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Death by Leverage
Death by Leverage
By Paul Price of Market Shadows
America’s national debt exceeded $15 trillion [with a T] for the first time on November 15, 2011. Deficit spending since then has pushed the total national debt closer to $17 trillion.
An official population of 316,110,225 (6-23-13) means every man, woman and child in America now owes $52,953 plus future interest costs.
It should be noted that the nearly $17T debt does not include the enormous unfunded liabilities for Social Security, Medicaid/Medicare and federal pensions, or the potentially crippling burdens of ObamaCare.
"The U.S. national debt comes out to about $16 trillion today [Nov., 2012]. That's something. But it's nothing compared to the extra $87 trillion in unfunded liabilities to Social Security, Medicare, and federal pensions. Here's how that works. If you add up all of the U.S. government's promises to pay retirement and health care benefits for the next 75 years and subtract the projected tax revenue dedicated to those programs over the next 75 years, there is a gap. A $87 trillion gap -- in addition to a $16 billion hole.
"'Why haven't Americans heard about the titanic $86.8 trillion liability from these programs?' Chris Box and Bill Archer ask in the Wall Street Journal. The authors blame the U.S. government for using shoddy accounting and for misleading the American public on their finances..." (Is Our Debt Burden Really $100 Trillion?, by Derek Thompson, The Atlantic.)
Incremental debt is being added at an unprecedented rate. Including future promises that have not come due yet, the total unfunded liability number is over five times higher.
The Treasury bond auction market reveals nothing about the true state of interest rates (the cost of borrowing) as shill bids from the Fed have sucked up virtually all net government bond issuance this year.
Europe is already in recession and drowning in debt. There are no solutions on the horizon. The idea that the Fed will cut back on money printing/bond buying programs is fantasy. The politically expedient solution is for quantitative easing (QE) to continue or even expand, both in the U.S. and abroad.
The only alternative is the outright confiscation of wealth. That technique was beta-tested just months ago in Cyprus.
Bubble valuations currently reside in the fixed income arena, and bonds appear riskier than stocks. Shares of highly levered companies have benefited from artificially low rates by refinancing old debt. They have also borrowed to pay for massive share buyback programs. Those times may be coming to an end.
Holders of long-term bonds are taking huge risks. A 1% rise at the long end of the yield curve could send 30-year bond prices down 17%. A 2% increase could drop principal values much more. Years of coupon payments could be wiped out on a total return basis.
Long maturity corporate paper issued just weeks ago as part of Apple’s (AAPL) $15 billion debt offering have already been marked down by over 10%.
A credit crunch, or a freeze, may be brewing that could be worse than what we saw in 2008. (A crunch implies credit is available at a high price. A freeze means it's nearly impossible to borrow at any price.) While it's a fool's game to try to predict the timing, we should be preparing.
Preparing for a credit crunch or freeze
Risk in the equity market is substantially lower than risk in fixed income. Especially compared to alternative investment vehicles, stocks are not overpriced (see Think stocks are overpriced? Think again and In Love with TINA).
Avoid bonds. But if you must keep any fixed income vehicles, be sure they have short maturities.
Make sure companies you own have enough predictable cash flow to service both bond interest payments and principal payments coming due within the next few years. 2008 taught us to avoid highly leveraged companies. When credit freezes, even healthier firms with maturing debt can be forced to issue highly dilutive shares or descend rapidly into bankruptcy.
Even top-rated firms can be forced into coercive terms if they need to refinance when money is tight. For instance, in 2008, Berkshire Hathaway extracted 10% interest plus warrants from Goldman Sachs, GE and others. The next cycle could lead to even more punitive terms.
Check balance sheet data by consulting subscription services such as Value Line, S&P or Morningstar. Free sites like Yahoo Finance and MSN MoneyCentral also offer access to up-to-date financial information. A firm that cannot meet its bond obligations is at the mercy of its lenders.
Stick with shares of dominant companies with solid balance sheets. I favor the companies included in our Virtual Value Portfolio, especially those still trading at prices close to where we initially added shares.
Avoid margin. Debt-free portfolios can wait out temporary storms. They allow for the possibility to add to your holdings after major selloffs.
Adapted from this week's Market Shadows' newsletter, The Banker Who Was God (6-23-13).
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Perhaps we could proactively start selling assets like the Whitehouse and Pentagon and then rent them back...Greece leads the way.
that is where the nsa comes in and the privatizing of the
security and searches. the power sits not with those who
own the judiciary, congress and the executive branches but
with those who have the "intelligence" or dirt on those
owners; the thought is horrifying, no, and very conspiratorial.
I thought the White House had already gone section eight.
"The wealth flows upward and is concentrated in the hands of the smallest "voting minority" of all. The rest of us have been effectively disenfranchised with no effective political representation."
But what is the intent of said effective political representation? More free lunches?
The reason we no longer see a real balance sheet is because all the revenue is sent overseas while we maintain the ever increasing debt. Remember CAFR reports? The amount of revenue absconded as of the late 90's was over 350 T, researched by a retired NSA agent who soon died thereafter. Now add that to the leverage of derivatives and you can imagine the damage that will be done when this blows. Just try to remember an apple is still an apple and you just might tweek through this crisis.
I've often wondered what a consolidated balance sheet would look like for the US. All we really get to hear about is the debt, and maybe a budget from time to time, but we never get to see an accounting of the country's assets. The government stopped providing a complete accounting decades ago. It's not exactly true that the debt can only be paid off through future tax revenue, although this is what most people are led to believe.
The unfunded liabilities are a problem but they have to be put in perspective. Most of the unfunded liabilities come late in the 75 year time frame. If we have 5% nominal GDP growth (say 2% real and 3% inflation) annual GDP will be $264 trillion in 2069. So between 2064 and 2074 we should generate about $2640 Trillion of GDP. So it's around 3% of just that 10 year period. And of course these are just government promises and not contracts. They simply won't be paid in full. Benefits will be cut and taxes raised. The problem is our kids and grandkids will get scr*wed.
So, in other words, there never really was any Socialist InSecurity "Trust" Fund.
if you wanted to design a global fascist system of
government and laws how would you do it? start
with a global fiat currency and then construct from
there till you get these two stories.
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Where that $20 tr. is hiding (best documentary I’ve seen this year)
Posted on June 26, 2013 by maxkeiser
http://www.maxkeiser.com/2013/06/where-that-20-tr-is-hiding-best-documen...
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So good to be a bankster
Posted on June 26, 2013 by Alex Schaefer — No Comments ?
The United States two-tiered Injustice System in full effect: A San Diego man is looking at 13 years in prison and $13,000 in fines for using washable chalk to protest the banking industry. Jeff Olson is being charged with 13 counts of vandalism for writing anti-bank slogans on sidewalks outside three Bank of America branches.
http://www.10news.com/news/jeff-olson-man-who-used-chalk-to-protest-big-...
http://www.cbs8.com/story/22686986/local-mans-chalk-protest-could-land-h...
Read more at http://www.maxkeiser.com/2013/06/so-good-to-be-a-bankster/#Ur1ZKGt1FSSqU...
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http://www.maxkeiser.com/2013/06/so-good-to-be-a-bankster/
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comment: prison for chalking sidewalk in any meaningful way,
riches for avoiding taxes in your home country causing general
underfunding and collapse of services and infrastructure and
governance resulting in insecurity and war where millions are slaughtered.
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sounds about right, the fruits of greed and fascism is bitter.
remember, the debt is the money, there the root problem.
and fraudulent induction is nearly universally misunderstood,
especially when it becomes systemic fraudulent induction,
ie culture. not your friend as terence mckenna said.
Terence McKenna: Culture is not your friend
http://www.youtube.com/watch?v=iYB0VW5x8fI
"The United States two-tiered Injustice System in full effect: A San Diego man is looking at 13 years in prison and $13,000 in fines for using washable chalk to protest the banking industry"
Rule of priviledge, not rule of law. When i was last called in for jury duty, there was no way i was going to find the defendent guilty. If no banker is going to be prosecuted for felony financial fraud, no one else is guilty of any crime either.
Jury nulification in every case would get the governments attention.
thank you for the tax tour of the world (Max Keiser courtesy).
Chillingly awesome to see Africa becoming a tax free services zone after being the extractive empires' private safari reserve; RM resource free, tax free and labour free.
"Colonialism by other means".
That judge's bench is as cluttered as his mind.
Debt share would be closer to $106,000 per federal tax paying person. Many pay no taxes and see the debt belonging to others or don't see it or care at all.
Democracy works reasonably well as long as you are using it to protect individual rights as described in the constitution, but when it is used to extract wealth from voting minorities, the game is up. There is no smaller voting minority than those who are yet to be born yet and that is ultimately who will be most dramatically affected. What the hell ever happened to our Supreme court that would ever let this come to pass. I guess it only proves that no system that is directed by people is immune from corruption. We were supposed to be a nation of laws, not people but we see how that worked out.
Really?
"Democracy" not working?
"extract wealth from voting minorities"?
That is rather disingenuous if in reference to the US.
A "democracy" requires, among other thing, an open government and informed citizens.
The wealth flows upward and is concentrated in the hands of the smallest "voting minority" of all. The rest of us have been effectively disenfranchised with no effective political representation.
This system operates, as the video shows, globally. And one should not ignore that "wealth" is being extracted in one way or another, from everyone else, the Bangladesh sweatshop worker, the migrant farm worker, and even the inmates of the world's biggest prison system.
To only be indignant about the taxes paid by the middle class is both superficial and short-sighted.
Whatever you might think about democracy, in a country that still operates without direct military or police threats to its population, we the people are still responsible for what is happening. We (although not me) voted for Obama and every other offfice holder for the last 200+ years. We may well be stupid or confused but we did it. Those who are getting rich are largely doing so because we gave it to them. This is not just about taxes but how our governemnt chooses winners and losers, like if you happen to be a coal miner. Its about creating laws that give incentives to certain businesses over others. Its about artificially keeping interest rates low and actively punishing anyone who might ask too many questions about your credit worthiness. Government is not supposed to be in the business of socially engineering the world towards some image of utopia, it is supposed to be about expressing the will of ITS people, not illegal immigrants or the Chinese, while still respecting the basic individual rights as laid out in the constitution. A basic framework of laws that would ensure that free trade exists withing the bounds of our country is what they are mandated with, not deciding what is best for any one person or group. But democracy has been used to prevert the republic and the intentions of the framers into a free for all money grab, that while portrayed to be for the good of those grabbing individuals, is always about the aggregation of power for the few. In a modern democracy the power of the many is always coalsced into power for the few.
You went off the track beginning with "still operates without direct military or police threats to its population".
Why ignore the world's biggest prison system, militarized police, mass surveillance, secretive government, managed media, etc.?
Direct military threats? Think globally. Militarism is both here and abroad. Include the "drug war".
Do you think it is just a matter of voting differently (because we are in a "democracy')?
Of course the victims should see through all the propaganda, overcome their fears, and make the sacrifices needed for change.
But really? Is it so easy and quick? Are no roadblocks being thrown in the way? Is it always successful? Have minorities ever been able to militarily repress majorities? Are the slaves to be blamed for their slavery?
Who knows what course history will take?
Perhaps you (and others) are mostly and simplistically blaming the oppressed for not ending their oppressions right away (and implicitly excusing to some degree the oppressors for their misdeeds).
Don't forget, corporations are people, too, my friend. ;-)
If we insist on taxing them as individuals, then we have no choice but to let them speak and act as such. Stop taxing businesses. It is stupid. If we buy products and services from them we pay the taxes. If they try to sell into international markets they are competitvely handicapped before they even get started. Tax the consumer at point of purchase. It is transparent. It allows choice. It levels th ecompetitive field substantially with foreign producers. But people will resist, because they believe the taxes companies and the rich pay are pennies from heaven, and that there is no cost to buying cheap imported goods over our own. And why not when you can line up enough government benefits to not even have to work for your Iphone. I wonder how many dollars an hour it works out to when you can "earn" $47k per year without leaving home?
Sounds lovely, but we all know the effective corporate tax rates have nothing to do with the nominal rates. It is all a charade. If the current system did not actually benefit TPTB, it would be changed. You doubt that? Well, the big, smart ones pay very little, if any.
And, of course it's easy to dis all the little people gaming the system, but I did not see any mention of all the corporate goodies doled out by .gov
When we start putting corporations in jail is when we should start treating them as individuals.
http://www.usnews.com/opinion/articles/2011/05/25/to-fix-the-budget-defcit-raise-corporate-taxes
At the moment, corporate tax revenue has plunged to historic lows. In 1960, the corporate income tax provided more than 23 percent of federal revenue; the Office of Management and Budget estimates that it will provide less than 10 percent this year.
During the 1960s, the United States consistently raised nearly 4 percent of GDP in corporate revenue. During the 1970s, the total was still above 2.5 percent of GDP. Now, the U.S. raises less than 1.5 percentof GDP from the corporate income tax. As the Congressional Research Service put it, "Despite concerns expressed about the size of the corporate tax rate, current corporate taxes are extremely low by historical standards." [Read the U.S. News debate: Should the U.S. adopt a flat tax?]
The United States effective corporate tax rate is also low by international standards (though the 35 percent statutory rate is the second highest in the world). There are plenty of reasons for this drop, but chief among them is the proliferation of loopholes and credits clogging up the corporate tax code (alongside the growing use of offshore tax havens and the ability of corporations to defer taxes on offshore profits indefinitely).
I thought it read "Death by Cleavage" I had to do a double take. I guess "Death by Leverage" could be just as painful, but there is a fine line between pleasure and pain.
That cleavage death thing has happened, sadly. What a way to go.
IMO, the global bubble is the entire "credit" as asset thing. It actually started with FDR, when they were scrambling to figure out how to justify lending to private banks to keep them functional. They settled on real estate loans as an asset class, rather than a neutral sum. Used that to loan gobs of FRNs to the banks, who then could prove to their depositors that they had the liquidity to saticfy requests for cash.
Fast forward to today where just about everything that is collateralized debt, and then synthetics, and etc are pushed over onto the asset side of the ledger. There is always a terminus to the fun ride simply due to the exhaustion of qualifiable collateral. One of the aweful side effects of the Bernank's purchasing of US T's has been the starvation of collateral from the banking system.
If we're going to get Death By Cleavage, I need specifics about the kind of cleavage we're talking about. I mean, there's cleavage and then there's cleavage.
If we're talking about Death By Elizabeth Taylor Cleavage, the kind that looks like a butt crack, then count me out. I'll drink lighter fluid and pee into a flaming volcano first.
There's just too much debt for way too little collateral. When the time comes that everybody wants to cash in, the mismatch gets very destructive.
Kind of like musical chairs, isn't it? Uh-oh. I can't hear any music.
What I do hear is the sound of hustling feet and shoving bodies and panicked cursing.
Good God! Where did all the chairs go? This can't be happening!
and coming to you in supersize rolls!
here we go, print more toilet papers to pay the debt
"The only alternative is the outright confiscation of wealth. That technique was beta-tested just months ago in Cyprus." In my so humble opinion, that's when the Cypriot people should have rose up in an armed rebellion and "disposed" of their national and local traitors. This literal BULLSHIT will continue to be a global menace until real Patriots shine the light of true freedom on the dark and evil ones that are intent of enslaving the world. I truly don't see a happy ending any time soon, and when it does come, it will make even the Civil War of these United States look like the proverbial walk in the park. Lock and load.