Drowning In The Money River

Authored by Adam Taggart via PeakProsperity.com,

Why the 99% of us are falling farther behind...

 

https://www.zerohedge.com/sites/default/files/inline-images/20180113_drown.png

It's a big club and you ain't in it.

~ George Carlin

If you suspect society is unfair, that there's a different set of rules the rich live by, you're right.

I've had ample chance to witness first-hand evidence of this in my time working on Wall Street and in Silicon Valley. Simply put: our highly financialized economy is gamed to enrich those who run it, at the expense of everybody else.

The Money River

A recent experience really drove this home for me.

Having received my MBA from Stanford in the late 90s, I remain on several alumni discussion groups. Recently, a former classmate of mine, who now runs her own asset management firm, circulated her thoughts on how today's graduating students could best access an on-ramp to the 'money river'.

What's the 'money river'? Good question.

The money river is the huge tsunami of investment capital sloshing around the globe, birthed by the historically-unprecedented money printing conducted by the world's central banks over the past decade. Since 2008, they've more than tripled their collective balance sheet:

(Source)

The $13+ trillion in new thin-air money issued to achieve this is truly staggering. It's so large that the human brain really can't wrap around it. (For those who haven't seen it, watch our brief video How Much Is A Trillion? to better understand this.)

But suffice it to say, all that money has to go somewhere. And it first goes into the pockets of those with closest access to it, and of those who direct where it flows.

In the context of MBA graduates working in finance, accessing the 'money river' often follows this recipe:

  • Step 1: Get hired by a buy-side fund (asset management firm, hedge fund, etc)
  • Step 2: Make friends at other funds by investing part of your portfolio in their offerings
  • Step 3: Leave to create your own fund, which all your new buddies will invest part of their firms' portfolios in
  • Step 4: Collect a fat annual salary of 2% of assets under management (regardless of how your fund performs), plus 20% of any gains

Let's put a little math behind this, with real-world numbers based on another classmate of mine who followed this recipe. After graduating, he went to work for a prestigious private equity firm, spending nearly a decade there as a fund manager. He then left to start his own fund.

Since he had invested in scores of ventures and funds while working for the private equity firm, he had amassed plenty of industry insiders who knew they had to reciprocate when it came time for him to hang out his own shingle, because "that's how the game is played". You help me when I need it, and I'll do the same for you.

Only a few weeks after announcing the formation of his new fund, he had raised $100 million for it. At his 2% management fee, that gave him an annual salary of $2 million no matter how the fund performed. And with the standard carried interest percentage, he had substantial additional upside of 20% of any profits the fund may take in the future.

Since forming this fund nearly ten years ago, the financial markets have been on a historic bull run, with hardly any corrections along the way. This is primarily due to the trillions in new money provided by the world's central banks mentioned above. So, it's little surprise that my former classmate's fund now stands at over $1.1 billion in assets under management.

That's now a $20 million annual management fee. Plus 20% on (conservatively estimating) hundreds of millions of gains made along the way.

Not bad work if you can get it.

No Fund For You!

But that's a big part of my point here. The 99% don't have a key past the velvet rope to access the money river.

Look, I don't begrudge this guy his success. Well, maybe I do; but it's not personal -- I know him well enough to say that for certain he's extremely smart, bold and hardworking. But he's benefiting from being in the Big Club that George Carlin railed about. The rest of us ain't in that club, and won't ever be. But our futures are being determined -- or more accurately put, undermined -- by it.

All that liquidity being provided by the central banks? To keep that money flowing it needs to be cheap to those who want to borrow it, so the banks have concurrently driven interest rates down to the lowest levels in recorded history (going back over 5,000 years). Some extra-aggressive central banks have even pursed negative interest rates.

What this has resulted in is a tremendous transfer of wealth to the already-rich at the expense of everybody else.

Those with the means and access to borrow have been able to get essentially free money to do so; while savers and those dependent on fixed income have been starved of any yield whatsoever.

The wave of global stimulus plus the low cost of borrowing has driven capital into nearly every asset market, rocketing prices higher. So those who have held those assets have become substantially richer, while those who have not have become increasingly priced out.

Along with asset prices, prices of nearly everything else have risen, too, dramatically increasing the cost of living:

Price inflation since 2000

(Source)

But, as costs have risen, wages have not. Especially when measured in real (i.e. inflation-adjusted) terms.

Real wages are now 7% lower than they were in 1973  --and that's calculated using the official government-reported inflation rate, which we all know vastly undercalculates the actual inflation rate. (Read our report on The Burrito Index to understand why the true price inflation households suffer is more like 5x greater than the official reported rate).

So the assets held by the rich shoot the moon, and they get access to the 'money river', to boot. While the rest of us see stagnant real wages and a skyrocketing cost of living.

Is it any surprise that a tremendous and still-growing wealth gap between the 1% and everyone else has resulted?

Real Wages Since 1980

(Source)

(Source)

The Future Looks Dim For Those Sleepwalking Into It

As we've written about at length in our recent report The Great Retirement Con, the average American worker is woefully unprepared to afford his/her retirement:

Retirement Savings By Age Cohort

(Source)

And for those counting on a pension, odds aren't bad it may get reduced/eliminated during a future economic crisis.

Think that could never happen? Well, Governor Jerry Brown just announced this on Wednesday:

California's Brown Raises Prospect of Pension Cuts in Downturn (Bloomberg)

California Governor Jerry Brown said legal rulings may clear the way for making cuts to public pension benefits, which would go against long-standing assumptions and potentially provide financial relief to the state and its local governments.

Brown said he has a "hunch" the courts would "modify" the so-called California rule, which holds that benefits promised to public employees can’t be rolled back.

"There is more flexibility than there is currently assumed by those who discuss the California rule,” Brown said during a briefing on the budget in Sacramento. He said that in the next recession, the governor “will have the option of considering pension cutbacks for the first time.”

That would be a major shift in California, where municipal officials have long believed they couldn’t adjust the benefits even as they struggle to cover the cost. They have raised taxes and dipped into reserves to meet rising contributions. The California Public Employees’ Retirement System, the nation’s largest public pension, has about 68 percent of assets needed to cover its liabilities.

Across the country, states and local governments have about $1.7 trillion less than what they need to cover retirement benefits -- the result of investment losses, the failure by governments to make adequate contributions and perks granted in boom times.

"In the next downturn, when things look pretty dire, that would be one of the items on the chopping block," Brown said.

And this is in California, one of the most pro-worker/pro-entitlement states in the Union. If California is already sending out warnings like this, you can be sure that the other 49 states are thinking of making (at least) equally-harsh cuts when the next recession hits.

Potential cuts to promised pensions is just one of the many ways in which those running the system will act to preserve their share of the pie when crisis next arises. Those concerned about what other measures might be taken would do well to read our report Upon The Next Crisis, The Rules Will Suddenly Change.

And for those who prefer their cynicism blended with hard truths and humor, watch this short video of George Carlin's epic rant against the elite's Big Club. I quoted Carlin at the beginning of this article for a reason, he really nailed the central point I'm trying to make (Warning: the language used gets quite graphic):

Fighting Back

So, what can the rest of us in the 99% do about it?

Is this a lost cause? Should we just accept our fate and sink to the bottom of the money river, smothered by its high prices and low yields?

No.

The good news here is that there's a clear set of strategies for keeping yourself afloat while the system continues to pursue these pernicious and deeply unfair policies. They take focus, effort and discipline -- but anyone implementing them will have good chance to stay ahead of the rising cost curve, and have a real shot a financial prosperity.

In Part 2: Winning Against The Big Club, we examine a number of strategies for offsetting the soaring costs of everything from burritos to healthcare -- with particular focus on the investments and actions you can take today, inside and outside of the markets, to preserve the purchasing power of your wealth from the nefarious "stealth tax" placed on your money by the kind of inflation discussed above.

Click here to read Part 2 of this report (free executive summary, enrollment required for full access)

Comments

TBT or not TBT Bear Sat, 01/13/2018 - 12:48 Permalink

CPI, including flat screen pixels, is in deflation.  The 99% are richer than ever in that area, and in case you think that's negligible, well a big proportion of our cortex is just about visual processing    Like 50% of living is seeing, so, the system has made us rich.  Netflix is nailing the content part, so we can live the 1% life visually. 

In reply to by Bear

Quantify TBT or not TBT Sat, 01/13/2018 - 13:16 Permalink

Is being a slave in the U.S. to bankers better or worse than life in Russia, China, Iran, Pakistan, Mexico, El Salvador....etc, etc, etc. I am far from rich, nor am I poor. My children are healthy and have roofs over their heads and are employed. Is this perceived oppressive life you speak of, a glass half full or half empty. Do you work in a coal mine or a production facility where they have suicide nets installed. 

In reply to by TBT or not TBT

VWAndy Sat, 01/13/2018 - 12:34 Permalink

  Its the honest labor that makes it all possible folks. The fiat is the scam that allows tptb to steal all that hard work.

  Stop doing stupid shit for money! I know its a hard thing to do completely but at least try not to do it so flipping much. Maybe even start doing the smart things for free. At minimum some smarter shit might be the result.

itstippy VWAndy Sat, 01/13/2018 - 13:06 Permalink

Also, stop doing stupid shit with the money you work so hard for.  If you spend every nickel you've got and borrow more to buy stuff you can't afford you'll end up without a pot to piss in or a window to throw it out of. 

I keep telling my hard-working stepson this, and he agrees, but he just can't seem to stop spending money above his means and saving nothing.  he just bought a brand new Chevrolet Colorado, four wheel drive and V6 engine.  It's a beautiful machine, but he can't afford to make payments on it and also build up some retirement savings or even pay down his existing debt.  He's a debt slave.  He says he'll just work his whole life and never retire.  What a puny plan.

Mrs. Tippy and I have considerable assets squirreled away the he's unaware of.  We have a modest home, modest vehicles, modest clothes, and live a modest lifestyle so he thinks we're of modest means.  He has no idea that we could buy a 2018 Chevrolet Colorado 4X4 with cash no problem.  Living like we do while having cash readily available is beyond his comprehension.

He'll come to his senses in another decade or so, and then we'll be there for him.  Until then he's going to have to keep working his ass off and paying the bankers, because if we payed his debts now he'd just go right back into debt on more foolish consumption.   

For Christmas a year ago he wanted a pair of Dr. Martin work boots.  They were BIG money for a pair of work boots, but I was happy that he wanted something practical.  We bought them for him.  Last Spring he came over to help me replace some old rotten fence, and he was wearing old sneakers.  You can't use a shovel or post hole digger wearing sneakers.  I asked him where his work boots were, and he looked at me like I was crazy.  He doesn't wear his expensive Dr. Martin work boots in the dirt; they'd get dirty.  They're for going out.  What the Hell?!?  

In reply to by VWAndy

bitzager itstippy Sat, 01/13/2018 - 13:26 Permalink

So while those m*f*kers printing and spending, you want me to work hard for Debt and keep paying bills without applying for credit? It's my CREDIT, it's not Bank, nor FED Reserve it's mine and it's UNLIMITED. Banks DO not loan money, they SELL and Monetize your signature, cause there is NO MONEY by definition other than Gold and Silver, Everything else is DEBT... Learn what Money really is, before talk nonsense BS, Mean while I apply for Unlimited FED Black Card and will get 1 Mil. Credit line and you keep working for sh*t.

In reply to by itstippy

itstippy bitzager Sat, 01/13/2018 - 13:46 Permalink

I retired last year.  I now spend my time alternating between repairing/refurbishing things that are worth repair/refurbishing, hunting and fishing, puttering around the house and garden, and doing stuff with Mrs. Tippy.  We're in our mid 60s and have no need or desire to borrow money from anybody.  It was a Hell of a lot of work and sacrifice to get to this point, but we made it.

What on Earth would I do with a $1M line of credit?  Buy a mansion and a yacht?  Dabble in cryptos?  We can afford anything we want already, because we don't want fancy "stuff".  We live better than 99% of mankind.  We have food, central heat, hot and cold running water, modern medical care, good clothes, decent health, and no financial stress.  Living large, as they say.

In reply to by bitzager

bitzager itstippy Sat, 01/13/2018 - 13:53 Permalink

Nevermind, bro you are good.. The problem is the way things are going many will never get no pensions or very small ones, just enough to leave in Africa maybe.. Hints about Credit is, you buy stuff then you discharge debt, as Big boys do(because banksters are fraud), ask them: Too big to fail :) Till you paid off your Mortgage, - Banks get paid x3 amount already, even if you Default on the payments... And after all they still want to do EXTRA (double deep) and do foreclosure??? Money supply is unlimited for those who learn the game... It's sad, but it's true... Otherwise we all die and we need nothing at the end, only LOVE, you know, what I mean.. Love and Peace..

In reply to by itstippy

heddahenrik Sat, 01/13/2018 - 12:35 Permalink

But for every day that goes, more and more computer algorithms are guarding the money river. Slowly, but steadily the financial industry will eventually be replaced by computers that work almost for free competing with each other.

World-Gone-Mad Sat, 01/13/2018 - 12:35 Permalink

Unlimited money printing will do it every time. More and more for the elite and eventually a two-class system - haves and have nots. It's a rigged system. End the Fed.

JibjeResearch Sat, 01/13/2018 - 12:46 Permalink

"Simply put: our highly financialized economy is gamed to enrich those who run it, at the expense of everybody else. "

 

No shit genius! But, not at the expense of people who truly know.

It's the reason why people need to understand SocioGeo Political Economy (SGPE).  Everything you learn in life is to prepare you to truly understand SGPE.  Once you understand it, you can beat them in their silly game and the shitty rules. 

 

I speak from experience, and I did it from outside the circle.  I don't need their fucken circle of friends.  Taking their money is my right by the power of Nerd... baitchezzz ahahhahaha

1. Understand SGPE.

2. Have a full time job ($40K/year), the number is debatable.

3. Save something.

4. Put that saving into investment and hedge accordingly to SGPE.

5. You will fucked up big time.., but keep doing it.  Don't give up.

6. My Experience: after fucking up for 10 years or so... and lost lots of money, I gained insight into how the fucken things work.

7. The last 3 years of success allowed me to made up all my lost and made gain, enough to push me to top 10% total wealth in America.

8.  There's no free lunch baitchezzz...

9.  You will have to pay a price in order to learn about our shitty ass world.

10.  Use your truthful knowledge to help others ... they (the good people any way) deserve to have something to give to their children/grand children.

11.  Talk shit all you want, I don't give a fuck, so STFU... ahahahha

12. Cause, I know for a fact, only the good/honest/truthful/perseverance people will gain this truthful skill in reading the SGPE.  Honesty and truthfulness are the requirement... baitchezz...

 

 

rejected Sat, 01/13/2018 - 12:48 Permalink

Really tired of this BS....

Today's idea of retirement is how much you have 'invested' in stocks.  Any other savings, savings account etc aren't even covered.

Boomers lost their ass in stocks in 1987,,, 2000,,, and 2008. Boomers also lost their ass in cash holdings where they were told by financial 'experts' back in the day to expect 4-5% interest.

Then add in 3-4% a year (some years 10-15%) inflation. The money saved is now valued at less then 50% of its value when saved 30-40 years ago.

The entire 401k is a sham. Just like the boomers the younger gens will be hit by stock collapses 2-3 times before they retire.

Worse,,, the wars and military/Intelligence complexes will continue costing untold trillions,,, devaluing the money even more.

Social Security has been demonized now for years and most likely will either be eliminated or worse privatized. Privatized means the financial thieves will get even more of your money to use for their pet projects.

As a boomer who has experienced this robbery I hope to warn the younger gens to be careful,,, believe nothing government, pundits, or your financial guru speak. They are all liars and thieves.

You have been warned.

And it's gone!

https://vimeo.com/43762138

mendigo Sat, 01/13/2018 - 12:53 Permalink

Pretty good.

Additionally the 1% are fairly protected against losses. They are influencers and have inside info - they make the rules.

There rest of us dont even know the rules. But we have people who are glad to tell us what to do with our money.

Not My Real Name Sat, 01/13/2018 - 13:17 Permalink

From the article: "And this is in California, one of the most pro-worker ... states in the Union."

Really? How can California be considered a "pro-worker" state when it refuses to pass a Right-to-work law? In California, employers can compel an employee to work for a union. That's not "pro-worker." 

Sudden Debt Sat, 01/13/2018 - 14:47 Permalink

People now use is as an excuse not to save anything anymore.

Saving for a pension? You won't get any so they don't.

 

But what they forget is that they should do it themselves... and that's work... and people are lazy.

 

2 weeks ago, I met a consultant that was well red, knows the entire economic deal and at first I tought we where on the same level.

UNTILL....

she said: "and when the economy implodes we'll just see what happens..." she refused to prepare or save...

now that's stupid... 

You know the boat is sinking and you refuse to spend some of your money to buy a life jacket...