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Rising From the Ashes…

November 15, 2017

This title is referring to this blog, not the economy. I decided to sideline it for a while because the debt run we were on seemed to have no end to it. And as long as we can consume more debt, we can consume more of everything else — at least for some period of time. There will be a day of reckoning for living on borrowed prosperity, but it has seemed to me that the debt binge we’ve been on appeared to have no end.

When last I left you, I predicted that there were three ultimate outcomes that will result from our unprecedented monetary policies: hyperinflation, recession (or worse), or stagflation on steroids. “Well Jon, what do you think it’s going to be?” Since I have sworn off making predictions, my answer is just “yes!”

“OK then, when will it happen?” Again, “yes!”

I do have what I consider an economic leading indicator that I do not think you will find anywhere else. This indicator has just reversed its own recent trend. I would say it has been flashing hyperinflation signs for some time now and may have just reversed course. What is my special economic indicator? It is the price of hotel rooms near San Francisco Airport. Hotel rooms in the Bay Area have been going stratospheric. The Hyatt, for example, has been going for $500-$600 per night (not including parking)! The Red Roof Inn, a very baseline hotel (motel) was running in the mid-$200 range. About three weeks ago I checked prices and noticed they had dipped. So last night I checked again and they appeared to have dipped a little more. In fact, from their peak prices, I think most hotels are down in price between 25-50 percent. There is a whole cottage industry that has sprung up as a result of ridiculous hotel room prices, like renting or sub-renting out a room — Airbnb and similar companies. It will be interesting to see if more normal hotel prices impact the Airbnb-type of income supplementing. And then in turn, whether that impacts paying for that $1.5 million mortgage on that 900 sq. ft. house. There are a lot of creative ways people are supplementing their income and still living paycheck to paycheck. When the dominoes begin to fall, there is no telling what direction they willgo.

Without making any specific predictions, I will say that this might be a time when you should be very vigilant about paying attention to your investments. Volatility has been on the historic low ends for some time.  If you see any seismic activity in that region be prepared to protect what you have by decreasing risk. Also watch foreign markets. China and Japan have both been leaders in this current debt experiment. They may see their debt markets crumble first, but much like the 2008 financial crisis, expect the contagion to spread.


Swimming with the Sharks: Goldman Sachs, School Districts, and Capital Appreciation Bonds

February 1, 2017

I placed a link to the following editorial on this site nearly a year ago. My bet is not many read the editorial. I believe it is of such importance that I wanted to reprint it. I went looking for this article after a conversation I recently had with a friend and former senator. I was complaining about the poor financial decisions the government seems to continually make. My friend asked why is government always the stooge when it comes to finances? He’s right — when you read the article below, can you imagine anyone, whether it is your personal finances or a business you were operating, making these types of financial decisions? If they did, they would not last long.
I wrote on a similar situation shortly after the 2008 economic collapse. A school district in the L.A. region was bragging about the new high-tech, modern high school they had built. The price tag was astronomical. One bright reporter asked if this was a good time to spend so much money on such a project. The superintendent’s response was, “Oh, don’t worry about the money, this was all done with bonds.” Yep, that’s what I was afraid of. We will end up paying that astronomical bill 20 times over!
Predatory lending exists for one reason. There are people in positions of financial responsibility stupid enough to agree to the loans. The next time Goldman Sachs CEO, Lloyd Blankfein, suggests that he “Is just doing God’s work.” He should look up God’s definition of the term usury!
Usury, by the way, seems to be the United States’ number one export these days. But don’t worry, the too-big-to-fail banks will always be in this export business because they have the unlimited backing of the central banks and their printing presses. Remember subprime home loans? When they blew up in the faces of the Wall Street banks, the Fed came to the rescue and took those loans off the banks’ balance sheets and transferred them the Fed’s balance sheet. What a great deal!


The fliers touted new ballfields, science labs and modern classrooms. They didn’t mention the crushing debt or the investment bank that stood to make millions. 

                       — Melody Peterson, Orange County Register, February 15, 2013  

Remember when Goldman Sachs – dubbed by Matt Taibbi the Vampire Squidsold derivatives to Greece so the government could conceal its debt, then bet against that debt, driving it up? It seems that the ubiquitous investment bank has also put the squeeze on California and its school districts. Not that Goldman was alone in this; but the unscrupulous practices of the bank once called the undisputed king of the municipal bond business epitomize the culture of greed that has ensnared students and future generations in unrepayable debt.

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A few facts in support of my last post

October 31, 2016

I did a little research over the weekend regarding claims I made in my last blog post. I found some interesting facts that I thought I would share. According to the Bureau of Labor Statistics (BLS), higher education tops the inflation list of goods and services over the last two decades. Also, outstanding student loans now exceed $1.4 trillion. That is an astounding figure.

BLS price increases from 1996-2016:

-College tuition                 +197%

-Childcare                            +122%

-Health Care                       +105%

-Food                                    +64%

-Housing                              +61%

I have argued several times on this blog that we have borrowed our prosperity. We have maintained and even increased our standard of living by going further and further in debt. This borrowed prosperity comes in the form of increased balance sheets of our central banks (the Fed’s balance sheet has increased from less than $1 trillion in 2008 to around $4 trillion today), it comes in the form of personal corporate and government debt and it comes in the form of unfunded liabilities. All these categories have grown exponentially, particularly since the 2008 financial crisis. They are all forms of stimulating the economy while pushing off the bills. We seem to have very little thought of how we will ultimately pay down on these various deficits that now are in the hundreds of trillions of dollars in our nation alone.

The U.S. debt, excluding unfunded liabilities and the increased Fed balance sheet, increased by $2.2 trillion over the last 12 months to a total $20 trillion. Remarkably, China — not to be outdone by us — increased their debt by $4.5 trillion over the same period.

I just thought I would share what I found.


October 27, 2016

Not that you really care (because truth be known, I don’t really care), but I thought I would give you a brief explanation for my year and a half silence on this blog.

First, I have never wanted to predict a time frame for when another financial correction might occur. Second, I never wanted to give investment advice. And third, I never wanted to depress people. I discovered that the more I blogged, the more all three of these began to occur. I always intended for my writings to be more of a big-picture, long-term view — very long term. My thesis is simple: you can’t implement the monetary and financial policies we have implemented in our nation (and now around the world through coordinated central bank actions) and not have some very serious consequences. It is what I refer to as the “Grand Experiment,” because no one really knows how this will ultimately end. However, human nature is to want to know the how and when because so much is at stake. That results in pressure to make predictions.

The funny thing about writing this blog is that I found I did not heed my own advice. I have made the comment to never underestimate what the Fed would be willing to do or how that might impact events that impact our economy. By late 2013 and 2014, I felt the central banks had used up all their tools for stimulating a stubbornly stagnate economy; that they really had only delayed the inevitable correction and in so doing, had actually created an even larger financial bubble. Since they had no more ammo to artificially stimulate markets, I felt gravity would soon take over and there would be some type of economic event in 2014. I was wrong on two fronts. Remarkably, our central banks found they could implement negative interest rates and the world did not implode. So there was no correction in 2014.


My way of analyzing things is quite simple — simple mind, simple analytics. The first thing I like to consider is what will history write about the decisions and actions we are taking today —  what will our kids and the history books say about the central bank grand experiment in 20 years, 50 years or 100 years from now? This is always an interesting exercise for me as I have kids in their early 20’s who will be stuck with the consequences of the decisions we are making today. I am not optimistic about a legacy of debt, greed, leverage and crony capitalism. We have sucked the life out of free markets.

The second exercise I like to consider is what would I have thought about our central bank and government actions half my life ago; a little less than three decades ago. In other words, if I was told in 1987 that by the end of 2016 that  central banks would be approaching ten years of a zero interest rate policy, with some central banks ($4 trillion in bonds) actually imposing negative rates, that our nation would be $20 trillion in debt and well over a $100 trillion in unfunded liabilities, that we actually had a program where our government (your tax dollars) paid people to destroy their cars (cash for clunkers) to revitalize the auto industry, or that we actually encouraged subprime home loans and then used taxpayers dollars to buy those same loans from the financial institutions that they predictably blew up on, that we would have somewhere around a quadrillion dollars in derivatives and where we were monetizing our own debt (Quantitative Easing) among many other unprecedented actions and policies. What might I have thought back then, or what might I have thought even ten years ago?

If someone had told me these things 29 years ago, I would have thought they were absolutely insane. Moreover, if I thought even one-tenth of what they were saying could be true, I would have thought that our nation would be experiencing the second coming of the Weimar Republic! It fascinates me that we find a way to accept these extraordinary actions as somehow being even remotely logical. I guess my fear is that one day we will wake up and find that we are the proverbial frog who wonders how we ended up in boiling water when we thought we were just relaxing in the hot tub.

But this is an essential part of keeping the whole game afloat. How can we go further and further down this monetary policy hole (abyss)? It is because the entire game/experiment relies on a general confidence that our central planners actually know what they are doing. And so far, we have not raised our hand and said, “This is absolute insanity, what is your grand escape for your grand experiment?”


What I believe is currently happening in our economy is a very interesting equilibrium. It seems the economy has not reset or collapsed, but it is also very different and few, with the exception of central bankers, Wall Street and politicians, would claim that our economy is healthy. It seems we are creating a new majority of workers who hold one or more part-time jobs and live paycheck to paycheck.

By artificially manipulating interest rates to zero and holding them at zero, we have affected the foundation of free markets. By affecting free markets we have affected supply and demand. By affecting supply and demand we have created substantial dislocations in our markets, particularly financial markets. In fact, by infusing massive sums of free money into our financial markets we have essentially implemented supply-side economics and we have stimulated demand outside the normal supply and demand curve. One might argue, “Well isn’t that good?” I would argue that it is artificial and it is temporary.

There are many examples, but let me just cite three simple examples of how monetary policies have created dislocations. Hedge funds with excess liquidity needing to find a return better than zero offered by bonds moved into buying single family homes to rent or flip. This was traditionally something very small investors did and they were forced to compete with investors who have nearly unlimited resources, driving prices back into bubble territory.

If you have kids you might be interested in this example. When I went to college, I paid my own tuition, books and other expenses and felt very fortunate that my parents helped with some of my rent, about $200 per month if I remember right. I graduated from college with no debt, except the debt of gratitude for my parents’ help. Student loans were nearly nonexistent in those days and I would have never expected my parents to take out a second mortgage on their house to pay for my college. Today both of these practices are common and the result is a hyperbolic increase in the cost of sending kids off to college. It is expected that both the student and the parents will go in debt to be able to send little Johnny to the best college he gets accepted to. And somehow if we don’t do that we are bad parents! This affects the supply and demand curve, because there is little more important to us than being viewed as good supportive parents, even if it means hawking both our future and our kid’s future. This is why the price of college has gone up so ludicrously.

I will try to keep this final example short, but it is a pet peeve. If you live in California you may have noticed that your water bill has gone up quite a bit lately, even if you have reduced your usage and don’t water your yard anymore. The excuse is that because of the drought, they are attempting to discourage water usage through increased prices. There are two main reasons for increased water prices. First, your water company is a monopoly, so they really can charge whatever they want. Second, they probably have loaded up on huge amounts of debt and you are getting stuck with that bill. Just wait until interest rates go up; then you will really see inflation —  in everything.

You may ask, “Are there no checks and balances on central banks?” There isn’t, really, except for supply and demand. For example, if only one central bank implemented the crazy policies we referenced above then funds would flow away from the country that that central bank represented to countries whose central planners maintained more reasonable and sound approaches. The fact that central banks seem to be coordinating their experiment and in many cases seem to be racing toward the bottom of a currency war, has allowed their policies to go unchecked — there simply is nowhere to run to. With the easy monetary policies there is more money than ever to chase after the few investments that still pay some type of return; that, my friends, creates an extremely skewed supply and demand curve in our financial markets. It invokes unprecedented risk taking, leverage and debt.


If you noticed, I did not predict a time frame for the day of reckoning. I have learned that Ms. Economics will always make a fool out of anyone who thinks they can predict her. Second, I did not give any financial advice. And well, as for not depressing anyone, I say two out of three is not bad.

What is the Fed going to do?

March 18, 2015

This seems to be the only thing that matters in our financial markets these days. What is the Federal Reserve going to do? Financial media and Wall Street are obsessed with whether the Fed is going to remove the word “patient” from their discussion points as it relates to when they may begin raising interest rates. This obsession should be alarming to us all. Why should a free market economy be obsessed with central bank actions, much less whether a single word is dropped from the Fed vernacular at their most recent meeting? Isn’t there a time where we stop and say, this is crazy, how did we get here? Markets hang on every word spoken by our great wizards of finance. In my book, this is not what healthy economies are made of. Jim Grant does a great job succinctly explaining the problem with the Fed interventionism. It is interesting that the CNBC interviewer desperately wants Grant to say it is “possible” that the Federal Reserve can actually pull this off and the economy can slowly recover. It is like she is saying, “Give us some hope here Jim! What happens to us if we lose hope in the Federal Reserve’s experiment?” Grant handles the question masterfully.

Here are some other concerns with FED policy. Finally some more “respectable” investors are beginning to sound off.

In both the interview and article I’ve linked to above, the point is that we are living on faith and when the realization finally kicks in that the Fed policy hasn’t worked and won’t work, that is when the game changes and probably changes rather quickly and dramatically. Our world central bankers have found themselves between the proverbial rock and a hard place. They have chased poor monetary policy with worse monetary policy and they have dug the hole deeper and deeper. Now they have to find a way to communicate how they will soon be “normalizing” interest rates as proof their policies have worked and the “recovery” is real, yet knowing deep down that they likely cannot normalize interest rates because the economy is to fragile as a result of their policies. This is how you get such ridiculous statements as “I think it is important to get started and to start normalizing policy,” which St. Louis Fed President James Bullard said in an interview with The Wall Street Journal. “Even once we start to normalize, interest rates would be extraordinarily low.”

At some point in the not-too-distant future I think we will see a moment of clarity much like we saw in October 2014, when the above type of noncompliance with mainstream thinking gathers momentum in more corners of the investment world and market turbulence returns only with a multiple attached to it. In the interim the Fed may want to quote the infamous words of Rodney King, when he said, “Can’t we just all believe?” Well, maybe that isn’t exactly what King said, but that is what the Fed would like you to do.

A couple of big picture visuals and a question

March 3, 2015

It is not often that you can find charts dating back to 3000 B.C. I find it interesting that interest rates are at an all time low. It wasn’t until the creation of the Federal Reserve that interest rates were subject to manipulation. In the not too distant future we will find out that our central banks really do NOT have a clue what they are doing, unless it was always their plan to destroy world currencies — in which case they will be extraordinarily effective. Regardless, what an interesting chart!

From a speech from the Bank of England's Andy Haldane.

Bank of England

And what can you expect when the correction hits? Notice the penalty for violating the following executive order back in 1933… pretty serious stuff!

Executive_Order_6102Finally, my question: so why has the price at the gas pump moved up so dramatically when the price per barrel of oil is still at a near current low of $49? Does someone know something we don’t?

While the following new headline doesn’t exactly answer my question about the rapid acceleration of gas prices, it would seem that maybe we should hold off on filling up our gas tanks until prices collapse again… or not!

US running out of room to store oil; price collapse next?

“The U.S. has so much crude that it is running out of places to put it, and that could drive oil and gasoline prices even lower in the coming months.”


February 27, 2015

In past posts I have discussed that while central banks attempt to continue the façade of appearing to be in control, there are actually market dislocations and nonsensical markets. I’ve compared the markets to a rigged casino — there is really no way for the average investor to win. So I was interested in watching Robert Shiller’s short interview on Yahoo Finance, in which he notes the obvious fact that the golden age of investing may be over, but Americans refuse to accept it (–robert-shiller-231354246.html). Shiller’s point is that old assumptions we used to use for saving for retirement have gone out the window. Instead of assuming that we can get annualized returns of 10 percent on your retirement savings, we may need to assume what the current bond rates are — essentially zero. So how can you possibly save enough? Shiller says you need to live like a poor college student; and by that he is not suggesting taking out unlimited student loans.

One reason Americans are not yet accepting the fact that a decent return on your investment can no longer be assumed is because, for now, the equity markets are continuing to set new record highs, and large institutional investors, such as pension funds, are making remarkable returns since the “end” of the financial crisis in 2009. But this is part of my concern—why are financial markets setting new highs? In the past, equity markets were at least somewhat correlated to what was happening in the economy. Ask yourself if today’s record-setting markets are an actual reflection of our record setting-economy. If you think the answer to that question is yes, you don’t need to read further. But I have to assume the reason anyone reads this blog is because they sense things are not adding up. It seems everything today hinges on whether our world central banks are going to continue to give us our economic heroin of easy money and a zero interest rate policy, which is now negative interest rate policy in numerous countries.

When I’ve talked about central banks and their unprecedented monetary experiments, I have often made a generalization by using the term, “our world’s central banks.” In reality, however, there is an amazing difference among the central banks’ policies. A few nations have quite a different position than one of easy money and zero interest rate policies. Russia, for example, in response to collapsing oil prices and the crashing Ruble, has an interest rate of 15 percent–17 percent. It’s interesting that the mainline financial media is not bringing attention to the disparate monetary policies among different central banks. But there are a few who are talking about the “divergence” in different central bank policies and making an astute observation that this divergence will cause us to hit a brick wall sooner than later. If the unprecedented monetary experiments of many central banks are supposed to be working so well, why aren’t all central banks participating? If we hit a brick wall because not all central banks are able to maintain the same monetary policies, there will be a once-in-a-lifetime opportunity to make a lot of money if you are on the right side of a bet on how this divergence resolves itself. When our financial markets are entirely about central bank policies, and not about what is happening in the economy, it is not a healthy market. Rather, it creates incredible dislocations from which smart people or insiders can make unprecedented riches. Divergent monetary policies may be our present-day subprime home loans equivalent in the potential havoc they may wreak on the economy.

Another thing, the speed at which segments of the financial markets move is unparalleled and seemingly intensifying over the last couple of decades. Contemplate some of our more recent market moves: the rise and fall of high tech/, the rise and fall of real estate, the rise and fall of equities, and now the rise and fall of oil prices. Except for oil, because we are still in the midst of the oil disruption, other assets have recovered at a breakneck pace. It has been my argument that this type of market volatility puts the small investor at a huge disadvantage. But our disadvantage is someone else’s advantage.

Returning to oil prices: how is it that the developments that have led to the collapse of oil prices — down nearly 70 percent since summer — took us all by surprise? The basic rationale behind this price drop is the exploration of shale oil and lower demand, neither of which occurred overnight, but for some reason knocked the feet out from under oil. It wasn’t long ago that a barrel of oil was $150; now it is below $50 and commentators are making a case as to why it will go below $40 per barrel, maybe as low as $20 per barrel. I want to ask, since the exploration of shale oil and lower demand has been building for a while, why weren’t these investment experts predicting this major drop last summer? I still have a difficult time purging my mind of the constant drum beat of “peak oil” (the theory that oil production will and already has peaked, driving prices higher and higher, necessitating drastic changes in our dependence on oil).

What we need to be discussing is “peak monetary policy, peak debt, peak derivatives, peak bubbles, peak volatility, peak manipulation…”

Yes, I think it is safe to say the golden age of investing is long gone — at least for the average Joe.

chessIf you haven’t had enough reading for one day, here’s another story worth reading: