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American • America’s Bubble Economy Is Going To Become An Economic Blac
America’s Bubble Economy Is Going To Become An Economic Black Hole
By Michael, on May 21st, 2013
What is going to happen when the greatest economic bubble in the history of the world pops? The mainstream media never talks about that. They are much too busy covering the latest dogfights in Washington and what Justin Bieber has been up to. And most Americans seem to think that if the Dow keeps setting new all-time highs that everything must be okay. Sadly, that is not the case at all. Right now, the U.S. economy is exhibiting all of the classic symptoms of a bubble economy. You can see this when you step back and take a longer-term view of things. Over the past decade, we have added more than 10 trillion dollars to the national debt. But most Americans have shown very little concern as the balance on our national credit card has soared from 6 trillion dollars to nearly 17 trillion dollars. Meanwhile, Wall Street has been transformed into the biggest casino on the planet, and much of the new money that the Federal Reserve has been recklessly printing up has gone into stocks. But the Dow does not keep setting new records because the underlying economic fundamentals are good. Rather, the reckless euphoria that we are seeing in the financial markets right now reminds me very much of 1929. Margin debt is absolutely soaring, and every time that happens a crash rapidly follows. But this time when a crash happens it could very well be unlike anything that we have ever seen before. The top 25 U.S. banks have more than 212 trillion dollars of exposure to derivatives combined, and when that house of cards comes crashing down there is no way that anyone will be able to prop it back up. After all, U.S. GDP for an entire year is only a bit more than 15 trillion dollars.
But most Americans are only focused on the short-term because the mainstream media is only focused on the short-term. Things are good this week and things were good last week, so there is nothing to worry about, right?
Unfortunately, economic reality is not going to change even if all of us try to ignore it. Those that are willing to take an honest look at what is coming down the road are very troubled. For example, Bill Gross of PIMCO says that his firm sees "bubbles everywhere"…
We see bubbles everywhere, and that is not to be dramatic and not to suggest they will pop immediately. I just suggested in the bond market with a bubble in treasuries and bubble in narrow credit spreads and high-yield prices, that perhaps there is a significant distortion there. Having said that, it suggests that as long as the FED and Bank of Japan and other Central Banks keep writing checks and do not withdraw, then the bubble can be supported as in blowing bubbles. They are blowing bubbles. When that stops there will be repercussions.
And unfortunately, it is not just the United States that has a bubble economy. In fact, the gigantic financial bubble over in Japan may burst before our own financial bubble does. The following is from a recent article by Graham Summers…
First and foremost, Japan is the second largest bond market in the world. If Japan’s sovereign bonds continue to fall, pushing rates higher, then there has been a tectonic shift in the global financial system. Remember the impact that Greece had on asset prices? Greece’s bond market is less than 3% of Japan’s in size.
For multiple decades, Japanese bonds have been considered “risk free.” As a result of this, investors have been willing to lend money to Japan at extremely low rates. This has allowed Japan’s economy, the second largest in the world, to putter along marginally.
So if Japanese bonds begin to implode, this means that:
1) The second largest bond market in the world is entering a bear market (along with commensurate liquidations and redemptions by institutional investors around the globe).
2) The second largest economy in the world will collapse (along with the impact on global exports).
Both of these are truly epic problems for the financial system.
And of course the entire global financial system is a giant bundle of debt, risk and leverage at this point. We have never seen anything like this in world history. When you step back and take a good, hard look at the numbers, they truly are staggering. The following statistics are from one of my previous articles entitled "Why Is The World Economy Doomed? The Global Financial Pyramid Scheme By The Numbers"…
-$70,000,000,000,000 – The approximate size of total world GDP.
-$190,000,000,000,000 – The approximate size of the total amount of debt in the entire world. It has nearly doubled in size over the past decade.
-$212,525,587,000,000 – According to the U.S. government, this is the notional value of the derivatives that are being held by the top 25 banks in the United States. But those banks only have total assets of about 8.9 trillion dollars combined. In other words, the exposure of our largest banks to derivatives outweighs their total assets by a ratio of about 24 to 1.
-$600,000,000,000,000 to $1,500,000,000,000,000 – The estimates of the total notional value of all global derivatives generally fall within this range. At the high end of the range, the ratio of derivatives to global GDP is more than 21 to 1.
The financial meltdown that happened back in 2008 should have been a wake up call for the nations of the world. They should have corrected the mistakes that happened so that nothing like that would ever happen again. Unfortunately, nothing was fixed. Instead, our politicians and the central bankers became obsessed with reinflating the system. They piled up even more debt, recklessly printed tons of money and kicked the can down the road for a few years. In the process, they made our long-term problems even worse. The following is a recent quote from John Williams of shadowstats.com…
The economic and systemic solvency crises of the last eight years continue. There never was an actual recovery following the economic downturn that began in 2006 and collapsed into 2008 and 2009. What followed was a protracted period of business stagnation that began to turn down anew in second- and third-quarter 2012. The official recovery seen in GDP has been a statistical illusion generated by the use of understated inflation in calculating key economic series (see Public Comment on Inflation). Nonetheless, given the nature of official reporting, the renewed downturn likely will gain recognition as the second-dip in a double- or multiple-dip recession.
What continues to unfold in the systemic and economic crises is just an ongoing part of the 2008 turmoil. All the extraordinary actions and interventions bought a little time, but they did not resolve the various crises. That the crises continue can be seen in deteriorating economic activity and in the panicked actions by the Federal Reserve, where it proactively is monetizing U.S. Treasury debt at a pace suggestive of a Treasury that is unable to borrow otherwise.
And there are already lots of signs that the next economic downturn is rapidly approaching.
For example, corporate revenues are falling at Wal-Mart, Proctor and Gamble, Starbucks, AT&T, Safeway, American Express and IBM.
Would revenues at Wal-Mart be falling if the economy was getting better?
U.S. jobless claims hit a six week high last week. We aren’t in the danger zone yet, but once they hit 400,000 that will be a major red flag.
And even though we are still in the "good times" relatively speaking, the federal government is already talking about tightening welfare programs. In fact, there are proposals in Congress right now to make significant cuts to the food stamp program.
If food stamps and other welfare programs get cut, that is going to make a lot of people very, very angry. And that anger and frustration will get even worse when the next economic downturn strikes and millions of people start losing their jobs and their homes.
What we are witnessing right now is the calm before the storm. Let us hope that it lasts for as long as possible so that we can have more time to prepare.
Unfortunately, this bubble of false hope will not last forever. At some point it will end, and then the pain will begin.
http://theeconomiccollapseblog.com/arch … black-hole
Statistics: Posted by yoda — Tue May 21, 2013 8:13 pm
View full post on opinions.caduceusx.com
America’s Bubble Economy Is Going To Become An Economic Black Hole
What is going to happen when the greatest economic bubble in the history of the world pops? The mainstream media never talks about that. They are much too busy covering the latest dogfights in Washington and what Justin Bieber has been up to. And most Americans seem to think that if the Dow keeps setting new all-time highs that everything must be okay. Sadly, that is not the case at all. Right now, the U.S. economy is exhibiting all of the classic symptoms of a bubble economy. You can see this when you step back and take a longer-term view of things. Over the past decade, we have added more than 10 trillion dollars to the national debt. But most Americans have shown very little concern as the balance on our national credit card has soared from 6 trillion dollars to nearly 17 trillion dollars. Meanwhile, Wall Street has been transformed into the biggest casino on the planet, and much of the new money that the Federal Reserve has been recklessly printing up has gone into stocks. But the Dow does not keep setting new records because the underlying economic fundamentals are good. Rather, the reckless euphoria that we are seeing in the financial markets right now reminds me very much of 1929. Margin debt is absolutely soaring, and every time that happens a crash rapidly follows. But this time when a crash happens it could very well be unlike anything that we have ever seen before. The top 25 U.S. banks have more than 212 trillion dollars of exposure to derivatives combined, and when that house of cards comes crashing down there is no way that anyone will be able to prop it back up. After all, U.S. GDP for an entire year is only a bit more than 15 trillion dollars.
But most Americans are only focused on the short-term because the mainstream media is only focused on the short-term. Things are good this week and things were good last week, so there is nothing to worry about, right?
Unfortunately, economic reality is not going to change even if all of us try to ignore it. Those that are willing to take an honest look at what is coming down the road are very troubled. For example, Bill Gross of PIMCO says that his firm sees “bubbles everywhere”…
We see bubbles everywhere, and that is not to be dramatic and not to suggest they will pop immediately. I just suggested in the bond market with a bubble in treasuries and bubble in narrow credit spreads and high-yield prices, that perhaps there is a significant distortion there. Having said that, it suggests that as long as the FED and Bank of Japan and other Central Banks keep writing checks and do not withdraw, then the bubble can be supported as in blowing bubbles. They are blowing bubbles. When that stops there will be repercussions.
And unfortunately, it is not just the United States that has a bubble economy. In fact, the gigantic financial bubble over in Japan may burst before our own financial bubble does. The following is from a recent article by Graham Summers…
First and foremost, Japan is the second largest bond market in the world. If Japan’s sovereign bonds continue to fall, pushing rates higher, then there has been a tectonic shift in the global financial system. Remember the impact that Greece had on asset prices? Greece’s bond market is less than 3% of Japan’s in size.
For multiple decades, Japanese bonds have been considered “risk free.” As a result of this, investors have been willing to lend money to Japan at extremely low rates. This has allowed Japan’s economy, the second largest in the world, to putter along marginally.
So if Japanese bonds begin to implode, this means that:
1) The second largest bond market in the world is entering a bear market (along with commensurate liquidations and redemptions by institutional investors around the globe).
2) The second largest economy in the world will collapse (along with the impact on global exports).
Both of these are truly epic problems for the financial system.
And of course the entire global financial system is a giant bundle of debt, risk and leverage at this point. We have never seen anything like this in world history. When you step back and take a good, hard look at the numbers, they truly are staggering. The following statistics are from one of my previous articles entitled “Why Is The World Economy Doomed? The Global Financial Pyramid Scheme By The Numbers“…
-$70,000,000,000,000 – The approximate size of total world GDP.
-$190,000,000,000,000 – The approximate size of the total amount of debt in the entire world. It has nearly doubled in size over the past decade.
-$212,525,587,000,000 – According to the U.S. government, this is the notional value of the derivatives that are being held by the top 25 banks in the United States. But those banks only have total assets of about 8.9 trillion dollars combined. In other words, the exposure of our largest banks to derivatives outweighs their total assets by a ratio of about 24 to 1.
-$600,000,000,000,000 to $1,500,000,000,000,000 – The estimates of the total notional value of all global derivatives generally fall within this range. At the high end of the range, the ratio of derivatives to global GDP is more than 21 to 1.
The financial meltdown that happened back in 2008 should have been a wake up call for the nations of the world. They should have corrected the mistakes that happened so that nothing like that would ever happen again. Unfortunately, nothing was fixed. Instead, our politicians and the central bankers became obsessed with reinflating the system. They piled up even more debt, recklessly printed tons of money and kicked the can down the road for a few years. In the process, they made our long-term problems even worse. The following is a recent quote from John Williams of shadowstats.com…
The economic and systemic solvency crises of the last eight years continue. There never was an actual recovery following the economic downturn that began in 2006 and collapsed into 2008 and 2009. What followed was a protracted period of business stagnation that began to turn down anew in second- and third-quarter 2012. The official recovery seen in GDP has been a statistical illusion generated by the use of understated inflation in calculating key economic series (see Public Comment on Inflation). Nonetheless, given the nature of official reporting, the renewed downturn likely will gain recognition as the second-dip in a double- or multiple-dip recession.
What continues to unfold in the systemic and economic crises is just an ongoing part of the 2008 turmoil. All the extraordinary actions and interventions bought a little time, but they did not resolve the various crises. That the crises continue can be seen in deteriorating economic activity and in the panicked actions by the Federal Reserve, where it proactively is monetizing U.S. Treasury debt at a pace suggestive of a Treasury that is unable to borrow otherwise.
And there are already lots of signs that the next economic downturn is rapidly approaching.
For example, corporate revenues are falling at Wal-Mart, Proctor and Gamble, Starbucks, AT&T, Safeway, American Express and IBM.
Would revenues at Wal-Mart be falling if the economy was getting better?
U.S. jobless claims hit a six week high last week. We aren’t in the danger zone yet, but once they hit 400,000 that will be a major red flag.
And even though we are still in the “good times” relatively speaking, the federal government is already talking about tightening welfare programs. In fact, there are proposals in Congress right now to make significant cuts to the food stamp program.
If food stamps and other welfare programs get cut, that is going to make a lot of people very, very angry. And that anger and frustration will get even worse when the next economic downturn strikes and millions of people start losing their jobs and their homes.
What we are witnessing right now is the calm before the storm. Let us hope that it lasts for as long as possible so that we can have more time to prepare.
Unfortunately, this bubble of false hope will not last forever. At some point it will end, and then the pain will begin.
View full post on The Economic Collapse
House, Senate Pass Different Bills: To Become Law Anyway?
Jim Harper
Something fishy happened on Friday, and without further action in Congress it should scuttle the legislation to exempt the Federal Aviation Administration from sequestration-based spending limits. But maybe the old saying, “close only counts in horseshoes and handgrenades,” also applies to Senate unanimous consent agreements. If President Obama gives the bill five days of public review under his Sunlight Before Signing promise, perhaps it can be hashed out before anyone does anything foolish.
You’re probably aware of the background: Across-the-board spending cuts were threatening air travel delays because of FAA furloughs. Late last week, the House and Senate both passed bills to allow the Department of Transportation to move money around, clearing up that problem. (No new spending; just movement of funds from lower priorities to air traffic control.)
As I detailed on the WashingtonWatch.com blog late Saturday, the Senate and then the House passed identical bills, but determined to see the House version passed into law. Because the House would pass its bill after the Senate was gone for the week, the Senate agreed to automatically pass a bill coming from the House “identical” to the one it had passed. Problem solved.
But on Friday afternoon, after the House had passed its identical bill, sponsor Rep. Tom Latham (R-IA) came to the floor and asked unanimous consent to change the word “account” to “accounts” in his bill. The change is a mystery. My guess is that the reference to a singular appropriation account would not allow needed flexibility because there are many FAA accounts. But the change also made the sentence ungrammatical as it has a second reference to a singular account.
Whatever the reason, there was a reason. And after changing the legislation, it was no longer identical to the Senate-passed bill. Thus, the bill sent to the Senate could not be automatically passed. Accordingly, the bill does not go to the president and does not become law.
Now, is the difference between the singular and the plural of the word “account” small enough that the Senate can go ahead and treat the bills as identical? That threatens the meaning of the word “identical.” It certainly mattered in the House. Procedure expert Walter Oleszek calls unanimous consent agreements of this type “akin to a negotiated ‘contract’ among all Senators, [which] can only be changed by another unanimous consent agreement.”
The House-passed bill not being identical to the Senate-passed bill, the better approach is to find that the Senate unanimous consent agreement does not apply, and the House bill should sit in the Senate awaiting further action.
At the time of this writing, no public sources indicate that H.R. 1765 has been passed in the Senate, presented to the president, or signed. If President Obama does receive the bill, he should give it the five days of public review that he promised as a campaigner in 2008. This would allow things to get sorted out, so that we avoid the constitutionally embarassing spectacle (and future Jeopardy/Trivial Pursuit item) of a president sitting down to sign a piece of paper that is not actually a bill readied to become a law.
View full post on Cato @ Liberty
When Did Laws Denying Same-Sex Couples Marriage Licenses Become Unconstitutional?
Ilya Shapiro
Readers of this blog know that Cato filed a brief in Hollingsworth v. Perry arguing that state prohibitions on same-sex marriage violate the Equal Protection Clause of the Fourteenth Amendment. But since when have they done that? More broadly, to quote a colloquy between Justice Scalia and Ted Olson in the Perry argument:
JUSTICE SCALIA: I’m curious, when - when did — when did it become unconstitutional to exclude homosexual couples from marriage? 1791? 1868, when the Fourteenth Amendment was adopted? Sometimes — some time after Baker, where we said it didn’t even raise a substantial Federal question? When — when — when did the law become this?
MR. OLSON: When — may I answer this in the form of a rhetorical question? When did it become unconstitutional to prohibit interracial marriages? When did it become unconstitutional to assign children to separate schools.
JUSTICE SCALIA: It’s an easy question, I think, for that one. At — at the time that the Equal Protection Clause was adopted. That’s absolutely true. But don’t give me a question to my question. When do you think it became unconstitutional? Has it always been unconstitutional? …
MR. OLSON: It was constitutional when we - as a culture determined that sexual orientation is a characteristic of individuals that they cannot control, and that that -
JUSTICE SCALIA: I see. When did that happen? When did that happen?
MR. OLSON: There’s no specific date in time. This is an evolutionary cycle.
With due respect to Ted Olson, a former solicitor general who’s argued more cases than I’ve watched, I think he missed the mark on this one. How do rights spontaneously emerge? To pick up on one of the above examples, was segregation constitutional in 1900 but then somehow not 50 years later? No, Plessy v. Ferguson was incorrectly decided in 1896 and Brown v. Board of Education overruled it rather than merely asserting that there was an “evolutionary cycle.” Justice Scalia himself recognized that state racial discrimination of all kinds became unconsitutional when the Fourteenth Amendment was ratified, in 1868 – and not at some time in future when each particular instance of it was found to violate that provision.
And so, either it was unconstitutional to exclude same-sex couples from marriage in 1868 or it’s still constitutional to do so. Josh Blackman and I wrote about doing this “originalism at the right time” in our exegesis of the Privileges or Immunities Clause in the context of the right to keep and bear arms, Keeping Pandora’s Box Sealed. (Josh later extended that analysis in a short piece on gender equality and sex discrimination.)
Which isn’t to say that what the challengers have to prove here that the drafters or ratifiers of the Fourteenth Amendment had gay marriage in mind. But it does mean that you have to look at what “equal protection of the laws” in 1868 and apply that understanding accordingly. As Elizabeth Wydra, my co-counsel on our Perry brief, wrote on the Constitutional Accountability Center’s blog:
While race was obviously at the forefront of the minds of the Amendment’s drafters – after all, they had just secured an amendment banning slavery in the wake of a brutal civil war–they specifically chose language that would protect against unequal treatment based on more than just racial discrimination, and in fact affirmatively rejected narrower proposals that would prohibit only racial discrimination.
Even so, had Olson given Justice Scalia the answer I have suggested, Scalia surely would have retorted that there was no way the American people were thinking of marriage equality for gay and lesbian couples when they ratified the Amendment. That’s not the point. No originalist – not even Justice Scalia – believes that the plain words of the Constitution apply only in the ways the framers expected. The ruling Justice Scalia announced from the bench just before the start of arguments this morning is a perfect example: just because there weren’t drug-sniffing police dogs in 1791, doesn’t mean their use can’t violate the Fourth Amendment’s protection against unreasonable searches and seizures, as the Court held today in Florida v. Jardines.
The Constitution guarantees equal protection of the laws to “any person.” In looking to what rights were understood to be protected equally, the framers of the Fourteenth Amendment understood state-sanctioned marriage as a personal, individual right that must be made available on an equal basis to all persons. Accordingly, by writing into the Constitution a requirement of equality under the law and equality of basic rights for all persons, which included the right to marry, the Amendment’s framers ensured that discriminatory state laws would not stand in the way of Americans exercising their right to marry the person of their own choosing. Laws that discriminate and deny to members of certain groups, including gays and lesbians, the right to marry the person of one’s choice thus contravene the original meaning of the Fourteenth Amendment.
See also Josh Blackman and Orin Kerr. And for more on the original meaning of the Equal Protection Clause, see my op-ed with CAC’s president, Doug Kendall.
View full post on Cato @ Liberty
Police State • Will expatriation become illegal?
Will expatriation become illegal?
by SIMON BLACK on FEBRUARY 1, 2013
February 1, 2013
En route from Lima to Santiago
Let’s end this week with something that we haven’t done in many, many moons: a Q&A.
Each week, my staff receives hundreds of questions from the 100,000+ Notes from the Field readers… and given the utter insanity which pervades the West right now, it’s high time we reintroduce Q&A as a regular feature of this letter. It’s my intent that the answers will really help flesh out the concepts we discuss regularly.
The first question is from Erik, who writes, “Simon, there seem to be so many high profile people leaving the country these days. Do you foresee a time when it may be illegal to do this?”
Great question. There have been a lot of high profile people who have reached their breaking points. Tiger Woods and Phil Mickelson recently disclosed their contempt for California taxes. Tina Turner and Eduardo Saverin renounced their US citizenship.
Over in Europe, actor Gerard Depardieu and billionaire Bernard Arnault have announced their departure from France.
And these are just the famous people. Legions of other unknowns have seen the writing on the wall and quietly moved themselves and their assets out of dodge.
For now, the door is wide open. Will it be forever? No chance. Throughout history, politicians have always reviled those who left home in difficult times.
In the early 1790s in France, the government passed a law confiscating the property of all Frenchmen who had left the country after July 14, 1789 (the date which marks the start of the revolution.)
The US government currently has tax penalties imposed against ‘covered expatriates’, i.e. those who have a net worth above $2 million or average annual tax liability of roughly $155,000 for the last five years (this adjusts with inflation).
Expatriates aren’t exactly a strong voting block, and governments desperately need the cash. So, yes, given current fiscal conditions and the historical patterns, it’s quite likely that much, much steeper penalties will be imposed in the future. And the penalties will apply across the board to more people… not just the ‘wealthy’.
Next, Jennifer asks, “Simon, I know that you travel so frequently. How do you stay in shape while traveling?”
There are few things more important than health, and unfortunately it can be challenging to maintain while on the road a lot.
I go out of my way to hit the gym every day… and if there’s no gym, I torture myself with an exercise video series that my friend and fitness guru Craig Ballantyne put together. His routines are perfect for when you want to squeeze in some exercise after a long day of meetings or travel, or when there’s no gym available.
(If you’re interested, you can check out Craig’s videos here. I highly recommend them.)
Food is even more important, so I always research which restaurants serve the cleanest, most organically grown meats. Plus I typically rent a short-term apartment if I’m going to be somewhere for more than a few days, so at least I can cook for myself. AirBnB.com and AlwaysOnVacation.co.uk are great tools for this.
Last, Michael asks, “Simon, if I purchase over $10,000 from a gold dealer like GoldMoney.com or BullionVault, is that reportable to the IRS if I am a US citizen?”
The short answer is YES. This was really ambiguous for a long time, but within the last year or so, the Financial Crimes Enforcement Network (FinCEN) issued guidance suggesting that foreign gold depositories like BullionVault and GoldMoney should be included in the Report of Foreign Bank and Financial Accounts.
This form, TDF 90-22.1, is due to the Treasury Department each year by June 30th. So if you had a GoldMoney account in 2012, it should be reflected on the TDF 90-22.1 that you submit this year.
There are also rules related to the Foreign Account Tax Compliance Act, but we’ll have to delve into those another time, I’m off to catch a plane. Have a great weekend.
http://www.sovereignman.com/expat/will- … gal-10730/
Statistics: Posted by yoda — Fri Feb 01, 2013 1:33 pm
View full post on opinions.caduceusx.com
Other • Pension Funds Become Hedge Funds, Roll the Dice on Exotic I
Pension Funds Become Hedge Funds, Roll the Dice on Exotic Investments
by John Rubino on January 28, 2013
Running a pension fund used to be one of the easier jobs in finance. The money came in steadily and predictably from member contributions, and you invested it conservatively (in investment grade bonds and blue chip stocks) to meet a modest annual return target of around 8%. It was cook-book money management, nice and cushy and low-stress.
But today’s pension funds have, in effect, two sets of criminally incompetent bosses making incompatible demands. At the national level the US borrows too much and lets its banks run wild, causing a debt crisis to which it responds by lowering interest rates to levels where investment-grade bonds yield next to nothing. At the state and local level, governors and mayors – loath to raise taxes or cut benefits to bring pension plans into balance – pressure funds to keep making their traditional 8% even though, with interest rates way down, that is now wildly optimistic.
So pension fund managers, forced to meet unrealistic goals in an inhospitable environment, have begun acting like hedge funds by turning to dangerous, sure-to-eventually-blow-up strategies like the this:
Pensions Bet Big With Private Equity
AUSTIN, Texas—On the 13th floor of a sleek downtown office building here, the trading desks are manned overnight. The chief investment officer favors cowboy boots made of elephant skin. And when a bet pays off, even the secretaries can be entitled to bonuses.
The office’s occupant isn’t a highflying hedge fund but the Teacher Retirement System of Texas, a public pension fund with 1.3 million members including schoolteachers, bus drivers and cafeteria workers across the state.
It is a sign of the times. Numerous pension funds are still struggling to make up investment losses from the financial crisis. Rather than reduce risks in the wake of those declines, many are getting aggressive. They are loading up on private equity and other nontraditional investments that promise high, steady returns in the face of low interest rates and a volatile stock market.
The $114 billion Texas fund has hit the trend particularly hard. It now boasts some of the splashiest bets in the industry, having committed about $30 billion to private equity, real estate and other so-called alternatives since early 2008. That makes it the biggest such investor among the 10 largest U.S. public pensions, according to data provider Preqin Ltd. Those funds have an average alternatives allocation of 21%.
Including all assets, the pension’s annual return from Dec. 31, 2007, to Dec. 31, 2012, was 3.1%—better than the median preliminary return of 2.46% among large public funds, according to Wilshire Trust Universe Comparison Service.
Texas pension officials say private equity helped offset declines in its other investments. Britt Harris, the pension’s chief investment officer, says he aims to “smash” the stereotype that government pension funds are on the losing end of most investments.
In November 2011, the Texas fund made one of the largest single commitments in the private-equity industry’s history, investing $3 billion in KKR and another $3 billion in Apollo Global Management APO. Three months later, Texas teachers bought a $250 million stake in the world’s biggest hedge-fund firm, Bridgewater Associates—a first such equity stake for a U.S. public pension.
For the fiscal year ended Aug. 31, the Texas teachers fund had a 7.6% return, and pension officials say they expect their bet on alternatives can help the fund hit its 8% annual target return over the long term. Over a ten-year period ending Aug. 31, 2012, the fund has had an annual fiscal year return of 7.4%.
And this:
Money Magic: Bonds Act Like Stocks
Pension funds across the U.S. are desperate to overcome low interest rates and churn out returns big enough to pay future retirees.
Now some hedge funds and money managers are pitching something they see as a Holy Grail: a strategy that often uses leverage to boost returns of bonds that usually occupy the low-risk, low-return portion of pension-fund investment portfolios.
Leverage relies on borrowing money or using derivatives to make large investments while putting up less cash. The tactic’s widespread use helped inflate the world-wide debt bubble that burst during the financial crisis, and it was blamed for ruinous losses at banks and securities firms.
But money managers such as Bridgewater Associates, the world’s largest hedge-fund firm, and a growing number of pension funds say this type of leverage is different. By using leverage through derivatives, such as bond futures, and by investing in commodities, some pension funds believe they can reduce their typically large exposure to the turbulent stock market and still earn solid returns.
Other proponents of this strategy, known as “risk parity,” include AQR Capital Management and Clifton Group, a Minneapolis-based investment firm.
Adding leverage to bonds, you can ‘lower your risk in your overall portfolio,’ Mr. Dalio says.
In Virginia, officials at the Fairfax County Employees’ Retirement System have revamped the entire $3.4 billion portfolio around a risk-parity approach. About 90% of the pension’s portfolio now is exposed to bonds, when factoring in leverage.
“We think we can improve returns while reducing the risk level of the portfolio,” says Robert Mears, the pension fund’s executive director.
Pension officials that employ risk parity say they are using a modest amount of leverage, and nowhere near what investment banks used leading up to the crisis. They also are trading in large, liquid markets, and say they have ample liquidity should they ever need to settle trading losses with cash.
Bridgewater is known as a pioneer of risk parity. Executives from the Westport, Conn., firm have pitched the idea to pension trustees across the U.S., even making a documentary-style online video about risk parity featuring founder Ray Dalio.
Pension funds and other institutional investors typically take most of their risks in the stock market. Mr. Dalio says risk parity spreads the risk to a pension’s bonds and other holdings.
“Ironically, by increasing your risk in the bonds you are going to lower your risk in your overall portfolio,” he said in an interview.
A core tenet of risk parity is that when stocks are falling, bond prices typically rise. By using leverage, bond returns can help make up for losses on stocks. Without leverage, bond returns in a typical pension portfolio of 60% stocks and 40% bonds wouldn’t be large enough to compensate for low stock returns.
Some thoughts
One of the tell-tale signs of a late-stage bubble is the ease with which tried-and-true business practices get tossed aside in favor of “innovations” that are really cons designed to maintain the deal flow. Day trading during the tech stock bubble and house flipping during the housing boom, for example, were hailed as genius at the time and revealed to be impossible (or at least too hard for amateurs) when those bubbles burst. Loading up on equities (private or public) or using leverage (inherently, unavoidably risky) to goose a portfolio of bonds simply creates a portfolio that behaves more like equities, which is to say far more erratically than bonds. Just like all go-long-the-bubble strategies, it’s brilliant while the markets are going the right way and catastrophic when they turn.
Already, interest rates are rising, which must be causing havoc with those leveraged bond portfolios.
Pension funds, because of their conservative institutional character, tend to be among the last to be pulled into the really crazy stuff, right before it all falls apart. They are, along with small retail investors, the market’s dumb money. Go back to the middle of the last decade and you’ll find stories (some of which I wrote) chronicling the innovative pension funds then loading up on alternative investments – and outperforming their peers in the short run. Most of them got creamed in 2009.
http://dollarcollapse.com/investing/pen … vestments/
Statistics: Posted by yoda — Tue Jan 29, 2013 2:48 pm
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Portugal May Become the First of Europe’s Bankrupt Welfare States to Stumble upon a Genuine Recovery Formula: Less Spending AND Lower Tax Rates
Daniel J. Mitchell
There aren’t many fiscal policy role models in Europe.
Switzerland surely is at the top of the list. The burden of government spending is modest by European standards, in part because of a very good spending cap that prevents politicians from overspending when revenues are buoyant. Tax rates also are reasonable. The central government’s tax system is “progressive,” but the top rate is only 11.5 percent. And tax competition among the cantons ensures that sub-national tax rates don’t get too high. Because of these good policies, Switzerland completely avoided the fiscal crisis plaguing the rest of the continent.
The Baltic nations of Estonia, Lithuania, and Latvia also deserve some credit. They allowed spending to rise far too rapidly in the middle of last decade – an average of nearly 17 percent per year between 2002 and 2008! But they have since moved in the right direction, with genuine spending cuts (unlikely the fake cuts that characterize fiscal policy in nations like the United States and United Kingdom). Yes, the Baltic countries did raise some taxes, which undermined the positive effects of spending reductions, but at least they focused primarily on spending and preserved their attractive flat tax systems. No wonder growth has rebounded in these nations.
The situation in the rest of Europe is more bleak, particularly for the so-called PIIGS. To varying degrees, Portugal, Italy, Ireland, Greece, and Spain have lost the ability to borrow, received bailouts, and been mired in recession.
The silver lining is that the fiscal crisis has forced them to finally cut spending. All of those nations implemented real spending cuts in 2011 according to European Commission data, bringing spending below 2010 levels. Final figures for 2012 aren’t available, of course, but the International Monetary Fund estimates that spending will drop in every nation other than Italy (where it will climb by less than 1 percent).
That’s the good news. The public sector finally is being subjected to some long-overdue fiscal discipline.
The bad news is that politicians also imposed very significant tax increases on the private sector. Income tax rates have been increased. Value-added taxes have been hiked, and other taxes have climbed as well. These penalties on productive activity undermine potential growth.
The politicians say that this is a “balanced approach,” but this view is misguided, First, as Veronique de Rugy has shown, it generally means lots of new taxes and very little spending restraint. Second, it is based on the IMF view of “austerity,” which mistakenly focuses on the symptom of red ink rather than the underlying disease of too much spending.
What Europe really needs is a combination of lower spending and lower tax rates.
Portugal may actually be moving in that direction, according to a report in the Wall Street Journal.
The Portuguese government is seeking to cut its corporate tax rate for new businesses to one of the lowest in Europe as part of a plan to attract investment and revitalize ailing industries, the minister of economy said. The government is in talks with the European Commission’s competition agency in Brussels to get approval to cut the tax on corporate income for new investors to 10% from the current 25%, the minister, Alvaro Santos Pereira, said in an interview. …”We want to make Portugal one of the most attractive countries in Europe for new investment,” Mr. Santos Pereira said. “We believe that by providing very strong fiscal incentives to new investments we will safeguard the budget side and at the same time become a lot more competitive,” he added. …While wealthy euro-zone countries and the IMF are beginning to recognize the need for measures to boost growth in austerity-hit countries, they have been reluctant to endorse tax cuts in countries under bailout programs. If implemented, the proposed tax cut would be a departure from a series of tax increases that countries including Portugal, Greece and Spain were forced to take as part their bailout conditions.
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Before getting too excited, it’s important to note that the Portuguese proposal is a bit gimmicky. It’s not a corporate tax rate of 10 percent, it’s a special rate of 10 percent for new investment, however that’s defined.
But at least it might be a small step in the right direction. As the article indicates, it “would be a departure from a series of tax increases.” And Portugal definitely has been guilty in recent years of raping and pillaging the private sector.
To be fair, though, this chart shows that government spending in Portugal did decline last year. And the IMF is projecting that it will fall again this year and next year.
But the key to good fiscal policy is reducing government spending as a share of economic output. And if tax increases keep the private economy in the dumps, then the actual burden of government spending doesn’t change much even when nominal outlays decline.
A pro-growth policy is needed to boost economic performance. Portugal’s corporate tax rate proposal, by itself, won’t make much of a difference. But if it’s the start of a trend, that could be significant.
By the way, it’s amusing to see that one of the bureaucrats from the European Commission is pouring cold water on the plan, implying that a decision to take less money from a company somehow is akin to government assistance.
“We would want to be sure that anything proposed would help the competitiveness of the economy,” said spokesman Simon O’Connor, “but at the same time it would have to be in line with state aid rules,” referring to EU regulations that limit the assistance governments can give to the private sector. “There really isn’t any scope for them to reduce revenue,” he added.
But I guess that’s not too surprising. Along with their tax-free colleagues at the Organization for Economic Cooperation and Development, the European Commission has been trying to undermine tax competition and make it easier for nations to impose bad tax policy.
Returning to our main topic, what’s next for Portugal?
Your guess is as good as mine, but Portugal’s leaders already have acknowledged that Keynesian fiscal policy is ineffective. Perhaps they’ve gotten to the point where they realize punitive tax systems also are destructive.
View full post on Cato @ Liberty
American • Obama’s America Will Become Detroit
Obama’s America Will Become Detroit
By Terence P. Jeffrey
December 12, 2012
President Barack Obama travelled to Michigan this week and made his case for class war in defense of the welfare state.
We need to take more money from the rich, he said, or schools will not be able to afford books, students will not be able to afford college, and disabled children will not get health care.
"Our economic success has never come from the top down," said Obama. "It comes from the middle out. It comes from the bottom up."
Obama spoke these words a few miles from Detroit — the reductio ad absurdum of his argument.
If America continues down the road to Obama’s America — a road that began when President Franklin Roosevelt started building a welfare state here — our entire nation will become Detroit.
Obama’s economic and moral vision has played out in that city. What he seeks has been achieved there.
Last week, as reported by the Detroit Free Press, Michigan’s state treasurer told Detroit’s mayor and city council that the state may soon appoint an emergency financial manager for the city. Under Michigan law, the paper said, only such a manager can initiate the steps leading to a bankruptcy filing for the city.
By current calculations, Detroit faces obligations over the next six months that exceed its revenues by $47 million. The city, the Free Press reported, now pays $1.08 in benefits to municipal workers and retirees for every $1.00 it pays in salary.
What happened to Detroit? It is achieving socialism in one city.
Traditional two-parent families and the productive taxpaying citizens they produce have fled. In 1950, according the U.S. Census Bureau, Detroit had 1,849,568 people and was the fifth-largest city in the nation. By 2000, its population had dropped to 951,270; by 2010, to 713,777; and by 2011, to 706,585.
What has happened to the people who remain? The Census Bureau estimates there are 563,055 people age 16 or older in the city who could potentially work and be part of the labor force. But only 54.3 percent of these — or 305,479 individuals — actually do participate in the labor force, meaning they either have a job or are looking for one.
Another 257,576 of Detroit residents age 16 or older — 45.7 percent of that demographic — do not participate in the labor force. They do not have a job, and they are not looking for one.
In fact, these 257,576 people in Detroit who do not have a job and are not looking for one outnumber the 224,846 residents who do have jobs. But of the 224,846 residents who do have jobs, 34,500 — or 15.3 percent — have jobs with the government. Thus, this city that boasted 1,849,568 residents in 1950 has only 190,346 private-sector workers today.
There are 264,209 households in Detroit, and 91,204 of them — or 34.5 percent — get food stamps.
Very few of the people who are staying out of the labor force in Detroit are staying out because they are stay-at-home moms with working husbands. Of the 264,209 households in Detroit, only 24,275 — or 9.2 percent — are married couple families with children under 18. Another 78,438 households — or 29.7 percent of the total — are "families" headed by women with no husband present. Of these, 43,742 have children under 18.
There were 12,103 babies born in Detroit in the 12 months prior to the Census Bureau survey, and 9,124 of them — or 75.4 percent — were born to unmarried women.
Of the 363,281 housing units in Detroit, 99,072 are vacant. Indeed, vacant houses have become a powerful visual symbol of what advancing socialism has done to the city. Traditional family life is nearing extinction in this once vibrant corner of America.
Obama said in Michigan that if the federal government does not take more money away from people who have earned it, the public schools may not be able to buy school books. But the Department of Education says that in the Detroit public schools — which have books — only 7 percent of the eight graders are grade-level proficient in reading and only 4 percent are grade-level proficient in math.
School books are not lacking here. Self-reliance, the spirit of individualism, and the Judeo-Christian values that support marriage and family are. They have been driven out by a government that wants the people to depend on it rather than on themselves, their families and their faith.
http://cnsnews.com/blog/terence-p-jeffr … me-detroit
Statistics: Posted by yoda — Wed Dec 12, 2012 7:39 pm
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Agriculture • Why the rare burger may soon become endangered
Why the rare burger may soon become endangered
It is a far cry from the traditional burger sold at fast-food outlets. All over the country restaurants are putting “gourmet” burgers on the menu, offering them from rare to well done.
Officials are cracking down on choosing how your ‘gourmet burger’ is cooked
By Ben Leach8:10AM GMT 09 Dec 2012
Now council officials are cracking down on the freedom to choose how your burger is done, warning restaurants not to offer them rare or even medium-rare.
A number of celebrity chefs are affected by the move, including Gordon Ramsay, whose Maze Grill restaurant sells a burger for £12, Angela Hartnett, whose York and Albany’s bar menu includes burgers, and the Soho House chain, run by Nick Jones, the husband of broadcaster Kirsty Young.
All face being asked at their next routine inspection how they offer their burgers after the decision by Westminster city council, which regulates food safety in more restaurants than any other local authority.
The decision is expected to be followed by other councils, but critics fear it could lead to questions over the safety of rare steaks and raw meat dishes such as steak tartare.
The policy is to be the subject of a legal ruling.
After routine inspections by environmental health officers, Westminster council challenged the way Davy’s was serving its £13.95 burgers at one of its restaurants in central London. Davy’s has taken the case to the High Court, which experts say could set a legal precedent as to whether or not diners will be able to order meat rare.
A Davy’s spokesman said: “The burgers are produced from high quality ingredients and Davy’s contends that it has safe measures in place to serve rare or medium-rare burgers.”
James Armitage, the council’s food health and safety manager, said: “This is about making sure customers are eating meat that is not a threat to their health. It is possible to produce burgers that can be eaten undercooked, but strict controls are essential.
“We have enlisted the UK’s top expert on E. coli, Prof Hugh Pennington, to get this matter resolved and he has outlined that rare minced meat that is not correctly cooked and prepared can kill.”
But John Cadieux, the executive head chef for the Burger and Lobster chain, said: “If you follow the guidelines to the letter then you’re going to destroy the burger industry.
“Not only that but you’re opening a Pandora’s box, because where do you finish? Steak tartare, runny eggs … the list is endless.”
According to the Food Standards Agency (FSA), there are no rules banning the sale of raw or rare meat by restaurants or caterers.
Tony Lewis, of the Chartered Institute of Environmental Health, said: the case would have “nationwide implications”.
“At present the guidance from the FSA is that for burgers the meat should be cooked at 158F (70C) for two minutes,” he said. “If Westminster loses the case we will have to reassess.”
http://www.telegraph.co.uk/foodanddrink … gered.html
Statistics: Posted by yoda — Sun Dec 09, 2012 4:27 pm
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