ZIRP – Page 3 – The Burning Platform

TWO OUTS IN THE BOTTOM OF THE NINTH

The housing market peaked in 2005 and proceeded to crash over the next five years, with existing home sales falling 50%, new home sales falling 75%, and national home prices falling 30%. A funny thing happened after the peak. Wall Street banks accelerated the issuance of subprime mortgages to hyper-speed. The executives of these banks knew housing had peaked, but insatiable greed consumed them as they purposely doled out billions in no-doc liar loans as a necessary ingredient in their CDOs of mass destruction.

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The millions in upfront fees, along with their lack of conscience in bribing Moody’s and S&P to get AAA ratings on toxic waste, while selling the derivatives to clients and shorting them at the same time, in order to enrich executives with multi-million dollar compensation packages, overrode any thoughts of risk management, consequences, or the impact on homeowners, investors, or taxpayers. The housing boom began as a natural reaction to the Federal Reserve suppressing interest rates to, at the time, ridiculously low levels from 2001 through 2004 (child’s play compared to the last six years).

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FOURTH TURNING: CRISIS OF TRUST

“Imagine some national (and probably global) volcanic eruption, initially flowing along channels of distress that were created during the Unraveling era and further widened by the catalyst. Trying to foresee where the eruption will go once it bursts free of the channels is like trying to predict the exact fault line of an earthquake. All you know in advance is something about the molten ingredients of the climax, which could include the following:

Economic distress, with public debt in default, entitlement trust funds in bankruptcy, mounting poverty and unemployment, trade wars, collapsing financial markets, and hyperinflation (or deflation)
Social distress, with violence fueled by class, race, nativism, or religion and abetted by armed gangs, underground militias, and mercenaries hired by walled communities
Cultural distress, with the media plunging into a dizzying decay, and a decency backlash in favor of state censorship
Technological distress, with cryptoanarchy, high-tech oligarchy, and biogenetic chaos
Ecological distress, with atmospheric damage, energy or water shortages, and new diseases
Political distress, with institutional collapse, open tax revolts, one-party hegemony, major constitutional change, secessionism, authoritarianism, and altered national borders
Military distress, with war against terrorists or foreign regimes equipped with weapons of mass destruction”

The Fourth Turning – Strauss & Howe – 1997

September 2015 marks the seventh anniversary of this Fourth Turning Crisis. The economic, social, cultural, ecological, political, and military distress propagates by the minute as the globe is besieged by economic turmoil, increased human suffering, and endemic corruption of the political and ruling classes. The Federal Reserve/Wall Street created global economic implosion was the spark which catalyzed this fourth Crisis period in U.S. history in September 2008. Neil Howe in a 2012 essay assessed the beginning of this Fourth Turning and why 9/11 was not the catalyst:

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THEY’RE GONNA NEED A BIGGER BALANCE SHEET

Driving home from work on Friday night I found it terribly amusing listening to the “business journalists” on the local news station trying to explain the 531 point plunge in the Dow and the 1,105 point plummet from the Tuesday high. The job of these faux journalist mouthpieces for the status quo is not to report the facts, analyze the true factors underlying the market, or seek the truth. Their job is to calm the masses, keep them sedated, and paint the rosiest picture possible.

The brainless twit who reported the stock market bloodbath immediately went into the mode of counteracting the impact of what was happening. She said the market is overreacting, as the country has strong job growth, low inflation, a strongly recovering housing market, and an improving economy. The fact that everything she said was a complete and utter falsehood was exacerbated by her willful ignorance of the Fed created bubble leading to the most overvalued stock market in history. How can these people pretend to be business journalists when they haven’t got a clue about stock market valuations and just say what they are told to say?

Anyone who listens to a mainstream media pundit, talking head, or spokes bimbo deserves the reaming they are going to receive. They are paid to lie, obfuscate, spin, and propagandize on behalf of their corporate media executives, who are beholden to Wall Street bankers, mega-corporations, and the government for their advertising dollars. The mainstream media is nothing but entertainment for the masses, part of the bread and circuses designed to distract the dumbed down, iGadget addicted, ignorant masses.

The entire stock market bubble has been created and sustained by the Federal Reserve and their QE and ZIRP schemes to prop up insolvent Wall Street banks, enrich corporate executives, and produce the appearance of a recovering economy. The wealth was supposed to trickle down to the masses, but the trickle has been yellow in appearance and substance. The average American is far worse off today than they were in 2007, with the Greater Depression Part 2 underway.

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CORPORATE DEBT – ROAD TO OBLIVION IN A BEAR MARKET

Any article that starts with a quote from Jim Grant is guaranteed to be a fact based, common sense, reasoned analysis of our warped, debt saturated, over-valued, Federal Reserve rigged financial markets. John Hussman starts his weekly letter with this quote from Jim Grant:

“The way to wealth in a bull market is debt. The way to oblivion in a bear market is also debt, and nobody rings a bell.” – James Grant

We’ve been in a Fed QE and ZIRP induced six year bull market that has been sputtering since QE 3 ended in October 2014. Leveraging yourself to the hilt and piling into the stock market has been the road to riches for six years, just as leveraging to the hilt in real estate was the road to riches from 2002 through 2007, and leveraging to the hilt in internet stocks was the road to riches from 1998 through 2000. Of course, the dot.com and housing road to riches detoured into ditches that wiped out trillions of phantom wealth, just as the current road is leading to a grand canyon size ditch.

Total credit market debt has reached all-time highs. The de-leveraging of consumers, liquidation of insolvent Wall Street banks, and bankruptcies of zombie retailers, real estate developers, and mall owners was postponed by Federal Reserve intervention, changing accounting rules to hide bad debt, political shenanigans, and taxpayers paying for the extreme risk taking by bankers and corporate CEOs. Total credit market debt sits at $59 trillion, up from $52 trillion in 2009 at the depths of the recession. This increase has been entirely driven by a $5.3 trillion increase in government debt and a $1.6 trillion increase in corporate debt. The propaganda about corporations flush with cash is bold faced lie. Corporations have increased their debt load by 25% since 2009.

As Dr. Hussman points out, the Fed has encouraged this behavior by the biggest corporations on the planet with their suppression of market interest rates and their gift of $3 trillion to the Wall Street banks. Corporate CEOs are supposed to be the smartest guys in the room, but they haven’t been able to grow their businesses through innovation, creativity, new products, or new investments in plant and equipment. Their entire playbook consists of outsourcing jobs to foreign countries, keeping wages below the level of inflation, and borrowing cheaply from Wall Street banks to buyback their stock and boost earnings per share, so their stock price will go higher, enriching themselves.

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DEPARTMENT STORE RESULTS IMPLODING

The government issued their monthly retail sales this past week and four of the biggest department store chains in the country announced their quarterly results. The year over year retail sales increase of 2.4% is pitifully low in an economy that is supposedly in its sixth year of economic growth with a reported unemployment rate of only 5.3%. If all of these jobs have been created, why aren’t retail sales booming?

The year to date numbers are even worse than the year over year numbers. With consumer spending accounting for 70% of our GDP and real inflation running north of 5%, it’s pretty clear most Americans are experiencing a recession, despite the propaganda data circulated by the government and Fed. The only people not experiencing a recession are corporate executives enriching themselves through stock buybacks, Wall Street bankers using free Fed Bucks while rigging the the markets in their favor, politicians and government bureaucrats reaping their bribes from billionaire oligarchs, and the media toadies who dispense the Deep State approved propaganda to keep the ignorant masses dazed, confused, and endlessly distracted by Cecil the Lion, Bruce/Caitlyn Jenner, Ferguson, and blood coming out of whatever.

You won’t hear CNBC, Bloomberg, the Wall Street Journal or any corporate mainstream media outlet reference the fact retail sales growth is at the exact same levels as when recession hit in 2008 and 2001. Their job is to regurgitate the message of economic recovery and confidence in the future, despite overwhelming evidence to the contrary.

Retail sales are actually far worse than the 2.4% reported number. Excluding the subprime debt fueled auto sales, retail sales only grew by 1.3% in the last year. The automakers are practically giving vehicles away as their lots are stuffed with inventory. The length of auto loans and the average amount of auto loans are now at all-time highs. The percentage of subprime auto loans is surging to record levels, as defaults begin to rise. The percentage of vehicles being leased is also at an all-time high. To call these “auto sales” strains credibility. These people are either perpetually renting their vehicles or just driving them until the repo man shows up.

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FED LUNACY IS TO BLAME FOR THE COMING CRASH

This week John Hussman’s pondering about the state of our markets is as clear and concise as it’s ever been. He starts off by describing the difference between an economy operating at a low level versus a high level. He’s essentially describing a 2% GDP economy versus a 4% GDP economy. We have been stuck in a low level economy since 2008. And there is one primary culprit for the suffering of millions – The Federal Reserve and their Wall Street Bank owners. They are the reason incomes are stagnant, the labor participation rate is at 40 year lows, savers can only earn .25% on their savings, and consumers have been forced further into debt to make ends meet. Meanwhile, corporate America and the Wall Street banks are siphoning off record profits, paying obscene pay packages to their executives, buying off the politicians in Washington to pass legislation (TPP) designed to enrich them further, and arrogantly telling the peasants to work harder.

In economics, we often describe “equilibrium” as a condition where demand is equal to supply. Textbooks usually depict this as a single point where a demand curve and a supply curve intersect, and all is right with the world.

In reality, we know that economies often face a whole range of possible equilibria. One can imagine “low level” equilibria where producers are idle, jobs are scarce, incomes stagnate, consumers struggle or go into debt to make ends meet, and the economy sits in a state of depression – which is often the case in developing countries. One can also imagine “high level” equilibria where producers generate desirable goods and services, jobs are plentiful, and household income is sufficient to demand all of that output.

The problem is that troubled economies don’t just naturally slide up to “high level” equilibria. Low level equilibria are typically supported and reinforced by a whole set of distortions, constraints, and even incentives for the low level equilibrium to persist. In developing countries, these often take the form of legal restrictions, price controls, weak property rights, political and civil instability, savings disincentives, lending restrictions, and a full catastrophe of other barriers to economic improvement. Good economic policy involves the art of relaxing constraints where they are binding, and imposing constraints where their absence allows the activities of some to injure or violate the rights of others.

In the United States, observers seem to scratch their heads as to why the economy has shifted down to such a low level of labor force participation. Even after years of recovery and trillions of dollars directed toward persistent monetary intervention, the economy seems locked in a low level equilibrium. Yet at the same time, corporate profits and margins have pushed to record highs, contributing to gaping income disparities.

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BACK TO THE BEGINNING

The MSM is ecstatic about May’s “tremendous” surge in existing home sales to a 5.35 million annual rate. The recovery has arrived. All is well. Those Obama waiter jobs at Ruby Tuesday are leading to a dramatic housing recovery. Please note a few things on the chart below. There was a spike in 2013 to this level and then it petered out. There was a spike to this level in 2009 when the Obamanistas were offering the first time home buyer credit to dupes, and then sales predictably crashed.

So annual sales are now where they were in 2007, after a 25% crash from the 2005 high. Annual sales are back to the 1999 through 2001 range, before Greenspan created the biggest housing bubble in history. After six years of 0% interest rates, foreclosure suppression, Wall Street hedge funds doing much of the buying, and Chinese billionaires buying everything they can get their hands on, this is all we have? I noticed the percentage of first time buyers went up to 32% from 27% last year, while the percentage of investors dropped to a four year low. You can thank the government, as Fannie, Freddie, and the FHA are now pushing 3.5% down payment mortgages to the poor ignorant masses. The smart money (Wall Street) is exiting and the dumb money (average schmucks) is being lured into the market by low down payments and delusions of future price increases.

With mortgage rates already rising above 4%, artificial demand from investors in reverse, a stock market crash in the not so distant future, prices out of reach for most people, and stagnant real household incomes, this does not mark the start of a housing recovery. It marks the beginning of the end for the latest bubble in real estate. Anyone who bought a low end home in the last year is already underwater, as you can see in the chart below. At least the .1% are still reaping the benefits of ZIRP and QE, as high end homes are booming. Welcome to the Bernanke/Yellen housing recovery.

CONSUMERS NOT FOLLOWING ORDERS

Last week the government reported personal income and spending for April. After months of blaming non-existent consumer spending on cold weather, shockingly occurring during the Winter, the captured mainstream media pundits, Ivy League educated Wall Street economist lackeys, and Keynesian loving money printers at the Fed have run out of propaganda to explain why Americans are not spending money they don’t have. The corporate mainstream media is now visibly angry with the American people for not doing what the Ivy League propagated Keynesian academic models say they should be doing.

The ultimate mouthpiece for the banking cabal, Jon Hilsenrath, who does the bidding of the Federal Reserve at the Rupert Murdoch owned Wall Street Journal, wrote an arrogant, condescending, putrid diatribe, directed at the middle class victims of Wall Street banker criminality and Federal Reserve acquiescence to the vested corporate interests that run this country. Here are the more disgusting portions of his denunciation of the formerly middle class working people of America.

We know you experienced a terrible shock when Lehman Brothers collapsed in 2008 and your employer responded by firing you.

We also know you shouldn’t have taken out that large second mortgage during the housing boom to fix up your kitchen with granite counter-tops.

You should feel lucky you’re not a Greek consumer.

Fed officials want to start raising the cost of your borrowing because they worry they’ve been giving you a free ride for too long with zero interest rates.

We listen to Fed officials all of the time here at The Wall Street Journal, and they just can’t figure you out.

Please let us know the problem.

The Wall Street Journal was swamped with thousands of angry responses from irate real people living in the real world, not the elite, QE enriched, oligarchs living in Manhattan penthouses, mansions on the Hamptons, or luxury condos in Washington, D.C. Hilsenrath presumes to know how the average American has been impacted by the criminal actions of sycophantic Ivy League educated central bankers and their avaricious Wall Street owners.

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GOVERNMENT USING SUBPRIME MORTGAGES TO PUMP HOUSING RECOVERY – TAXPAYERS WILL PAY AGAIN

It seems hard to believe, but your government is purposely recreating the mortgage debacle of 2007 and putting you on the hook for the billions in losses coming down the road. In their frantic effort to generate the appearance of economic recovery they are willing to gamble with taxpayer’s money while luring unsuspecting blue collar folks into buying houses they can’t afford. During the previous housing bubble, greedy Wall Street bankers, deceitful mortgage brokers, and corrupt rating agencies colluded to commit the greatest control fraud in the history of mankind. This time it is your government, aided and abetted by the Federal Reserve, that is actively promoting the lending of money to people incapable of paying it back. And again, you the taxpayer will be on the hook when it predictably blows up.

The FHA, created during the first Great Depression, is supposed to be self-sustaining through mortgage insurance premiums charged to homeowners, just like Fannie, Freddie, Medicare, Social Security, and student loan lending were supposed to be self- sustaining through taxes, fees, and interest. This agency was supposed to promote homeownership for lower income Americans, but has been used by politicians as a tool to capture votes, payoff crony capitalist benefactors, and as a Keynesian stimulus tool designed to kindle a fake housing recovery. They entered the fray at the tail end of the last Fed/Wall Street created housing bubble, insuring a huge number of subprime mortgage loans from 2007 through 2009. The taxpayer has already had to bail out this incompetent, politically motivated, joke of an agency to the tune of $1.7 billion in 2014.

Edward J. Pinto, a former Fannie Mae official, estimates that under standard accounting practices the agency is already insolvent to the tune of $25 billion. Mark to fantasy accounting hasn’t just benefitted the criminal Wall Street cabal, but also the bloated pig government housing agencies – Fannie, Freddie and the FHA. The FHA’s share of new loans with mortgage insurance stood at 16.4% in 2005 and currently stands at 44.3%. This is a ridiculously high level considering the percentage of first time home buyers is near all-time lows and low income buyers have lower real median household income than they had in 2005. Distinguished congresswoman Maxine Waters, who once declared: “We do not have a crisis at Freddie Mac, and particularly Fannie Mae, under the outstanding leadership of Frank Raines.”, prior to them imploding and costing taxpayers $187 billion in losses, thinks the FHA is doing a bang up job. Her financial acumen is unquestioned, so you can expect another bailout in the near future.

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BREAKING BAD (DEBT) – EPISODE THREE

In Part One of this three part article I laid out the groundwork of how the Federal Reserve is responsible for the excessive level of debt in our society and how it has warped the thinking of the American people, while creating a tremendous level of mal-investment. In Part Two I focused on the Federal Reserve/Federal Government scheme to artificially boost the economy through the issuance of subprime debt to create a false auto boom. In this final episode, I’ll address the disastrous student loan debacle and the dreadful global implications of $200 trillion of debt destroying the lives of citizens around the world.

Getting a PhD in Subprime Debt

“When easy money stopped, buyers couldn’t sell. They couldn’t refinance. First sales slowed, then prices started falling and then the housing bubble burst. Housing prices crashed. We know the rest of the story. We are still mired in the consequences. Can someone please explain to me how what is happening in higher education is any different?This bubble is going to burst.” – Mark Cuban

Now we get to the subprimiest of subprime debt – student loans. Student loans are not officially classified as subprime debt, but let’s compare borrowers. A subprime borrower has a FICO score of 660 or below, has defaulted on previous obligations, and has limited ability to meet monthly living expenses. A student loan borrower doesn’t have a credit score because they have no credit, have no job with which to pay back the loan, and have no ability other than the loan proceeds to meet their monthly living expenses. And in today’s job environment, they are more likely to land a waiter job at TGI Fridays than a job in their major. These loans are nothing more than deep subprime loans made to young people who have little chance of every paying them off, with hundreds of billions in losses being borne by the ever shrinking number of working taxpaying Americans.

Student loan debt stood at $660 billion when Obama was sworn into office in 2009. The official reported default rate was 7.9%. Obama and his administration took complete control of the student loan market shortly after his inauguration. They have since handed out a staggering $500 billion of new loans (a 76% increase), and the official reported default rate has soared by 43% to 11.3%. Of course, the true default rate is much higher. The level of mal-investment and utter stupidity is astounding, even for the Federal government. Just some basic unequivocal facts can prove my case.

There were 1.67 million Class of 2014 students who took the SAT. Only 42.6% of those students met the minimum threshold of predicted success in college (a B minus average). That amounts to 711,000 high school seniors intellectually capable of succeeding in college. This level has been consistent for years. So over the last five years only 3.5 million high school seniors should have entered college based on their intellectual ability to succeed. Instead, undergraduate college enrollment stands at 19.5 million. Colleges in the U.S. are admitting approximately 4.5 million more students per year than are capable of earning a degree. This waste of time and money can be laid at the feet of the Federal government. Obama and his minions believe everyone deserves a college degree, even if they aren’t intellectually capable of earning it, because it’s only fair. No teenager left behind, without un-payable debt.

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BREAKING BAD (DEBT) – EPISODE TWO

‘If you’re committed enough, you can make any story work. I once told a woman I was Kevin Costner, and it worked because I believed it’ – Saul Goodman – Breaking Bad

“As calamitous as the sub-prime blowup seems, it is only the beginning. The credit bubble spawned abuses throughout the system. Sub-prime lending just happened to be the most egregious of the lot, and thus the first to have the cockroaches scurrying out in plain view. The housing market will collapse. New-home construction will collapse. Consumer pocketbooks will be pinched. The consumer spending binge will be over. The U.S. economy will enter a recession.” – Eric Sprott – 2007

In Part One of this article I provided the background of how our current debt saturated economy got to this point of ludicrousness. The “crazy” bloggers, prophets of doom, and analysts who could do basic math were warning of an impending financial crisis in 2006 and 2007, which would be caused by the issuance of hundreds of billions in subprime slime by the Too Big To Trust Wall Street shysters. Subprime mortgages, auto loans, and credit card lines provided the kindling for the 2008 conflagration.

Under normal circumstances we wouldn’t have seen such irrational, reckless, greedy behavior from Wall Street for another generation. But, Wall Street didn’t have to accept the consequences of their actions. They were bailed out and further enriched by their puppets at the Federal Reserve, the lackey politicians they installed in Washington D.C., and on the backs of honest, hard-working, tax paying Americans. The lesson they learned was they could continue to take excessive, reckless, unregulated risks without concern for losses, downside, or consequences.

In reality, the Fed and government have worked in tandem with Wall Street to create the subprime economic recovery. The scheme has been to revive the bailed out auto industry by artificially boosting sales through dodgy, low interest, extended term debt. With the Feds taking over the entire student loan market, they have doled out hundreds of billions to kids who don’t have the educational skills to succeed in college, in order to keep them out of the unemployment calculation.

That’s why you have a 5.7% unemployment rate when 41% of the working age population (102 million people) is not working. The appearance of economic recovery has been much more important to the ruling class than an actual economic recovery for average Americans, because the .1% have made out like bandits anyway. Who has benefited from the $650 billion of student loan and auto debt disseminated by the oligarchs in the last four years, the borrowers or lenders?

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BREAKING BAD (DEBT) – EPISODE ONE

“At this juncture, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.” – Fed chairman, Ben Bernanke, Congressional testimony, March, 2007

“Capitalism without financial failure is not capitalism at all, but a kind of socialism for the rich.” – James Grant, Grant’s Interest Rate Observer

The Federal Reserve issued their fourth quarter Report on Household Debt and Credit last week to the sounds of silence in the mainstream media. There were minor press releases issued by the “professional” financial journalists regurgitating the Federal Reserve’s storyline. Actual analysis, connecting the dots, describing how the massive issuance of student loan and auto loan debt has produced a fake economic recovery, and how the accelerating default rates in auto loans and student loans will produce the next subprime debt implosion, were nowhere to be seen on CNBC, Bloomberg, the WSJ, or any other status quo propaganda media outlet. Their job is not to analyze or seek truth. Their job is to keep their government patrons and Wall Street advertisers happy, while keeping the masses sedated, misinformed, and pliable.

Luckily, the government hasn’t gained complete control over the internet yet, so dozens of truth telling blogs have done a phenomenal job zeroing in on the surge in defaults. The data in the report tells a multitude of tales conflicting with the “official story” sold to the public. The austerity storyline, economic recovery storyline, housing recovery storyline, and strong auto market storyline are all revealed to be fraudulent by the data in the report. Total household debt grew by $117 billion in the fourth quarter and $306 billion for the all of 2014. Non-housing debt in the 4^th quarter of 2008, just as the last subprime debt created financial implosion began, was $2.71 trillion. After six years of supposed consumer austerity, total non-housing debt stands at a record $3.15 trillion. This is after hundreds of billions of the $2.71 trillion were written off and foisted upon the backs of taxpayers, by the Wall Street banks and their puppets at the Federal Reserve.

The corporate media talking heads cheer every increase in consumer debt as proof of economic recovery. In reality every increase in consumer debt is just another step towards another far worse economic breakdown. And the reason is simple. Real median household income is still below 1989 levels. The average American family hasn’t seen their income go up in 25 years. What they did see was their chains of debt get unbearably heavy. Non-housing consumer debt (credit card, auto, student loan, other) was $800 billion in 1989.

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FOURTH TURNING – THE SHADOW OF CRISIS HAS NOT PASSED – PART THREE

In Part One of this article I attempted to illuminate the concept of generational theory as articulated by Strauss and Howe in The Fourth Turning. In Part Two I provided proof this Crisis is far from over, with ever increasing debt, civic decay and global disorder propelling the world towards war.

Seeds of Crisis & War

“The seasons of time offer no guarantees. For modern societies, no less than for all forms of life, transformative change is discontinuous. For what seems an eternity, history goes nowhere – and then it suddenly flings us forward across some vast chaos that defies any mortal effort to plan our way there. The Fourth Turning will try our souls – and the saecular rhythm tells us that much will depend on how we face up to that trial. The saeculum does not reveal whether the story will have a happy ending, but it does tell us how and when our choices will make a difference.” – Strauss & Howe – The Fourth Turning

When you accept the fact history is cyclical and continuous linear progress is not what transpires in the real world, you free yourself from the mental debilitation of normalcy bias and cognitive dissonance. Things do get worse. There are dark periods of history and they recur on a regular cycle. And we are in the midst of one of those dark periods. This Crisis will not be resolved without much pain, sacrifice, bloodshed, and ultimately war. Catastrophe is a strong possibility. The core elements of this Crisis – debt, civic decay, global disorder – are coalescing into a perfect storm which will rage for the next ten to fifteen years. The rhythms of history only provide a guidepost of timing, while the specific events and outcomes are unknowable in advance. The regeneracy of society into a cohesive, unified community, supporting the government in a collective effort to solve society’s most fundamental problems seems to have been delayed. Or has it?

Maybe the answer can be found in the resolution of the last Fourth Turning. The seeds of the next crisis are always planted during the climax of the previous crisis, when the new social order is established. The American Revolution Crisis created a new nation, but left unresolved the issue of slavery. This seed grew to become the catalyst for the Civil War Crisis. The resolution of the Civil War Crisis greatly enhanced the power of the central government, while reducing the influence of the States. The rise of central authority led to the creation of the Federal Reserve, the implementation of income taxes to fund a vastly larger Federal government and the belief among the political class that America should intervene militarily in the affairs of other countries. The Great Depression was created by the monetary policies of the Federal Reserve; the New Deal programs were a further expansion of Federal government; FDR outlawed the ownership of gold; and America’s subsequent involvement in World War II created a military and economic superpower.

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RAND PAUL REINTRODUCES BILL TO AUDIT THE FED

The “Audit The Fed Bill” was passed in the House of Representatives with overwhelming bi-partisan support with a vote of 333-92 in September 2014.
Senator Rand Paul’s Bill has 30 cosponsors including Ted Cruz (R- Texas), Mark Rubio (R- Florida), Senate Majority Leader Mitch McConnell (R-Kentucky), and Richard Shelby (R-Alabama).
If passed it would likely be vetoed by President Obama who this week proposed a $4 trillion budget for fiscal year 2016.
Since the 2008 Financial Crisis solutions of Quantitative Easing and ZIRP, the Federal Reserve’s balance sheet has expanded to over $4 trillion.
The Federal Reserved paid an all time record high profit of $98.7 billion to the United States Treasury for fiscal year 2014.
The first ever partial audit of the Federal Reserve in 2011 by the Government Accountability Office revealed the Federal Reserve secretly gave $16 trillion to domestic and foreign banks between December 2007-June 2010:

Citigroup: $2.5 trillion ($2,500,000,000,000)
Morgan Stanley: $2.04 trillion ($2,040,000,000,000)
Merrill Lynch: $1.949 trillion ($1,949,000,000,000)
Bank of America: $1.344 trillion ($1,344,000,000,000)
Barclays PLC (United Kingdom): $868 billion ($868,000,000,000)
Bear Sterns: $853 billion ($853,000,000,000)
Goldman Sachs: $814 billion ($814,000,000,000)
Royal Bank of Scotland (UK): $541 billion ($541,000,000,000)
JP Morgan Chase: $391 billion ($391,000,000,000)
Deutsche Bank (Germany): $354 billion ($354,000,000,000)
UBS (Switzerland): $287 billion ($287,000,000,000)
Credit Suisse (Switzerland): $262 billion ($262,000,000,000)
Lehman Brothers: $183 billion ($183,000,000,000)
Bank of Scotland (United Kingdom): $181 billion ($181,000,000,000)
BNP Paribas (France): $175 billion ($175,000,000,000)

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NO ONE TOLD YOU WHEN TO RUN, YOU MISSED THE STARTING GUN

Ticking away the moments that make up a dull day
You fritter and waste the hours in an offhand way.
Kicking around on a piece of ground in your home town
Waiting for someone or something to show you the way.

Tired of lying in the sunshine staying home to watch the rain.
You are young and life is long and there is time to kill today.
And then one day you find ten years have got behind you.
No one told you when to run, you missed the starting gun.

Pink Floyd – Time

I stumbled across two mind blowing charts yesterday that had me pondering how generations of Americans had frittered their lives away, spending money they didn’t have on things they didn’t need, utilizing easy to acquire debt, and saving virtually nothing for their futures or a rainy day. We are a nation of Peter Pans who never grew up. While I was driving home from work, one of my favorite Pink Floyd tunes came on the radio and the lyrics to Time seemed to fit perfectly with the charts I had just discovered.

We were all young once. Old age and retirement don’t even enter your thought process when you are young. Most people aren’t sure what they want to do for the rest of their lives when they are in their early twenties. Slaving away at your entry level low paying job, chasing the opposite sex, getting drunk, and having fun on the weekends is the standard for most young people. But you eventually have to grow up. Because one day you find ten years have got behind you. No one tells you when to grow up. And based on the charts below, tens of millions missed the starting gun.

I graduated college in 1986 and started my entry level CPA firm job, making $18,000 per year. I did live at home for a year and a half before getting an apartment with a friend. I was able to buy a car, pay off my modest student loan debt, go out on the weekends, and still save some money. I was in my early 20’s and had opened a mutual fund account at Vanguard. Anyone who entered the job market from the mid 1970s through the mid 1980’s, which would be the late Baby Boomers and early Generation Xers, had job opportunities and the benefit of low stock market valuations.

P/E ratios of the market were single digits in the late 70s and early 80s, versus 20 today. Dividend yields on stocks averaged 5% for the S&P 500, versus 1.9% today. The Dow bottomed out at 759 in 1980, while the S&P 500 bottomed at 98. A 20 year secular bull market was about to get under way. Baby Boomers and Generation Xers had the opportunity of a lifetime. Even after six years of the bull, when I graduated from college the Dow stood at 1,786 and the S&P 500 stood at 521. I had just begun to invest when the 1987 crash wiped out 20% in one day. It meant nothing to me. I didn’t have much to lose, so I just kept investing.

The 20 year bull market took the Dow from 759 to 11,722 by January 2000. The S&P 500 rose from 98 to 1,552 by March 2000. You also averaged about a 3% dividend yield per year over the entire 20 years. Your average annual return, including reinvested dividends, exceeded 17%. Anyone who even saved a minimal amount of money on a monthly basis, would have built a substantial nest egg for retirement. If you had invested in 10 Year Treasuries, your annual return would have exceeded 11% over the 20 years. Even an ultra-conservative investor who only put their money into 5 year CDs would have averaged better than 7% per year over the 20 years.

Even with the two stock market collapses since 2000, your average annual return in the stock market since 1980 still exceeds 11%. That’s 34 years with an average annual total return of better than 11%. Every person who had a job over this time frame should have accumulated a decent level of retirement savings. That is why the chart below is so shocking. Over 15% of all people 60 and older and 23% of people 45 to 59 years old have NO retirement savings. None. Nada. Zilch. This means 25 million Boomers and Xers are stuck living off a Social Security pittance and choosing between keeping the heat on or eating a feast of Ramen noodles and Friskies. It seems they let 30 years get behind them. They missed the starting gun.

I’m not shocked that over 50% of 18 to 29 year olds have no retirement savings. With the terrible job market, declining real wages, massive levels of student loan debt, two stock market crashes in the space of eight years, and 4% annual returns since 2000, young people today have neither the means nor trust in the system to save for retirement. Their elders had no such excuse. Just a minimal amount per paycheck saved over the last 30 years would have compounded to well over $100,000, even at modest salary levels. It is disgraceful that 25 million people over the age of 45 have saved nothing for their retirement. Far more disgraceful is the median household retirement balance of $3,000 for all working age households. There are 122 million households in this country and 61 million of them have $3,000 or less in retirement savings.

The far worse data points are the $12,000 median retirement balance of aged 55 to 64 households and the $10,100 median retirement balance of aged 45 to 54 households. These people are on the edge of retirement and have less than one year’s expenses saved. There is no legitimate excuse for this pitiful display of planning. These people had decades to save, strong financial market returns, and if they worked for a decent size organization – matching contributions to their retirement accounts. They didn’t need a huge salary. They didn’t need to save 20% of their salary. They didn’t have to be an investing genius. A savings allocation of just 3% to 5% would have grown into a decent sized nest egg after a few decades of compounding.

We know from the data in the chart, it didn’t happen. The concept of delayed gratification is unknown to the millions of nearly broke Boomers and Xers, shuffling towards an old age of poverty, misery and regret. A 64 year old has a life expectancy of about 20 years. They’ll have to budget “very” frugally to make that $12,000 last. The question is how did it happen. I don’t buy the load of crap that you can’t judge people as groups. I judge people by their actions, not their words. I know you can’t lump every Boomer and Xer into one box. Individuals in every generation have bucked the trend, lived within their means, saved for the future, and accumulated significant nest eggs for their retirement. But the aggregate numbers don’t lie. The majority of those over the age of 45 have squandered their chance at a relatively comfortable retirement. These are the people who most vociferously insist the government do something about their self created plight. It’s their right to free healthcare, free food, subsidized housing, free utilities, higher minimum wages, and a comfortable government subsidized retirement. They are wrong. They had a right to life, liberty and the pursuit of happiness. It was up to them to educate themselves, get a job, work hard, and accumulate savings.

The generations of live for today, don’t worry about tomorrow Americans over the age of 45 have no one to blame but themselves. They bought those 4,500 sq foot McMansions with negative amortization 0% down mortgages. They had to keep up with the Jones-es by putting in granite counter-tops, stainless steel appliances, home theaters, Olympic sized swimming pools, and enormous decks. They have HDTVs in every room in their house and must have every premium cable channel, along with the NFL package. They upgrade their phones every time Apple rolls out a new and improved version. They pay landscapers to manicure their properties. They lease new BMWs every three years. They have taken exotic vacations on an annual basis. They haven’t packed a lunch for themselves since they were 16 years old. Eating out for lunch and dinner has been a staple of their existence for decades. That morning Starbucks coffee is a given. A new wardrobe of name brand stylish clothes for every season is a requirement because your neighbors and co-workers are constantly judging you. Nothing proves you’re a success like a Rolex watch, Canali suit, Versace boots, or Gucci handbag. The have it now generations got it then and have virtually nothing now because they acquired all of these things with debt.

Real cumulative household income is up 10% since 1980. Consumer debt outstanding has risen from $350 billion in 1980 to $3.267 trillion today. That is a 933% increase. We’ve had decades of faux prosperity aided and abetted by Wall Street shysters, corrupt politicians, mega-corporation mass merchandisers, and Madison Avenue maggots trained in the methods of Edward Bernays to convince willfully ignorant consumers to consume. And consume we did. Saving, not so much. You can blame the oligarchs, bankers, retailers, and politicians for the fact you didn’t save, but it rings hollow. No matter how much propaganda is spewed by the ruling class, we are still individuals with free will. The older generations had choices. Saving money requires only one thing – spending less than you make. Most Boomers and Xers chose to spend more than they made and financed the difference. When the average credit card balance is five times greater than the median retirement account balance, you’ve got a problem. The facts about our consumer empire of debt are unequivocal as can be seen in these statistics:

Average credit card debt: $15,593
Average mortgage debt: $153,184
Average student loan debt: $32,511

$11.62 trillion in total debt
$880.3 billion in credit card debt
$8.05 trillion in mortgages
$1.12 trillion in student loans

I don’t blame those in their 20’s and 30’s for not having retirement savings. Anyone who entered the workforce around the year 2000 has good reason to not trust the system or their elders. There have been two stock market collapses and every asset class is now extremely overvalued due to the criminal machinations of the Federal Reserve. There are far less good paying jobs. Real wages keep declining. They were convinced by their elders to load up on student loan debt, leaving them as debt serfs. The Wall Street/Federal Reserve scheme to boost home prices and repair their insolvent balance sheets has successfully kept young people from ever being able to afford a home. So you have young people unable to save, invest or spend. You have middle aged and older Americans with little or no savings, mountains of debt, low paying service jobs, and an inability to spend. The only people left with resources are the .1% who have captured the system, peddle the debt, and reap the rewards of consumption versus saving. They may be able to engineer a stock market rally to further enrich themselves, but they can not propel the real economy of 318 million people. Our consumer society is dying – asphyxiated by debt – shorter of breath and one day closer to death.

I’d love to offer some sage advice on how to fix this problem, but it’s too late. Too many people missed the starting gun. More than ten years got behind them. No one is going to come to the rescue of people who never saved for their future. The Federal government has already made $200 trillion of entitlement promises it can’t keep. State governments have made tens of trillions in pension promises they can’t keep. They can’t tax young people who don’t have jobs. Older generations who think the government is going to rescue them from their foolish shortsighted choices are badly mistaken. Their benefits are likely to be reduced because the unsustainable will not be sustained. The 45 to 64 year old cohort who chose not to save can run and run to try and catch up with the sun, but it’s too late. It’s sinking. Their plans have come to naught. They are destined for lives of quiet desperation. There is nothing more to say.

So you run and you run to catch up with the sun but it’s sinking
Racing around to come up behind you again.
The sun is the same in a relative way but you’re older,
Shorter of breath and one day closer to death.

Every year is getting shorter; never seem to find the time.
Plans that either come to naught or half a page of scribbled lines
Hanging on in quiet desperation is the English way
The time is gone, the song is over,
Thought I’d something more to say.

Pink Floyd – Time

WHAT THE FED HAS WROUGHT

The chart below might be the most powerful indictment of the Federal Reserve and our corporate fascist empire of debt ever created. Some people don’t get charts. Charts tell a story. This chart tells the story of elitist bankers supporting the agenda of a corporate fascist state, resulting in the gutting of the middle class. Anyone who views this chart in a positive manner is either a Federal Reserve banker or their paycheck is dependent upon the continuation of the pillaging of the working class. Corporate profits are at all-time highs. Profit margins have always reverted to the mean throughout modern history. If they remain at all-time highs then something is terribly wrong.

“Profit margins are probably the most mean-reverting series in finance, and if profit margins do not mean-revert, then something has gone badly wrong with capitalism. If high profits do not attract competition, there is something wrong with the system and it is not functioning properly.” – Jeremy Grantham, Barron’s

Here is the story I see in that chart. Corporate profits as a percentage of GNP have averaged 6.5% over the last 67 years. As you can see, it is a volatile figure. Corporate profits rise during expansions and fall during recessions. That has been a given over time. The reason corporate profits have always reverted to the mean was due to the basic tenets of free market capitalism. When a company is generating outsized profits, that industry will then attract new competitors, resulting in price competition and lower profits. From 1950 through 1971, corporate profits as a percentage of GNP fluctuated in a narrow range between 5% and 7%. This was a reflection of a market driven by competition, a non-interventionist Federal Reserve, and a government not captured by corporate interests.

It is no coincidence since Nixon closed the gold window in 1971 and unleashed greedy bankers, feckless politicians, and self serving corporate executives to utilize easy money and prodigious amounts of debt to financialize our economic system and deform capitalism, corporate profits have boomed and busted. The Fed created booms and busts are clearly evident on the chart. Nixon toady Arthur Burns created an inflationary boom in corporate profits to 8% of GNP in the late 70’s followed by the collapse to 3% caused by Volcker having to raise rates to extreme levels to crush the Burns created runaway inflation.

You can see exactly when the Maestro assumed command at the Fed and proceeded to introduce the Greenspan Put, encouraging speculation, borrowing and mal-investment. His easy money boom led to the dot com bubble that doubled corporate profits from their 1987 low. Of course the profits vaporized in an instant and plunged to 4% of GNP in 2001. Greenspan and then Bernanke proceeded to drive interest rates to record lows creating a prodigious housing bubble resulting in the greatest level of mal-investment and financial fraud in world history. Corporate profits as a percentage of GNP skyrocketed from 4% to 10% in the space of six years. The banking cabal had captured the system.

The Fed orchestra kept the music playing and Wall Street kept dancing the rumba with their corporate CEO dates. The Keynesian acolytes were ecstatic. The Austrians warned of the impending bust. No one listened. The collapse of the worldwide financial system was portrayed by the corporate mainstream media, bankers like Dimon, corporate CEOs like Immelt, billionaires like Buffet, captured government bureaucrats like Paulson, and politicians like McCain and Obama, as a systematic risk that required a taxpayer rescue of criminals.

The $800 billion gift to bankers and mega-corporations by the Washington DC Party of captured politicians was chicken feed compared to the $3.5 trillion of newly printed fiat handed to Wall Street and corporate America by Bernanke and Yellen. Five years of 0% interest rates have impoverished senior citizens and savers, but they have done wonders for Wall Street and mega-corporation profits, along with executive bonuses. Corporate profits soared from 4.5% of GNP to an all-time high of 10.5% in the space of three years and have remained at this elevated level.

Who Needs Wage Earners Anyway?

Is it a coincidence that corporate profits as a percentage of GNP are at record highs while employee compensation as a percentage of GNP is at record lows? Is it a coincidence that employee compensation as a percentage of GNP peaked at 51% in 1971? That year certainly seems to be a turning point in U.S. economic history. Gold’s purpose as a check on statists, Keynesians, politicians, bankers, and the military industrial complex couldn’t be any clearer. The decline has multiple causes, but the storyline about technology being the major cause is patently false. My observations are as follows:

From the end of World War II until the mid-1970s employee compensation as a percentage of GNP was consistently between 49% and 51%. The middle class saw their standard of living rise as wages outpaced inflation, savings rates were high and led to capital investment, debt was used for long term purchases like a home or automobile, and bankers accepted deposits and made safe loans. Technological progress over the thirty years was constant, but did not result in declining wages.
From the moment Nixon closed the gold window, employee compensation as percentage of GNP relentlessly declined for the next quarter of a century from 51% to 44%. Over this time frame our economy deformed from a goods producing system driven by savings and capital investment into a service/financial economy built upon consumer debt, conspicuous consumption and market gambling. Our iconic mega-corporations fired Americans and hired Chinese slave laborers, lobbied for tax breaks, invested in their own stock, kept wage increases below the level of true inflation, and paid extravagant compensation packages to their Harvard MBA executives.
The brief upturn created by Greenspan’s irrational exuberance 90’s boom was short lived. The relentless decline resumed after the dot com collapse, even as Greenspan and Bernanke blew their epic bubble. Their financial engineering machinations on behalf of Wall Street did nothing for the average worker on Main Street. Employee compensation as a percentage of GNP declined from 47% to 44% BEFORE the financial collapse.
Unequivocal proof that Bernanke’s sole purpose of QE and ZIRP was to benefit his Wall Street owners can be seen in the continued decline from 44% to 42% since 2008. There has been no recovery for the average American. Wall Street is rolling in dough. Corporate America is rolling in dough. Politicians are rolling in dough. The average American worker is rolling in dog shit.

The mouthpieces for the Deep State insist corporate profits have reached a permanently high plateau. It’s another new paradigm. Just like 1929, 1999, and 2007. Jeremy Grantham is right. The system is broken. The inmates are running the asylum. But financial engineering will not work permanently. Baijnath Ramraika and Prashant Trivedi in their outstanding article Why Jeremy Grantham is Right about Corporate Profit Margins prove that corporate gross margins have not grown, technological advancement has not been a major factor, innovation and capital investment are non-existent, and corporate CEOs have utilized one time schemes to boost profits.

There are a few major reasons for record corporate profits. The Fed’s gift to banks and mega-corporations of zero interest rates have allowed S&P 500 corporations to refinance their existing debt and take on new debt at below market interest rates. The average interest rate paid by S&P 500 companies is now at all-time lows. Any normalization of interest rates would crush corporate profits.

Even though you hear constant propaganda from the corporate MSM, corporate CEOs, and captured politicians about the dreadful level of corporate taxes, the truth is that mega-corporations are paying record low levels of actual taxes. When profits are at record highs and tax payments at record lows you know they have captured the system. “Creative” tax avoidance and the FASB allowing banks to mark their assets to fantasy have played an enormous role in record profits.

The short term oriented casino mentality of corporate CEOs can be plainly seen in the fact depreciation expense as a percentage of revenue is at 25 year lows, resulting in short term profits but long-term decline. Instead of investing in capital to increase efficiency or expand their business, greedy myopic CEOs have chosen to buy back their own stock at all-time high prices. They did the same thing in 2005 – 2007. Driving up quarterly earnings per share to boost their own stock option compensation is how it rolls in corporate America today. Investing in their workers through higher wages isn’t even a consideration. They don’t teach that in Ivy League MBA programs. SG&A expenses as a percentage of revenue have been driven to all time lows, as outsourcing, downsizing, and working people to death have done wonders for corporate profits.

Ramraika and Trivedi reach damning conclusions of corporate America, based on their detailed unbiased research:

As the world moved increasingly towards the idea of shareholder-value maximization, time horizons for management and the shareholders have shortened. As Montier shows, the average lifespan of a company in the S&P 500 in the 1970s was about 27 years and is down to about 15 years now. In tandem, the average tenure of CEOs is down from about 10 years in the 1970s to about 6 years now. Combine this with the incentive systems prevalent today (think stock options), and it is only logical that a CEO who is going to be around for as few as six years and is going to get a large chunk of her rewards in stock options will want to see higher stock prices.

Cutting SGA expenses and postponing capital investments — actions that carry positive short-term earnings impact at the expense of a business’ competitiveness in the long-term — look promising to managers whose payoffs depend on stock prices in the short-term. Not surprisingly, the renters (there are hardly any owners any more) clamor for just such actions. The problem with this thinking is that the long-term eventually shows up. And when it does, profit margins will have no choice but to remember their long forgotten tendency to revert to mean.

Are interest rates going to be driven lower for corporations? Are taxes going to be driven lower? How many more people can corporations fire? Have economic downturns been eliminated by the Federal Reserve? Will record profits not result in increased competition and price wars? Can wages be driven even lower?

The financial, economic and political system has been captured by corporate fascist psychopaths. The Federal Reserve has aided and abetted this takeover. Their monetary manipulations have resulted in this deformity. Psychopaths always go too far. The American middle class has been murdered. Decades of declining real wages have left them virtually penniless, in debt up to their eyeballs, angry, frustrated, and unable to jump start our moribund economy by buying more Chinese produced crap. Yellen, her Wall Street puppeteers, and the corporate titans should enjoy those record profits and record stock market highs. It won’t last. Short-term profits will be wiped out, as long-term consequences always arrive when you least expect it. The artificial boom will lead to a real depression. Luckily for the oligarchs, most middle class Americans are already experiencing a depression and won’t notice the difference.

“True, governments can reduce the rate of interest in the short run. They can issue additional paper money. They can open the way to credit expansion by the banks. They can thus create an artificial boom and the appearance of prosperity. But such a boom is bound to collapse soon or late and to bring about a depression.” – Ludwig von Mises