The Wall Street Examiner http://wallstreetexaminer.com Get the facts. Tue, 31 May 2016 16:07:56 +0000 en-US hourly 1 Gold Shows Little Propensity To Rally http://wallstreetexaminer.com/2016/05/gold-shows-little-propensity-rally/ http://wallstreetexaminer.com/2016/05/gold-shows-little-propensity-rally/#respond Tue, 31 May 2016 12:37:16 +0000 http://wallstreetexaminer.com/?p=296700 Gold has hit the latest 13 week cycle projection and an important support level, but there are other signs that still point lower. Click here to download complete report in pdf format (Professional Edition Subscribers). Try the Professional Edition Precious Metals Pro Report risk free for 90 days. Click here for more information or join now! Enter…

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Gold has hit the latest 13 week cycle projection and an important support level, but there are other signs that still point lower.

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The Five Stages of Central Bankers’ Failure http://wallstreetexaminer.com/2016/05/five-stages-central-bankers-failure/ http://wallstreetexaminer.com/2016/05/five-stages-central-bankers-failure/#respond Tue, 31 May 2016 01:46:00 +0000 http://wallstreetexaminer.com/?guid=9ce330bed2099f5887109268bbcb4000 Central bankers are in denial that all their trillions of dollars, euros, yen and yuan have completely and utterly failed to achieve the desired result.

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This is a syndicated repost courtesy of oftwominds-Charles Hugh Smith. To view original, click here. Reposted with permission.

Central bankers must accept the complete and utter failure of their policies if we are to move forward.
Central bankers are now in the denial and anger stages of Kubler-Ross’s famed stages of loss: denial, anger, bargaining, depression and acceptance. Central bankers are in denial that all their trillions of dollars, euros, yen and yuan have completely and utterly failed to achieve the desired result: “organic” (i.e. unmanipulated by central states/banks) expansion of productivity, investment and household earnings.
Central bankers not only continue to insist their free money for financiers will eventually “trickle down” to the masses–they’re angry that the masses aren’t buying it. Central bankers are now blaming the masses for maintaining a perverse psychological state of disbelief in the omnipotence of central banks and their policies.
Central bankers are raging at the psychology of hesitant households, which they finger as the cause of global weakness: if only people believed everything was great, they’d borrow and blow tons of money, and the ship would leave port with a full head of steam.
The central bankers have spent seven years constructing “signals” that are supposed to create a psychological state of euphoria that leads to more borrowing and spending. The stock market is at all-time highs–don’t those stupid masses get it? That’s the “signal” that all’s well and they should get out there and borrow more money to enrich the banks!
Central bankers’ anger is not directed at the source of the policy failures–themselves–but at the masses, whose BS detectors suggest all the signals are manipulated and therefore worthless. The skeptical psychology of the masses is akin to the mark at the 3-card monte table: the crooked dealer (in this case, the central banks) has let the mark win a few rounds to “prove” the game is honest, but the mark remains skeptical.
This is infuriating central bankers, who counted on the marks falling for the rigged game. This wasn’t supposed to happen, they rage; the Keynesian bag of tricks was supposed to work. Stage-managed perception (i.e. rising markets mean the economy is healthy and vibrant) was supposed to trump reality (i.e. the economy is sick, dependent on the dangerous drugs of debt and speculation).
Next up: bargaining. Central bankers are kneeling at the false gods of the Keynesian Cargo Cult and saying that they’ll offer “helicopter money” (more fiscal stimulus) if only the financial gods restore “growth.”
They hope that by being “good central bankers” the gods will delay the inevitable destruction of their empires of debt.
There are now signs of debilitating depression in central bankers. The failure of their policies is finally sinking in, and central bankers are sagging under the depressing reality. They look somber, freeze up at the microphone, and have withdrawn from “whatever it takes” euphoria as they realize that another round of free money for financiers and manipulated markets will only make the problems worse and erode what’s left of their crumbling credibility.
Only when central bankers accept the complete and utter failure of their policies and accept the reality that their policies have increased wealth inequality and crippled the global economy with debt, speculation and manipulation, can we finally move forward.
Until then, we’re stuck with the world central bankers have created: a world of rising wealth and income inequality, of permanent manipulation of markets as a means of managing perceptions and of speculative debt/leverage bubbles that will burst with a ferocity few expect or understand.
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Wall Street Examiner Disclaimer: The Wall Street Examiner reposts third party content with the permission of the publisher. I curate these posts on the basis of whether they represent an interesting and logical point of view, that may or may not agree with my own views. No promotional consideration has been offered or accepted. The opinions expressed in these reposts are not those of the Wall Street Examiner or Lee Adler and no endorsement of the content so provided is either expressed or implied by our posting the content. Some of the content includes the original publisher's promotional messages. The Wall Street Examiner is not familiar with the services offered and makes no endorsement or recommendation regarding them. Do your own due diligence when considering the offerings of third party providers.

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The Fat Lady Always Sings Twice http://wallstreetexaminer.com/2016/05/fat-lady-always-sings-twice/ http://wallstreetexaminer.com/2016/05/fat-lady-always-sings-twice/#comments Mon, 30 May 2016 13:20:32 +0000 http://kunstler.com/?p=6379 I’ll say it again: Hillary is a horse that ain’t gonna finish. The Democrats better be prepared to haul Uncle Joe out of the closet, fluff up his transplanted hair, wax his dentures, give him a few Vitamin B-12 shots, and stick a harpoon in his fist for the autumn run against the White Whale (if Trump is actually nominated).

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This is a syndicated repost courtesy of KUNSTLER. To view original, click here. Reposted with permission.

That was the week Hillary began to look like the candidate who fell off a truck wearing a Nixon mask. Email-gate is taking on the odor of Watergate — the main ingredient of which was not the dopey crime itself but the stonewalling around it. The State Department Inspector General’s report saying definitively, no, she was not “allowed” to use a private, unsecured email server validated Donald Trump’s juvenile name-calling of “Crooked Hillary.”

We may never hear the end of that now (if Trump is actually nominated). And, of course, there lurks the Godzilla-sized skeleton in her closet of the still-unreleased Goldman Sachs speech transcripts, the clamor over which is sure to grow. Meanwhile the specter of the California primary looms, a not inconceivable loss to Bernie Sanders. And onto the convention in Philly which I contend will be even more fractious and violent than the 1968 fiasco in Chicago.

I’ll say it again: Hillary is a horse that ain’t gonna finish. The Democrats better be prepared to haul Uncle Joe out of the closet, fluff up his transplanted hair, wax his dentures, give him a few Vitamin B-12 shots, and stick a harpoon in his fist for the autumn run against the White Whale (if Trump is actually nominated).

The Republican convention in Cleveland is apt to be as bloody and violent a spectacle too (if Trump is actually nominated), with Black Lives Matters cadres having already promised to put on a show for global television and their Latino counterparts marching with Mexican Flags and cute signs saying: Trump: Chingate tu madre, perhaps garnished with the sobriquet pendejo. In such a situation, Trump has enormous potential to make things worse with his childish snap-backs. Hubert Humphrey in 1968 at least had the good sense to keep his mouth shut about the moiling multitudes out on Michigan Avenue inveighing against him.

The Vietnam War was a grave debacle, and it especially pissed off the young men subject to being drafted to fight in it, but the woof and warp of American life was otherwise intact. Blue collar workers still pulled in high wages in the Big Three auto plants, and women had not yet declared war on men, and the airwaves weren’t pornified, and there were still people in government with moral authority who loudly opposed official policy. The sobering martyrdoms of Martin Luther King and Robert Kennedy sanctified the opposition to the status quo. Even Hubert Humphrey himself, a thoughtful man underneath his Rotarian clown mask, began to turn away from Lyndon Johnson’s war hawks.

Nixon won. He surely benefited most not so much from the war issue and the riots in the streets as from the mass defection of Southern states from the long-entrenched domination of the Democratic Party — directly due to Johnson’s dismantling of the old Jim Crow laws. As a personality, Nixon was as much a pendejo as Donald Trump, but no one doubted his ability to run the machinery of government, if not the way they wanted to run it.

One difference today is that the two supposedly leading candidates, Hillary and Trump, are broadly loathed and mocked by people of all ages, not just disaffected youth. Trump appears to actually know so little about the major problems the country faces — energy, trade, the animus of foreigners — that he would be literally helpless in crisis. Hillary would enter the White House more mistrusted than Tricky Dick, and more starkly wired into the parasitical elites draining the body politic of its precious bodily fluids — in the immortal words of Doctor Strangelove.

Though it appears that Trump has consolidated the delegate vote needed for nomination, something tells me that a move is yet afoot to knock the gold ring out of his grubby fingers. Speaker of the House Paul Ryan is playing it very cagey and you can imagine that current party stalwarts and office-holders all over the land are wringing their hands over being asked to follow Trump into some dark night of the American soul. Paul Ryan must know that a coup at the convention is still conceivable and that the action inside the hall will be as violent as the street-fighting outside.

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The post The Fat Lady Always Sings Twice appeared first on KUNSTLER.

Wall Street Examiner Disclaimer: The Wall Street Examiner reposts third party content with the permission of the publisher. I curate these posts on the basis of whether they represent an interesting and logical point of view, that may or may not agree with my own views. No promotional consideration has been offered or accepted. The opinions expressed in these reposts are not those of the Wall Street Examiner or Lee Adler and no endorsement of the content so provided is either expressed or implied by our posting the content. Some of the content includes the original publisher's promotional messages. The Wall Street Examiner is not familiar with the services offered and makes no endorsement or recommendation regarding them. Do your own due diligence when considering the offerings of third party providers.

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The State of The US Housing Bubble http://wallstreetexaminer.com/2016/05/state-us-housing-bubble/ http://wallstreetexaminer.com/2016/05/state-us-housing-bubble/#respond Mon, 30 May 2016 01:16:50 +0000 http://wallstreetexaminer.com/?p=296637 The idea that US housing prices are not in a bubble because they haven’t reached new highs on an inflation adjusted basis has become popular lately. I have a couple of problems with that idea. First, its proponents deflate house prices by CPI, then conclude that since real, “inflation” adjusted adjusted existing home resale prices have yet…

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The idea that US housing prices are not in a bubble because they haven’t reached new highs on an inflation adjusted basis has become popular lately.

I have a couple of problems with that idea.

First, its proponents deflate house prices by CPI, then conclude that since real, “inflation” adjusted adjusted existing home resale prices have yet to exceed their peak in 2005-06, therefore the current market is not in a bubble. Somehow, if CPI is inflating at less than 2% and house prices are inflating at 6%, the “real” inflation rate of houses at triple the CPI inflation rate is not a bubble.

They may be right, but I don’t think so.

Their reasoning ignores the fact that house prices were at the top of the bubble in 2005-06, and that bubble soon deflated. Prior to the peak, house prices bubbled higher for 5 years. Bubbles are not a single point in time. They involve a process of speculative price inflation. Most bubbles in modern history evolved over a similar lifespan.  They typically lasted about 5 years from the time prices first accelerated out of a base pattern until the time they reached their parabolic peak. By those standards, in bubble years the housing market is elderly. It may have further to go, but its days are numbered.

Here’s another problem with judging “bubble or not bubble” in terms of inflation adjusted prices. The proponents of this measure fail to account for the fact that if they deflate prices by an inflation factor, then they should also deflate the incomes which people have available to purchase those houses. We can only judge whether prices are expensive or not relative to the incomes people have available to purchase the houses. If incomes are rising 6% per year and house prices are rising 3% per year, then houses are getting cheaper. In this case, the situation is the reverse of that.

We can derive a fair and unmanipulated measure of the price to income ratio of houses, similar to the PE ratio of a stock, by dividing the median US house sales price by the median US household income. We use the nominal actual median price for the year divided by the median household income for that year. The Sales Price/Median Household Income Ratio, or P/I can then be compared year to year on an apples to apples basis, just as we compare PE ratios to the past to determine whether stock prices might be overvalued.

The P/I ratio enables us to measure and visualize how much prices have risen relative to incomes, which is a truer measure of “bubbleness” than price alone. Bubbles die when prices outrace the ability of buyers to pay. First sales volume collapses, then prices follow soon after when sellers experience a Wile E. Coyote moment en masse. That’s what happened in the 2005-2007 period.

While the US may not yet be at the top of a bubble, the charts below show clearly that it is certainly in a bubble, two bubbles in fact. One is a bubble in existing home resales, which may have some room to run, or not, and one is a bubble in new home sales, which is in a state of record hysteria.

The first shows the inflation curve of existing home resale prices along with the graph of median household income and the P/I ratio. 

State of the Resale Housing Bubble - Click to enlarge

Click to view chart if reading in email. 

It’s easy to see how fast house prices have outpaced median incomes, and I may have been generous in estimating 2% increases in median incomes for 2015 and 2016. From 2008 to 2014, the most recent year for which median income is available, the compound growth rate of median household income was just 1.1% per year. In contrast, since housing prices bottomed in 2009, the median US house resale price has inflated at 5.1% per year. The picture is even worse since 2011. House prices have been inflating at a compound rate of 6.3% since then. Data available for 2016 so far suggest the market is on track for to hit a similar inflation rate.

While the current bubble in resale prices is not as extreme as at the peak of the last bubble, at nearly 4.2 times median household income are mid bubble relative to the 2003-06 period. In terms of time, however, this bubble is elderly, and at risk of proximate death. The past bubble is not so distant that people don’t remember what happened. Reaction time could be quicker this time as a result of that memory.

Central banks rigging long term interest rates have driven the current bubble. In order for prices to continue rising against the slow rise in household incomes, mortgage rates would need to keep falling. Even if they were to remain stable and prices continued to rise, eventually this would lead to bubble top conditions. In a scenario where mortgage rates begin to rise and incomes continue to grow at a snail’s pace, the end will come sooner. Whether you believe the current price bubble is sustainable or not is contingent on what you believe about mortgage rates. Will they continue to decline or not?

The picture is more extreme for new home sales. In that arena both prices and P/I ratios are in raging bubbles, even bigger than the 2002-06 bubble.

State of the New Home Price Bubble - Click to enlarge

Click to view chart if reading in email. 

Builders have gone crazy building bigger and bigger homes for rich people. Fewer and fewer households can afford the median price of a new home. In view of that trend, it’s only a matter of time before this market collapses again. Any rise in mortgage rates above current levels could be the clincher.

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Fixing This Financial Mess Should Be Our Next President’s No. 1 Priority http://wallstreetexaminer.com/2016/05/fixing-financial-mess-next-presidents-no-1-priority/ http://wallstreetexaminer.com/2016/05/fixing-financial-mess-next-presidents-no-1-priority/#respond Sun, 29 May 2016 14:00:58 +0000 http://moneymorning.com/?p=222849 Whatever the outcome in November, our new president will be saddled with a tremendous economic mess.

The post Fixing This Financial Mess Should Be Our Next President’s No. 1 Priority was originally published at The Wall Street Examiner. Follow the money!

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This is a syndicated repost courtesy of Money Morning - We Make Investing Profitable. To view original, click here. Reposted with permission.

Whatever the outcome in November, our new president will be saddled with a tremendous economic mess.

The United States is drowning in debt, some $19.3 trillion right now. Entitlement spending is about to explode, including the costs of Obamacare that were conveniently delayed until its chief author left office. The cost of servicing what will soon be a $20 trillion federal deficit is heading higher and consuming a larger percentage of government spending. The United States’ fiscal situation is on an unsustainable trajectory.

The situation, however, is not hopeless. There are steps a new president can take to improve the situation.

But there’s one thing he – or she – absolutely must deal with right away.

Right now, only a massive reprogramming will place the U.S. economy on a sufficiently productive path to pay its current and future obligations. Some may view the following proposals as extreme, but they are absolutely necessary. Whether they are feasible depends on whether we can summon the political and moral courage to enact them.

Here’s my radical proposal.

Taxes Are Killing Us, We Need to Cut Them

The tax code is the DNA of the economy. It establishes incentives for different types of economic behavior. Unfortunately, the U.S. tax code has been hijacked by Wall Street, Big Business, Big Oil, and other “Big” special interests.

The result is a system that favors debt over equity and speculative over productive investment.

In some cases, such as the totally unjustified tax breaks given to hedge fund and private-equity managers, the wealthiest Americans are allowed to pay significantly lower tax rates on their income than lower-earning Americans.

Until these flaws in the economy’s DNA are fixed, the United States will keep growing more indebted, less productive, and less competitive.

The first step is to broaden the tax base and promote tax fairness. A common misconception is that the way to promote “fairness” is to raise taxes: That type of thinking is the product of minds that understand little of economics and less about human nature.

Lower tax rates benefit everyone but particularly those who aspire to the top of the economic pyramid. Higher tax rates discourage economic activity and encourage people to avoid taxes.

The government is an inefficient allocator of capital. Higher tax rates reduce the return on capital, create disincentives for investment, and reduce the amount of capital available for investment in productive activities such as technology, education, building new factories and capital goods, and research and development.

They also reduce the capital available to invest in raising labor productivity to enhance economic growth and income gains. In short, they trap the nation in an economic death spiral.

Leaving more income in the hands of the private sector, on the other hand, is the surest pathway toward economic revival (which we certainly need right now).

My solution is simple:

  • Drastically lower all income tax rates. Individual tax rates (including payroll taxes) should be lowered to 10% on all incomes below $100,000 per year, 20% on all income below $1,000,000 per year, and 25% per year for all income above $1,000,000.
  • Get rid of tax deductions. Ordinary income tax rates should be lowered and all individual deductions (with two exceptions) reduced or eliminated. The only tax deductions that should be kept in place are the charitable deduction, which should be capped at 20% of income annually, and retirement plan contribution deductions for taxpayers with income below $500,000 per year. Taxpayers with higher incomes should be permitted to contribute to these plans, but their deductions should be capped. Businesses should continue to be able to deduct their ordinary and necessary business expenses from their income to determine taxable income.
  • Stop “rewarding” people for borrowing money. One of the biggest flaws in the tax code is that it creates enormous incentives to borrow money. This makes the U.S. government – which means the U.S. taxpayer – a partner in every single debt transaction in the economy. Every time someone borrows money, he or she is subsidized by his fellow citizens. Is it any wonder that debt never stops growing? An essential step that must be taken to fix the tax code and strengthen the economy is ending the interest deduction for all debt – and that includes the hallowed home mortgage deduction. Once we start treating equity and debt equally, the foundation of the American economy will strengthen as equity replaces debt in individual and corporate capital structures. An appropriate period to phase-in this change (i.e., five years) should be provided, but we must bite the bullet and recapitalize our economy with equity.
  • Stop killing businesses with obscene corporate tax rates. The U.S. corporate tax rate of 35% is among the highest in the world; it should be cut in half to 17.5% and applied to net income after all reasonable and necessary business expenses. Special tax breaks should be eliminated except where they relate to scientific or medical research. High U.S. corporate tax rates are placing American corporations at a serious competitive disadvantage because they make the United States an undesirable location for corporate headquarters and investment. Rather than criticize U.S. companies for taking advantage of perfectly legal strategies to reduce their tax burdens, Congress should lower these tax burdens and make it more attractive for U.S. companies to remain domiciled and invested in their own country. Corporations respond to incentives, and the U.S. tax code currently incentivizes them to get out of town.

Like monetary policy, tax policy suffers from the flawed belief that economic actors do not respond to incentives. Tax policy loses the forest for the trees; it focuses on tax rates rather than overall tax revenue. Each time tax rates were lowered, tax revenue increased because economic growth increased.

It is common sense that taxpayers will spend less time avoiding taxes if they are required to pay lower rates and if they believe the system is taxing them fairly. If overall corporate tax rates were lower, more revenue would remain in the United States, and more taxes would be paid here which, after all, is the point of the tax code in the first place.

In Addition

End the Estate Tax…

The estate tax should be eliminated. Rather than promoting tax fairness by confiscating the life’s work of the most accomplished people in society, the estate tax is a socialist relic that is easily avoided and accomplishes little.

It should be given a decent burial and free up financial and intellectual capital for more productive uses.

… But Raise Sin Taxes

Taxes should be raised significantly on cigarettes, alcohol, legal gambling, and guns. In addition, if marijuana is legalized (as it should be), it should be taxed heavily. All of these activities (with the possible exception of marijuana usage) contribute to higher healthcare costs and should be discouraged by the government that ends up paying for much of the damage they cause.

The most effective and equitable way to accomplish this is by making those who use these products compensate society directly through higher taxes.

Until we fix a system that encourages and rewards debt, gullible investors will continue to rush into extremely risky debt investments, like high-yield. The worst is not over for leveraged corporate borrowers, so I’ve prepared a simple way to profit from Wall Street’s debt addiction. Click here to download “How to Play the Debt Game… And Win” and you’ll get my Sure Money investor service, too. There’s never a charge.

 

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The post Fixing This Financial Mess Should Be Our Next President’s No. 1 Priority appeared first on Money Morning – We Make Investing Profitable.

Wall Street Examiner Disclaimer: The Wall Street Examiner reposts third party content with the permission of the publisher. I curate these posts on the basis of whether they represent an interesting and logical point of view, that may or may not agree with my own views. No promotional consideration has been offered or accepted. The opinions expressed in these reposts are not those of the Wall Street Examiner or Lee Adler and no endorsement of the content so provided is either expressed or implied by our posting the content. Some of the content includes the original publisher's promotional messages. The Wall Street Examiner is not familiar with the services offered and makes no endorsement or recommendation regarding them. Do your own due diligence when considering the offerings of third party providers.

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Stocks Reach Critical Inflection Point- Here’s What to Look For http://wallstreetexaminer.com/2016/05/stocks-reach-critical-inflection-point-heres-look/ http://wallstreetexaminer.com/2016/05/stocks-reach-critical-inflection-point-heres-look/#respond Sat, 28 May 2016 19:51:55 +0000 http://wallstreetexaminer.com/?p=296592 The 13 week cycle turned up last week. That at least kept the 6 month cycle in a flat down phase. Cycle screening data was much stronger on the week. That resulted in a breakout in the aggregate measure. Market Indicators Update Daily Market Update Pro subscribers (Professional Edition), click here to download the complete market…

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The 13 week cycle turned up last week. That at least kept the 6 month cycle in a flat down phase. Cycle screening data was much stronger on the week. That resulted in a breakout in the aggregate measure.

Market Indicators Update

Daily Market Update Pro subscribers (Professional Edition), click here to download the complete market update report in pdf format. Cycle Screens Report below.

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Losing Ground In Flyover America, Part 3 http://wallstreetexaminer.com/2016/05/losing-ground-flyover-america-part-3/ http://wallstreetexaminer.com/2016/05/losing-ground-flyover-america-part-3/#respond Sat, 28 May 2016 14:29:09 +0000 http://davidstockmanscontracorner.com/?p=106821 As we indicated in Part 2, the Fed’s crusade to pump-up inflation toward its 2.00% target by hammering-down interest rates to the so-called zero bound is economically lethal. The former destroys the purchasing power of main street wages while the latter strip mines capital from business and channels it into Wall Street financial engineering and the inflation of stock prices. In…

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This is a syndicated repost courtesy of David Stockman's Contra Corner » Stockman’s Corner. To view original, click here. Reposted with permission.

As we indicated in Part 2, the Fed’s crusade to pump-up inflation toward its 2.00% target by hammering-down interest rates to the so-called zero bound is economically lethal. The former destroys the purchasing power of main street wages while the latter strip mines capital from business and channels it into Wall Street financial engineering and the inflation of stock prices.

In the case of America’s 80 million working age adults (25 or over) with a high school education or less, the Fed’s double whammy has been catastrophic. As we demonstrated yesterday, the employment-to-population ratio for this group has plummeted from 60% prior to the great recession to about 54% today.

In round terms this means that the number of job holders in that pool of the less educated has shrunk from 49.4 million to 43.5 million since early 2007. That’s nearly 6 million workers gone missing or 12% of the total from just nine years ago.

And as we documented yesterday this plunge is not due to aging demographics. The MSM meme that its all about the baby boom hanging up their spikes doesn’t wash; the labor force participation rate of persons over 65 has actually increased sharply in recent years.

Shrinking Pool Of Workers With High School Education Or Less

But even those who have managed to stay employed have suffered a devastating reduction in purchasing power. In fact, based on our Flyover CPI, each dollar of wages would buy 3.1% less annually or a cumulative70% less since 1999.

And that assumes just 65% of the budgets of these low wage households are consumed by the four horsemen of inflation—-food, energy, medical and housing. There can be little doubt that they actually spend a materially greater share on these necessities than we have allocated to them in our index.

Flyover CPI Since 1999

By contrast, nominal wages rates for the high school and under workers have risen by less than 50% over the same period. That means drastic purchasing power compression.

In fact, flyover America’s vast cohort of less educated workers has experienced an approximate 1.1% decline in their real weekly wages every year this century. In 2015 dollars of purchasing power, average pay has declined from $475 per week to $397 per week.

That’s right. When viewed on an annualized basis, households which were scrapping by on $24,700 per year in 2000 have seen the purchasing power of their pay checks drop to $20,600 today or by nearly 17%.

Yet the house of academic fools in the Eccles Building keep insisting that we have insufficient inflation!

Likewise, the all knowing pundits of the Acela Corridor (Washington/Wall Street) can’t figure out why Donald Trump has come roaring out of nowhere.

Real Weekly Wages- High School Graduates, No College

 

That gets us to the Wall Street/Keynesian cult of consumer spending. The latter holds that Americans who “shop until they drop” are the mainspring of the economy based on the silly observation that personal consumption expenditures (PCE) comprise 70% of the GDP accounts, which themselves are a Keynesian construct.

Then again, no one told them that fully $3.5 trillion or 28% of total PCE consists of imputed housing consumption and health care costs heavily funded by third-parties such government entitlements and employer-based health insurance plans.  No one “shopped” to fund either of these huge PCE components, but self evidently someone worked to pay the taxes and premiums.

That is, real capitalist growth and prosperity stems from the supply-side ingredients of labor, enterprise, capital and production, not the hoary myth that consumer spending is the fount of wealth.

Yet even within the framework of our Keynesian monetary central planners, how did real PCE grow so strongly during the last two decades when real income for a huge share of the work force were falling so sharply?

In a word, debt. The flip-side of the Greenspan/Bernanke/Yellen wage crushing operation was a national LBO in the household sector.

During the 21 years between Greenspan’s arrival at the Fed in August 1987 and the early 2008 peak, household debt erupted from $2.7 trillion to $14.3 trillion or by 5.3X.

To be sure, nearly $12 trillion of extra debt, representing an annual growth rate of nearly 8.5%, speaks for itself in terms of the implied monumental excess. But our Keynesian witch doctors have a way of attempting to minimize the import of it by what we call the “inflation lockstep fallacy”.

That is to say, there is purportedly not so much to see here because much of this huge gain represents inflation; and, of course, wages and incomes were inflating over this 21 year period, too. What counts, or so claim our Keynesian bettors, is “real dollar” amounts as computed by their bulimic inflation indices.

Au contraire!

Wages in the Chinese export factories were not being set by the PCE deflator less food and energy as confected and tabulated by some GS-16s in the BLS’ statistical puzzle palace. On the margin, wages in the world’s labor market were less than $1 per hour equivalent during most of that time.

And that’s a full stop. Constant dollar statistical deflators had nothing to do with it.

The Fed’s policy of systematically and massively inflating the domestic cost of living and household debt, therefore, resulted in a giant economic deformation—-one even greater than that implied by the parabolic debt gains through 2008 shown above.

Indeed, the full import can only be grasped by considering the sound money contrafactual case. To wit, as we demonstrated in an earlier post on this topic the CPI would have declined by 1-2% per year under a sound money regime after the early 1990’s when China’s export machine took off.

That means that even under a scenario of 3% labor productivity growth and constant household leverage ratios (i.e. debt-to income), total household debt would have grown by perhaps 2% per annum.

So by 2008 outstanding household debt would have been in the range of$4 trillion, not $14 trillion.

That’s right. Thanks to the utterly wrong-head monetary policies of Greenspan and his successors, US households ended up with $10 trillion of extra debt to lug around. And in the bargain, they got bloated nominal wage rates, which resulted in the massive off-shoring of their jobs, and shrinking purchasing power, which lowered the living standard of the less educated flyover zone work force by 17% just since the turn of the century.

The extent of this destructive household sector LBO is hinted at in the graph below. Historically, the ratio of household debt—-mortgages, credit cads, car loans and the rest—–was under 80% of wage and salary income.

After Nixon pulled the props out from the last vestiges of sound money at Camp David in August 1971 and turned the Fed loose to print at will, however, the ratio began to creep steadily higher.

Yet it was only after the arrival of Greenspan in the Eccles Building that the household leverage ratio went virtually parabolic, climbing from about 100% of wages and salaries to nearly 225% by the early 2008 peak.

We have called this a one-time parlor trick of monetary policy because while the leverage ratio was rising, it did permit households to supplement spending from their current wages and salaries with the proceeds of incremental borrowings. Undoubtedly, this artificial goosing of living standards by the central bank money printers did help flyover America from feeling the full brunt of its shrinking job opportunities and  the deflating purchasing power of its pay checks.

No more. The household LBO is over and done, but the slightly declining leverage ratio shown in the chart is not a measure of progress; it’s an indicator of the distress being felt by households that have been forced to cut their consumption expenditures to the level of current earnings, which, in turn, are not rising nearly as fast as the 3.1% inflation rate afflicting flyover America.

Household Leverage Ratio

There is no secret or mystery as to how America’s working households were led into this appalling debt trap. The fact is, the befuddled Greenspan actually bragged about it when he celebrated the higher consumption levels that were being funded by MEW or mortgage equity withdrawal.

That was just Fedspeak for the fact that under its interest rate repression policies, American families were being massively incentivized and encouraged day and night by cash-out mortgage financing ads ( e.g “Lost another one to Ditech!”) to hock their homes to the mortgage man and splurge on the proceeds. This reached nearly a $1 trillion annual rate and 9% of disposable personal income at the peak just before 2008.

That Greenspan took great pains to track the data and publish the above chart is a measure of how far the Fed had descended into “something for nothing” economics.

Did they think that the leverage ratchet would never stop rising? Did they not recognized the fundamental economic fact of the present era? Namely, that there is a massive 80-million strong baby-boom generation heading for retirement and that for better or worse, home equity accumulation owing to the deductibility of interest has been its primary vehicle of savings?

Well, apparently not in the slightest. Here is what was happened behind the screen during Greenspan’s spurious MEW campaign. American households were strip-mining the equity from their homes and burying themselves in mortgage debt.

Total mortgage debt outstanding soared from $1.8 trillion to $10.7trillion or by nearly 6X during this 21 year period. And even though housing prices more than doubled, the ratio of equity to owner-occupied housing asset value plunged from 67% to 37% over the period.

Here’s the thing. The MEW party ended nine years ago, but virtually all of Greenspan’s MEW is still there. Flyover America may not know exactly how it got buried in such massive debts, but it knows that the current Washington/Wall Street Bubble Finance regime has left it high and dry. It now suffers a relentless shrinkage of living standards even as these contractual debt obligations chase the huge cohort of baby-boomers right into their retirement golden years.

The only thing that is worse than the MEW legacy plaguing seniors is happening on the other end of the demographic curve. Among student age Americans, the degree of debt enslavement has become even more draconian.

In the last decade alone, total student loans outstanding have nearlytripled, rising from $500 billion in 2006 to $1.34 trillion at present. And for reason laid out below, the disproportionate brunt of this massive student loan burden is being shouldered by flyover America.

That’s because the preponderant share of the nation’s 25 million higher education students come from the flyover zones. Those precincts still had a semblance of a birth rate 25 years ago, unlike the culturally advanced households of the bicoastal meccas.

Stated differently, these staggering debt obligations were not incurred by Wellesley College art history majors or even needs-based diversity students at Harvard Law School. They are owed by the inhabitants of mom and pop’s basements scattered over the less advantaged expanse of the land.

After all, the Ivy league schools including all of their graduate departments account for only 140,000 students or 0.5% of the nation’s total. Even if you add in the likes of MIT, Stanford, Caltech, Northwestern, Duke, Vanderbilt and the rest of the top 20 universities you get less than 250,000 or 1% of the student population.

The other 24 million are victims of the feckless Washington/Wall Street ideology of debt and finance. To wit, tuition, fees, room and board and other living expanses have erupted skyward over the last two decades because Washington has poured in loans and grants with reckless abandon and Wall Street has fueled the madcap expansion of for-profit tuition mills.

Even setting aside the minimum $50,000 annual price tag at private institutions, the tab has soared to $20,000 annually at public 4-year schools and nearly $30,000 per year at the tuition mills.

These figures represent semi-criminal rip-offs. They were enabled by the preternaturally bloated levels of debt and finance showered upon the student population by the denizens of the Acela Corridor.

So the former now tread water in an economic doom loop. Average earnings for 35 year-olds with a bachelors degree or higher are $50,000 annually, compared to $30,000 for high school graduates and $24,000 for dropouts.

Thus, the sons and daughters of the flyover zones feel compelled to strap-on a heavy vest of debt in order to finance the insanely bloated costs of higher education. But once so education, the overwhelming majority end up with $30,000 to $100,000 or debt or more.

In this regard, the so-called for profit colleges like Phoenix University, Strayer and dozens of imitators deserve a special place in the halls of higher education infamy. At their peak a few years ago, enrollments at these schools totaled 3.5 million.

But overwhelmingly, these “students” were recruited by tuition harvesting machines that make the all-volunteer US Army look like a piker in comparison. To wit, typically 90% of the revenues of these colleges were derived from student grants and especially loans——-hundreds of billions of them—-but less than one-third of that money went to the cost of education, including teachers, classrooms, books and other instructional costs.

At the same time, well more 33% went to SG&A and the overwhelming share of that was in the “S” part. That is, prodigious expenditures for salesmen, recruiters, commissions and giant bonuses and other incentives and perks.

Needless to say, this made for good growth and margin metrics that could be hyped in the stock market. After the cost of education and all of the massive selling expense to turbocharge enrollment growth was absorbed, there was still upwards of 35-40% of revenue left for operating profits.

That’s right. For a decade until the Obama Administration finally lowered the boom after 2011, the fastest growing and most profitable companies in America were the for profit colleges.

In short order they became a hedge fund hotel, meaning that the fast money piled on the for-profit college space like there was no tomorrow. So doing, they often drove PE ratios to 50X or higher, bringing instant riches to start-up entrepreneurs and top company executives, who, in turn, were motivated to drive their growth and profit “metrics” even harder.

At length, they became tuition mills and Wall Street speculations that were incidentally in the higher education business or not. The combined market cap of the five largest public companies went from less than $1 billion to upwards of $30 billion in a decade.

The poster boy for this scam is surely Strayer Education. Between 2002 and the 2011 peak, its sales and net income grew at 30% per year and operating margins clocked in at nearly 40%.

It was peddled as a growth wonder among the hedge funds, causing its PE ratios to push into the 60-70X range in its initial growth phase and remain in the 30-40X range thereafter. Accordingly, its market cap soared by 7X from $500 million to $3.5 billion at the peak. The hedge funds made a killing.
STRA Market Cap Chart

STRA Market Cap data by YCharts

 

Wall Street Examiner Disclaimer: The Wall Street Examiner reposts third party content with the permission of the publisher. I curate these posts on the basis of whether they represent an interesting and logical point of view, that may or may not agree with my own views. No promotional consideration has been offered or accepted. The opinions expressed in these reposts are not those of the Wall Street Examiner or Lee Adler and no endorsement of the content so provided is either expressed or implied by our posting the content. Some of the content includes the original publisher's promotional messages. The Wall Street Examiner is not familiar with the services offered and makes no endorsement or recommendation regarding them. Do your own due diligence when considering the offerings of third party providers.

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Here’s Why All Pension Funds Are Doomed, Doomed, Doomed http://wallstreetexaminer.com/2016/05/heres-pension-funds-doomed-doomed-doomed/ http://wallstreetexaminer.com/2016/05/heres-pension-funds-doomed-doomed-doomed/#respond Fri, 27 May 2016 00:58:00 +0000 http://wallstreetexaminer.com/?guid=7e84106f843e039cd4f8ac9939607e4b There are limits on what the Fed can do when this bubble bursts, as it inevitably will, as surely as night follows day.It's no secret that virtually every pension fund is dead man walking, doomed by central banks' imposition of low yields on safe ...

The post Here’s Why All Pension Funds Are Doomed, Doomed, Doomed was originally published at The Wall Street Examiner. Follow the money!

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This is a syndicated repost courtesy of oftwominds-Charles Hugh Smith. To view original, click here. Reposted with permission.

There are limits on what the Fed can do when this bubble bursts, as it inevitably will, as surely as night follows day.
It’s no secret that virtually every pension fund is dead man walking, doomed by central banks’ imposition of low yields on safe investments, i.e. Zero Interest Rate Policy (ZIRP).
Given that both The Economist and The Wall Street Journal have covered the impossibility of pension funds achieving their expected returns, this reality cannot be a surprise to anyone in a leadership role.
Public Pension Funds Roll Back Return Targets: Few managers count on returns of 8%-plus a year anymore; governments scramble to make up funding
Here’s problem #1 in a nutshell: the average public pension fund still expects to earn an average annual return of 7.69%, year after year, decade after decade.
This is roughly triple the nominal (not adjusted for inflation) yield on a 30-year Treasury bond (about 2.65%). The only way any fund manager can earn 7.7% or more in a low-yield environment is to make extremely high risk bets that consistently pay off.
This is like playing one hand after another in a casino and never losing. Sorry, but high risk gambling doesn’t work that way: the higher the risk, the bigger the gains; but equally important, the bigger the losses when the hot hand turns cold.
Here’s problem #2 in a nutshell: in the good old days before the economy (and pension funds) became dependent on debt-fueled asset bubbles for their survival, pension fund managers expected an average annual return of 3.8%–less than half the current expected returns.
In the good old days, the needed returns could be generated by investing in safe income-producing assets–high-quality corporate bonds, Treasury bonds, etc. The risk of losing any of the fund’s capital was extremely low.
Now that the expected returns have more than doubled while the yield on safe investments has plummeted, fund managers must take risks (i.e. chase yield) that can easily wipe out major chunks of the fund’s capital if the bubble du jour bursts.
Here’s problem #3 in a nutshell: everyone who rode the great bubble of 1994 – 2000 (including pension funds) soon reckoned 10%+ annual returns on equities was The New Normal, so expecting 7.5% – 8% annual returns seemed downright prudent.
When that bubble burst, decimating everyone still holding equities, the Federal Reserve promptly inflated two new bubbles: one in stocks and another in housing. Once again, everyone who rode these two bubbles up (including pension funds) minted hefty profits year after year.
This seemed to confirm that The New Normal included the occasional spot of bother (a.k.a. a severe market crash), but the Federal Reserve would quickly ride to the rescue and inflate a new bubble.
When the dual bubbles of stocks and housing both burst in 2008, once again the Fed rushed to inflate another set of bubbles, this time in stocks, bonds and rental housing. Lowering interest rates could no longer generate a new bubble. This time around, the Fed had to lower interest rates to zero indefinitely, and embark on the most massive monetary stimulus in history–quantitative easing (QE) 1, 2 and 3–to inflate a third bubble in stocks.
This unprecedented expansion of free money for financiers and dropping interest rates to zero generated a bubble in bonds and an echo-bubble in real estate–specifically, commercial real estate and rental housing.
These three bubbles once again generated handsome yields for pension funds.Once again fund managers’ faith in the Federal Reserve maintaining a New Normal of occasional crashes quickly followed by even bigger bubbles was rewarded.
But the game is changing beneath the surface of Fed omnipotence. The returns on zero interest rates (or even negative rates) have diminished to zero, and the Fed’s vaunted monetary stimulus programs have been recognized as enriching the rich at the expense of everyone else.
Even with the unprecedented tailwinds of one massive bubble after another, pension funds are in trouble. The high-risk returns of Fed-induced bubbles followed by the inevitable crashes cannot replace the safe, high yields of the pre-bubble-dependent economy.
If funds are in trouble with stocks in a new unprecedented bubble high, how will they do when stocks fall back to Earth, as they inevitably do in boom-bust cycles?
The usual justification for nose-bleed valuations is sky-high corporate profits.But profits have rolled over, and irreversible headwinds are increasing: a stronger U.S. dollar, an aging populace desperate to save more for retirement, an entire generation burdened with student debt and often-worthless college diplomas, a global economy on the brink of recession, diminishing returns on firing workers, diminishing returns on financialization legerdemain, etc.
Meanwhile, commercial real estate loans have soared above the previous bubble highs.
This seems to prove that no bubble bursts for long with the Federal Reserve at the helm, but there are limits on what the Fed can do when this bubble bursts, as it inevitably will, as surely as night follows day.
The Fed can’t lower interest rates below zero without signaling that the economy is well and truly broken, and it can’t force people who are wary of debt to borrow more, even if it effectively pays borrowers to take on more debt.
All the Fed can do is extend new debt to unqualified borrowers who will default at the first sneeze. This will trigger the collapse of whatever new credit-fueled bubble the Fed might generate.
The political winds are also changing. The public’s passive acceptance of central banks’ let’s make the rich richer and everyone else poorer policies may be ending, and demands to put the heads of central bankers on spikes in the town square (figuratively speaking) may increase exponentially.

It’s looking increasingly likely that third time’s the charm: this set of bubbles is the last one central banks can blow. And when markets free-fall and don’t reflate into new bubbles, pension funds will expire, as they were fated to do the day central banks chose zero interest rates forever as their cure for a broken economic model.

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Wall Street Examiner Disclaimer: The Wall Street Examiner reposts third party content with the permission of the publisher. I curate these posts on the basis of whether they represent an interesting and logical point of view, that may or may not agree with my own views. No promotional consideration has been offered or accepted. The opinions expressed in these reposts are not those of the Wall Street Examiner or Lee Adler and no endorsement of the content so provided is either expressed or implied by our posting the content. Some of the content includes the original publisher's promotional messages. The Wall Street Examiner is not familiar with the services offered and makes no endorsement or recommendation regarding them. Do your own due diligence when considering the offerings of third party providers.

The post Here’s Why All Pension Funds Are Doomed, Doomed, Doomed was originally published at The Wall Street Examiner. Follow the money!

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Capital Flees Europe to US Markets and Banks http://wallstreetexaminer.com/2016/05/capital-flees-europe-us-markets-banks/ http://wallstreetexaminer.com/2016/05/capital-flees-europe-us-markets-banks/#respond Thu, 26 May 2016 23:44:21 +0000 http://wallstreetexaminer.com/?p=296438 Virtually nothing has changed since the last update, other than an uptick in current US GDP for the second quarter. When economic data releases begin to reflect this next month, the market reaction should be negative as traders conclude, correctly, that the Fed will tighten. Markets top out when the news is good, because that is, in fact, when the Fed turns the screws.

The post Capital Flees Europe to US Markets and Banks was originally published at The Wall Street Examiner. Follow the money!

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This is the last of a series of free Wall Street Examiner Pro Trader reports that I have been posting as I recover from my emergency open heart surgery on May 3. Next week I will return to regular publication of these reports for subscribers only. 

This report covers US and European central banks and banking  indicator trends and what they tell us about the outlook for the US stock and bond markets. Download the complete report in pdf format here. 

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I thank each one of you for your patience and support! Thanks to the many of you who have written to me directly offering your encouragement! I truly appreciate hearing from you. Fortunately, my recovery has been going very well. 

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Download the complete report in pdf format here.

Virtually nothing has changed since the last update, other than an uptick in current US GDP for the second quarter.  When economic data releases begin to reflect this next month, the market reaction should be negative as traders conclude, correctly, that the Fed will tighten. Markets top out when the news is good, because that is, in fact, when the Fed turns the screws.

Trends in the Fed balance sheet, in US commercial banking data, and in European banking data remain in place. The US banking system and systemic liquidity continue to expand as capital flows out of Europe, fleeing NIRP. Regardless of which central bank prints the money, capital will seek the highest returns relative to risk. With negative interest rates and negative sovereign yields in Europe, the US remains a magnet for funds fleeing the punitive policies in Europe. The flow of this flight capital into the US continues to buoy US stock and bond prices.

When that will end depends on both central bank policies and the faith and confidence of market participants in those policies. While we can track bank data for any sign of change in deposit growth or loan growth, the first signs are likely to show up in the technical analysis of the markets themselves, which you can follow in the Pro Trader market updates.

Download the complete report in pdf format here.

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European Reforms: Mostly "No Show" grades http://wallstreetexaminer.com/2016/05/european-reforms-mostly-no-show-grades/ http://wallstreetexaminer.com/2016/05/european-reforms-mostly-no-show-grades/#respond Thu, 26 May 2016 23:31:00 +0000 http://wallstreetexaminer.com/?guid=2935d363b7136e1ea3869410ce441505 An interesting heat map from Moody's covering the deteriorating pace of reforms in the euro area

The post European Reforms: Mostly "No Show" grades was originally published at The Wall Street Examiner. Follow the money!

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This is a syndicated repost courtesy of True Economics. To view original, click here. Reposted with permission.

An interesting heat map from Moody’s covering the deteriorating pace of reforms in the euro area:

Source: @Schuldensuehner 

The key point is that under the monetary easing created by the ECB, Euro area sovereigns are all slacking off on reforms, especially more politically difficult reforms, such as product markets reforms (9 out of 11 states are in red, none in green), pensions & healthcare reforms and fiscal reforms (5 out of 11 are in read). The best performing countries are, bizarrely, Spain and Italy. Farcically, Ireland apparently does not require reforms to improve efficiency of public administration. Presumably, Moody’s analysts never heard of tsunami of public waste unleashed by the likes of HSE and Irish Water.

Take it for what it is – a sketchy top-level view of the reforms landscape and give it a wonder: are ECB policies helping long term sustainability of European institutions or harming it?.. In 23 out of 60 point observations, the reforms have delivered so far ‘no or limited progress’ and only in 6 out of 60 point observations, the reforms have delivered ‘substantial progress’. Go figure…

Wall Street Examiner Disclaimer: The Wall Street Examiner reposts third party content with the permission of the publisher. I curate these posts on the basis of whether they represent an interesting and logical point of view, that may or may not agree with my own views. No promotional consideration has been offered or accepted. The opinions expressed in these reposts are not those of the Wall Street Examiner or Lee Adler and no endorsement of the content so provided is either expressed or implied by our posting the content. Some of the content includes the original publisher's promotional messages. The Wall Street Examiner is not familiar with the services offered and makes no endorsement or recommendation regarding them. Do your own due diligence when considering the offerings of third party providers.

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