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Financial Skeptic Bulletin, August 2013

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[Aug 29, 2013] Why Work After Retirement?

"If I work after I retire from my corporate job, it will be doing something different that would allow me to try something new."
Yahoo! News

Why would anyone want to work after retirement?

... ... ...

Retirement can be a difficult transition for many of us. Instead of an abrupt transition to full retirement, why not work a little bit and ease into it? Staying active by working part time after retiring from a long career can help your finances and help you adjust to a less structured retiree lifestyle.

Joe Udo blogs at Retire By 40 where he writes about passive income, frugal living, retirement investing and the challenges of early retirement. He recently left his corporate job to be a stay at home dad and blogger and is having the time of his life.


I"m almost 55. I'm looking forward to retirement, and have financially planned for it.

If I work after I retire from my corporate job, it will be doing something different that would allow me to try something new. Im an accountant, and could see doing something like selling jewelry, working at Barnes & Nobel, or teaching knitting classes.


Most people retire so they can travel, do hobbies and spend time with grandkids and friends but all of that gets old after awhile. Many who retire from their jobs wish they still had work to do of some sort just to stay active, bring in some extra money and feel worthwhile again. If not for anything else, put some structure in one's life.

Let Tyrants Fear

Bull(s)(h)(i)(t) article, they want you to work till you drop, plain and simple. Now people that can not plan their budgets, money, and always in debt, they will have to get their act together, if they want to retire.


If you're working after retirement, you're not retired.


Most people work part time jobs when they retire because the 401k that replaced company pensions, are not a viable solution to the large majority of Americans. You will see retiremnt drop over the next 10 years.

Retirement is just an after thought where 401k's are concerned. 401k's real purpose is to fuel the stock market. Every friday billions of dollars are payroll deducted from almost everyone's check. It sure keeps the bankers humming along, and if everyone would stop investing that money...

.America as a country would be devasted. That is why they wanted to get their greedy little fingers on your social security. The typical american worker gets only the crumbs off the 401k's and then you get a guy like George Bush whom absolutely killed the economy, and took those crumbs away.

If your looking to retire on 401k's, you better be investing some serious jack and hope that your pile doesn't run out before you die. Good luck with that.


"You need to have a purpose" we work so we can enjoy life - retirement is a pleasure not a worry...


It is a paradox for the elites. They need everyone to be financailly overwhelmed so they have to work until the day they die so that no one has free time on their hands to get angry at the growing inequality and injustice of the system.

However, since illegal aliens, outsourcing and technology are eliminating the need for thousands and millions of jobs, the traditional model of working for a living is no longer viable. Furthermore, the young are increasingly the group being unemployed....and we all know what large numbers of young unemployed looks like....(Arab Srping.)

Now, with retirement age people completely unprepared due to the dismantling of pension plans and unions, there is a perfect storm on the way.

I would say that Capitalism has run it's course and the predictable revolts, riots and revolutions are right around the corner if the rich elites don't start giving back.


If you still need money you made the wrong decision to retire in the first place. Retired 12 years and loving it.

[Aug 29, 2013] Fed Tapering Economy Without QE May Not Look Much Different, Here's Why

The amount of QE we've been doing puts us in uncharted territory.

John Smith

"I don't think QE has had a huge impact on the real economy except in a few sectors" . . . sure trillions in newly created fiat hasn't had an impact, what is this idiot smoking? And has he ever heard of DEFICIT SPENDING, where the f does he think that comes from?


The stock market is not the economy. The economy may not be worse off, but the market will be without the artificial stimulus pumping it up.


... they spent $85B each month buying bad securities from banks (among other things). And this guy is trying to tell us that it has no impact!


The way the market has been reacting this year, QE has already been factored in by the investment banks. Future market reactions will be based on what Congress does, or doesn't do, in the coming weeks about debt ceiling increases, annual budget, social security tampering, obamacare taxes, sequestering, etc.


You are trying to tell us that removing $85B a month injection of funny-money into financial markets won't have an effect? Really? That is a staggering amount of money, even for Americas economic size. Lets just stop the propaganda, turn off the sewer pump of QE, and swallow our medicine. Lets just get it over with so financial markets can finally begin to heal for real (i.e. without government/Fed ginormous intervention).

[Aug 28, 2013] Fed Tapering Will Cause Markets to Freak Out Heidi Moore

Moore is quick to discount the most popular arguments against a market crash, the first being that an eventual tapering is already priced in. "Even if you tell people that things are coming in the market, they don't necessarily process it the way that they should because everything is the next trade, it's now," she says.

And the second argument: markets are reaching record highs based mostly on company fundamentals, not the QE injection. "Corporate profits are not as strong as they appear," refutes Moore. "You've seen a lot of giant companies suffer from fallen profits--the Microsofts (MSFT), Wal-Marts (WMT) [and] Blackberrys (BBRY)."

[Aug 26, 2013] The Recession That Never Ended 2008 -2013 (and Counting) by Charles Hugh Smith

Images removed. See original site for very informative graphs. Several metrics shows, that despite the climb in GDP, the recovery has not made its way through the economy. Those metrics are: full-time employees as a percentage of the population; median household income (down 7.2 percent); real personal income less transfer receipts (government payments); and overall income disparity, which has yawned over the past decade.

The reality is that the recession never ended for 95% of U.S. households, and by many metrics the recession has deepened.

If you want to claim the 2008 recession ended, you have to find a metric that reflects "growth." For instance, gross domestic product (GDP), which has expanded since 2009.

But as Lance Roberts, Gordon T. Long and I discuss in Is the US in a Recession? (43 min. video, 52 slides), this metric of "growth" is suspect on a number of counts.

None of these charts is remotely expansionary. We can further question broad-based measures of expansion such as GDP statistically: in economies with high income/wealth inequality such as the U.S., the top 5%'s expansion of income and wealth creates an illusion that the entire workforce is doing better when the opposite is true.

If you doubt this, please examine this chart of income disparity. Note that the vast majority of income increases have accrued to the top 5%:

In other words, huge leaps in the income and wealth of the top 5% mask the decline of income and wealth of the bottom 95%. Average all wealth and income and it appears that the economy is expanding to the benefit of all, when it fact only the top 5% have escaped the recession; the recession never ended for the bottom 95%.

An even better way to create an illusory expansion is to simply not measure trends that would reveal a deepening recession. For example, what percentage of student loans are purposefully taken out as a substitute for income, i.e. used to pay basic living expenses rather than education? Anecdotally, there is plentiful evidence that a great many people are signing up for one class at the local community college in order to get a student loan to live on.

Is it any wonder that student loan default rates are soaring? The people taking out student loans just to get by have no means to make payments once the loan money is consumed.

Is an economy of people obtaining student loans they have no way to service as the only available means to keep themselves off the street a healthy economy?

Correspondent B.C. recently sent some statistics on housing and the Millennial Generation's jobs/work/earnings prospects. (For example, household_formation)

Age 20-34:

How many people 34 and under qualify for a non-subsidized home mortgage? That is, how many qualify under traditional rules (income = 3 X mortgage payments, 20% down payment in cash, etc.) How many people in this age group can possibly qualify for a conventional mortgage when only 44% have full-time jobs?

Is an economy in which people in their 30s cannot find full-time work or afford to buy a house a non-recessionary economy?

The reality is that the recession never ended for 95% of U.S. households, and by many metrics the recession has deepened. The trick is to not measure those metrics; what isn't measured doesn't exist, especially recession.

Are you in the New York City region? Meet other OfTwoMinds Like-Minded people (via Meetup) interested in building social capital and exploring the alternative ideas presented here. Check it out! (Thank you, Neil T. for establishing this Meetup.)

Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

  1. Debt and financialization
  2. Crony capitalism and the elimination of accountability
  3. Diminishing returns
  4. Centralization
  5. Technological, financial and demographic changes in our economy

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate.

[Aug 25, 2013] The Essence Of The Banking Industry...



The movie is, 'The International'...

Up vote for those who are curious and want to watch it.

[Aug 24, 2013] All Wars Are Bankers' Wars


Feb 4, 2013

Written and spoken by Michael Rivero. The written version is here:

Video by Zane Henry.

This video is in the public domain. The producers have waived their copyright to this video. Listen to a post production conversation between the producers by clicking on this mp3:

You are welcome to make copies and to distribute this video freely. A free downloader is available here:

You might need this CD burner application (because the above application might be a little buggy)

If you have a PC you can use the above link (download the software first) to download it and burn it to a DVD and it is easy to do it. It is for your friends that don't have a computer and may have a DVD player instead or to give out to the public as a form of activism.

[Aug 23, 2013] The Taper Risk Is In Stocks Not Bonds

Zero Hedge

According to the Fed, QE's aim was to drive down interest rates to unattractive levels by purchasing bonds in the market, thus encouraging participants to purchase riskier (and higher-yielding) securities. As Cornerstone's Ronnie Spence notes, this risk-seeking behavior in theory boosts asset prices (and increases the 'wealth effect'). However, when one examines what has actually happened under QE, only stock prices have followed the QE theory.

In fact interest rates have only declined in periods when the Fed stopped QE.

Spence points out, that the drop in rates in response to QE likely results from the plunge in equity prices that has resulted when the Fed has looked to end their QE programs. Put another way, "Taper" is a false narrative for higher rates when in fact all the 'taper' risk is in stocks (and historically traders haven't priced it in until the money actually stops flowing).

[Aug 23, 2013] Comments on New Home Sales Hoocoodanode


Blackhalo wrote:

What do you mean by "real."

I should have written: "real interest rates"

I am just astounded that without median incomes rising, and interest rates going up (real & nominal), that home prices are expected to rise.

Perhaps the real story is that supply is going to be controlled and kept low, which is the only way I can see it happening.

black dog

Perhaps the real story is that supply is going to be controlled and kept low,

thanks for the intro:

A federal housing program originally designed to help keep people in their homes is increasingly being used for a dramatically different purpose - the demolition of vacant homes that keep property values from rising.

Read more: Treasury's latest housing plan: Start demolishing houses - The Hill's Floor Action
Follow us: @thehill on Twitter | TheHill on Facebook

[Aug 21, 2013] Bond investing in a rising interest rate environment

August 14, 2013 | Vanguard
In this interview, Brian Scott, a senior investment analyst in Vanguard's Investment Strategy Group, discusses concerns about the bond market and explains why Vanguard believes bonds can play a crucial diversification role in your portfolio, even in the event of a significant downturn.

We're getting a lot of questions about whether bonds are headed for a bear market. What is a bond bear market, and how is it different from a stock bear market?

Listen to an audio recording of this interview "

It's an interesting question, because there is not a commonly accepted definition for a bear market in bonds. The answer for stocks is a rather simple one. There is a widely accepted, broadly used definition for a bear market in stocks, and that's a decline of at least 20% from peak to trough in stocks.

Now, if you tried to use that definition and apply it to bonds, we've never had a bear market in bonds. In fact, the worst 12-month return we've ever realized in the bond market was back in September of 1974, when bonds declined 13.9%. So we've never had a decline of the same magnitude as we've had in stocks, and I think that's one of the key differences between stocks and bonds.

Back to your original question then: What is a bear market in bonds? And, judging by investor behavior and reaction to losses in bonds, I think the answer is simply any period of time wherein you realize a negative return in bonds.

Is a bond bear market something we should be concerned about? If so, is there anything investors can do to prepare?

We've a great deal of sympathy for the anxiety that investors feel about the bond market right now. Typically, an investor that has an allocation to bonds-particularly those that have a large allocation to bonds-tend to be more risk-averse and become more unsettled when they see negative returns in any piece of their portfolio, let alone their total portfolio.

So we understand how unsettling this environment can be-and, in fact, we have actually realized a negative return in bonds. If you're looking at the 12-month return through the end of June 2013, bonds are now down about 0.7%-and when I say bonds, I'm referring to the Barclays U.S. Aggregate [Bond] Index. So, by that definition, and if you use the definition of a bear market I applied earlier, you could say-and some people have argued-that we are actually in a bear market in bonds.

And so it's unsettling; but, in times like these, what we encourage investors and their advisors to do is to look at the total return of their portfolio. And I think they'll feel much more comfortable when you take that perspective. As an example, an investor in Vanguard's Balanced Index Fund that has a mix of 60% U.S. stocks and 40% U.S. bonds realized a rate of return of 12% through June 30, 2013. So a total return perspective is especially valuable in times like this.

You recently co-wrote a research paper in which you note that in 2010, like today, investors also believed rising interest rates would cause bond losses, but that didn't happen. Does the experience of the last three years suggest anything about what investors should do now?

I think the last three years are very instructive and really impart a lot of lessons that investors can find very valuable in times like this. So for a little bit of historical perspective, back in about April/May of 2010, the yield on a 10-year Treasury note was about 3.3%. That was a level that was probably lower than almost all investors have ever seen in their investment lifetime. And you have to go back to August of 1957 to see yields as low as they were back in May of 2010.

And I think that perspective alone caused many people to assume that interest rates had to rise. And I think an important lesson from that environment and how the market actually reacted is that the current level of interest rates tells us absolutely nothing about their future direction. Just because yields are low doesn't mean that they can't go lower or that they must go higher. But at any point, in May of 2010, if you looked at what the market was pricing in and looking at forward yield curves, the market's expectation were that yields were going to rise, and the 10-year Treasury yield was going to rise to a level slightly over 4%.

In fact, what actually happened is that yields fell to just over 1.4%-again, I'm referring to the 10-year Treasury note. And if you had shortened the duration of your portfolio or moved your bond portfolio entirely into cash, you lost a tremendous amount of income.

I think another important lesson is that making knee-jerk reactions in your portfolio can be damaging over time and potentially even incur tax losses as well as higher transaction costs.

Do you have any thoughts about how to make the case that the smartest course of action is probably no action, assuming a portfolio is already well constructed?

That's a hard thing to do, because in the face of what you think is an impending loss in your portfolio, it's a very natural and even human reaction to feel like you have to do something. But we would argue, very strongly, that investors are best served by not changing their asset allocation unless some strategic element of their asset allocation has changed.

And, by that, I mean if your investment time horizon has changed, your investment objective has changed, if you really have an enduring change in your risk tolerance, then perhaps it's worth altering your strategic asset allocation. However, if those circumstances have not changed, you're probably best served by maintaining the strategic asset allocation that you set.

What are some indicators that your risk tolerance may be changing?

If you have extreme anxiety-let's face it, if you can't sleep at night, perhaps it's worth asking yourself whether your risk tolerance has changed. What we found-and we're not unique in this-is that investors tend to have a high level of risk tolerance when times are good and then when capital markets are delivering strong, positive returns. That changes sometimes over time. Now, we're not suggesting that you should frequently change your portfolio, but if you're really having a high level of anxiety over losses, perhaps it's worth becoming more conservative.

I think another way to react to the current environment is just to recognize the role that each asset class has in your portfolio. Stocks are designed to deliver strong capital gains-ideally, over the long term, above the rate of inflation so that you can grow your spending power over time. The role of bonds-at least the primary role of bonds, in our minds-is to act as a cushion or balance to stocks. Stocks tend to be much more volatile, much more prone to significant losses in bear markets in excess of 20%, and, when that happens, bonds tend to be an ideal cushion against equity market volatility.

It's very paradoxical. But perhaps, if you are feeling a higher level of anxiety because of the volatility in the fixed income markets in particular, the right answer for you might actually be a higher allocation to bonds. Because we actually think that because bonds are a good cushion to equity market volatility, over the long term, a higher allocation to bonds will reduce the total downside risk in your portfolio.

Investing can provoke strong emotions. In the face of market turmoil, some investors find themselves making impulsive decisions or, conversely, becoming paralyzed, unable to implement an investment strategy or to rebalance a portfolio as needed.

Discipline and perspective are qualities that can help you remain committed to your long-term investment programs through periods of market uncertainty.

Learn more "

Well, that's certainly counterintuitive. Despite what you just said, your paper does ask the question of whether investors should consider moving away from bonds.

Yeah, that's the most common question we're getting right now. There's a lot of interest in other instruments that we're calling bond substitutes. Now, there's not necessarily anything wrong with them. So I think the term might impose kind of a negative connotation on some of these bond substitutes, but people are viewing other higher-yielding investments as a potential substitute for the high-quality bonds in your portfolio.

Some of those substitutes that I'm referring to are things like dividend-paying stocks, some high-yield bonds, floating-rate bonds, etc. And one of the things that we're really encouraging investors to recognize is that, while these instruments have higher yields than high-quality bonds like you get with the Barclays U.S. Aggregate [Bond] Index or certainly with Treasury bonds, they do have a very different risk profile, particularly when equities are declining. When equities are doing very poorly, many of these bond substitutes actually act a lot more like equities than bonds.

So it sounds like attempts to reach for income could end up depressing your overall returns. Is that right?

Over the long term, we think the answer is absolutely yes, and we've done some work around this, and we've modeled what we think will be forward-looking returns of portfolios over the long term for balanced investors. And what we found is the higher your allocation is to equities, the larger the downside risk in your portfolio is over time. And that's also true if you move away from high-quality bonds and Treasury bonds, in particular, and invest your bond allocation in some of these bond substitutes we've been talking about.

Older investors may be worried about generating income in a low interest rate environment. Do you have any advice?

This may be the hardest question you've asked of all, because we have a tremendous amount of sympathy for investors in this situation, those who are older-or, really, frankly, anyone who's really dependent on their portfolio to produce income for them, to meet their current spending needs, because you're absolutely right. The traditional answers to providing income-high-quality bonds-are not providing the level of income that investors have grown accustomed to. We've actually referred to these investors-and, really, maybe more appropriately call them savers-as a sacrificial lamb of current monetary policy. The very low interest rate environment we're faced with has really imposed a severe penalty on these savers.

And our answer is that if you choose to move away from the high-quality bonds into instruments that will generate more income in your portfolio, you'll likely get more income over time, but you'll also very likely experience a much higher level of volatility in that income stream. Of course, the only other alternative is to reduce your spending, which perhaps is even harder to do than to stomach lower levels of income for your portfolio. So there really is no easy answer.

Vanguard really emphasizes the idea of total return. Could you talk a little bit more about that and what that means in light of what's happening in the bond market?

I think it goes back to not looking at each piece of your portfolio and the returns that they're currently generating, but the return of your total portfolio overall. It's very rare that all assets in your portfolio are delivering very strong returns at any point in time. In fact, you don't want that if you're a balanced investor, because if you do have assets that are that highly correlated in good times, chances are they'll be very highly correlated in bad times as well, and you'll realize very sharp losses in declining equity markets. But ideally, if you have a balanced, diversified approach to investing, you'll realize healthy rates of total return over time.

Vanguard research

Risk of loss: Should the prospect of rising rates push investors from high-quality bonds? PDF

[Aug 19, 2013] Shiller: Why Innovation Is Still Capitalism's Star

"We are indeed fortunate that Dr. Robert Pangloss Shiller has shared his edifying personal story about how to be innovative and successful through hard work and self-financing. A more straightforward example of the psychological phenomenon of projection would be hard to find."

Quick one -- see previous post -- from Robert Shiller:

Why Innovation Is Still Capitalism's Star, by Robert Shiller, Commentary, NY Times: Capitalism is culture. To sustain it, laws and institutions are important, but the more fundamental role is played by the basic human spirit of independence and initiative.

The decisive role of the "spirit of capitalism" is an old concept, going back at least to Max Weber, but it needs refreshing today with new evidence and new thinking. Edmund S. Phelps, a professor of economics at Columbia University and a Nobel laureate, has written an interesting new book on the subject. It's called "Mass Flourishing: How Grassroots Innovation Created Jobs, Challenge and Change" (Princeton University Press), and it contains a complex new analysis of the importance of an entrepreneurial culture.

Professor Phelps discerns a troubling trend in many countries, however, even the United States. He is worried about corporatism, a political philosophy in which economic activity is controlled by large interest groups or the government. Once corporatism takes hold in a society, he says, people don't adequately appreciate the contributions and the travails of individuals who create and innovate. An economy with a corporatist culture can copy and even outgrow others for a while, he says, but, in the end, it will always be left behind. Only an entrepreneurial culture can lead.

Is the United States really becoming corporatist? I don't entirely agree with such a notion. ...


Here Kiddies, watch Yale Guy show us how wonderful it is to be Yale Guy and pretend that what we are seeing is the way in which we can all get to be Yale Guy. I am all tingly.


August 16, 2013

Mass Flourishing-How It Was Won, and Then Lost
By Edmund Phelps

"Mass Flourishing: How Grassroots Innovation Created Jobs, Challenge, and Change"

The epic story of the West is the development in the 19th century of a mass prosperity the world had never seen and its near-disappearance in one nation after another in the 20th. Mass Flourishing is a history linking this story to the rise and fall of homegrown innovation. It is also a text on the nature and sources of prosperity. It has two components. The material part is growth of productivity and wages. The non-material part is flourishing - successful exercise of creativity and talents. To flourish, people have to engage a world of challenges and opportunities. The economy's dynamism and the resulting experience of business life are central to our well-being.

Mass prosperity came with the mass innovation that sprung up in 1815 in Britain, soon after in America and later in Germany and France: It brought sustained growth to these nations - also to nations with entrepreneurs willing and able to copy the innovations. It also brought flourishing to large and increasing numbers of people - mass flourishing. There were experiential benefits: Routine work, dull and lonely, gave way to careers that took twists and turns and jobs that were rewarding. There were also developmental benefits: As people used their imagination to create new things and their ingenuity to meet challenges, they found self-expression, self-realization and personal growth in the process....

Dryly 41:

Take a careful look at what "Neutron Jack" Welch did to the General Electric corporation during his tenure. Reginald Jones, Welch's predecessor, had the "spirit" of G.E. as: "loyalty, moral integrity and innovation" When he was 80 years old Thomas Edison was asked what he considered his greatest invention. Edison said: "The research laboratory". Welch reduced employment from 411,000 to 299,000 in 5 years and closed and reduced research labs.

He led the financialization of the U.S. economy making G.E. Capital to the 7th largest bank which was insolvent in the crisis and was bailed out. He "managed earnings" hitting the numbers quarter after quarter using what Fortune called "accounting in Wonderland" just like Ken Lay and Jeff Skilling at Enron but he got away with it. His alcolyte Bob Allen, as head of AT&T sold Bell Labs to Alcatel and another, Robert Nardelli, was an unsuccessful CEO at Loews, Chrysler and Freedom Group. Many CEO's followed Neutron Jack's autocratic methods of mass firing employees while "looting" the corporation with excessive pay. I think Shiller is on to something.

Peter K. said in reply to Dryly 41...

And then Welch has the gall to accuse the civil servants at the Bureau of Labor Statistics of cooking the books in order to help Obama. What chutzpah.

Textbook projection.

Matt Young:

Mass Flourishing.
That would mostly be Episcopalions, less guilt more ceremony.

anne said in reply to Matt Young...

Really funny.

Joe Smith:

Nineteenth century innovation was not a mass exercise. A few dozen people around the world did most of it: Watt, Perkins, Edison, Tesla, Otto, Diesel, Bessemer etc.

Scaling back the industrial research labs at GE, Bell Labs etc. has been a tragedy precisely because big innovation is not a broad based, grass roots exercise.

The best thing government could do to increase innovation right now would be to outlaw software patents.

anne said in reply to Joe Smith...

The best thing government could do to increase innovation right now would be to outlaw software patents.

[ Do discuss this further when possible. I am quite interested in intellectual property patents in this regard. ]

Joe Smith said in reply to anne...

I am not an expert on intellectual property but I am a lawyer and I used to be a computer programmer. What I see when I look at software patents is: (1) an industry that developed much faster before software patents were recognized; (2) widespread simultaneous invention; (3) huge transaction costs in trying to license large numbers of individual "technologies" when putting together new products; (4) patents on what seem to be straight forward engineering solutions to problems; (5) patents on general concepts; (6) a software patent licensing industry built on and dedicated to extorting money from people who actually invest money to design a product and bring it to market. Overall, it seems like the costs of allowing software patents far outweigh any modest increase in research patents may encourage.

grizzled said in reply to Joe Smith...

My guess is that software patents reduce research. Realizing that they lack the resources to play this game people who might try to innovate in software don't.

I admit I have no evidence to support this beyond gut feeling. But I agree that the case for software patents is at best slim.

anne said in reply to Joe Smith...

I am thinking this through carefully, but I am fairly well convinced that patent and copyright law has become too restrictive from the perspective of needlessly limiting competition and too restrictive from the perspective of the original developers of the law.

Christiaan Hofman:

"...even the United States"? Seriously? The US is leading the way! And as for the question "Is the United States really becoming corporatist?", my take is that the answer is no, it already is.


In that line of thought I fear that our change of patents from "first to innovate" to a "first to file" system is a game changer. This means that if you innovate something and do not have the ressources to take out a patent, then it can be stolen by the first corporation that puts its eye on it. It also means that innovators with no interest in commercialization, no longer have the ability to simply put their innovations out for free public use.

I still remember an article about Yemen (cannot find the link) where the gist of it was that nobody wanted to start a business or work hard to get expensive things, because they knew that anything they attained worth anything would be stolen by armed gangs. First thing I ever heard about countries desperately locked into poverty that made sense.

Joe Smith said in reply to DeDude...

"innovators with no interest in commercialization, no longer have the ability to simply put their innovations out for free public use."

I think you will find that "publication" of the innovation will be "prior art" and make it very hard for someone else to then patent it. There would be a lot to be said for the establishment of a secure web site where inventors could put innovations into the public domain in a searchable and verifiable way.

grizzled said in reply to DeDude...

I think you have this backwards. Filing a patent application is not a terrifically expensive process; what costs serious money is litigation over who was first to invent.

While first to file is a step forward, the problem with the current system is that the Patent Office, staved of resources by design, cannot research prior art; so, many more patents than should be are granted.

The result of this situation is the use of the legal system for blackmail.

However, for a little comic relief see this:

which always cheers me up.

Second Best:

There's too much emphasis on future innovation compared to efficiency losses caused by corporatism blocking existing innovation.

For example consider what AT&T and Verizon have done to phone service and the internet, essentially returning to an industry structure similar to the early days of the Ma Bell monopoly, except with a dominant unregulated monopoloy (a duopoly only if areas are served by both) free to extract maximum economic rent while choking off bandwidth, volume throughput and access with an underbuilt system intentionally denied technology ungrades in many areas.

This is common in many industries in different ways, where the market power acquired may not reach that evident in telecommunications but is still substantial. Of course the important new version of market power since Ma Bell comes on a global scale from MNCs.

The great irony is corporations achieve overwhelming lock-in of economic power politically in the name of innovation when in fact, they selectively trample the impact of past innovation and block competitive new innovation at the same time.

What innovation is left for themselves is used to maximize productive efficiency for which most gains are distributed to themselves rather than consumers and labor, through targeted administered pricing disciplined more by market power and price discrimination than competition.

No amount of pollyanish localized new innovation is going to break through the entry barriers going forward until legal action is used to break up the vast network of monopoly and oligopoly power already in place.

hapa said in reply to Second Best...

i imagined hosting a panel yesterday, with a development economist and a business leader participating. it went well, up until the direct questions.

ECONOMIST: there's well-tested evidence that the dissemination of knowledge -- and broad incorporation of best practices -- is key to regional economic welfare. what role have you played in flattening learning curves in your sectors?
CEO: we lawyered up, and patented anything we found lying around.
ECONOMIST: dear god. including public domain materials?
CEO: it's common sense.


I don't think it is correct to think of innovation as something done by Ayn Rand heroes. Most innovation is small and incremental, and most of it is done by workers and/or customers. A different kind of oil here, a different resistor there, a few minor but useful modifications to an algorithm today, and a few suggestions for more tomorrow. But the way property laws and customs exist today, the real innovators seldom get any financial reward for it. If they're really lucky, they get a nod and a wink in the staff meeting while the management team takes all the credit.

Dryly 41 said in reply to Randy...

Then what changed? "Neutron Jack" bought RCA which Robert Sarnoff built up over a lifetime and dismantled it giving away his research lab in Princeton, N.J. as a tax write-off. At the same time Tom Browkow's butt was sitting in the anchor chair praising him much as the media praised Alan Greenspan. Time magazine had a cover which said
"The Maestro" as Bob Woodward called him was "Chairman of the Committee That Saved The World"(which should go down in history with "Dewey Defeats Truman". In 1980, financial services received 20 per cent of corporate profits, by 2007 41 per cent. It's clear to me we got far away from Edison and toward finance.

Tom Shillock:

We are indeed fortunate that Dr. Robert Pangloss Shiller has shared his edifying personal story about how to be innovative and successful through hard work and self-financing. A more straightforward example of the psychological phenomenon of projection would be hard to find.

Phelps' observation about institutions is not a "disturbing trend" but reality. While institutions are necessary for the efficient functioning of large industrial societies they also stifle whatever gets in their way. America has become largely a society of institutions not citizens. It is slightly exaggerated to say that the average citizen enjoys rights to the extent of the power of the institution/s he or she belongs to. Individuals with wealth enjoy rights in proportion to their wealth, an elite institution.

Too many of America's institutions, private and public, steer the country in rather the ways that they and the wealthy did in the latter part of the 19th century when the government was much smaller. The result is an increasingly ossified Kafkaesque society. The interests and power of institutions makes them refractory to change no matter the toll they take on society. The mega financial institutions are the best recent example. They (along with help from politicians and the Fed) caused the Great Recession but have yet to be reformed. Their executives have the power to avoid criminal prosecution even indictment e.g,, HSBC. Savings and Loan executives were not as powerful. Health care institutions such as medical insurance and the pharmaceutical companies blocked reform of health care to the detriment of America. Physicians and health care organizations like hospitals block public disclosure of their performance while fleecing patients and society.

Public and private universities like Yale have institutionalized themselves as expensive tollbooths to employment not unlike those imposed on river traffic between 800 and 1800 on the Rhine by nobility and the Holy Roman Empire.

Before 1980 the government more or less enforced the laws against monopolies and other illegal combinations and collusion. This gave individuals and smaller companies with innovative ideas and products something of a chance and created an "innovator's dilemma" for large ossified companies. Creating economic and market space for innovators helped. Using government money to fund "incubators" or entrepreneurs is just another way to finance R&D for large corporations who buy up the innovators. It reinforces institutional interests and arrangements.

anne said in reply to Tom Shillock...

We are indeed fortunate that Dr. Robert Pangloss Shiller has shared his edifying personal story about how to be innovative and successful through hard work and self-financing. A more straightforward example of the psychological phenomenon of projection would be hard to find....

[ Projection, perfect and perfectly blinding. As for the individual-institutional tension or conflict, that is simply copying John Kenneth Galbraith but sadly with no particular focus that would allow an extension of the ideas of Galbraith after all these decades since "Countervailing Power." ]

[Aug 19, 2013] The Bearish Trend Has Resumed - Don't Show A Tweeted Out Bill Gross This Chart

Zero Hedge

Because there is nothing easier for Bernanke to do (in 15 minutes or less) than to enact a wholesale scramble out of stocks and right back into bonds, when he needs it.

That's exactly right. As a trade only, this is how I made a killing in 2011....loading up on 5-10 year Treasuries in the spring of that year. Equities plunged. Then I dumped all my Treasuries on the spike in prices.

I'm chomping at the bit to put on this same trade now. Will wait for the 10 year to get closer to 3% before loading up on T-notes, and patiently wait for the 'correction' in equities.......earning carry while waiting.

Clowns on Acid

Have to agree w/ Boston. The Fed will protect itrs balance sheet (by default the US currency reserve status and Clearing House mechanisms) before it "protects" the failed "wealth effect" stock market. They are finally admitting (after untold damage to the socio-economoic fabric of the US and world) that unicorns to not exist (but don't tell the children...ok?).

The issue has moved beyond the Fed's QE trying to achieve the "fair", "non racist", wealth effect. Regardless what the Ad agencies lock step profiles of a healthy "American" consumer "should" look like.

The Fed's strategy has moved from "wealth effect" to "survival" mode. The Fed will protect the Bond markets and let the equities go (fall) where they may.

Without a functioning bond market there is NO equities market -- Larry "the cold winter" Summers knows this...does Yellen? (I don't know...I think she is up to page 25 in the new Dodd Frank regulations.)

IMHO - Miners that pay dividends based on the price of their underlying PM, should get a good boost from the long only Mutual fund stooges, however they are already been front runn'd by some hedge funds....per usual.

Now about that Rodeo clown.... I understand that the Eygyptian media has that story on the front page....


S&P500 Hourly looks bearish.

But the daily does not show confirmation - yet. This market has been pushed well beyond its real value. But there are buyers out there than want is held here or even higher.

The fight between the bulls and bears is far from over.

[Aug 18, 2013] Bill Gross Asks The $64,000 Question Who Will Buy Treasuries When The Fed Doesn't

Note that this is a blast from past. The post is dated Mar 02, 2011.
Mar 02, 2011

After serving as the inspiration for the Chairsatan's latest appellation with his February missive, Bill Gross now goes for the jugular with the $64,000 question: with "nearly 70% of the annualized issuance since the beginning of QE II has been purchased by the Fed, with the balance absorbed by those old standbys – the Chinese, Japanese and other reserve surplus sovereigns.

Basically, the recent game plan is as simple as the Ohio State Buckeyes' "three yards and a cloud of dust" in the 1960s. When applied to the Treasury market it translates to this: The Treasury issues bonds and the Fed buys them. What could be simpler, and who's to worry?

This Sammy Scheme as I've described it in recent Outlooks is as foolproof as Ponzi and Madoff until… until… well, until it isn't. Because like at the end of a typical chain letter, the legitimate corollary question is – Who will buy Treasuries when the Fed doesn't?"

[Aug 18, 2013] Guest Post What Is Going To Happen If Interest Rates Continue To Rise Rapidly

Zero Hedge

Submitted by Michael Snyder of The Economic Collapse blog,

If you want to track how close we are to the next financial collapse, there is one number that you need to be watching above all others. The number that I am talking about is the yield on 10 year U.S. Treasuries, because it affects thousands of other interest rates in our financial system. When the yield on 10 year U.S. Treasuries goes up, that is bad for the U.S. economy because it pushes long-term interest rates up. When interest rates rise, it constricts the flow of credit, and a healthy flow of credit is absolutely essential to the debt-based system that we live in.

Just imagine someone squeezing a tube that has water flowing through it. The higher interest rates go, the more economic activity will be squeezed. If interest rates continue to rise rapidly, it will be more expensive for the U.S. government to borrow money, it will be more expensive for state and local governments to borrow money, the housing market may crash again, consumer debt will become more expensive, junk bond investors will be in for a world of hurt, the stock market will experience a tremendous amount of pain and there is a good chance that we could see the 441 trillion dollar interest rate derivatives bubble implode. And that is just for starters.

So yes, we all need to be carefully watching the yield on 10 year U.S. Treasuries. On Friday, it opened at 2.76% and hit a high of 2.86% before closing at 2.83%. The yield on 10 year U.S. Treasuries is up nearly 120 basis points since the beginning of May, and almost everyone on Wall Street seems convinced that it is going to go much higher.

We are truly moving into unprecedented territory, because we have been in a bull market for U.S. Treasuries for the last 30 years. Many investors don't even know that it is possible to lose money on U.S. Treasuries. They have been described as "risk-free" investments, but that is far from the truth.

In fact, we could see bond investors of all types end up losing trillions of dollars before it is all said and done.

And those in the stock market will lose lots of money too. Low interest rates are good for economic activity which is good for the stock market. The chart posted below shows that stock prices have generally risen as the yield on 10 year U.S. Treasuries has steadily declined over the past 30 years...


When interest rates rise, that is bad for economic activity and bad for stocks. That is why so many stock analysts are alarmed that interest rates are going up so rapidly right now.

And as I wrote about the other day, we have just witnessed the largest cluster of Hindenburg Omens that we have seen since before the last financial crisis. The stock market already seems ripe for a huge "adjustment", and rising interest rates could give it a huge extra push in a negative direction.

By the time it is all said and done, stock market investors could end up losing trillions of dollars in the next stock market crash.

In addition, rising interest rates could easily precipitate another housing crash. As the Wall Street Journal discussed on Friday, as the yield on 10 year U.S. Treasuries goes up it will also cause mortgage rates to rise...

Higher yields will push up long-term borrowing cost for U.S. consumers and businesses. Mortgage rates will rise, and investors are keeping a close eye on whether this may derail the recovery of the housing market, which has shown signs of turning a corner this year.

In one of my previous articles, I included an example that shows just how powerful rising mortgage rates can be...

A year ago, the 30 year rate was sitting at 3.66 percent. The monthly payment on a 30 year, $300,000 mortgage at that rate would be $1374.07.

If the 30 year rate rises to 8 percent, the monthly payment on a 30 year, $300,000 mortgage at that rate would be $2201.29.

Does 8 percent sound crazy to you?

It shouldn't. 8 percent was considered to be normal back in the year 2000.

If you own a $300,000 house today, do you think it will be easier to sell it or harder to sell it if mortgage rates skyrocket?

Yes, of course it will be much harder. In fact, there is a good chance that you will have to reduce your selling price significantly so that prospective buyers can afford the payments.

Let us hope that the yield on 10 year U.S. Treasuries levels off for a while. If it says at this current level, the damage will probably not be too bad.

But if it crosses the 3 percent mark and keeps soaring, things could get messy pretty quickly. In fact, according to a Bank of America Merrill Lynch investor survey, the 3.5 percent mark is when the collapse of the bond market is likely to become "disorderly"...

Our latest Credit Investor Survey, conducted July 8-11, showed that 3.5% on the 10-year is most commonly thought of as the trigger of a disorderly rotation – i.e. higher interest rates leading to outflows and wider credit spreads – among high grade investors.

Put differently, 3.0% on the 10-year will not lead to overall wider credit spreads if there is enough buying interest from institutional investors (though note that the 10s/30s spread curve would flatten further, as mutual fund/ETF holdings are concentrated in the belly of the curve, whereas institutional demand is disproportional in the long end of the curve). However, if the probability of a further move higher in interest rates to 3.5% is high – which will be the perception if interest rate volatility is high – certain institutional investors will choose to remain on the sidelines.

Thus there may not be enough institutional buying interest to mitigate retail fund outflows and contain overall high grade spread levels.

So what is causing this?

Well, there are a number of factors of course, but one very disturbing sign is that foreigners are selling off U.S. Treasuries at a pace that we have not seen since 2007...

One of the biggest fears in the financial markets is that foreign investors will stop buying U.S. Treasury securities, causing borrowing rates to surge.

Not that this is the beginning of a frightening trend, but new data from the Treasury Department shows that foreigners were net sellers in June. In fact, this is the largest net sale of U.S. securities since August 2007.

Do you remember all of the warnings that we have received over the years about what would take place when foreign countries started dumping U.S. debt?

Well, it looks like it may be starting to happen.

Unfortunately, there is no way that the party that the U.S. government has been throwing can continue without foreigners buying our debt. We have added more than 11 trillion dollars to the national debt since the year 2000, and according to Boston University economist Laurence Kotlikoff we are facing unfunded liabilities in future years that are in excess of 200 trillion dollars.

Even with foreigners continuing to loan us gigantic mountains of super cheap money, it would still take a doubling of our taxes to put us on a fiscally sustainable course...

Writing in the September issue of Finance and Development, a journal of the International Monetary Fund, Prof. Kotlikoff says the IMF itself has quietly confirmed that the U.S. is in terrible fiscal trouble - far worse than the Washington-based lender of last resort has previously acknowledged. "The U.S. fiscal gap is huge," the IMF asserted in a June report. "Closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 per cent of U.S. GDP."

This sum is equal to all current U.S. federal taxes combined. The consequences of the IMF's fiscal fix, a doubling of federal taxes in perpetuity, would be appalling - and possibly worse than appalling.

Prof. Kotlikoff says: "The IMF is saying that, to close this fiscal gap [by taxation] would require an immediate and permanent doubling of our personal income taxes, our corporate taxes and all other federal taxes.

"America's fiscal gap is enormous - so massive that closing it appears impossible without immediate and radical reforms to its health care, tax and Social Security systems - as well as military and other discretionary spending cuts."

Can you afford to pay twice as much in taxes to the federal government? Very few Americans could.

But that is how serious the financial problems of the federal government are.

And all of the above assumes that interest payments on U.S. government debt will remain at current levels. If the average rate of interest on U.S. government debt rises to just 6 percent, the U.S. government will be paying out a trillion dollars a year just in interest on the national debt.

Also, all of the above assumes that we will have a healthy financial system that does not need to be bailed out again.

But if rapidly rising interest rates cause the 441 trillion dollar interest rate derivatives bubble to implode, the bailout that the "too big to fail" banks will need will likely be far, far larger than last time.

In fact, once that bubble bursts there probably will not be enough money in the entire world to fix it.

If the picture that I have painted above sounds bleak, that is because it is bleak.

Sometimes I get frustrated with myself because I don't feel I am communicating the tremendous danger that we are facing accurately enough.

We are heading for the worst financial crisis in modern human history, and the debt-fueled prosperity that we are enjoying today is going to go away and it is never going to come back.

You can dismiss that as "doom and gloom" and stick your head in the sand if you want, but that isn't going to help anything. Instead of ignoring reality you should be working hard to prepare your family for what is coming and warning others that they should be getting prepared too.

When a hurricane is approaching landfall, you don't take your family out for a picnic at the beach. That would be foolish. Unfortunately, way too many Americans are acting as if nothing like the financial crisis of 2008 could ever possibly happen again.

If you deceive yourself into thinking that all of this is going to have a happy ending somehow, you are going to get blindsided by the coming storm.

But if you make preparations now, you might just be okay.

There is hope in understanding what is happening and there is hope in getting prepared.

So watch the yield on 10 year U.S. Treasuries. The higher it goes, the later in the game we are.

Jim in MN:

It is not bad for the economy to have normal interest rates.

It was and is bad for the economy for the Fed and their agents to play God with interest rate policy, like pompous children.

Normalize the rates, balance the budget, let the chips fall.


Agreed. Normal interest rates (5-9%) are not bad for the REAL economy. Such rates rewards people who actually save and invest. That is a good thing.

Normal interest rates, however, are the death knell for the Entitlement State. That is why I don't think they'll rise without a big, knockout fight of some kind. But, in the end, pretending that $$ has no value created distortions which cannot be maintained forever.


Sounds like graham summers has a new pen name


you gotta love that the guy who writes "the economic collapse blog" wants us to think he is rooting for this "Let us hope that the yield on 10 year U.S. Treasuries levels off for a while. If it says at this current level, the damage will probably not be too bad."


Yeah what he meant to write was "Lets hope rates skyrocket and armageddon happens, i've been stocking up on supplies for years and I have a boner just thinking about it!" Login or register to post comments

dime showmen

lol, zing!

"Sometimes I get frustrated with myself because I don't feel I am communicating the tremendous danger that we are facing accurately enough...but if you make preparations now, you might just be okay."

A Lunatic

Aren't people already losing money on treasuries once inflation is taken into account? The government and monied interests would have us believe all of this chicken little bullshit about economic implosion over a rise in rates, which is long overdue and could benefit quite a few sectors of the real economy. It's time to kick these fuckers off the teat......

Prairie Dog

Over-excitable, hyperbolic, simplistic analysis. Yields have been at all-times lows. If they go back to normal, that's a good thing. Yields going up = expectations that Fed will taper = economy is getting better. No improvement in economy = no taper = yields will fall again = go back to sleep.

[Aug 18, 2013] Shorting US government bonds boosts Rothschild's fund By Vanessa Kortekaas

That's the vultures who were waiting for the signal, about which Warren Buffet warned...
August 16, 2013 |

Taking short positions in US government bonds helped boost net assets in the first half of the year at RIT Capital, Jacob Rothschild's listed investment trust.

"Recognising that US authorities would face difficulties in suppressing bond yields in the face of an improving economy, we held short positions in government bonds during the period," said Lord Rothschild, chairman.

[Aug 18, 2013] Bonds to benefit from ageing population

July 25, 2013 |

"Bond markets tend to benefit from ageing populations relative to equity markets," says Douglas Renwick, director at Fitch Ratings.

And the population in the industrialised world is ageing dramatically. While those over 65 accounted for 12 per cent of the population in 1982, this has risen to 16 per cent now and is projected to reach 25 per cent by 2042.

"We are at an inflection point," says Jonathan Willcocks, managing director at M&G Investments. "Two thirds of investable assets in the western world are now owned by those over 50."

There are a lot of assets to shift. Around 70 per cent of all world equities are owned by mutual funds and wealthy individuals, according to a white paper by the Network for Sustainable Financial Markets, all of whom can shift their allocation.

[Aug 17, 2013] Guest Post Let Them Eat Credit

Zero Hedge

Right now, for some unbelievably stupid fucking reason, everyone thinks its okay that practically every developed country in the world is purchasing its own debt. QE in the simplest terms is government-sponsored financial leverage. I am astounded that, at the very least, nobody realizes what a terrible precedent this sets. If ya can't pay the debt, why not buy it and inflate the financial system/rich people! Sovereign debt repos by sovereigns to infinity! Great idea!

Whoever invented QE and somehow made it sound like it would 'create jobs' deserves a serious pat on the back from the leaders of every developed country. Easy money makes the rich richer, as can be seen by the performance of the S&P 500 post-QE/common sense. Jobs have not been the result. You're either not smart or naive if you think QE and ZIRP "creates jobs" to quote our almighty leader (wait, is it Obama or Bernanke?).

And the rich getting richer is exacerbated even more since the average American got so burned on a NINJA loan that they took out in mid-2007 that they won't even use the spigot of easy credit when it's flowing. I'll take a 7% ARM loaded with hidden fees, but a 3% fixed rate post-'every bank getting sued for fraud so they can't de-fraud customers as much' on a somewhat stabilized home market, oh no I don't know that sounds like too much of a risk to me. Don't get me started on reverse mortgages.

Side-note in all seriousness now that I'm on the topic of banks, if you've ever worked at a bank, you know why financial crises and bubbles happen. Banks A-Y won't quote at a rate, but Bank Z will. Bank Z gets market share. Investors in Banks A-Y want to know why profits are lower in this business line. Banks A-Y capitulate and start quoting lower. The cycle repeats itself again and again and again and the bubble occurs. Just check out Fannie/Freddie's behavior after losing market share to private label MBS.

Not to mention holding long-term liabilities on short-term credit is an inherent moral hazard. When the music stops, there will always be a Drexel/Bear/Lehman that gets caught with their pants and down holding the newest financially engineered risky asset that liquidity suddenly evaporates in. Banks do this/hold each other's CDS/send their big guys to the Fed and Treasury all for control. If there is no political will to rid the system of moral hazard, then large banks will keep doing it.

Thanks Chuck for explaining this issue so succinctly:

C stockholders really loved that one. Although, yes, the politics of a bulge bracket choosing not to dance left his hands pretty much tied.

Back to the world. The world's debt load is mind-bogglingly large. To put it in perspective, the media views the United States as more fiscally and economically sound than the rest because...

  1. Sovereign debt is essentially equal to the value of all the goods and services produced in the country annually
  2. The rate at which that pile of sovereign debt is growing is slowing
  3. U.S. equities are outperforming the world right now and confirmation bias tends to get involved with the mainstream media
  4. Sure as hell beats a quadrillion yen

I believed like everyone else in the financial world that the next thirty some odd years would be a deleveraging cycle with slower growth, but our quality of life left fairly intact. My views changed with the advent of Abenomics.

Japan set off a debt bomb that will so greatly roil the financial system that another Great Depression is all but a certainty; it is simply a matter of when.

Let's say a Japanese default occurs. The implications of a G7 default are absolutely mind blowing. World financial stability would crumble beneath us. Liquidity in the sovereign debt market would be severely impacted.

World governments would attempt to provide liquidity because their incumbent status in the world financial system is much, much to important to risk, but hell if the EU can't even do Euro Bonds, then how in god's name could they pull off World Bonds?

Yeah, World Bonds... let that sink in for a bit. Or rather, EU-China-Japan-U.S.-Russia...etc. Bonds?

Who gets included in these bonds and who doesn't? If you aren't included, say hello to my friend over here civil war because sovereign debt is less liquid so you can't pay off your debts. The sheer scale and political will it would require to somehow save the world financial system after a Japanese default is truly awe-inspiring. And a Japanese default isn't a crazy scenario at all.

But alas, world powers know how important their control of the currency system is. Central banks truly hate gold. Conspiracy theories aside, why else would they hold so much of it if not for attempting to control it? They hate BitCoin too, or really the precedent that a virtual currency sets.

I'm losing my train of thought. Japan. What's so shitty about it?

  1. A quadrillion yen
  2. That's about triple the value of goods and services produced annually in the country. The term GDP is overused; I feel like people forget what it really means.
  3. Ginormous deficit, and it isn't going away thanks to their awful demographics.

Bravo guy who wrote the 'let's censor just the P in V' law. You unwittingly made the country with the weirdest sexuality even weirder, and therefore you made the demographics even shittier, and therefore Japan's chance of default even higher.

We're fucked. We really are fucked. We went too far down the rabbit hole of leverage.

Thanks baby boomers! You left us a nice steaming pile of debt horseshit to deal with while you slowly die off on pensions and social security.

[Aug 17, 2013] Beware of Black Swans Coming Out of Washington, Says Lutz

Lutz has one key "tell" for investors trying to gauge the potential impact of the inevitable mess created by our elected officials: Housing. The iShares US Home Construction ETF (ITB) is down more than 16% in three months and nearing official bear market territory. If housing isn't a black swan (it wouldn't be a shocking event), it's a canary in the coalmine. If housing fails the whole economy could die in mortal peril.

iPhone 5C

"As Alan Greenspan said years ago, 'it begins and ends with housing,'" Lutz concludes. "If we start losing control of rates all of the sudden what we're going to have is a collapse in the housing market, GDP is going to start falling apart, employment, and then the collateral damage of consumer spending because rates are going higher."

Buckle up, America. We could be in for yet another bumpy ride.

[Aug 17, 2013] Fed Watch Fall Tapering in the Air

Economist's View
Via Joe Weisenthal:
it's VERY strongly worth noting that David Rosenberg has written a note and slide dek[sic] today (which we published at Business Insider) wherein he departs from the deflation camp.

I suspect the Federal Reserve is going to have a hard time keeping a lid on interest rates despite their best efforts to push back the timing of the first rate increase. I think there are still market participants who have yet to adjust their expectations that QE is not forever, and that expectation delivered unusually low term premiums. Hence rates remain under pressure until everyone comes to the acceptance that end of asset purchases is arguably a paradigm shift.

And, speaking of paradigm shifts, note that long-time deflationist David Rosenberg is changing his tune.

Via Joe Weisenthal:
it's VERY strongly worth noting that David Rosenberg has written a note and slide dek[sic] today (which we published at Business Insider) wherein he departs from the deflation camp.

Are we at the low water mark for inflation? Maybe, and if the Fed even suspects this is the case, they will be even more eager to end asset purchases and normalize policy.

darrell -> Paine ...

Our economy is plagued by about $1.5T a year trade imbalances that drain money from active circulation. We've been able to maintain our economy by ensuring an equal or greater amount of new money (and offsetting debt) can be created.

How would focusing on regulation ensure that we can keep borrowing new money into existence as fast or faster than it drains from active circulation?

Darryl FKA Ron -> Paine ...

We got a pair of unseemly banksters bails Followed by a sleepy hollow reformation of the hi fi laputa

A fiscal recovery package one third adequate in both size per quarter and number of quarters of up thrust

And err universal health as built by greedy Lilliputians"

[That question is what brought me to these cages. There is no satisfactory answer to it though.}

Matt Young:

Yields up, 2.8%, that implies growth. Good news?

Matt Young -> Matt Young...

2,8 refers to ten year, where the knee of the curve. Ten years is likely the effective peak of DCs term structure.

Matt Young -> Matt Young...

The rise in yields from a few months ago is 1.3% roughly. Since we rollover and borrow about 5t per year, the extra yields permanently add 120 billion per year in payments from the middle class. Ok, anyone still uncertain about what's killing the middle class?

John Cummings -> Matt Young...

Right, but that also increases bank lending which covers the cost of the 120 billion. Little surprise that the housing boom went from froth to insanity when the yield curve steepened the 2nd half of 2003.

Matt Young -> John Cummings...

some day bank lending will return, five year, ten years? at that point your theory will be proven.


By my somewhat limited understanding of leverage in the economy (total debt / fed balance sheet) I calculate that we've reduced leverage from 28-to-1 5 years ago, to 14-to-1 now.

The lower leverage "should" make it possible for banks to issue a lot more loans. HOWEVER, it appears to me that QE (lowering leverage by expanding the fed balance sheet) has not increased lending.

Household debt is flat. Business debt is up, but not sufficiently to ween us off the $1T+ national deficits.

So, they end QE.... big deal. The data indicates they were just pushing on a string anyway.

Darryl FKA Ron-> darrell...

One end of that string was tying down mortgage rates, which helped clear some of that foreclosure inventory.

QE did not make a boom, but it added a little sizzle where there were borrowers than could realistically meet their payments and had something to do. My state (Va) borrowed $6B via bond sales for highways. The real estate market broke loose here around the first of the year. It is not a bubble, which is good. But home sales are healthy again.


Has anyone commented on the historic event of Japan and China selling back U.S. Treasuries or are they all hiding under their beds?

John Cummings -> Kenezen...

nah, it is all the FED according to the chicken little's of today.................The FED controls everything and everyone................they do.......really.........I swear it.

On the serious side, the Asian US treasury selloff was a thumbs up to Abe and capital flight back to Asia. I thank them. Now time for Europe to get it together and drive long rates to 4.00% and when the economy is still chugging a long, maybe the chicken little's will figure it out.


I'm starting to think that the Fed's analysis of QE is inconsistent.

Can both of these positions be correct?

[Aug 17, 2013] Economist's View Fed Watch Fall Tapering in the Air

anne said...

August 15, 2013

* Remember, the Vanguard yields are after cost. The Federal Funds rate is no more than 0.25%.

Reply Thursday, August 15, 2013 at 03:09 PM

anne said...

January, 2013

Ten Year Cyclically Adjusted Price Earnings Ratio, 1881-2013

(Standard and Poors Composite Stock Index)

August 15 PE Ratio ( 23.79)
July PE Ratio ( 23.60)

Annual Mean ( 16.48)
Annual Median ( 15.89)

-- Robert Shiller

Reply Thursday, August 15, 2013 at 04:23 PM

anne said...

January, 2013

Dividend Yield, 1881-2013

(Standard and Poors Composite Stock Index)

August 15 Dividend Yield ( 2.00)
July Dividend Yield ( 1.93) *

Annual Mean ( 4.44)
Annual Median ( 4.37)

* Vanguard yield after costs

-- Robert Shiller


[Aug 15, 2013] Weekly Initial Unemployment Claims at 320,000, Four Week Average Lowest since 2007


even the Fed admits QE had little to no effect on the real economy. This author is kind and sees it as a way to recapitalize the banks. To those who are less kind, it was just a wealth transfer mechanism to select industries (almost exclusively FIRE with special attention to RE) and asset owners of this country and around the world. Not to mention all the people on the losing side of the govt sponsored corruption. It's safe to drop the meme that QE saved the economy, it was govt sponsored theft plain and simple.

Can't help but see the recent inexplicable change in position by the Fed in the light of this report. As more people look at QE and its effect on the real economy and the truth comes out, that it is wealth transfer and nothing more, it gets difficult to maintain any rational position on its practice. The Fed is taking the opportunity to declare victory and get out while it still can before it loses all credibility.

The Fed's QE Confession


sum luk wrote:

differ with your conclusion that QE did not save the economy

like Fisher, I distinguish QE1 from what followed. I think QE1 was necessary to save the banking system, initially, What followed was nothing short of financial rape.

Rob Dawg:


even the Fed admits QE had little to no effect on the real economy.

1.63% to 2.76%.

sum luk:

arthur_dent wrote:

What followed was nothing short of financial rape.

... speaking of which, I think this is worthy of being reposted: Fed tapering: The math investors need to know - Brett Arends's ROI - MarketWatch

Rob Dawg

arthur_dent wrote:

What followed was nothing short of financial rape.

I note how the end of QE is being justified on the basis of effectiveness and markets and yet the paying interest on excess reserves is being totally ignored.


Rob Dawg wrote:

and yet the paying interest on excess reserves is being totally ignored.

the last figure I saw claimed that interest on excess reserves amounted to an annual gift of $5B to the banking industry. Nice to top off the bonus pool.

Rob Dawg:

sum luk wrote:

... speaking of which, I think this is worthy of being reposted: Fed tapering: The math investors need to know - Brett Arends's ROI - MarketWatch

Excellent explanation of the discount rate.

Rob Dawg:

arthur_dent wrote:

the last figure I saw claimed that that interest on excess reserves amounted to an annual gift of $5B to the banking industry. Nice to top off the bonus pool.

The Fed should be confiscating excess reserves and returning window assets at par.


Rob Dawg wrote:

The Fed should be confiscating excess reserves and returning window assets at par.

Austerity is for the little people (and banks).


sum luk wrote:

I respectfully differ with your conclusion that QE did not save the economy ~ assuming you mean saving the economy from entering a depression. Remember when people seriously wondered whether we would pull out of this at all.

Five years on, I still don't agree with this view, but what if you're right? Coincidentally, I spent some time last night pondering this very thought.

My conclusion was that I hope you're not. Because we've fixed nothing in the interim; trillions in liquidity were used in lieu of any real fixes to the system, have eliminated any concept of moral hazard, and have served (perhaps as a side effect, perhaps not) to exacerbate income and wealth disparities and destroy J6P's faith in the financial system.

I think another shock to the system is likely - perhaps soon, perhaps not - and I believe that this time popular sentiment to let the chips fall where they may will ultimately be too great to ignore.

If QE and TARP were really what saved us from a depression, that trick won't work a second time.

[Aug 14, 2013] Three reasons the market is peaking Doug Kass

Doug Kass hasn't exactly been dead-on with his market calls this year. In fact, Kass has been bearish all year, while the S&P (^GSPC) has climbed 19 percent. But this bear isn't backing down just yet.

"Combine the likelihood that we're at the upper range for price-to-earnings multiples, we have political issues that are profoundly important, and we have some deterioration in the technicals," and Kass believes he has all the reason in the world to be short the market right now.

The president of Seabreeze Partners Management laid out each potential catalyst in depth on Tuesday's " Futures Now ."

Reason one: Multiples will contract

When asked what he missed about the market's rise this year, Kass pointed at one factor: Multiple expansion.

"Frankly, we have to realize that most investors and strategists and talking heads on CNBC have made very little change in their economic forecasts, and forecasts for earnings, for this year and the next," Kass said.

In other words, it's not so much that earnings have greatly improved, but rather that investors have been willing to pay more and more for those largely flat earnings.

"If we look at the 35 percent increase in the S&P since the beginning of 2011, 90 percent of that gain came from multiple expansion," Kass said.

(Read more: Guest blog - Why I'm buying into the market right now )

A price-to-earnings multiple of 16 may not be far above the five-decade average of 15.2. But Kass still believes that given the current state of the market, it is inappropriate for multiples to be elevated.

"Given the structural global economic issues-disequilibrium in the U.S. jobs market, continuing leverage, et cetera-and the fact that all this is contributing to tepid economic growth, a discount to the average over the last five decades of 15.2 is probably more appropriate," he said.

Reason two: Politics will spook the market

Kass believes that the fall will be a busy season for politicians-and this could be a major concern for the bulls.

"I believe that [politics] is going to return to the front burner in the coming months," Kass said. "And if we look at the September and October political agenda, it's lengthy. It includes the debt ceiling, government spending, immigration, tax, GSE reforms and, of course, what the Fed is going to do."

There won't necessarily be a government shutdown or a bruising immigration fight. But with so many contentious topics coming up, Kass believes that the market could get spooked.

(Read more: Siegel: Keep buying--you 'can't lose' )

"I think that investors have become inured to this nonsensical rhetoric we've seeing in Washington," Kass granted. "But we could still have a lengthy fight, and an impasse could again weigh on business and consumer confidence."

For evidence of the same, just look at what happened at the end of 2012-when D.C. brinksmanship around the "fiscal cliff" put the market rally on pause.

Reason three: History says the rally can't last

"The third issue are the technicals," Kass said, "and that's what's really changed."

Kass points out that history seems to indicate that the rally should soon run out of steam.

(Read more: Marc Faber: Look out! A 1987-style crash is coming )

"The bull market is long in the tooth," Kass said. "We're almost 54 months from the generational low in March of 2009. And if we look over the last 60 years, the average bull market has been only about 43 months." On top of that, "the longest bull markets lasted about 56 to 60 months."

That means that the rally stocks have enjoyed is becoming increasingly unprecedented.

And undergirding this thesis, again, is Kass' ursine view of the global economy.

"If we look at the longest bull streaks, obviously they didn't face the structural economic headwinds," he said.

Any way you cut it, then, Kass believes that this market should be sold.

Watch " Futures Now " Tuesdays and Thursdays at 1 p.m. EDT exclusively on !

More From CNBC

[Aug 12, 2013] Budget Bedlam This Fall Stan Collender's Capital Gains and Games

Here are the key elements about what's ahead...or not ahead...on the budget when Congress returns to Washington in September.

1. Debt Ceiling. I'm listing this first only because it's not something that that has to be dealt with immediately. Yes, the debt ceiling will have to be raised at some point, but the latest word from the Treasury is that the "extraordinary measures" it can take to delay the day of reckoning will last into November. In other words, as much as the White House might like to get this out of the way, there's no rush.

That's not to say that Congress and the White House couldn't work something out on the debt ceiling in September. But the likelihood of them doing a deal before it's absolutely needed is as small as me not needing my air conditioner in Washington this month.

2. Government Shutdown. It's important to note that I'm not labeling this "fiscal 2014 appropriations." The truth is that none of the individual appropriations bills -- the legislation that supposed to be signed into law before the fiscal year begins -- have any real chance of being enacted by October 1. That means we're talking about a continuing resolution...or a shutdown.

I'm exceptionally hesitant to predict a shutdown. Although I was technically correct last year when the government did close for about 40 minutes, I obviously was also wrong that a longer shutdown was going to happen.

Still, concluding that a shutdown is more likely this year than it was last year actually is quite easy:

Then add three more things to all this already considerable disarray.

As a result, it's hard to come up with a scenario that makes even a short-term let alone a full-year budget agreement by October 1 a sure thing.

3. Sequester. Let me start by correcting a common misperception: If there is a sequester for fiscal 2014, it won't happen on October 1 or any time this fall.

Sequestration takes place 15 days after the end of the session of Congress. Technically that could be any time, but Congress almost certainly won't be able to adjourn until the next session begins because Senate Republicans will want to prevent the president from making recess appointments during adjournment. That makes mid-January the most likely time for a sequester to occur.

But the fact that it might not happen until next year won't keep the sequester from having an impact on the budget debate this fall. Some House Republicans are insisting that the spending in the fiscal 2014 appropriations be at the sequester level. But, as was obvious this past week when the Transportation/Housing and Urban Development appropriation was pulled from the agenda because its spending levels were both too high for some Republicans and too low for others, there's no agreement about that.

That means that, at the very least, the possibility of the across-the-board reductions that could happen in January will have an impact on every budget negotiation. For many, the sequester spending levels will be the default position and the minimum they will accept.

4. The Grand Bargain. Can we all please stop talking about a grand budget bargain this fall as if it is anything but a fantasy? If by "grand bargain" we're talking about tax reform that increases revenues, and Social Security and Medicare spending reductions in exchange for stopping sequesters, there's no way -- repeat, no way -- that it happens this fall, this year, or before the next election a year from this November.

Even a mini-bargain like the one the White House supposedly is trying to put together with some GOP senators won't fly in the House of Representatives. Here's a secret: it's not likely to fly in the Senate either.

5. Tax Reform. See #4 above.

I'm expecting the federal budget bedlam to last through the fall and into next winter.

A short-term continuing resolution negotiated very close to October 1 that lasts until the middle of November, that is, until the extraordinary measures run out, is the most likely tactic, and even that's only got about a 60 percent chance of happening.

It may well be that Boehner needs to show his tea partiers that he is willing to shut the government for them, and the tea partiers may need to show their voters that they were willing to let it happen.

That first short-term CR then most likely will be followed by a combination second continuing resolution and debt ceiling extension that lasts until the middle of January so that all three fiscal deadlines -- government funding, debt limit and sequester -- come together in a new fiscal cliff (#cliffgate) that roils markets and politics yet again.

That's also about the time when the Obama fiscal 2015 budget is supposed to be submitted to Congress, but it almost certainly will be delayed, perhaps for months, because the fiscal 2014 decisions will not yet be final. That will extend the budget bedlam through most of next year.

In other words, if you follow the federal budget for any reason, enjoy this August. The weather may be bad, but the Redskins are undefeated, traffic is light and you can grab an extra hour or so of sleep. Those may be the best things that happen to you for quite some time.

[Aug 11, 2013] Are You Losing the Retirement Gamble

April 23, 2013 | PBS

For most Americans, traditional retirement is now a pipe dream. Six in 10 believe they'll have to delay retirement. Yet, the financial services industry is making billions of dollars a year managing the funds we still have.

What's going on? And who's to blame?

In The Retirement Gamble, FRONTLINE correspondent Martin Smith investigates what happened to retirement in America and the role that financial services companies may be playing in draining your savings, year after year.

Through interviews with Wall Street executives at the helm of the mutual fund industry and former financial advisers who may or may not have their clients' best interests at heart, Smith traces the remarkable rise of the 401(k)-a product Americans buy without knowing its true cost.

How much, exactly, are Americans paying in fees for their 401(k) accounts - and what are they getting in return? What happened to retirement in America - where did pensions go? And what are some of the biggest misconceptions consumers have about retirement? What do we need to know?

We've asked Martin Smith and producer Marcela Gaviria to join us to take these questions - and answer yours.

We'll also be joined by leading 401(k) expert Robert Hiltonsmith, a policy analyst at Demos who is interviewed in the film. Our guest questioner is Penny Wang, a writer and editor at Money, where she writes a monthly mutual fund column, Fund Watch.

Next Avenue senior editor Richard Eisenberg will also be dropping by to ask questions and offer commentary.

We'd like to thank Money and Next Avenue for partnering with us on this chat.

You can leave a question in the chat window below, and come by at 2 p.m. ET on Wed., April 24 to join the live discussion.

[Aug 11, 2013] The Problem with 401(k) Plans by James Kwak

August 9, 2013 | The Baseline Scenario

By James Kwak

Apparently my former professor Ian Ayres has made a lot of people upset, at least judging by the Wall Street Journal article about him (and co-author Quinn Curtis) and indignant responses like this one from various interested parties. What Ayres and Curtis did was point out the losses that investors in 401(k) plans incur because of high fees charged at the plan level and high fees charged by individual mutual funds in those plans. The people who should be upset are the employees who are forced to invest in those plans (or lose out on the tax benefits associated with 401(k) plans.)

In their paper, Ayres and Curtis estimate the total losses caused by limited investment menus (small), fees (large), and poor investment choices (large). Those fees include both the high expense ratios and transaction costs charged by actively managed mutual funds and the plan-level administrative fees charged by 401(k) plans.

What really annoyed people in the 401(k)) industry (that is, the mutual fund companies that administer the plans and the consultants who advise companies on plans) was Ayres and Curtis's charge that many plans are violating their fiduciary duties to plan participants by forcing them to pay these fees. Various parties connected with a plan (e.g., the named fiduciary, the administrator, the investment adviser) have fiduciary duties, which include duties of prudence (doing a reasonably diligent job) and loyalty (putting the participants' interests first). Overpaying for investment management and administrative services would seem to constitute a breach of these duties.

The response of the industry has been one of righteous indignation and blanket assertion. For example, Drinker Biddle huffs, "In our experience, most plans are well-managed." 401(k) plans provide different "services," so different plan-level fees are appropriate; and high fund fees are OK because "it is commonly accepted that the use of actively managed funds is prudent."

Just because lots of rent-seekers say so doesn't make it so. Investment management is pretty close to a commodity business. Even if markets for illiquid assets aren't that efficient, and even if publicly traded securities markets are a little inefficient around the edges (and I have no problem with rich people putting their excess cash into hedge funds trying to exploit those inefficiencies), paying money to gamble on fund managers is not something that companies should be encouraging their employees to do. There's no good reason not to just provide a lineup of cheap, big index funds with low costs and low tracking error.

Plan administration is a commodity business, too. I've been in 401(k) or 403(b) plans at four companies (one of which changed administrators partway through), my wife has been in plans with two different administrators, and apart from fund choice I don't recall any differences between them (and I'm pretty attentive to these things).

So yes, most plan sponsors and administrators are violating their fiduciary duties, as I argued in a paper (summary here). Not that they should stay up nights, at least for now. The courts have for the most part endorsed current behavior, probably "reasoning" that if everyone's doing it, it must be OK. But anything Ayres and Curtis can do to draw attention to the problem of high fund fees and plan fees will help move us closer to the day when workers don't have to pay for their companies' poor choices.

  1. @ AndyfromTucson
    Although your employer (and especially the "planner" who gets the use of that money, often an insurance company such as Met Life) will try to talk you out of it, I believe that you can transfer part of the money (the vast majority of it over time) to a Roth IRA or traditional IRA (depending on your age and individual tax situation). If you make 1 transfer (rollover) per year (which I believe is the current limit) you can still take advantage of the employer matching in your 401k and yet transfer the majority of your money where you have more choices how to invest and lower fees (say for example at a discount brokerage such as Fidelity or TD Waterhouse)

    Best way might be to consult an CPA or a CFP (Certified Financial Planner) before you make any moves. Here is one good link for info on transfers or the better word is "conversions":

    Also a "heads up" post on how exactly a lot of these schemes work, and that's exactly what many 401k's are, SCHEMES:

    A 50 minute documentary that explains very well how the fund companies (including ETFs) fleece and/or bilk people with fees:

[Aug 07, 2013] Busting The Three Biggest Bullish Beliefs

I feel the invisible hand searching for something in my pockets
Zero Hedge


I frame the debate as fantasy vs reality. The bull arguments are all based on fantasy, backed up by accounting that would land any private citizen in jail.

You can either be a bull living in la la land, or a bear living in reality. Reality isn't very fun, but it is REALITY.

Or are we really to believe that a company that loses millions on billions in revenue is a sound investment.

Try paying bills with that type of a system. Call your bank and tell them that you made $60k but you can't make your mortgage payment because you spent all your money. But instead of cash they can accept shares of yourself. Which are better than money because if your value goes up, the value of their shares will go up. Which will actually be worth more than your original mortgage payment.

The entire stock market system is bullshit. A system engineered to transfer wealth from people of worth to people of no worth.

Why do you buy stock?

So why are the shares worth something?

Answer: Because you believe someone else will pay more for the shares sometime in the future.

But why are the shares worth more? If the company has no profit, how can the company be worth more money?


Myth: U.S. stocks will grow into their earnings expectations as the U.S. economies recover

Im hoping the same for my dick for years.


Stocks will go up until something TBTF (or nearly so) actually does (nearly) fail.
Until that event, the optimistic speculators will keep winning by buying stocks (or houses).

[Aug 05, 2013] Columbia Economist Dr. Jeffrey Sachs speaks candidly on monetary reform

Level of corruption of the system is just staggering...

From the event at the Philadelphia Fed on April 17th, 2013 (04/17/2013) conference segment "Fixing the Banking System for Good" .

[Aug 02, 2013] Trader Describes How Dishonesty Pays in Finance, Big Time

August 2, 2013 | naked capitalism

MaroonBulldog says:

August 2, 2013 at 2:25 pm

I disagree. Traders are a little different, even from the other graduates of the MBA program. For one thing, they tend to be a little smarter, especially when low cunning and numeracy are involved. Second, they tend to have had their consciences dulled by too much uncritical study and acceptance of classifcal economics and finance. And they are more manipulative, or they wouldn't be traders. These are the reasons why they are more dangerous than most. It was for good reason that the Enron expose was named for the traders, "The Smartest Guys in the Room."