False; as commendable
as it was, it is high time to shift the concern to
Robust-Fragile, and social epistemology
to the more serious  problem of Sucker-Nonsucker.

—NN Taleb

The Governor of Texas was bragging. No surprise, it being a native Texan’s propensity. “Forty-eight percent of all jobs created in America were created in Texas,” Said former Governor Rick Perry in 2009. So now it’s April 2015 and he’s no longer governor. Good thing, unless he wants to tell us layoffs are the Next Big Thing:

Texas layoffs

I don’t mean to be piling on here. Half my family lives in the Lone Star State. Politicians everywhere use any opportunity available to them to take credit for good economic data points, however ephemeral they may be. And, being an oil country dude, Perry was probably unduly optimistic about the staying power of a domestic industry that now requires extreme high prices to be viable.

The oil industry is in the toilet, but that’s not the only problem with employment. The employment report last week was dismal: 93 million employable people are out of the work force. The drop in the unemployment rate, regarded as something to celebrate in Washington, merely reflects a labor force participation rate that has declined to what it was back in 1977, when most households still had only one earner.

The entire nation is beset with a dearth of well paying jobs. Recent payroll jobs reports tell us that the complexion of the US labor force is that of a Third World country. Most of the jobs created these days are lowly paid domestic services.

The bubble in global debt continues unabated. Both lenders and borrowers learned nothing from the collapse in ’07-’08. Global debt is up 40% since 2007 to $199 trillion, and, as a percentage of GDP, it  averages globally 286% now vs. 269% in ’07. Lending standards have also plummeted.  In ’07, just before the crash, about 20% of corporate loans were “covenant lite,” meaning loans without adequate collateral. Today over 60% of lending is high risk.

Meanwhile, The stock market ran up big last week as the fast money crowd celebrated the reality that the Fed will not be raising rates in June. However, the game is getting harder to play. Since late January, the daily chart of the Dow Jones Industrial Average has been tracing out an exhaustion pattern. There may or may not be one more modest new high before the pattern ends and a sharp decline ensues. I don’t know whether this will be the start of a major decline, but it makes no sense here to tempt fate. The economic underpinnings are way too fragile.

At tops like this one, there are two types of participants:

Non-suckers: bankers, brokers, financial advisors and economists who advise their clients to be fully invested. For this they get handsome fees without having any skin in the game.

And,

Suckers: investors who, on their own or on the advice of the non-suckers cluelessly risk their futures in grossly overpriced investments.

The end game for the suckers is pretty awful. Non-suckers with no skin in the game will be fine. Well, they may be driving cabs or serving lattes at Starbucks while surviving in decidedly more modest circumstances after their clients are ruined. But they’ll be fine.

Cheers,

Rod

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A wise Man’s Thoughts

The Trader

An essay from In Our Time (1977),
a book by Eric Hoffer.
Posted with permission from Hopewell Publications

It seems strange we know so little of the history of the trader. The trader preceded the cultivator and the herder, and he is probably more ancient than the hunter and the warrior.

The trader and the artist are probably of equal antiquity, and the most uniquely human. There are animal hunters and warriors, and some ant species engage in activities reminiscent of cultivating and herding, but nowhere in the animal world is there anything remotely equivalent to the trader and the artist.

That early man, so naked to the elements and predators, should have survived at all seems miraculous. But the situation becomes doubly miraculous when we find that earliest man was the only lighthearted being in a deadly serious universe, given to playing and tinkering, and exerting himself more in the pursuit of superfluities than of necessities. He had ornaments before he had clothing, and clay figurines before clay pots. From his earliest beginning man was a luxury-loving animal, and the earliest trade was in luxuries. Trade in necessities was a late development.

The trader was probably the first individual. He became an individual not by choice but by circumstances. He was either a straggler left behind, or a fugitive or a sole survivor. Earliest trade was foreign trade, and the trader was a foreigner. Even at present in backward parts of the world most traders are foreigners: Indians in East Africa, Lebanese and Greeks in West Africa, Parsees in India, and Chinese in Southeast Asia. I can see the first trader, and outsider, approaching a strange human group, bearing a gift of something new and desirable, and then going from group to group exchanging gifts.

Considering the trader’s antiquity and the vital role he played in the evolution of civilization, it is difficult to understand the scorn and disdain he evoked in other human types, particularly in the warrior and the scribe. To the warrior who made history and the scribe who recorded it, the trader was the embodiment of greed, dishonesty, cowardice, dishonor, mendacity and corruption in general. Yet it was the trader who first gave weapons to the warrior and the craft of writing to the scribe. Trader’s’ tags and marks of ownership preceded clay tablets and papyrus rolls. Later, when the scribe had made writing so cumbersome and complex that one needed a lifetime to master it, the Phoenician trader moved in to simplify it by introducing the phonetic alphabet.

The age-old enmity between warrior and trader becomes particularly intriguing when seen in the light of recent events which indicate a kinship between the two so close as to make possible and interchange of roles. We have seen German and Japanese warriors become the world’s foremost traders, and Jews foremost warriors.

As to the antagonism between the trader and the scribe: Where the trader is in power, the scribe is usually kept out of the management of affairs, but is given a free hand in the cultural field. By frustrating the scribe’s craving for commanding  action the trader draws upon himself the scribe’s scorn, but he also releases the scribe’s creative powers. It was not a mere accident that the Hebrew prophets, the Ionian philosophers, Zoroaster, Confucius and Buddha made their appearance at a time when the trader was in ascendance. The same is of course true of the beginning of the Renaissance, and of the cultural flowering in modern times.

Where the scribe is in power the trader is regulated and regimented off the face of the earth. In scribe-dominated communist countries the legitimate trader has been liquidated, leaving only the clandestine traders, the true revolutionaries, who undermine and frustrate totalitarian domination.

In free societies, the tug of war between trader and scribe has had beneficent effects. The trader cracked the scribe’s monopoly of learning by diffusing literacy through popular education, while the scribe has been in the forefront of every movement that set out to separate the trader from his wealth. As a result, both learning and riches have leaked out to wider sections of the population.

 

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The Bubble Of The Sociopaths

…Or the brightness in the memory of the failed hotel
where the waiters in their immaculate white uniforms
were barefoot…

—Gilbert

Spring of 2000 looked for all the world to me like the popping of a huge stock market bubble, an overdue event that had been building for decades. The market was as frothy as I had ever seen it. Little old ladies were cashing in government bonds to buy dot coms, frantically snatching up new issues with zero fundamentals and virtually no chance of successfully carrying out their bizarre business plans.

Big Bust ahead

It was a top of sorts. But before a real washout-something to be expected when too many fools drive valuations beyond reason-the Fed stepped in and halted the collapse by drastically lowering  interest rates. This came to be known as the Greenspan Put, meaning “Don’t worry folks, I’ll print money so you won’t have to take your medicine for being foolish.”

With cheap money, the party migrated to real estate. When that bubble popped, it looked, finally, as if a thorough cleaning of the Augean Stables was underway. Another chance missed. Instead, the Fed bailed out the banks and furiously printed money to get the economy back on track. The recovery has been tepid, although government reports fancifully say things are fine.

So now, completely ignoring a crappy economy, the stock market starts up again and steadily cruises to an all time excess of valuation and sentiment, and I’m up nights, trying to figure out what’s left to inflate, and how.

I am slow on the uptake. It was right in front of me. With ZIRP, the Fed’s Zero Interest Rate Policy, meaning absurdly low rates, corporations overcame their lousy earnings by borrowing money to do stock buybacks, shrinking the number of shares outstanding in order for flat to lower per share earnings to be higher when divided by fewer shares outstanding. Does this make sense? Of course not, unless you’re a CEO whose bonus is tied to the performance of the stock. You load the company with debt so you can shrink the equity. Your huge, reckless buy orders drive the stock up. Now you can exercise your stock options profitably.

Here’s a typical example: Caterpillar’s revenues have gone nowhere for several years

Caterpillar sales

But the stock has held up:

Caterpillar stock

The company has consistently beat analysts’ earning estimates by spending huge amounts of money doing buybacks to shrink the shares outstanding.

CAT buybacks

Note that capex (capital spending for growth) is in the toilet. Obviously, management doesn’t see business growth on the horizon, so they can make things look good by shifting paper around. Who wins? Short term, the management. Long term, the shareholder is holding the bag when leveraging the balance sheet in front of an obviously deteriorating economy becomes unsustainable.

Is this a popular strategy?

From Zero Hedge:

…as we showed yesterday, in Q1 companies in the S&P 500 spent a record amount of cash not on growth (or maintenance) capex, not on employee salaries, but on stock repurchases – that one most direct way to boost a company’s stock price and to “beat” Wall Street expectations by reducing the number of shares outstanding.

And now we also learn of the other “unintended” benefit of record stock buybacks, if only to CEOs: as a result of cost-indiscriminate buying back of their stock, as in using corporate cash, Corporate CEOs, whose pay is now more closely tied to stock performance than ever, were also paid the most. Ever.

Or to simplify further: out of the corporate cash pocket and into the personal cash pocket. Rinse. Repeat.

And since the S&P 500 ends up at record highs, everyone is happy, except for the employees of said company, who, long after the CEO is retired on their own private island, are virtually assured of wholesale layoffs as the next management team scramble to figure out how to keep the business going under a record debt load…

So, it’s a bubble, not driven by the mindless over enthusiasm of speculators. The three trillion dollars corporations have flung into the market since 2005 constitute a calculated move by sociopath CEOs to enrich themselves. If they get out before they’re found out, they will make out. The result will still be a crash. And, by adding significantly to the economy’s total debt, the next downturn stands to be the mother of all downturns. Ain’t that grand?

Cheers,

Rod

Posted in Economy, On Markets | Comments Off on The Bubble Of The Sociopaths

All About Me

Selfie

Here’s the elevator version: I was born in Tokyo, Japan, then went to live in Buenos Aires, Argentina, then Lima, Peru and then Montevideo, Uruguay, all before I was ten. At thirteen, I was sent to boarding school in San Marcos, Texas, where I went to class and drank some beer. Then I went to Texas A&M for a semester and drank some beer and went to some classes. Then I went to LSU for a couple of semesters and drank beer. Then I hitchhiked to California and joined the Marine Corps before the draft board called my number.

I drank some more beer in the Corps, but got a few pointers on life in those three years.

After that, I got married, had four kids, lived in Oakland, New Orleans, Atlanta, New York, New Orleans again, and Vero Beach, where I intend to stay, having gotten sober here twenty-seven years ago. Some would say it was an interesting life. Seen through the bottom of a beer bottle, it was OK…maybe.

I am grateful for one thing about the first fifty years of my life: All of my children have grown up to be terrific people in spite of me. On the other hand, I don’t regret one damn minute of that dysfunctional era. I wouldn’t want to do it over,  but the experience gave me a lot to think about since I’ve been trying to grow up.

And, for me, it’s all about growing up. Emotional development stops when an alcoholic starts drinking alcoholically. That’s why so many alcoholics are jerks. I was a fifty year old teenager when I stopped drinking. But, never mind, the journey out of that miasma has been nothing short of wonderful.

As I slowly got my wits about me, I tried to figure life out. What are the priorities, I’ve wanted to know. David Brooks, in his book, The Road To Character, posits that we are in a contest within ourselves with divergent goals: resume virtues, and eulogy virtues. Things to brag about, satisfy the ego, and actions to nurture the soul.

My ego is never satisfied. Trying to give that sucker what he wants is a thankless task. Time spent doing the next right thing is better.

Brother Timothy, a Benedictine monk I knew, gave succinct homilies when he preached at mass. “If you just be good, you’ll be fine,” he said. I don’t have a better idea.

The quest, then, is what does it mean to be good? I think it comes down to my relationship with you. If we’re about you, it’s good. If we’re about me, not so.

I was seventy-six a few days ago. I’m fit enough and fully engaged in my work. I trade futures, something that I can do until I croak and they find me slumped over the quote machine, I guess.

I’m blessed with a wonderful soul mate in Cindy, my wife of twenty-three years. She just makes me better. Between us, we have six kids, six kids’ spouses/sig. others, and an even dozen of the best grand kids on the planet. All a joy to hang with.

The shot of me was taken by Bob Craig. Still half in the shadows, but emerging. That’s enough about me.

Cheers,

Rod

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Going Big or Going Broke?

golden arches

It was Saturday morning, and lunch for my wife, four kids, and me was the issue. The answer was McDonald’s. Fast, cheap and reasonably good (I liked the fries). Six burgers, six orders of fries, please, for which I gave the counter boy $1.50 and I’m back home in a flash.

The year was 1966. Minimum wage for part time workers was 0.70/hour and the kid at the counter was sixteen. The min wage today is a shade under 8 bucks and, unless I’m going big, I can replicate that lunch order for  $14.62, which is about right, given the fifty year interval.

But the “counter boy” is not a boy anymore. He/she is an adult trying to support a family, and $7.60/hour forces the worker to rely on food stamps, Medicaid, and God knows what other kind of assistance to get through the month.

Workers in the fast food industry are demonstrating for $15/hour, which would go a long way towards providing them a living wage. I’m all for it. Trouble is, the industry prices its product against a lot less in labor costs. Double wages and now it’s thirty bucks for the plainest lunch on the planet. That’s going to be a hard sell.

Any increase in labor costs plays havoc with already razor thin margins in that industry. The business model was never about giving families a middle class income. Today’s fast food worker was the factory worker of the past, forced down the line to work in one of the few jobs available to semi-skilled workers anymore.

Income inequality is not just about excessive compensation for corporate executives. The workplace for great swaths of the job market has been permanently altered. Much higher productivity is required for incomes to rise meaningfully. This is not likely to happen, given that indicators of economic activity are rolling over. Seeing this, few companies are putting capital to work for growth, preferring instead to buy back their own stock and pay out dividends.

The traditional sources of growth, new industries and game changing new technologies, are not on the immediate horizon. You won’t hear this from the Fed, but unemployment and underemployment will be around for a long time. The direction in both the economy and the capital markets is down, sure to worsen the situation for millions of families.

So, it becomes a social issue. Much is already being done, both privately and by government. Over 900 families with working heads of household in our county are receiving food every week from the privately funded local food pantry. Government programs are also available.

In my view, it is folly to be talking about cutting back on programs now. The conversation needs to be about expanding these services.

Unless you like the idea of people starving.

Cheers,

Rod

 

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Sitrep

 

To all but their colleagues, traders can sound unintelligible when shouting across the trading floor. “How’s Apple?” one yells. “Crowded trade,” comes the shout from the other side of the floor. Sounds like crowded train-a good fit because a crowded trade is a situation in which most of the players are aboard, a setup for eventual collapse. The wiser man, then, would stand down.

Crowded Trade

Today, the entire market is a crowded trade (or train, if you like). Here’s a look at how the participants feel and behave:

Fund managers are all in, holding almost no cash. This means they will have to start liquidating immediately when redemptions begin coming in.

Individual investors, likewise, have niggling amounts of cash in investment accounts, meaning little to buy with.

Traders, per the Commitment of Traders Report are lopsidedly bullish.

These conditions do not presage a significant move up. Quite the contrary.

Meanwhile, the market trades heavy (trader jargon for the sense that it doesn’t want to rally). It will be said (by the bulls) that it is consolidating in order to charge North again. Hmmm…

heavy market

Maybe, but the data on the economy is beginning to implode, casting doubt on the bullshit we get from government reports:

Wholesale trade

Wholesale Sales quit “recovering” five years ago, now going negative.

baltic dry index

 The Baltic Dry Index, which measures changes in the cost to transport raw materials, has fallen below the level of thirty years ago, indicating lots of excess shipping bottoms with no goods on order for transport.

Retail Sales mom

Retail sales plunged twice as much as expected in February. Worst back-to-back drop since October 2009.

Hardly a healthy picture. The question is, will the economy catch up to a market that’s priced for perfection? Doubtful.  I’m fading that trade.

Cheers,

Rod

 

 

Posted in On Markets | Comments Off on Sitrep

Primer On Stock Buying

Dear Nathan,

You’d like me to help you pick a stock, and I will. But first, let me tell you what I think buying stock is about. A share of stock in a public company is like a boat. It’s a vessel we put our money in so that it will ride with the great current of the stock market.

Our goal is to benefit from owning that stock by receiving dividend income during our holding period,  and to ultimately sell for more than we paid for it. The starting place for our research is not the stock. It is  is the condition of the stock market, because if the broad market is not going up, even the best companies will have difficulty going up. And when the market gets into a big falling period-known by investors as a bear market-well, we can just about be guaranteed to lose money.

So, what is the condition of the market today? Very expensive. It has been going up a long time and has been pushed up way beyond the value in relation to the ability of the underlying economy to produce the earnings necessary to sustain your stock. Take a look:

Stocks today

What’s more, the economy is starting to go down, so it won’t be long before the market comes down, too. That’s the way I see it, anyway, and, for various reasons, the orange line at the right of the chart is the trajectory I’m projecting for the market. In sum, let’s look at a stock to buy, but let’s plan on waiting until the market comes down and offers us a good chance to make money.

I believe you said you’d like to buy Apple. It’s a heck of a company, but it has a flaw: it is the most popular stock in the world today. More people and more institutions own Apple than any other stock. The problem, Nathan, is who’s left to buy it? You might just be the last guy aboard.

The time to have bought Apple was before they developed the iPod, the iPad, and the iPhone. The stock has gone up 10,000 percent since it came out with these wonderful things. Can they do this again? I don’t know, but technology companies usually have one exciting period, and then a new technology replaces them while they are struggling to hold on to what they’ve got:

Apple

Apple today

As you can see, Apple’s not cheap. I don’t know if the bloom is off the rose with it, but I have lost more money buying popular stocks than I like to think about.

I would rather have you look at a more basic industry, one with a good reason to have growing business in their products for many years to come. I’m thinking of Gardner Denver, manufacturer of industrial products with businesses the world over. To me, the interesting thing about GDI is that two thirds of the world is emerging from the backwaters to a modern economy.

Ironically, the fact that so many of these people already have cel phones, computers and social media devices (very easy to install internet and satellite communications in Tibet, or Gabon, or Nigeria, etc.) makes them eager to modernize, and to do that they need infrastructure and industrial development. Gardner Denver and other companies in the field would be worth looking at. They are not cheap today, of course, but, when the market comes down, I expect them to  be good long term investments–maybe pay for your college. So, let’s do a little research in those areas. I’ll be in touch as we go along. No rush, though, you don’t want to be loading your boat at a time like this:

After 165 years, a new company to operate Niagara Falls boat tours

My feeling is that anyone buying stock today is as likely to make any money in the next few years as the folks in this boat are apt to make it up Niagara Falls:

Talk to you soon,

Rod

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Oil: Deflation’s Leading Edge

The sun goes up and goes down. A success
without any enhancement whatsoever.

–Gilbert

Dear Maridel, Dave, Jack and Martha,

Mind your businesses, now, deflation is coming. We haven’t seen this in any meaningful way during my 76 years on this earth, but it stands to be a lulu, and getting through it will require that we get our costs down to maybe half of what they are now, no matter how prudent we may have been.

You’re busy with your lives, so you may not see it coming. Google “Williston, ND oil bust” for a preview. A collapse in the oil patch tends to lead the rest of the economy. The 1980-82 crash in oil ($42 a barrel down to $8) preceded the worst recession since the depression.

The difference between now and ’82 is the amount of debt in the global financial system. It is much greater and involves billions more people than 30 years ago. Every nation is borrowed to unprecedented levels in relation to GDP. Deflation is the final chapter in an economic expansion that was  financed with borrowed money.

Borrowed money financed extreme speculation in commodities during the first decade of the new millennium. The story-there is always a story-was that China, Brazil, India and Russia were exploding, economically. Well, they were–on borrowed money. Now China has too many unsold, unoccupied buildings, Russia doesn’t have anything because it is a kleptocracy and the wealth that came from high energy prices wound up in the Swiss and Cypriot bank accounts of Putin’s henchmen, and both Brazil and India have corruption, with assets being diverted to the powerful.

The result is an extreme excess of production in the world and a collapse in every currency against the dollar. To try to keep things going, the commodity producing nations are shipping as much as they can to whoever they can foist it on at any price. China is shipping tons of steel to the U.S., putting a hurt on the American steel industry, and so it goes.

Meanwhile, debt laden consumers in the U.S. and elsewhere are raising their savings rates, not spending. The increase in spendable income from a big drop in gas prices has not resulted in an increase in spending. By year’s end, retail businesses in your town will start feeling this. Outside of the now collapsing oil industry, the biggest growth in employment in recent years has been in the restaurant industry. That’s over, eating out is peaking now and I’d hate to own a restaurant.

The rise in the stock market over the last couple of years is unwarranted, based on the underlying company values. As I’ve said in earlier posts, there are three sources of the flow of funds:

1) Highly leveraged speculation by hedge funds- guys that trade OPM (Other People’s Money), much of it belonging to pension funds desperate to get returns to provide promised benefits. The hedge fund guys extract big fees and have no skin in the game themselves.

2) Share buy-backs by corporations, also with borrowed money, serving to keep the price going up so that the senior suits can exercise outrageous stock option packages.And,

3) Clueless 401k investors, advised by agents also have no skin the game.

The game is being played by sociopaths and pathetic neophytes. If you own any stocks, be sure to put stop losses under your positions.

I’m looking forward to seeing some of you for dinner on Easter Sunday.

Love,

Dad

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Wishes Granted…Unfortunately

El clavo que sobresale siempre recibe un martillazo
(The nail that sticks out always gets hit by a hammer)

It will be said that the historic disparity between the real economy, which is slipping fast, and the fantastically expensive market, is the Fed’s fault. Would that it were true. We could have run the suits out of the country long ago,  letting reality prevail, causing a small market adjustment instead of facing an inevitable ferocious crash. Trouble is, it’s our fault. We the people asked for it. No market hiccups, please. Find a way to keep it going, we say.

Makes me think of the demand a newly retired lady recently made of her advisor: “I spent a lifetime eating hamburger, young man. Now I want you to see to it that I eat steak!”

Sure. The advisor is stuck with what the market will give him. The Fed, on the other hand, can print money. So, the advisor and his client may bitch about money printing, but anything that might cause a pause in the elevation of the lady’s retirement account is unacceptable. Fed members are bureaucrats. They like their jobs. No way are they going to piss this lady off, so they print money and hold interest rates down in order to pump up the economy.

But the exercise fails because demand is weak. You can’t get people to buy if they don’t feel they can. Consumers are loaded with debt, fatigued, and, per the polls, glum about the future. Jobs that pay a living wage are not available, and they know it.

So, instead of boosting economic activity, which could improve corporate earnings, producing tangible, lasting growth for the market, the cheap money is being borrowed by corporate America so that Corporate CEOs, in an audacious act of self dealing, can have the company buy back stock at expensive prices in order to keep the move going and be able to exercise their stock options profitably.

Nothing new about this ruse. It produces a bounce for a year or two, but eventually the real economy weighs too heavily, and a crash follows. The CEOs retire to their homes in the Hamptons and unwitting retirees and 401k investors get squadoosh.

S&P companies have spent more than $2 trillion on buybacks since 2009. By any measure, this is a mania, which has now gone stratospheric, with announced buybacks of $104.3 billion in planned purchases in February, running at almost twice the $55 billion bought a year earlier (TrimTabs Investment Research) and an average of more than $5 billion of buybacks each day.

Eventually, buybacks will reveal the reality: companies cannot find ways to invest in their companies to produce significant profits. That’s when the real economy puts the kibosh on the market.

 Apple, by the way, is the winner in the buyback sweepstakes. It is true that they have been extremely profitable, but I fail to see the value of borrowing money to buy their own expensive stock.

The FOMC gave the market some comfort a couple of hours ago. Using her typical bureaucratspeak, Fed Chairperson Janet Yellen gave assurances that she wasn’t going to not raise rates unless she maybe had to, and even then, she might, or might not.

The retired lady and her advisor can rest easy for another month. And that is what she and every other investor wants, even if it’s phony. So, don’t blame the Fed members for wanting to keep their jobs.

Cheers,

Rod

Posted in Economy, On Markets | Comments Off on Wishes Granted…Unfortunately