This page has been archived and commenting is disabled.
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.
++
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.
.
.
.
#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
.
»
- advertisements -
Perhaps this shoud also make it to Ben's desk: The Age Of Inflation by Jacques Rueff.
if the fed read ZH they would have allowed the markets to truly reset a long time ago...
Oh, they READ ZH.
They even have it printed on newsprint so they can wipe with it afterwards.
The rape isn't complete until the victim stops moving.
Hi Bruce . Nice article and one question.
They can read this article and all the comments here but do you really believe that they want to learn something from here and change their policy ? I don't think so. From his ivory tower he thinks that he is the King and we are the pheasants..
The Fed has annouced that they are reading financial blogs. They do read Zero Hedge. Does it make a difference? Might it change the choices that are made?
I doubt it. But if enough people do read things that take the Fed to task, it might just make a difference.
There are plenty of folks on Capital Hill who read ZH too.
A working Justice [aka Fairness] System and a private Fed Reserve System seem mutually exclusive in terms of human nature. Look at the current scene for ample evidence.
Unfairness promotes chaos. It is predictable, even though timing and the nature of the chaos cannot be.
They can read?
Maybe there's a halfway house, where counseling is available for those who used to believe in the ZIRP cult. First we need to tell them that it's OK, we understand why they believed what they believed, after all it worked several times before, so we understand. Lots of us used to believe the same thing. But while it may appear that the sun is circling the earth since it re-appears every morning, you can actually better explain that bright light appearing in the sky if you understand that it's the Earth rotating it into view each day.
Patience, understanding, counselling...maybe subdued lighting and comfortable couches.
Hi Bruce, Nice article.
I believe the problem with expecting change from the FED in resonse to criticism is embodied in the old adage (Sinclair Lewis, I believe),
"It is very difficult to get a man to understand something when it isn't in his financial interest to understand it"
That's why we need financial systems which minimize using other people's money (OPM) to solve problems. How to do it? That's the rub. Downsizing institutions of all sorts is a good start, however.
Better to end one institution than downsize 10. As long as they live they will be led by some egotist who wants to grow his power base.
Close Dept Edu., Dept of Ag, Dept of Public Works and toss in Culture actually kill that one before Quincy Jones gets his way), Econ Devel and finally HEW and return medicine to the market place which does not have the ability to fuck up healthcare as much as the government has because businesses have to make money to stay open..
The Fed doesn't want to see it's Crony Crapitalism taken to task.
The Fed does not believe in free markets. It believes in it's monoply on money. If they lost their monopoly on money then they would lose their power, and it would be rightfully returned to where it belongs, to the people. All my life the Government has refused, and I mean outright refused, to live within it's means. Enough is enough.
I know what it means to have a Government/Bank in control of the money supply, the interest rate(the price of money), the amount of national debt that the people(sheep) owe, and an income tax(automatic fleecing).
The day I (might)quit buying Gold and Silver is the day that the Government has fully paid off the National Debt. Can anyone tell me how likely that is to happen?
The amount of sociopaths that wander around lower Manhattan on a daily basis is truly frightful. They do not care what is written here. They care only about perpetuating the evil system to which they have pledged their allegiance. You can tell them water is wet and that the sky is blue and they will not believe it if it gets in the way of their warped views.
The people running this system truly are the worst that humanity can possibly produce. They cheerfully go back to Bergen County, Westchester and Connecticut every day. No plague they create, or harm they cause, bothers them in the slightest.
I'll tell you one thing that doesn't make it to Benocide's desk - WB7's images.
No. WB7's images don't make it to Bernanke's desk. But there are some folks at the Fed who are tasked to review what is posted at ZH (and other web sites).
So someone at Eccles is look at W's artwork. That thought makes me laugh as much as W's stuff.
Dear FED and Capitol Hill,
Please end your delusion now that anything you do will "save" the economy.
Your incessant jiggering and manipulation along with inability to prosecute theft or hold any corporation or bank responsible for themselves have ruined the nation.
Claw back the bailouts, end the FED, and put JON CORZINE and his ilk behind bars.
Better to have a short term economic "collapse" than the nation collapsing from moral and ethical rot.
I have completely lost faith in every institution of the nation and see no reason to pledge allegiance to them.
The monuments, statues, and ideals live but they are filled with hollow men.
Regards,
ebworthen
We will have the collapse regardless. This is exactly how I feel. Thanks.
I think the thing that saddens me the most is the disregard for the "rule of law" that the U. S. has prided itself on for so long. It has brought much prosperity since those who came here assumed that they would all play by the same rules. Not any longer. Until the actual laws are enforced, and some high-profile people do some jail time, there will linger that unspoken fear. Fear that we are not singing from the same hymnal, and some will be chosen for the kingdom of Wall Street heaven -- and some will not. Those less fortunate will do time behind bars for minor infractions, but those guilty of grave crimes which bring down the State will only be rewarded.
Do I hear an amen?
AMEN BROTHER!
When interest rates go up, and for sure they will. The US government, states, and local municipalities will not be able to pay their debts. Then the real pain will come. The only way out will be massive defaults.
When interest rates go up, and for sure they will. The US government, states, and local municipalities will not be able to pay their debts.
... which is why interest rates will not be allowed to go up.
high, never ending money supply going nowhere ends up in Weimar nightmare. Law of the woody asymptote, as declared by Confucious; woman with skirt up runs faster than man with pants down. The clown is now gonna hit the wall in free fall without his honey bun. As the skirtless woman is hope of naked economic growth there where "woody asymptote" is exuberant money growth in naked debt build up.
the only moral of this sad story is that we all end up naked.
I believe this is true if you are a sheep. Do I live in a nation of sheep?
Baaa-a-a-a-h.
Is this like one of those WW II british broadcasts to the resistance?
Some of your coments are good: I guess the strain in Spain is causing you a lot of pain.
I have no exposure to spanish pain except that they beat a french team who deserved nothing better. I am flattered that my onomatopoeia knee jerked rant reminds you of whodunnit titbits from the french resistance pantry.
Fight and never yield! I hate the 100 - age = bond holdings rule. There is a time to go "all in" for either bonds or stocks. Unfortunately, with this maket I'm "all out" on both.
Bruce Krastings "tear down that fence !!!" (again, read in your mental Ron Reagan voice)
So are you going to buy a new house when the S&P hits 30,000?
ZIRP kills.
Just say no.
How about a new horse?
Trust me. They look nice, but they are a money pit. Worse than boats.
So true. Reminds me of an old yarn...." the only guy who makes any money at the horse races is the guy who makes the saddles".
Long RIMM and NOK for the cage fight. "There can be only one!"
Oh and savers have all the money; so lets fuck them till they cough it up. Muppet Bitchez
"Wad of cash"?? I thought the trust fund was looted and replaced with IOUs?! Also, factor in anyone aware doesn't TRUST Wall St or the Gov't, so they're only spending on essentials for the foreseeable future.
There is no cash. http://www.garynorth.com/public/7789print.cfm
What sits in the SS Trust Fund are non-marketable obligations. When they are redeemed where will the "cash" come from to satisfy these obligations? Bernanke's printing press? There is no secondary market for these. When they are redeemed the choices are default or creating yet another obligation for future generations to deal with.
Virtual is the new Black...
Or perhaps virtual is the new blackhole.
Where are they keeping this "big wad of cash" that SS has?
To you and the comment above about SS and the consequences of lower interest rates (and my crack about cash):
In June of each year SS rebalances a substantial portion of its bond holdings. They will have hundreds of billions (AKA - a wad of cash) to re-invest for 15 years. The results of this rollover of funds will be released in July. I believe that the report will show the reality of what is happening to SS's interest income. It's falling off a cliff.
I plan to write about this when the report is released. So please give me a few weeks to prove the case that lower interest rates are causing significant deterioration at the SS Trust Fund.
bk
The Government has never found a lockbox they couldn't break into.
They should put it in Hillary's lockbox. I can't think of anybody, including Bill, that would want to break into that.
bk,
thanks for the heads up...i'll be waiting, me worrying sick SS would fallin off a cliff and pensioners will weep.
thanks for sharing
When the Union of The ( many ) Soviet Socialists Republics ground to a dead halt, all pensions were paid in full. You couldn't buy a pack of Marlboros but you got every kopeck.
"I can guarantee you will get your social security. I can't guarantee what it will buy you. Now shut your fucking mouth and thank me for my brilliance."
- A. Greenspan
Greenspan may not have said it in those actual words, but the late Senator Proxmire of Wisconsin came pretty close:
(The Social Security System, Hearings Before the Joint Economic Committee, Congress of the United States, 94th Cong., 2nd Session, May 26 and 27, 1976, pp. 27-28. Washington: Government Printing Office, 1977.)
ZIRP has less to do with promoting economic growth than with enabling deficit spending to continue and even accelerate. And SS is sitting on a wad of debt, not cash.
I got into investing in this day and age (in Europe) and the only stock I owned lost 50% in two years. I'm happy 1) that I only put 10% of my capital and 2) that I'm no longer envisaging any further investment in stock. I'm just waiting to see it all tumble down in smoke.
How are low interest rates hurting Social Security? SS holds older, higher yielding bonds earning 4.4% last year.
And with SS now running a net outflow, they're not buying many new bonds at the new low rates.
Egad.... See my response to this above.
The 99% have neither political influence nor HFT computer programs. They should not play in any game with corrupt rules and compromised officials. Let the elite bastards play with their paper until it all crumbles in zombie-like disintergration. May the DOW/Gold ratio be 1:1. Anyone want to bet that it will be at 4000?
High yield isn't all bad, Bruce. Dividends definitely help recover from periods of drawdown. The trick generally is to stay away from companies with a high payout ratio and rotate your portfolio once a year to stay with the high yield/low payout ratio stocks.