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Financial Skeptic Bulletin, 2007

Note: Due to the size news for 2007 were divided on 12 "per month" chunks.  See the table above for access to each month of data.

At the beginning of the year it was clear at all that the scope of subprime mess is such that recession in eminent. Only few people predicted recession. George Soros proved to be one of the the most accurate forecasters. Greenspan as always was the worst ;-)

As always the most difficult task is to distinguish signal from noise.

Retrospective (News are added with one year lag)

[May 10, 2007] Buttonwood Gored by the bull Economist.com

According to Chris Watling of Longview Economics, the top 1% of households owns around 40% of America's wealth—the highest proportion since 1929. In the 1970s, they accounted for just 20%.

This creates its own problems, especially when workers are increasingly expected to provide for their own retirement. After all, many companies are retreating from the provision of defined-benefit (final salary) pension schemes because of the cost. As companies switch to defined-contribution (money purchase) schemes, workers not only receive, on average, lower contributions from their employers; they also lose an insurance policy against poor stockmarket returns (because the companies were committed to make up any shortfall in the pension fund). Such a policy would be very expensive to buy in the open market.

Workers trying to replicate a final-salary pension have two further problems. The first is that high share and bond prices imply low yields (the two are inversely related). So they need a larger sum to generate a given retirement income.

The second problem is that, when asset prices are high and yields are low, future returns are likely to be subdued. It thus takes a lot more effort to generate a given lump sum for retirement.

With government bonds and cash yielding 4-5% in Britain and America, financial advisers use a rule of 25. In other words, you need capital equal to 25 times your desired retirement income (equivalent to taking a 4% yield). So for a Briton to have a reasonable—but hardly lavish—retirement income of £20,000 ($40,000) a year, he would need £500,000. For most people, saving such a sum is unimaginable; they may not bother to try, given the scale of the task and the attraction of immediate consumption.

Some of this reluctance may be based on money illusion. In 1990, when a Briton could earn double-digit returns from keeping his money in cash, his capital was being eroded by inflation. Nevertheless, the real yields on assets such as index-linked bonds, seen as the best match for a pension liability, are also very low. Britain's long-dated index-linked gilt yields just 1%; investing £500,000 would thus generate an annual income of just £5,000.

So the world may divide into four. The already wealthy will be well provided for in retirement. The other group of “haves” will be those who have worked for the government and whose final-salary pensions will be funded by taxpayers.

The have-nots will also consist of two groups. Some will have worked for the private sector and will have built up some kind of savings, but their nest-egg will give them scant scope for comfort in their declining years. In some countries, such as Britain, the tax and benefits system may penalise their thrift. The other group of losers will be those relying on state benefits; the generosity of which varies from country to country.

That looks like an unstable and arbitrary situation, with wealth dependent on who you worked for and when you worked rather than on merit. The more numerous losers may demand higher taxes to penalise the lucky winners. What the market hath given, investors may find a future government taketh away.

[Mar 11, 2007] Another study confirms contrarian view of bull market

401K investors should follow, should not they?

MarketWatch

... the top long-term performers appear to have begun an orderly process of taking some money off the table.

[Feb 10, 2007] Financial Sense Storm Watch Update The Next Rogue Wave by James J. Puplava 12-15-2006

Watch the credit markets—especially subprime lenders.

Looking back over the last three decades, there have been at least a dozen such episodes that erupted in the wake of the various Fed tightening cycles. So far, real estate is falling, the economy is slowing, but we have had no major financial mishaps. But it is still early and the fallout from real estate has much further to run. Watch the credit markets—especially subprime lenders. And watch the U.S. dollar. I am assuming Hank Paulson and Ben Bernanke went to China for other reasons than "to see The Great Wall." I suspect their motive is to obtain Chinese cooperation in devaluing the dollar.