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My Ex Bonds and Ben Bernanke
Three-four years ago I had a nice bond portfolio. For a guy who should
have know better I completely boinked it up. I fell prey to the worst of
errors. I let disbelief guide my choices.
I had a bunch of high coupon NYS GO Muni’s. Almost all of them have been
called. I had 5 and 5 1/2% Agency MBS. I knew that was subject to
prepay, but I never expected to get 80% cashed out. The corporate’s were
high yield so I kept the maturities short. Most have been paid off.
Net-net my fixed income is down a cool $150, 000. I have managed
equities and at my age I am not going overboard on that. I think all
preff stock is junk. I will not buy JNJ for a 3% yield and lose a 1/3 of
my equity. And I am not going out far on the curve when there is no
payback. So I am screwed. Losing this much income makes it hard to plan
for expenditures. Relying on the equity market to earn a stable income
is not possible.
So if you lose that much income what do you do? I cut fixed and variable costs.
-I left my high-end golf club. Saved $30k on that. Last I checked there
were 70 out of 270 members looking to do the same thing. Talk about a
leading indicator.
-I had my eye on a new A-6. Call that $30k with the trade. I nixed that
plan so a few folks in Wolfsburg have a car less to build.
-My farm pickup has gone to work six days a week for the past 12 years.
The help, the rust and the big loads have beaten it to pieces. I need
something that will push snow, so that is another $40k. Screw that, we
will drive the piece of crap until it dies.
-I was thinking of asking a lady to come with me for a few weeks to
Europe. Saved at least $10k there when I never brought the topic up.
Funny thing is, she’s there now with another guy. Possibly he does not
have a “duration” problem.
-I have an endless list of trades working for me. Plumbers, carpenters,
masons, electricians. I usually budget 30k for this. These guys are all
calling me up to see if I am okay and do I have some work? I tell them,
“Next year”.
-My apple orchard needs pruning and the tree guy came over to talk about
it. I also told him next year. The risk is we have heavy wet snows and I
will lose trees so I am taking a gamble. Another 10g saved.
-I give 10% of my income to various forms of charity. I am not doing so
this year. $15k to the plus, but I don’t feel so good about it.
That adds up to $165,000. But I know something will break and I am
hoping to come in at the $150,000 that I lost to the bond market. If
nothing breaks I will find something “good” to do with the extra.
Ben Bernanke does not give a rat’s ass about me. Nor should he. There
are plenty of situations that are screaming for help that are much more
important than I am. I have no problem with those priorities.
Ben is probably going to be working on his speech as he flies out to
Jackson Hole. It will be an important presentation that many will focus
on. I am sure that he will acknowledge the weakness in the economy. He
will point to the recent steps he has taken and he will promise to do
more “as necessary”. In other words, ZIRP will be with us for a long
time yet to come.
Bernanke has a better handle on the numbers than anyone. He knows we are
hitting an economic wall. But he can’t figure out what to do so he
looks in a college textbook and reaffirms his belief in Keynesian
economics and voodoo monetary policy. The only medicine he understands:
zero interest rates. The poor guy must be wondering why his efforts have
failed so miserably. He is now looking at a questionable future. If he
steps on the gas with QE2 and fails, he will go down in the books as the
worst fed governor in history. I think is going to fail miserably.
How many people look like me? A million? Three million? Five million? It
is many more than you might think. If it is 3mm then it translates to a
drop in consumption of $450 billion or 3-¼% of GDP. So without the me’s
of this country contributing to consumption we have a tremendous drag.
We need 3-1/4% growth or the social obligations/debt will eat us alive
in a few years. We’re not going to see that growth. QE is the culprit.
And Bernanke does not get it.
Note: The NY Times
had a front-page story by Sewell Chan that spelled out his thoughts on
the dilemma Bernanke faces. He started the column with these words:
Bernanke to Offer Outlook as Fed Weighs Bolder StepsOn Friday Ben Bernanke will offer his outlook on the economy and explain the Fed’s recent modest move.
This is a dangerous understatement by Mr. Chan. Until very recently
Bernanke and the bulk of the board members had been signaling that the
next move in monetary policy was going to be a return to normalcy. The
Fed’s recent move to initiate the first step in QE-2 is a 100% u-turn on
what has been said/promised for the past year. There is nothing modest
about that step. The markets have shown they don't like it. Every
additional measure that Bernanke takes will lead to more
dissatisfaction. Ben can’t connect these dots. He thinks the solution to
our problem is to create free money so the commercial banks can
generate big income to absorb the big losses. It is a dead end policy
for the real economy.
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Thanks man... we're all in this together...
bought 2 kilo apples for 1 euro saved 2 euros.
didn't go to a movie saved 8 euro.
smoking my own homegrown pot saved 8 euro.
cutting my own hair saved 12 euro.
masterbated myself saved 50 euro on pros.
come on most people on this planet do not make
150$K in a lifetime.
Nice story Silver.
I did and spent it all. Now I don't and probably will not for a number of years to come. Like I said. I won't spend. So where does that take us?
Bruce -great post. I get the idea of what I should not buy, like bonds and JNJ. But what should I buy? Or should we just pay down debt?
What won't Dear Leader confiscate to pay for his wars?
Thanks for the personal share. I'd say more like 1 million roughly like you, and the loss of income does add up.
Go east, middle-aged man, that's where the safest high returns are in Zirp world.
Bruce: What golf club? I am interested as I am thinking of dropping mine in CT as well.
So, basically, Bruce has lost the ability to make $150,000.00 a year playing golf and taking chicks to europe. Doesn't sound like such a bad thing to me.
In fact, the misperception that a person should be able to make three times the median family income in their country every year into infinity, by just sitting on their ass while their "savings" expands -- and that somehow a "free market" will allow this -- is the primary reason for this miserable economic depression.
A system like that isn't a capitalist economy, it's a feudal state.
I appreciate your sentiment. Some perspective. I earned this money. I worked many years for it. The bulk of it was made during Clinton. I live in NY. So I paid 50% of what i made in taxes. So as far as I am concerned I paid my dues and I deserve the assets that I have.
I identified the things I have cut back on for a reason. The are all contributors to economic growth. You may not like them, okay. But when I buy a plane ticket or new car of hire a carpenter to fix my roof it adds to total economic activity.What I earned on those bonds went right out the door into others pockets. That is the way the sytem works.
I am not asking you to be sorry for me. That would be silly. And yes maybe you are right that I and a hell of a lot of others have to cut back on consumption. But where does that take you??
It takes you to a place where the economy does not grow. Where unemplyment is above 10% and even worse, youth unemployment is at 20%. Markets do not go up, multiples contract. We lose a decade or more and the US ends up a much poorer country with a declining standard of living. You really want that?
Interesting read. I do hold Ben B responsible. I have always been a saver and my money earns squat. These idiots scare me and I think they may just crash the dollar. Most of my investments are in Asian funds and gold funds. I am looking at putting more of my liquid assets in foreign funds, just in case they actually manage to kill the dollar. I worked hard for my savings and do not want to be CHEATED by these idiots sparking very high inflation or a dollar collapse.
PS. Ben is basically saying spend, don't save S$@t, banks get free money, and rack up some debt sheeple!
Your money has been 'earning' more in the past decade sitting in cash or in bonds, than it has been in risk assets.
I don't see why you are complaining. You take no risk, and receive returns that are greater than those of the risk takers. You're rich, while the risk takers are bankrupt. How is that supposed to lead to a prosperous economy? We can't be just a nation or an economy of coupon clippers.
I actually wish that were true, the portion I had in the US markets was hit pretty good. Rich? LOL.
If it makes you feel good get a few credit cards and pick up a couple of extra plasma TVs. LOL
Bruce, I am not begrudging you what you have earned. It's the underlying assumption that what you have earned should "grow," thus compounding and allowing you to take vacations, golf, and improve your quality of living while retaining the principal, on into infinity. THat's not growth, that's a pyramid scheme.
Wealth does not compound in a steady fashion. Ultimately anything that compounds is exponential, and therefore ultimately unstable and unpredictable. Yet financial advisors have made a living for the past half-dozen decades convincing their clients that assets magically "grow" and if you have a critical mass of them, you and your heirs need never produce anything or serve anyone again -- you will be masters of those who serve and produce. You will be holders of capital, which grows all by itself.
There is no perpetual motion machine. Yet the financial model in which people collect "interest," which they can live off of each year without dipping into their principal, is set up on precisely that premise.
Exactly, if debt holders are suffocating the economy through the cost of debt service to businesses, which is far in excess of profit on a risk-adjusted basis, than how is it that debt holders can achieve a return at all? Eventually it all collapses upon itself.
I sort of want to apologize, publicly, to Bruce, for being harsh. But I make no apologies for questioning just how fixed income holders expect to be paid, when there's no industry, and when industrial output is collapsing because real businessmen (not these faux banker 'businessmen', really thieves in disguise) have been sucked dry by creditors.
By the way, I paid NYS income and Federal income taxes on that income I had. Now I have much less income and I pay less taxes. I am down $150k But NYS is down and so is the IRS. For me alone my tax bill is at least $50k less.Then there is the sales taxes, SS taxes and income taxes that others would have paid if I had spent the money. The multiplier is running in reverse.
Wonder why tax recepeipts are falling? Cause guys like me are not making money and thus not paying taxes. A few years and a few more trillion dollar deficits and we all blow up.
No winners.
First. you seem to forget that it is not your money ... it is theirs. Your net is merely a gratuity fo stewarding it a little better than perhaps other elements of society might, but make no mistake who all the money actually belongs to.
Bruce, I love your contributions to ZH, please never stop. That being said, you remind me of Jesse of Jessiescrossroadscafe. You are a hopeless limosine liberal. Those of us who are physically, or mentally, in "flyover country" have little sympathy for you. All we ever wanted was to get you east-coast liberals off of our backs, and here you are pining about how in the future you will not be able to contribute as much to the parasites who have or almost have ruined our lives.
Sure, Bernanke's ZIRP policy is hurting pensioners all over. Meanwhile, the progressives you east coast liberals have saddled us with for decades have created a monster state in Washington, destroyed states rights, and burned the constitution. Instead of whining about your "sacrifices", you should be appologizing for what the elites you have imposed on us have done.
Tks. One thing. Not one word of whining in this.
Bruce, by government accounting standards you have deprived the various governments in question of about $90k of their money (ignoring the multiplier effect, which would surely have taken this well above your $150k).
Please send a check to Obama, c/o IRS, and he'll make sure the returned funds are distributed appropriately.
Bruce - thank you for this piece
Thanks Bruce.
I really liked this article. It was great reading an article that was more "personal" & easier to read than some of the technical articles. My sister & I do the same thing, except on a much smaller scale. We cut corners to make up for the lost $$$$ in a different area of our lives. Thanks ...... I really enjoyed this posting . Can you imagine how awful it must be for some of our "elderly" people who have to cut corners with their meager income in order to keep themselves fed ! ............ BERNANKE & ALL NEED TO GO, THEY'VE DONE ENOUGH DAMAGE IN THE PAST 25 YEARS ALONE TO LAST MY LIFETIME, MY KIDS' LIFETIMES & MY GRANDKIDS' LIFETIMES.......... not to even mention THOSE UNBORN LIFETIMES !!
"The Super Rich Are Super Pessimistic"
Good article.
But maybe it is good that you stop spending, and other people, more productive than you, get to consume a bigger part. Maybe not, its not for me to decide. But there are a lot of people doing productive jobs with a miserable salary. It is my opinion that the financial industry is overextended and needs to be smaller.
Also, the USA needs seriously to start thinking on consuming less and using those resources to invest and create industry. In other words, instead of trying to reinflate the consumer bubble, it would be better to start using the freed resources for investment.
Hey, how about this. I've got a net worth in 7 figures, no debt, and an 800 plus fico, so here'a my proposal. I'd like a little QE-2 please. I'll take it at 0%, invest it immediately in treasuries at 2% to 3% and promise to spend every dime of the interest I receive, which is a hell of a lot better than hoarding it like the scumbag bankers do. We'll call it INFA, you know, like TARP. It can stand for I'm Not Fucked Anymore.
Borrow short lend long at this juncture? Almost certainly this is going to end badly. Don't do it.
Where do you find these 2-3% treasuries? Certainly not on the short end of the yield curve. You have to go into the 10-year or 30-year T-Bonds to find yields like those, and there is massive risk of capital loss.
Its far from a risk-free trade. In fact, once inflation picks up and rates start backing up, it will be the trade that ultimately deep-sixes the banks.
That the big banks seem to be engaging in it is the epitome of irresponsibility, but I suspect that TPTB gave them an ultimatum either to support the government debt markets, or be taken out back and shot if they dare pile into real assets.
Leo is 100% right: "They don't want you to save, they want you to speculate."
Well, I ain't biting. More land, a big greenhouse, solar, geothermal, water capture system, waste recycling, the whole shebang!
Oh! Some bees and chickens and I'll be a fat village soon enough.
Bill Gross's new normal..
Keynes paradox of thrift..
Bernanke’s savings glut..
If there was a greater demand for credit, interest rates would rise.
Government policy has destroyed equity and the formation of capital over the past decade. Shareholders have been severely damaged to the point where they can't start new ventures, and increase borrowing.
The economy doesn't get out of its rut until equity is rewarded. Hungry businessmen tend not to be happy businessmen.
Think about it from a small business perspective; if you own a small business, do you go on a hiring binge, when you can barely pay your own bills? Of course not. You hunker down, and hope things will improve next quarter. American businesses have been doing this for the past decade, hunkering down, waiting to see ROI on their existing investments before making new ones.
Youre too late. Theres too much debt to deal with in any constructive manner. Debt for equity swaps will be next on the agenda. More pain for shareholders at the expense of bond holders. Have you learnt nothing through history? Bondholders always get their pound of flesh whilst those gamblers at the bottom of the foodchain get leftovers if lucky.
Zimbawbe, Weimar Germany, Chile, Argentina are examples of 'history', where debt dissappeared and equity became extremely valuable. Hyperdeflation isn't any more assurred or promised than hyperinflation.
I know Ben B. lies through his teeth, and can be seen as a contrarian indicator, but certainly, if today's prices (in commodities, in food, etc.) remain at today's levels with today's suppressed economy, imagine where they would be with a 'normal' economy? $75/barrel oil today is like $10/barrel oil 20 years ago.
Oh yea, government is the root of all the problems in this country. Just ask my social security collecting mother or ask my single brother who is living off food stamps and unemployment checks or better yet ask my millionare brother about how miserable his life is because he the government tax his capital gains at 15% after he sold his business to someone that will outsource the work to China.
Real world reporting there, Bruce. Thank you. I am totally out of all "markets" and am working very hard on getting my wife's State retirement money out of the so-called "cash" accounts it is in. It's like pulling teeth and she'll take a hit. She has not questioned the moves at all. I've tried to keep her up to date on the current economic clime without scaring the crap out of her. She's fixed until she retires in 5 or 6 years as far as solid employment -- and she works hard at what she does. One of those actually loyal and dedicated "public employee" types... not a leech on the system. Although there are plenty around her who are. I'm quite proud of what she does and she does not deserve to get the shaft from circumstances that she did not create. Me? I've got gold and silver that has been accumulating since 1999. No prob.
Do you think Dear Leader will confiscate any of these assets? What about having money in Malaysia, Australia or Switzerland?
You'd have to outline the mechanism whereby he could do that. I'm not voluntarily giving any information.
A Little paint and Bondo will fix that truck right up!
Right. About a ton of bondo.
Bruce, I enjoyed this post but you really didn't have to let your truck get that bad!
Zinc primer, Loctite anti-rust, etc, etc. There's lots of inexpensive things you could have sprayed or brushed on to keep it from looking like that.
But, as bad as it looks, I would still rather march behind it in a parade than I would march behind the Obama administration.
Everyones looking for ways to reduce spending and then there are taxes not to pay.
http://www.entertonement.com/clips/zqtcttbccs--Dont-Sleep-with-No-WhoreWall-Street-Martin-Sheen-Carl-Fox-
As always a pleasure to read.
FOR A FEW DOLLARS MORE
http://williambanzai7.blogspot.com/2010/08/t-shirt-must-haves-for-laborl...
Thanks for sharing. I'm 80 and the 5% CDs I bot a few years back are running of soon and I will have no income from assets. Dont hold many equities, have some gold and gold stocks. I have done exactly what you have done in cutting back but have run out of options of things to cut back. The last thing to go will be the tuition for my grandsons private school, no need to comment further on that. I personally don;t see any way of salvation for the country as things have escalated far beyond what can seemingly be done. Maybe we need this guy Christy from NJ for Presidnt, someon who tells it like it is.
What kind of pain would we be looking at if the government simply put a plan in place with timelines to reduce the deficit to zero, say within 3 years... something that might actually stave off a USD default?
Well I know a guy who got drunk and actually circumsized himself with a hunting knife (I kid you not). This is the sort of pain that we'll likely need to experience in order to avoid a default of the USD.
We either need to cut it... or cut it off.
At this point, we just can't only cut. Sad but inevitable; tax loopholes of all kind have got to go.
Full disclosure: I'm not holding my breath.
The only way the government could do that would be to place massive amounts of money in the hands of equity owners, owners of equity in firms that produce tangible, not 'financial' output. Because they've tried with bond owners, and failed miserably.
Government has spent the past decade pursuing bondholder-friendly, and decidedly stockholder-unfriendly policy. The recent bailouts have been an example of the unmitigated disaster that supporting bondholders, over shareholders has been for the economy. There wouldn't be a debt problem if the government had pursued stockholder-friendly policy.
Pitz
If someone calls me a troll, I have won and they have lost.
Thanks for offering your interesting point of view. While I can agree that stocks relative to bonds might be undervalued, the likely collapse means some stocks won't fall as fast as wallpaper bonds.
I fully agree that specific companies, light on debt and high on liquidity can be part of a back stop plan, but don't be placing too many eggs there.
Interesting, plausible, uncertain. Interdependency and Murphy rules.
Thank you.
I had a truck like that. Now I got a 1986 Chevy S10 rusting out, but the smaller tires are way easier to change.
NEST EGG WARNING
http://williambanzai7.blogspot.com/2010/08/t-shirt-must-haves-for-laborl...
Thanks for sharing Bruce. It is a real struggle out in fixed income land.
I manage my mother's portfolio of bonds and fixed income mutual funds. Other than a state teachers pension, some soc sec survivors from my late father, its her portfolio that covers her expenses.
As she is over 80 and still going reasonably strong, I can not expose her to much risk. I hope that the monolines that backstop the debt don't get hit too frequently and hard, as the problems of the States and Muni-entities roll through their budgets. She is exposed to the terror that is Kaliphonia, and this concerns me, but its also somewhat unavoidable, as that's where she lives.
I've diversified her across the state, and laddered her out thru 2014, with individual holdings of cities, school districts, water districts, etc. Very little of the true "state" entity. There are also GNMA funds, Vanguard's S/T Investment Grade, Dodge & Cox Income Fund, American Century Calif Tax-Free Bond Fund, and a smattering of a couple others. Its hard to trust another portfolio manager sometimes, but in the FI space, they tend to be pros.
Good luck.