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Broken Fences
I was down at the barn working on a busted mower when a neighbor jogs by wearing white Nikes and a maroon tracksuit. I wave, he stops, says hello and asks:
“So when are you going to get those fences fixed?”
The guy has a point. The fences are shot. But this is an old barn, and the horses are long gone, so I don’t really give a shit about the damn fences. I tried for a second or two to think of a nasty response; the best I could come up with was:
It’s on the to-do list. It will happen when the S&P hits 1,800!
I don’t think he liked that answer, so he jogged off.
Actually, there was a fair bit of truth to my answer. My spending patterns have changed the past four years. I’m sure that there are many like me. In the aggregate, it is a phenomenon that is extending the economic slowdown.
I believe that one should own equities in an investment portfolio. I think there should be some discipline as to how large a percentage equities should be as share of the total. A long establish rule on this question is that one takes their age, and subtracts it from 100. The result is the percentage that should be dedicated to stocks. For a person who is 20 years old, 80% in stocks was the recommendation. For a guy like me, at age 62, the number falls to only 38%.
After fours years of ZIRP and QE you can take that old formula and kiss it good by. It doesn’t work in June of 2012; it’s not going to work anytime over the next five years. With interest rates now at levels guaranteeing a negative real rate of return well past 10 years, the allocation to equities has to go way, way up in order to have a chance of matching the real rates of return achievable five years ago.
The dilemma that I face is exactly what Bernanke wants me to confront. He wants me to be 100% in equities. He is convinced that higher stock prices are the only way to get the economy moving. At this point in history, I think that his actions are now slowing the economy.
Equity returns are, to say the least, unpredictable. Given that I have now near zero investment income that is “certain” (high grade bonds) I have changed my planning/spending habits. I used to be able to look at a spreadsheet in January, and know that in June my NYS Dormitory bonds were going to pay me $X. So I would note in the calendar to call the contractor (for whatever needed mending) at the end of April. No longer. All those nice bonds have been called or matured. Now I say to myself:
“If XYZ stock gets to 60, I’ll sell half, pay the taxes and put up the damn new fences in the pony paddock”.
I’m not asking for one lick of sentiment. My point is to describe something that I believe is a big drag on the economy. When I (and others) book a job three months in advance, the contractor can hire more workers knowing when checks will be coming in. My visibility creates the contractors visibility. The predictability of revenue creates the opportunity for economic expansion and job creation.
The Federal Reserve is operating monetary policy using a simple formula:
Lower interest rates across all maturities ALWAYS increases economic growth.
My personal example proves this formula to be flawed. I think the formula is more complicated:
Lowering interest rates across all maturities has both positive and negative consequences. As interest rates approach zero, (with the prospect that they will remain so for years to come) the negative consequences outweigh any benefits.
The idea that lower interest rates are hurting savers is an old one. The question is, "How significant are the negative consequences of low interest rates?" The multi-decade efforts in Japan to reflate an economy with low interest rates is a shining example of policy that has not worked.
I’ve not seen any discussion that attempts to quantify how large a drag on economic activity low rates are. I know that some of the folks at the Fed will read this; my request/challenge to them is that they respond with an answer.
If the Fed did a fair job of looking at this, and took into consideration all of the consequences of the prolonged zero rate policy, it would be forced to conclude that it is now causing more harm then good. I doubt that we will see an analysis from Bernanke's Fed that answers my question. The Fed has no incentive to document the downside of their policies. So much for that “Open Communication Policy” Bernanke keeps selling.
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Notes: #1
I know that some will be itching to point at dividend stocks as the answer to the need for predictable revenue. Those that tout this approach (especially those on TV) often point to two stocks that are perfect for coupon clippers, AT&T and Verizon.
I think that T and VZ are trading fodder for computers. They are fine stocks to “rent” from time to time in an effort to make a buck. But those that buy this stuff, and then go to sleep thinking their money is safe, are either ill informed or crazy. At 45++ Xs earnings an investor could lose five years of income in any given month.
I can’t wait to hear the howls from retail investors when this lesson is learned (it will be learned). When it does happen, those investors will blame Bernanke for forcing them into inappropriate investments. As well they should.
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#2
Social Security is a good example of where low interest rates are causing severe pain. The SS Trust Fund is sitting on a wad of cash. The interest on the portfolio was projected to extend the life of the Trust Fund for decades to come. Bernanke's zero interest rate policy will accelerate the death of the Trust Fund by ten years. What's that going to cost us? Trillions is the answer.
H/T: PE from Seattle
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The FED is causing damage and cannot stimulate the market in its efforts. M2 Money Velocity have caved in along with house prices and Fannie/Freddie are thwarting refi efforts, further dampening monetary policy effectiveness.
http://confoundedinterest.wordpress.com/2012/06/24/the-limits-of-fed-mon...
FEDS days are numbered. They do not know how they are going to replace themselves yet. Interest should be illegal and carry a high criminal charge. But zero at this time doesn't work. So use this time to abolish interest completely.
Equities (stocks) are a vehicle for theft.
When you speak of stocks I hear the clack of casino chips and the tumbling of dice.
The FED is the cigarette girl.
The fed is the cigarette girl who owns the casino. The fed creates the currency and controls the monetary system that everything is predicated upon.
Bruce-
Many who would be retiring now are not, because they can't produce sufficient income from their savings. I'm in that boat. So a young person who would ordinarily take my job, is instead unemployed. These low interest rates actually worsen unemployment from this standpoint.
Amen to that! Where I work, you should see all of the gray-haired old coots still working. Most of them look like they should have retired years ago, but still they totter on, pretending to get something done. Back in 2002 when my wife and I moved to our current location, there was lots of talk about the tens of thousands of older employees that were going to be retiring from this really good employer, NEVER HAPPENED! When I finally got my feet in the door, I can see why.
And yup, I expect to be doing the same when I am at their age. Years and years of trying to save money, followed by a layoff that drained the money, worsened by never being able to get five + years in any of the companies (minimum required to earn a retirement), place me at the ripe age of 50, going on 51, living paycheck-to-paycheck, with hardly any savings. I do have an $1100.00 per month retirement from Northrup Grumman Corporation, but that is only good if they are still a valid company 15 years from now. Should they merge with another company, I know not what the results will be.
Time is coming when all those pensions will be dishonored. People won't work to provide a benefit they can never have and beleive is unfair for someone else. It sucks for people who gave their lives to big companies and government, but hey, it's capitalism. We just scuttle the boat when it's to expensive to fix.
just let me go back to the way it was when i was a kid, please !! i go to the local bank, i take my savings & put it in a savings account & earn interest on that money .
As an aside, how many here recall the "Christmas Club" at their local bank ? I used to dutifully put away a portion of my paper route earnings in same when I was a kid.
Alas, that was the Seventies...indeed -- how many even retain a hard copy newspaper subscription anymore ?
Good post (again) Bruce, but how about this?:
(What if) The Fed and Uncle Ben are aware of the diminished-to-zero utility of ZIRP and the loss of income certainy and the consequences of that - but can't really do a damn thing about it?Rock and Hard Place location - monetary policy is stuck big time, and the US fiscal policy is totally missing in (in)action. If the Fed were to relax ZIRP even a trifle, all hell would break lose. I'm 73, understand your bind, same one I'm in, and I have cut back on the big and medium stuff as well. However, I have no solutions, or even mad/crazy proposals for the Fed at this time, and I am truly afraid anything positive the Fed could come up with would (will) be undone by our dysfunctional Congress.
So you have fairly pointed our the problem, and suggest the Fed study it - what are they gonna do if they find the thesis that low interest rates are now doing more harm than good? How can they tweak the current policy slowly enough to not cause a financial meltdown, but fast enough to do some meaningful good, with the so-called fiscal cliff rapidly approaching?
I think the Fed is stuck, and Congress is locked up, and this will not end well in 2013-14. I hope I am wrong about this.
Thank God the "Congress is locked up" ... the only thing they can do is the wrong thing since the current president would only sign bills that are the wrong thing ... p.s. I see in 2008, you were successful in electing 'Nobody for President'
You can turn to some ADR stocks for high-yield. i.e.
Telecom Corporation of New Zealand Limited (NZT) pays 7.6%.
Plus New Zealand currency is commodity backed.
I'm not knocking NZT. But you want me to build a fence on the predictability of that?
I see a big slowdown coming. If that happens the A$ is going to get crushed big time. With it goes the Kiwi.
In dollar terms, NZT could be down 20% in a year. There is only one way to look at this, TOTAL RETURN, not just a dividend stream.
I want you to build a fence with the predictability of a hammer.
The equation goes like this: when lumber is on sale + sunny weekend weather = new fence. If you're waitin' around for the market to do it for you, you've got too much property for your proclivities.
pull the rest of the fence down, and cut it up for firewood. like you said, you don't really use it.
I dont know if you have a wood or barbed wire fence, but the cost of material is greatly increased over the last few years. As you point out, return on savings and assets is small. Even Jamie in the blood buckets of the Wild West in London has lost a buck or two.
For those of us who were children of the depression children, the concept of do without or pay cash and do it yourself, may not save even us.
Please keep up the excellent informaiton flow Bruce. In that you may have an inclination to tinker, Craigslist tools for sale has been a good buy spot for me to get some special tools that i could not afford. It is a hell of a mess when these men have to sell their tools. Paying a fair price without beating the guy up, gets me an affordable good tool and gives cash to the seller. That way you can own quality SnapOn or Proto rather than cheap China.
On the East Coast, we have the Black Locust, which some of us grow and harvest for fence post.
If you gravel the bottom of the post hole, black locust can last a very long time...
I've got cedar out my way, pretty decent as well for fencing, though Black Locust is really the king.
Have you ever heard of folks charring the bottom (to the depth they'll be set) of posts before setting them? Supposedly this is supposed to reduce rot. It might be and old farmer's tale, I don't know. And, really, if one starts out with Black Locust or Cedar it would be a LONG time before one could conclude any testing of this.
Bruce, Bernanke does not care about savers!!! MMT suggests that interest rate machinations are how the FED puts the Brakes on an economy that is overheating and inflating too rapidly. Additionally, it is all according to their little Social Utopian plan of eventual income equality for the 99.99% and whatever they can dream of for the .01%. In a world where money can be conjured into existence with a keystroke they don't need "SAVERS" to create capital anymore. They just print it up, hand it to the banks in exchange for their trashy shit from the last time around(which gets added to the entire debt load of the country mind you) and the banks will eventually start pumping the juice into the economy again and make more bad decisions with tax payers money. Rinse and repeat, If you Save money you are looked upon by these elitist bastards with great scorn. They think you are supposed to go through life never saving a dime with prudent investment and the GUBMENT will take care of you and put you out of your misery at the end of your life. The elitists that run the show want higher asset prices because they own most of the wealth and they benefit from inflation much more so than the little guy with more reasonable expectations. Give it time and they will set a new paradigm for what is considered "inflation" prolly 4-5% will be acceptable and they will make up some stupid excuse only an Ivy league elitist could come up with to justify it. Money itself is a mere fabrication, an idea that when respected can do wonderful things for social order, but when abused, well we see the results of that now don't we....It's ZIRP 4ever now. That's the only way for the Gubment to keep from going broke.
The Bernank told us point blank in a TV interview that he does not care about savers, so that much is true.
The only thing he cares about is preventing the TBTF banking system from going over the Event Horizon.
"Bernanke does not care about savers!!!"
Who knows what he thinks, but... it should be pretty clear that the "problem" is velocity. If people were saving then investing (making money available to the big players) dries up; of course, given falling growth there's just not enough to ramp up as much as had been ramped in the past.
This problem is best seen as the problem of trying to push on a string... The System is dying, the patient no longer responds.
You're right. Bernanke does not give a rats ass about savers like me. I'm not sure he should, there are other priorities that are larger.
Ben's mandate is to maximize employment. Contrary to some of the comments here, I think he actually does care about unemployment, he actually believes he is doing his best to address the problem. But he is wrong on policy.
I think that long term zero rates are a drag on employment. I think the Fed's policies are now counterproductive to the stated objective of reducing unemployment. There is anecdotal evidence that confirms this. I want an answer from the Fed on this.
I'm not at all advocating some giant leap up in interest rates. I think that ST rates should be 1-2% and there should be no more intervention in the long end of the curve (QE/Twist).
That would put the 10 year at ~3%. If the economy can't survive this, then it is time to get into the life boats. Normalizing interest rates at low level should have been done a year ago.
Ben should not have extended Twist. There has been more than enough intervention and manipulation of the capital markets.
You're right. Bernanke does not give a rats ass about savers like me. I'm not sure he should, there are other priorities that are larger.
Sacrifices have to be made. There is always collateral damage in any war. Benji just needs to be aware he may end up with a pitch fork shoved up his ass if he is not careful.
'Caring about unemployment' is certainly a relative term in the realm of the Fed's explicit and implicit mandates.
'Maintaining price stability' is one of those other explcit mandates that the Fed has conveniently relaxed to help obtain other objectives, employment included.
One could go further and say that the Fed relaxed the employment mandate in 2008-09 in order save the financial system from collapse, which perhaps, could have caused more unemployment (so we are told).
The central issue here is that the Federal Reserves primary mandate (and it's certainly implicit) is to maintain its debt-based money system through whatever controls they can... at least until and even more sinister money system comes along... or the current system implodes upon itself.
Over the past 4 years, we've seen a slow motion train wreck occurring, where massive private debts were going sour and many of those entities feeding on the carcass were infected. Both the Fed and the U.S. government have worked hand in hand moving a lot of these sour debts into public hands, and in exchange for the Fed taking on additional (and risky) debts, the Fed has alllowed the government cheap financing of their own debt issuance (deficit financing) by manipulating prices in government fixed income market across the curve. The government has upped the ante as well by failing (not trying) to slow down spending anywhere else.
I think if the Fed really cared about unemployment, they would have taken fiscal policy to task in a year when a budget wasn't even submitted by the current administration. I think the Fed cares more about making sure the banking system has time to repair itself-- and if their monetary manipulations happen to move the needle on employment and/or zee price stability, so much the better.
The Fed could adequately address the problems with unemployment in short order by doing 2 basic things: (1) promote policies that address boosting the velocity of money (by raising interest banks pay on reserves); and (2) promote "carrot and stick" policies that enforce medium and long term employment and entitlement goals. If goals aren't implemented, the Fed shouldn't be the marginal price setter (and cheap financier) when things go awry in Washington (which they will). In this sense, Ben Bernanke's bark is much wrose than his bite (of which doesn't really exist).
I think the Fed knew its priorities very well in the post-crisis period... so the big surprise to me is the view that the ZIRP/QE policies working against them on the employment is a new revelation in the Bernanke camp. My bet is that this emerging adverse outcome was in their probability distribution, and was recognized while policy decisions were being made the last 3 years. The reality is that they've went this far knowing the adverse consequences to preserve their debt-based money system, and keeping the major banks well-reserved was a central part of that strategy. Employment and price stability are nice mandates, but not when things are imploding around you and the existence of your institution is at risk.
The good news for the Fed is that they have about 20 years of rolling recessions to figure out how to get out of this mess... before someone starts asking some really tough questions,.
"The good news for the Fed is that they have about 20 years of rolling recessions to figure out how to get out of this mess... before someone starts asking some really tough questions,."
20 years? I doubt they can muddle through 20 more months before the whole rotten, smelly system comes crashing down.
Analyzing Bernanke is like analyzing Obomba. They're either corrupt, deluded, or they're morons (I'll leave aside the possibility they're all three). In Bernanke's case, I don't think he's a moron. And I don't necessarily think he's corrupt. I just think his head is just full of facts and theories that are 100% wrong. He's a high priest, condemning Galileo for saying the Sun, not the Earth, is the center of the solar system. Ben KNOWS the Earth is the center.
In Obomba's case, I don't think he's deluded, or a moron. Which leaves the third choice.
In all they remind me of space shuttle engineers, using their flawless calculations to make an ungodly huge and complicated machine. How high it flew! Until a nasty little O-Ring eventually told the truth...in spectacular fashion.
"Ben's mandate is to maximize employment. Contrary to some of the comments here, I think he actually does care about unemployment, he actually believes he is doing his best to address the problem."
What?! You're serious? Wow! The Fed is controlled by the Global Bank Cartel. The Fed, along with the bought-and-paid-for Federal government facilitatd the financial bubbles and protected their GBC owners in the atfermaths. What part of that don't you get?
When a banking system becomes insolvent deposits should be guaranteed and new banks created. The shareholders and unsecured lenders to the old banks get wiped out/restructured. WHAT SHOULD NOT HAPPEN is a taxpayer funded bailout that sells the Country's future down the river.
Get a grip Bruce.
Here, here!
Bruce, I disagree that Ben truly cares about unemployment or anything that has to do with the average American person. I will not red arrow you. If he does care about any of this it is completely superficial, maybe even artificial. If I am pounding nails into your balls and I ask you, "how is your cold?" that doesn't really indicate a sincere interest in your well being.
All of these academics, apparatchiks and puppetmasters should be forced to work as busboys, janitors or lawn mowers for 1 month per year. Maybe then they would have some interest in the real world. You can't live in a fantasy and care about reality.
prices are falling "like Leaves of Grass" right now. The fixed income set is opening up their wallets to take care of the kids and grandkids (if need be.) The Kings of Chaos are now contained in a Matrix of War Motives as Gentle Ben follows BHO into an extraordinary conflaguration that has erupted throughout the entirety of the Middle East. The ghosts of Patton and Monty are firing up their engines as destiny meets them this time. Has the USA been nothing more than a plot of some Ancient Device still yet to be discovered? Or was their a choice "the Americans" could have made to avoid this Date with Destiny? Historians will longer ponder this question as the bulk of Western Civilization discovers "when they come here we go there."
Bruce if they doubled the ten year to 3% there is a chance it could set off a massive wave of treasury selling. If they ever hinted at the possibility of raising rates it could be epic to watch these positions unwind. Since they would most likely send rates higher than they want (because they never get it exact) we would certainly have defecit funding issues. Just my 2 cents.
So you are saying that Bernanke has put us in a trap that we can't escape from?
I agree.
Did the Fed consider my thoughts and the many in this stream that identify specific areas that are being dragged by monetary policy?
No. I don't think they ever considered the downside to (a minimum) of six years of zero interest rates.
The Fed has a one track mind. The lower interest rates go, the better they like it. Bernanke is following the Japanese playbook. He will get the same results - 20 years of recession.
bk
Do you think he has any conception of or interest in what he's doing to the reserve currency status of the dollar? More and more nations that formerly used it to settle their trade are making agreements to transfer value solely between their own currencies. What does he think will happen to all that inflation that got foisted on other nations around the world?
I agree with you right up until Japan. Who knows, but I agree with Schiff that we don't get off that easy.
You make a very good point. The FOMC effectively promised "Go ahead and leverage on short term paper. We promise not to raise rates before 2013, and maybe 2015, so you're safe."
If they renege, their last shreds of credibility are gone, and it's game over.
Bruce, I am glad you said the following as it reflects the evolution of my own thoughts as well.
"Bernanke does not give a rats ass about savers like me. I'm not sure he should, there are other priorities that are larger."
After a lifetime making a living in various "markets" I had/have a strong distrust of any mechanism that is controlled and manipulated. That is not the way things work in the long run. I was more "let it all blow up" when I first realized how much decption there is in the finance world. More than I an now. However, now I am truly worried at the current worldwide level of insolvency. Or at least my increased awareness of it. Your proposal ( I think that ST rates should be 1-2% and there should be no more intervention in the long end of the curve (QE/Twist).) is a modest one, and perhaps the best.
The simple way to get to real or healthy interest rates is to not lend to banks.
No bailouts would also allow for market determined interest rates.
Interest rates are like wheat or eggs; a central committee has no idea of the demand, and is therefore constatnly making people go hungry or creating a stinking mess of wasted "food".
Yes, Yes, Yes! Price fixing by committee doesn't work any better for the price of money (ie. interest rate) than any other commodity. If people would just get this simple concept, the days of the FED would be very limited. Only large free markets can determine prices via supply/demand-for money, food, or anything else.
It's not price fixing. It isn't multiple buisnessmen getting together to agree on a price. It is price command. As in a command economy.
The Fed should have some sort of old Soviet name. Like, FEDGLOPMONSPOT.
Workers of the world unite. You have nothing to lose save free market signals!
Martin Armstrong said one way they got the Fed System passed was to make the 12 geographical districts. Each district would have its own interest rate. So when the harvest came in, or planting time came, the farmers wouldnt be tied to the industrial interest rate needs.
After a while, Mr NY Fed came up with a reason to take all interest rate power for itself.
They simply did a few crises' to scare the changes through.
Somebody said never let a crisis go to waste. The shadow masters of NY Fed go one better: engineer the crisis to meet ones needs.
ZIRP is the Keynesian end game
The Fed is painted into a corner that it can not get out of...
correct....and ZIRP is in an all out war against the primary instinct of capital preservation in a risk-off economic environment. Also, any green arrow on interest rates blows up many, many ponzis ( think derivatively ).
Meanwhile, I will continue my austerity program of flushing after every 3 pees.
and I will continue to compost the contents of my sawdust toilet...
T and VZ are at 15 times forward earnings according to Yahoo Finance.
Agree that dividend paying stocks are priced for perfection+ though. Most utilities are at 17 times earnings...
I was relying on those type of stocks but I feel the risk is too high now, settling for zero.
My philosophy to owning dividend yielding stocks is that I want to have the people who run the company hold most of their personal income/fortune and income from dividends in that stock. KMP and TNH are two that fit that bill. Bill Kinder owns huge amounts of KMP and never sells-the business is bullet proof unless people stop needing natural gas transport. Similarly for TNH unless people stop growing crops and eating food-in which case even guns and gold won't help you. TNH is 70% insider owned and there's never any insider selling-so I pay no attention to price fluctuations at the marginal limited free float. Thus, interests are aligned between owner and stockholders, something you can't say for Vz or T and many other companies.
However, in this market the real gains come from shorting really bad companies-there's simply so many of them: An example, i've made more short term income from shorting FSLR using puts since 6/28/11 (when it was at ~$120) than anything else (its around $15 now and going to zero). I just take profits near expiry, roll down in strike and out in duration.
I'm in a similiar boat Bruce. I'm 60 retired and have just hunkered down with cash. I can live ( modestly) on my capital and I intend to do so rather than risk it in Bernanke's stock market. He'll run out of time before I will. BTW you said you are 62. Are you taking your social security benefits now? I intend to on my 62nd birthday. I ain't going to risk them being 'means tested' if I wait till 66!
US to fall off 'fiscal cliff', warns Joseph Stiglitz
http://www.telegraph.co.uk/finance/financialcrisis/9351640/US-to-fall-of...
Bruce, how long has it been since your "duration problem" article? (my favorite of yours) That was the first time you discussed the change in spending habits. I am 59 1/2, had a very comfortabe interest income a few years ago. It certainly has changed my spending habits.
the only error I think bruce makes is he still be3leives the reaons that come from bernenke's mouth are the things he believes. Since I consider almos the opposite I find my analysis is more useful. I discount what he says and follow the money for the real reasons.
my conclusion is he is paying off his backers (finance) attemtping to cover up his own screw ups, and doesn't give a crap about the economy at all really as long as wall street is doing well.
Like I said, The Fed reads my stuff. It definately reads Zero Hedge. On this article, I think they will read through the comments.
We can only hope that your thoughts make it to Bernanke's desk...
bk