“Those who get handouts always think they deserve them. The very same people never think anyone else does. That is precisely what is wrong with the statements of Charlie Munger, as well as the statements of Ryan Skene and his ilk, in defending them.”
Posts Tagged ‘mike shedlock’
As one of the themes that underlies this current crisis, fiduciary duty or the lack thereof is a permanent feature of my rants.
In this regard, Mike Shedlock has a blog entry from yesterday that highlights the current climate of expediency, apathy and selfishness that allows public officials and politicians to perpetrate what is by now a well documented criminal con on society.
This is the relevant bit:
“Where is the fiduciary responsibility?
OK. Time for the rant.
James Kochan, the chief fixed-income strategist at Wells Fargo Fund Management who helps oversee $179 billion said of the trend toward looser debt covenants “We got ourselves in trouble with that in the past and here it is again. It’s not that surprising, but it is disturbing.”
The article goes on to say, “Money managers say they have little choice but to go along. They need to find a home for the record $29.4 billion that has flowed into high-yield bond mutual funds …”
That last statement was not attributed to anyone specifically. However, it is clearly part of the problem. Where is the fiduciary responsibility? Where?
Yes, Virginia, There is a Choice!
Of course there is a choice. If a fund manager does not think he can wisely invest fund flows, then he should not take them.
The correct choice is to say, “We think this market is fully priced, we do not like the risk-reward setup, and we advise treasuries, or sitting in cash, or whatever.”
I heard many horror stories from people whose managers said they were willing to go to cash. In 2008 none of them did.
Wells Fargo, Fidelity, Vanguard, etc., all offer a whole range of products, none of them giving any discretion to the fund manager. The money comes in, the managers put 100% of it to work collecting a fee for his services, even if the manager thinks the market is primed for a huge drop.
A friend told me his experience at a large brokerage firm that had 500 managed account programs consisting of the usual gamut of garbage: big cap, small cap, mid cap, emerging markets, blends, various grades of bonds, foreign equities, a dozen blends, energy, bio, semiconductors, tech, ad nauseum.
All 500 strategies had one thing in common: They were all 100% long 100% of the time. There was not one alternative strategy that allowed shorting or hedging or simply taking half the chips off the table if the risk reward setup was unfavorable.
Why is this?
Fee Structure Offers Managers Huge Incentive To Do Wrong Thing
Part of the problem is the fee structure system itself. Typically clients only pay fees when the money is invested. Thus, there is a huge incentive to “invest” whether it makes any sense or not, even in cases the manager is pretty sure it is wrong.
The second problem is, if the manager does not take the money, it will go somewhere else.
To that I say, so what?
Ultimately the only choice is to always act in the best interest of the client, even if that means sending them somewhere else, not accepting new funds, or sitting in cash waiting for better opportunities.
Putting money to work, even though a manager thinks “We got ourselves in trouble with that in the past and here it is again” is precisely one of the things blatantly wrong with Wall Street. Unfortunately, that attitude is all too commonplace. Don’t expect it to change anytime soon.
This is my second rant on the subject. In case you missed it, please see Rant of the Day: No Ethics, No Fiduciary Responsibility, No Separation of Duty; Complete Ethics Overhaul Needed.“
Some outstanding essays from Gary Shilling via John Mauldin and from Dave Rosenberg via Mike Shedlock.
First Gary Shilling (GS):
It is a long read packed with insightful information and graphs that are really worth your time. Not withstanding his conclusion and the dynamics that lead him to it, that I tend to wholeheartedly agree with, in my opinion GS too fails to explain the how and why of the dynamics.
For exmaple, in the opening paragraph, GS correctly identifies the problem when he says: “Beyond the current recession, the worst since the 1930s, lies years of slow growth…” . However, GS does not explain how and why we’ve had slow growth for many years. Because to be correct, we’ve had slow “real” growth. But other than real growth, GDP has been chugging along at an average of 4% yoy at a nominal rate. Hence the question I ask in many of my essays. That is, in a service economy that is composed of 70% consumption, how much real wealth is created in a 4% yoy progression? The answer of course is to be found in the quantity of inflation that is induced into the system. Considering that inflation as measured by the growth of credit and money supply has been progressing at an average 10% yoy (with peaks at 20%), it is immediately evident that there has been little “real” wealth generated. However, even identifying the cause of weak “real” growth does not explain why that should have been so. And the answer to this question, of course, is to be found in the choice of monetary system. A choice, I might add, that is arbitrary and unilateral and has never been submitted to the people for ratification. So, by completely disregarding the monetary system, GS still falls for many popular myths on which more later.
Also, although he identifies increased government regulation as a drag on the economy, in reading the paragraph I cannot help but get the feeling that GS may agree with some of the proposed regulation. However, other than forcing derivatives on an exchange, I strongly disagree that any increased regulation might help preventing anything. We do have strong regulation but enshrined in the Fiat monetary logic is the necessity to disregard practices that are initially border line legal but that, as the inflationary dynamic develops, become down right illegal and criminal – (SIVs, off balance sheet entities, mark to model accounting … ). Once again; the fiat monetary logic conforms to the law of diminishing returns. Therefore you always need greater degrees of inflation in order to bring about the same GDP expansion. Once the inflationary logic goes beyond its half way point, fraud is virtually guaranteed by necessity and aided and abetted by government.
Somewhere in the essay GS also believes in the “savings glut” claptrap. There is no such thing of course. What there is instead, is a fiat monetary system that is predicated on inflation and is inherently exponential in nature. Thus inducing ever greater quantities of inflation in the system results in the logical transition from a manufacturing economy to a service economy which, by necessity, becomes an economy based on imports and consumption. That being the case, inflation (as measured by money supply and credit) is exchanged for goods and services overseas. So, the savings glut would not exist if it weren’t for excessive inflation of the global reserve currency: i.e. the US Dollar.
Somewhere in the essay, GS also says that “bankers fear inflation”. To which I can only say: right! Inflation is the conditio-sine-qua-non of the fiat monetary system. Bankers’ only way to make money is to generate inflation. In the absence of inflation, banks would have to create far less credit and money thereby limiting profits. In a fiat monetary system the authority that is charged with creating money does so and charges interest. In the particular case of the USA, the Federal Reserve creates the money and gives it to the Treasury and charges interest in the process. Thus, every Dollar bill that leaves the Fed is devalued by that much. The less intuitive ramification of this monetary system is that debt can never be repaid. That’s because if you rustled up all the coins and $ bills in circulation and gave them back to the Fed, you would still owe them interest on the last bill that was created and delivered. Thus, a fiat monetary system can only survive in an inflationary environment. Absent inflation, the fiat monetary system implodes and with it so do governments.
Also, in chart 9, GS seems to think of inflation in terms of prices. Prices of course are a function of inflation; they are the manifestation of inflation but are not the cause.
Towards the end of the essay, GS states that he sees local government and state spending increasing at 5% and says that as tax revenue dwindles at state level, the money will have to come from Washington. Of course, if you’ve read any of my essays, you will know that there is very little difference between individuals, corporations, local government, state government or, indeed, the Federal Government. That is, when bankruptcy overwhelms individuals and corporations, it will progressively overwhelm local, state and Federal Governments too. So, we may want increased spending from our governments but in a situation of global bankruptcy and rising interest rates, governments will have a hard time borrowing even more than what they already have. Not only that, but how much more production capacity can we really absorb world wide? I mean, considering that industrial capacity utilization has been steadily declining over the years thereby progressively eroding pricing power, why should we create even more of it now?
I have to run now and will polish and add to my comments at a later date. For the time being do read the two essays from Gary Shilling and Dave Rosenberg because they are really worth it.
Dave Rosenberg essay via Mike Shedlock
Classic Mike Shedlock analysis dicing and slicing the figures and telling you what is coming down the pike. Ignore this information at your own peril. If these figures do not spell war, I don’t know what does.
I have been following a number of unemployment charts showing just how bad the current recession is. Click on any chart to see a sharper image.
Job Loss Recovery
The last three recessions are unlike the eight preceding recessions. For numerous reasons described below we are heading for another job loss recovery.
Job Loss Recovery Detail
click on chart for sharper image
If the pattern holds, unemployment will rise until 2011 or beyond. Moreover, take a look at the first chart again. Odds of a double dip recession similar to 1980-1982 are high after whatever inventory rebuilding and bottom fishing in housing ends.
Consumer Confidence About Jobs
The Following is by permission from Contrary Investor
Contrary Investor writes:
“The jobs hard to get response is pushing up against 30 year highs seen in the last few months. Likewise the jobs easy to get component of the survey has hit a new low for the current cycle. We’ll just have to see how hard the folks at the Bureau of Labor stats can goose the headline payroll numbers for July with further Birth/Death model estimates. We’ll be surprised at nothing. But consumers are telling us labor market conditions have worsened, despite the government numbers. And without question this has driven their consumption behavior. ”
Decade For Lost Jobs
Please consider the following chart from Lost Decade For Jobs by Michael Mandel of BusinessWeek.
Record Number See Benefits End
The following chart is courtesy of David Rosenberg.
Take a good look at that chart. It’s 50,000 now. The expectation is 500,000 by September and 1.5 million by the end of the year. What are the odds Obama creates 1.5 million jobs by the end of the year? Can he really create any? For how long?
While on the subject of claims please consider the following four charts courtesy of Chris Puplava at Financial Sense. I asked him to chart Data from Moodys.
Continuing Claims Since 2000
Continuing Claims as % of Population Since 2000
Continuing Claims as % of Population Since 1980
Chris notes “The EUC and the extended benefits come out with a lag as Moody’s had data for them only up to 07/11/09 while the continuing claims data is up to 07/18/09. The charts above are through 07/11/09.”
I commented on the above series of charts in Weekly Unemployment Claims Portend Disaster.
Here is a snip.
Unparalleled Continuing Claims
On a percentage of population basis this recession is unparalleled.
Making matters worse, the US consumer was nowhere near as leveraged to real estate in 1980 or 1982 as now. Also note that boomers are heading into retirement now, undercapitalized and looking for jobs, in effect competing against their kids and grandkids for jobs.
Look at the average age of baggers in grocery stores or greeters at Walmart. These people are not working because they want to; they are working because they have to. Demand for jobs is at an all time high while the number of available jobs and the pay scales of those jobs have both collapsed. The employment situation is not only an unmitigated disaster, things are about to get worse with pending state cutbacks.
Because of expiring claims, continuing claims data will soon start looking better. The reality however, is things will get worse for another year as unemployment soars into double digits. My forecast in January was 10.8% in 2010 while the Fed’s was 8.5%. I see no reason to change mine, but the Fed upped theirs.
The implications for housing and especially commercial real estate are ominous.
Part Time Employment
The following graph from Calculated Risk shows the unemployment rate and the percent of the civilian labor force that is working part time for economic reasons.
New figures come out on Friday but here is the June count of Part-Time Employment.
Table A-5 Part Time Status
click on chart for sharper image
The chart shows there are 9 million people are working part time but want a full time job. A year ago the number was 5.5 million.
The following graph on the number of workers who have exhausted their regular benefits is also courtesy of Calculated Risk:
Calculated Risk writes:
“The blue line is the number of workers unemployed for 27 weeks or more. The red line is the same data as a percent of the civilian workforce. According to the BLS, there are almost 4.4 million workers who have been unemployed for more than 26 weeks (and still want a job). This is 2.8% of the civilian workforce.
Right now very few workers have exhausted their unemployment benefits, but there is tidal wave coming. The Law Project estimates 0.5 million workers will have exhausted their extended benefits by the end of September, and close to 1.5 million by the end of 2009. Unless the unemployment rate starts to decline, the numbers will continue to grow rapidly in 2010.”
Incredible Shrinking Boomer Economy
Before many companies start hiring full-time workers, they will first put part-timers back to work full time. This will add significant delays to the hiring process in this “recovery”.
Indeed, by the time “stimulus” wears out (and it will), the economy will be slipping back into a double-dip recession.
Note that there is no driver for jobs other than inventory replenishment and various stimulus measures. The latter does nothing but push demand forward. Meanwhile Wages and Salaries Fell 4.7%, Most On Record.
Finally, I want to leave you with a thought from the Incredible Shrinking Boomer Economy.
In his Town Hall Meetings Bernanke said:
“It takes GDP growth of about 2.5 percent to keep the jobless rate constant. But the Fed expects growth of only about 1 percent in the last six months of the year. So that’s not enough to bring down the unemployment rate.”
Inquiring minds might be asking: Why does it take 2.5% growth to keep the jobless rate constant? The answer is the first 2.5%+- of GDP is based on hedonics and imputations. In plain English, the first 2.5%+- of GDP (if not much more) is fictional. When the economy is growing at 2% it feels like a recession because it probably is, even though no one will admit it.
Now consider the implications of a 2.4% GDP forecast for three decades.
If Bernanke is correct that it takes 2.5% GDP growth just to keep the unemployment rate constant, and McKinsey is also correct in its 2.4% forecast, we will be stuck with 10% unemployment for decades.
No Driver For Jobs
In the 1980’s and 1990’s an internet boom created massive numbers of jobs. Between 2000 and 2007 a housing boom created massive numbers of jobs. I keep asking what the next driver for jobs will be. Inventory replenishment will not do it. Nor will one-time stimulus efforts like road building.
Nothing on the energy front seems capable at this time of producing such a boom. Commercial real estate is massively overbuilt as is the retail sector. So don’t look for Home Depot (HD), Lowes (LOW), Target (TGT), or Walmart (WMT) to lead the way. Forget about banking too as Citigroup (C), Wells Fargo (WFC), and Bank of America (BAC) have their hands full and then some.
And although one can never tell in advance when technology breakthroughs will happen, as we have seen, internment booms are not that common. In 2001 everyone was waiting for the next “killer app”. Everyone is is still waiting so don’t look at Intel (INTC), Microsoft (MSFT), or the technology sector either.
So while everyone is tooting horns and cheering the end of the end of the recession before it has even ended, those graphs and comments from Bernanke himself will put the pending job loss Recovery into better perspective.
Mike “Mish” Shedlock
Big hat tip to Mike Shedlock for this pearl. If I were a cynic, I’d say this is more evidence that if we are preparing for something, we are preparing for war.
The chart below is self explanatory but in case you can’t make sense of it here is what it means. Shipments of manufactured durable goods are down across the board; this is the reason unemployment is rising and consumer expenditure is cratering along with government revenues. But shipments of manufactured military goods are up… thus bringing up the average for all shipments.
Good. Got bullion?
In the US as in Europe, we are on track to see some very unhappy, unemployed, hungry, homeless people by the end of this year.
So, you are a Western industrialized country. You cannot meet your financial obligations to your own people or to your outside creditors. The economy is contracting, unemployment is soaring and your tax revenues are dwindling.
What do you do? I honestly want your opinion.
What do you do?
Another must-read from Mike Shedlock
Strikingly and glaringly mafia style… and it’s being debated publicly in the halls of government… when approved, this truly will be the end of the road for many nations and currencies…
Words cannot begin to express what this plan means folks. I know it is all part and parcel of the cycle we’re living and we should just ride it out. The inevitability of it all nonetheless elicits a high degree of morbid fascination….. deers in headlights I guess…