Since 3 readers sent me the following note I guess I'd better react to it. Matt O'Brien wrote Weds in Follow@ObsoleteDogma about research by Emmanuel Saez of UC Berkeley and Gabriel Zucman of the London School of Economics:
“Once upon a time, the American economy worked for everybody, and even the middle class got richer. But this story has only been a fairy tale for almost 30 years now. The new, harsh reality is that the bottom 90% of households are poorer today than they were in 1987.
“This is actually a much more dramatic statement than it sounds. While the Federal Reserve has already told us that the median households is worth less now than it was in 1989 -- that's the household right in
the middle -- it turns out that everybody but the richest 10% of Americans are worst off. That includes the poor, the entire middle class, and even what we would consider much of the upper class.
“This troubling finding [is] based on data from Saez- Zucman's new paper on U.S. wealth inequality, based on tax data. Inflation-adjusted net worth from 1945 indexed to 100, [shows] that the bottom
90% actually did very well during the first decades of the postwar period -- adding more wealth, in percentage terms, than those at the top.
“But these days of shared prosperity have come to an end, gradually and then suddenly. It started in the 1980s when the top 1% awoke from their long postwar slumber, thanks to the combination of lower
taxes, financial deregulation, and new technology. It wasn't a total disaster for the bottom 90%. Even as most Americans saved much less, accumulating far less wealth, stock markets and housing prices
continued to rise. Until they didn't, coming crash down in 2007-2008.
“The problem was that middle class doesn't own that much in stocks, but went into debt to buy lots of housing. So the housing crash turned their biggest financial asset into an albatross, wiping out their
equity but not their debt. And the housing recovery hasn't done much to fix this, since it's struggled to move beyond the 'nascent' stage.
“Stocks, meanwhile, collapsed during the crisis, but came back soon after. The middle class, in other words, missed out on the big bull market in stocks, but not on the even bigger bear one in housing.
“That's why the recovery has restored so little of the wealth that the recession destroyed. The bottom 90% kept losing net worth the past few years, in large part due to rising student loan debt.
Lost 25 Years
“It's been a lost 25 years for the bottom 90%, but a lost 15 [years] for the next 9% too. Altogether, the bottom 99% are worth less today than they were in 1998.
“This isn't a story about the top 1% running away from everybody else. It's a story about the top 0.01% doing so. Since 1980, the top 0.01 percent's piece of the wealth pie has increased by 8.6 percentage points, while the next 0.09 percent's has done so by 5.4. The bottom 99%, meanwhile, have seen their wealth share fall an astonishing 18 percentage points.
“A bit of historical perspective: the top 1% now own over 41% of all the wealth in the country. That's the most since 1939, although still well below the all-time high of 51% in 1928.”
One reader says: “There's a lot wrong with our country when, not only are 90% worse off but also 48% of our entire national wealth is held by 1% of the population. We may even be in that 1% but this situation is not a good inheritance to leave to our children.”
He suggests a few measures:
“Start off by eliminating the capital gains tax break on 'carried interest.' The Romneys have no money at risk for their 20% cut of private equity fund profits.
“Both sides of the Hill have been bought by the billionaires. Obama proposed repeal in 2009 and got nowhere despite a Democrat majority in both Houses.
“Next put billionaires in jail when they violate the law, e.g. Steven A. Cohen of SAC.
“No I am not a lefty. I am totally middle of the road and fed up with our corrupt society.”
Your editor thinks we should vote 'nay' on some corporate proxies which provide excessive compensation for their brass. If the Swiss can stop golden handshakes and Alpine-size golden parachutes, surely we can too. Your editor is a certified liberal Republican of the Rockefeller persuasion, if poorer. But like my reader we made money with the 1% in recent years by being in the stock market, and because we both are old enough to already own mortage free homes.
Sunday is going to be a big news day. There will be results from elections in Ukraine and Brazil. And the European Central Bank will publish the results of the latest bank stress tests.
Some recent polls show Aécio Neves pulling ahead of Pres. Dilma Rousseff prior to a TV debate tonight. Others show Rousseff in the lead. Brazilian polling is primative and in the first round the tallies failed to show Neves's gains over Marina Silves.
Better Late Than Never
It is now late Thursday afternoon and after valiant efforts over nearly 4 hours by Soleiman, a technician from Time Warner and your editor (we took a break for lunch), I am back on-line. Soleiman became my friend by declaring that despite being of Hausa (northern Nigerian) background, as the father of a teenaged daughter he thoroughly disapproves of Boko Haram. Of course I was not wearing my chador, so maybe he answered right to pretend to being more Westernized than he is.
There is much catching up to do so this blog will switch over to business for the current subscribers.
No Blog Emergency
Wednesday there was no blog. After I listened in to a company report in the morning, my Internet went down the whole working day. The repairman from Time Warner is coming Thursday morning and I will play catch up after I am back on-line.
Apologies to all. Technology strikes again.
I am off to a party at the Harmonie Club, the "Our Crowd" center from the mid-19th century German-Jewish exodus, well before my parents came to America in the 1930s. When I worked for the Senate Foreign Relations Committee, its chairman, Clifford P. Case, R-NJ, regaled me with the tale of how his colleague, Sen. Jack Javits, R-NY, had been blackballed by the Harmonie because he was of Polish Jewish origin.
The party I am going to is for my neighborhood improvement committee which paid to use the club so its officers don't care about our ethnicity.
Keynesians in Foxholes
Once again China has come up short of expectations with a 5-year low level of Q3 growth at 7.3% last month. The Chinese locomotive for global growth is late. And the air is still unbreathable and the Hong Kong demonstrators still demand democracy rather than merely a full rice-bowl.
Germany meanwhile is suffering an unexpected lag in growth despite its being the European Fuehrer of arch-orthodox fiscal conservatism. Meanwhile Germans want repairs on the Autobahn, but who will fianance them?
Who will Germany's heralded Mittenstand export goods to if the rest of Europe is forced to cut deficits to meet German standards of rectitude?
Macro-economist Russell Jones today has come out in favor of fiscal activism. He writes in a paper published today by Llewellyn Consulting in London:
“If fiscal policy is to be reactivated to expand demand, it will have to be innovative, designed [so] that debt sustainability is properly taken into account, and the maximum value extracted from each initiative. It will have to be closely dovetailed with monetary policy, and appropriate political fig leaves provided.” Here is more from Jones:
Keynesians in a Foxholes
“As Nobel laureate (and hitherto arch fiscal policy conservative) Robert Lucas put it: 'We are all Keynesians in a foxhole.'”
Jones's reasoning follows:
“On one side are those who aver that fiscal profligacy was the core of the world's recent problems; that budgetary stimilus is impossible to calibrate with busines; that it cannot deliver 'permanent' jobs and 'crowds out' productive private sector activieites; that it risks excessive inflation; and imposed an unfair burden on future generations.
“On the other side are those [with] a more constructive view [of fiscal activism], especially when output is far from potential; private sector animal spirits are depressed; households and businesses are debt- or liquidity-constrained; interest rates are historically low; market failures are numerous; and there is a clear shortage of high-quality infrastructure.
“Notwithstanding the enduring difficulties of fine-tuning and co-ordination, and recognition that exessive optimism and political short-sightedness encouraged disastrouse fiscal incontinence for decades following World War II, we find ourselves much more aligned with the second group than the first.
“Low growth can be as much of a catalyst for high debt as high debt can be a catalyst for low growth.”
More for paid subscribers follows from Britain, China, The Netherlands, Finland, Ireland, Canada, Denmark, Australia, and Argentina.
Gold? Korea? Germany?
On Friday, a technical outage took down the OTC markets in the US for over two hours and prices could not be quoted. This kept the recovery in stock prices late in the day from boosting the shares of small caps.
Blue Chip Blues
Meanwhile there is no joy in big stocks. First Dutch Philips Lamps, British Mothercare, and German SAP, and then American champ IBM, reported rotten results. Blue Chips are in trouble.
The transmission belt to the rest of the market is margin trading. Low margin interest is one result of low interest rates overall. But actually the US Fed has a role in this area: setting how much margin has to be posted for a trade is up to the US central bank. Now that the excesses of optimism about stocks is being deflated for owners of the 2014 version of the Nifty Fifty, they are getting margin calls from supposedly stable and non-volatile shares. That means they have to sell other stocks.
According to today's Financial Times, margin debt peaks are “a precursor to bear runs in the past”. The newspaper says that NYSE margin levels were barely off their peak YTD hitting $463 bn in August (from an all-time high of $466 mn in Feb.) In unwinding positive positions, the borrowers spread the contagion.
It's not over yet. There is still Ukraine, Ebola, Hong Kong unrest, deflation in Europe, and stock slumps to worry about. It may be time to think again about that classic safe haven, gold. Adrian Ash writes that it is not that simple:
The Case for Gold
“As the stock market slumps, gold's unique appeal stands out again, Gold has risen nearly 4% so far this month. Major world stock markets have dropped up to 10%. Hot-money hedge funds pile back into gold futures and options. Headline writers proclaim the return of 'safe haven' gold.
“If you want insurance against wars, plagues, or financial woes, a lump of metal won't work. But if you want to insure your own savings, reducing losses, and boosting long-term returns, then history says gold really can help.
“Over the past 4 ½ decades, gold has risen in each of the 5 years when the S&P has lost 10% or more, averaging 34% gains. Adding gold to a standard portfolio split between equities and bonds would have reduced your risk and boosted your returns as well.
“Short term gold often leaves pundits and hacks scrating their heads. When the US stock market tanked, in short order gold often went with it.
“The S&P 500 index on 8 occasions since 1969 [sank] 10% or more in one month. Gold has fallen alongside it 4 times, including the Lehman's crash of October 2008, and lost a monthly average of 4.5% overall.
“Longer term, beyond the horizon of newspaper headlines, gold haa helped smooth losses and boost returns.
“Start with a simplified model of 60% in US shares and 40% in Treasury bonds. Since 1969, that has earn[ed] 9.7% annualized with a maximum 1-yr loss of 14.2%.
“Switching 1-tenth of your money into gold and holding 55% stocks, 35% bonds, and 10% gold would have earned 10% annualized with a maximum 1-yr loss of 12.8%. Equity dividends and bond interest are included but [not transaction costs or ] taxes. You rebalance to keep your target allocation each new year.
“Or go plumb crazy and put 20% of your savings into gold. Your split of 50% stocks, 30% bonds, and 20% gold would have earn[ed] 10.1% annualized since 1969, with a maximum 1-yr loss of 11.6%.
“According to regulatory warnings, the past is no guarantee of the future.”
World Gold Council Line
Adrian Ash is head of research at www.Bullionvault.com, our London-based advertiser, which offers a cheap and taxable way to buy and hold physical gold. His data on adding gold to a portfolio is based on studies by the World Gold Council, which owns shares in bullionvault and the SPDR Gold ETF, GLD.
When it ran out of water because of drought, we sold our Saneamento de São Paulo state-controlled waterworks shares. Now cornered by revelations of corruption at Petrobras, which funded her party under her watch, Pres. Dilma Rousseff is using the SBS water supply cuts to attack Aécio Neves, her opponent in the Oct. 26 runoff vote. Neves heads the state govt of São Paulo which sought to cut water consumption by offering price breaks for people and industry using less. She may get away with it as the latest polls show the race is neck and neck. Unlike corruption, droughts are Acts of God. More on this below for paid subscribers.
Across the eastern edge of Canada a new pipeline is growing, Energy East. It is an alternative export route for Canadian Athabasca oilsands to the still-contentious Keystone XL which would head for US Gulf ports, and will remain totally on Canadian soil on its way to St John, New Brunwick, a distance of over 3000 miles. The Energy East partners are TransCanada and Irving Oil. It will handle only about 1/3 as much heavy crude as Keystone and will cost more to build. With other alternatives ranging form safer railway oil-shipment tankcars to an export port in Hudson Bay, all plans depend on the price of oil not falling as far as anticipated Saudi Arabian oil chiefs, to $80.
What this means for one of our stocks is discussed below.
More from Britain, Brazil, The Netherlands, Israel, Ireland, Switzerland, Germany, Belgium, Mexico, and South Korea.
Today our tables have been posted with considerable uncertainty.
We await some updates from our team of writers around the world which means some holdings are now reduced to "hold". Hold is not a way to say "sell" without selling, as it is for brokers. We are a newsletter and say hold when we are not sure what is happening.
Our writers will come up with their decision in the next few days and the holds may or may not turn into sells.
To see the portfolios please visit www.global-investing.com and sign in. Paid subscribers get to view all portfolios and pre-subscribers only the closed positions. Please use the printer friendly button to view spreadsheets more easily on laptops and hand-held devices.
The reason we need to define hold is that Mark Hulbert who tracks our newsletter and others uses the old brokerage definition of hold, a way to say sell without saying sell. What we are saying is that new subscribers who normally are expected to buy every share or bond or fund in their preferred part of the market shouldn't buy these stocks now, but wait for clafication. Older hands are expected to hold. Nada mas.
Stock Markets Survived
Stock markets survived Shemini Atzereth (yesterday) and will probably survive the weekend.
After my Weds. screed about the dropping oil price, a long-term reader wondered if I was assuming that the Saudi acceptance of an oil price drop truly had been coordinated with US oil companies and the Arabists of Foggy Bottom.
I assumed this based on what I called “rule-based” behavior guidelines.
As always there was coordination. The oil majors are not exactly enthusiastic about a lot of shale players bringing on new oil and gas in the USA which reduces their market clout. Shale is like alternative energy, and fuel-saving in power plants, autos, and homes. It cuts our dependence on the House of Saud.
Our Dept of State however needs the Saudi regime to continue to act as a friendly ballast in the region, which requiresthat Riyadh have enough money after royal excesses to keep its population happy and fund alternatives to Islamist extremists, Moslem Brothers, and dissidents around the Gulf and the Middle East overall.
But there is another factor. As more and more shale-extraction technology develops, the cost (and the environmental risks) go down sharply. Experience pays. More on this for paid subscribers below.
Again please do not extrapolate for other commodity prices from the sagging price of crude oil. Copper, iron ore, and even gold are doing better in the present confusion. Crude oil is in a bear market, off 20% this autumn.
Reincarnated As The Bond Market
For the stock market conniptions of the past two weeks, lower oil prices were a sideline in the panicky and bizarre sell-offs.
I am reminded of the famous quip by James Carville: “If there was reincarnation, now I want to come back as the bond market. You can intimidate everybody.”
After the exit of Bill Gross from Pimco bond markets were hit with unseemly volatility. Much debt was suddenly for sale because the Pimco had to find cash to pay out withdrawals from its fund after it lost its inflation guru. This initially crushed bond prices.
Coupled with hints that the QE wind-down here would be delayed, and a mounting conviction that there will be more bond-buying in other countries (including the European Community), bond yields alternatively trended up (which pushed their prices up and downed yields) and then fell which improved their yields. The resulting volatility hit stock markets around the world.
More from The Netherlands, both good and bad news, plus updates from Britain, Denmark, Norway, Switzerland, Israel, Ireland, Belgium, and Spain.
Gold Bug Alert
There will be no blog tomorrow. There will be one Friday if stock markets survive.
Gold Bug Alert
Commodity prices do not move in lockstep with each other. In the olden days, people used the price of copper (“Dr. Copper”) to forecast economic growth. Now it may be that iron ore (which is not as publicly priced as copper) is the new standard for prediction. Iron ore is looking healthy given the messy outlook in many parts of the world.
Gold, a unit of exchange, a store of value, and a medium of exchange, rather than a mere raw material, has apparently disconnected from commodity pricing, both on its upward and now downward trajectory. Silver, however, still acts like a normal mere commodity.
And oil, about which I wrote yesterday, is no longer a fundamental indicator.
A new referendum in Switzerland, the land of direct democracy, is going to tackle the role of gold. On Nov. 30, Swiss will vote on new measures on gold.
The referendum would compel the Swiss National Bank, the central bank, to store all Swiss gold reserves inside Switzerland, and not, for example, in the vaults of the Federal Reserve. The Swiss CB would also have to keep gold holdings to cover 20% of all its assets. And it would be obliged to never sell gold again, ever, for any reason.
Wilhelm Tell Overture
The motive of these measures is the desire to build up the battered respectability of Swiss banks. And a bit of pure Wilhelm Tell Overture nationalism and protectionism, a feature of many recent Swiss votes.
However the impact might actually be the reverse of what is intended. If foreigners who have gold held in Swiss bank vaults fear that it may be snatched, they will pull the money. Swiss bank storage charges are high and disauasive in any case.
Switzerland is the prime gold storage site on earth. While total holdings of client gold are not published, our advertiser Bullionvault.com (which likes its clients to store their gold in Britain) estimates that foreign investors placed 1,400 metric tonnes of the yellow metal in Swiss bank vaults in the period from 2009 and 2013. Despite much lower fees in Britain, about 75% of Bullionvault.com users store their gold in Switzerland even if they trade it in Britain.
If the referendum passes, the Swiss CB will have to buy more gold than has piled up in Swiss vaults over the past 4 years, at least 1,500 tonnes. This is about the same amount as Switzerland sold off in 2000-2008 (after an earlier referendum allowed it.)
The CB has taken a lead in opposing a oui-ja-si vote in the referendum, threating deflation and recession in Switzerland and the rest of Europe. It also violates a treaty between 22 central banks on gold trading.
But there are precedents for interfering with the free transfer of gold. In 1933 the new Roosevelt administration banned hoarding, exporting, or trading the yellow metal. All gold was supposed to be turned over to the US Treasury. I was given a $5 gold piece to wear in my shoe (as something old, to bring prosperity) when I got married. It had been hidden from the Feds.
The other precendent is Germany's CB decision to repatriate the country's gold from the Federal Reserve Bank here and the heredity and profligate enemy, France. It was announced at the start of last year. So far, almost no gold has yet been shipped back to Germany of the nearly 700 tonnes the Bundesbank owns. At the rate of movement last year the German gold hoard will not be completed as targeted in 2020. (Thanks to Adrian Ash, head of research at Bullionvault.com for help with this article.)
Gold is up again today as an alternative to dollars and stocks. The euro, the yen, and the Swiss franc are all up about 1% which is good news for our portfolio diversified globally. Moreover, the switch of stock investors out of large cap shares into smaller more obscure ones should benefit our portfolios.
More for paid subscribers from Panama, Brazil, Canada, Norway, Argentina, Australia, Britain, Switzerland, and Israel.
The virus-laden e-mail opens “Hi” which is not what the supposed sender normally would write. I got it and so did one of our contributors in Latin America. I didn't open the attachment because I have an instinct for these things; he opened his. If you get a “Hi” email, don't open the attachment!
This is an example of using precedents to understand the world. I use rules-based thinking when opening e-mail. I also use it in pricing close-end funds or holding companies, or in predicting the price of oil, or in evaluating biotech stocks. In pricing stocks owning other stocks, with a few exceptions (like Berkshire Hathaway, now a brand name to conjure with in real estate and men's sports shirts as well as stocks), the vast majority are discounted, often ridiculously discounted.
That is why closed-end funds or holding companies are such a tempting part of the stock market.
It is not because the discounts are expected to disappear. They don't. It is because you get $1 of assets working for you (and producing dividends for you) for around 93 cents. The average US discount over time is 7% although in a market sell-off it is often much higher. It is often higher but less well tracked for foreign CEFs.
The only thing unusual about the failed Dutch ipo yesterday for Bill Ackman's Pershing Square Holdings is that the underwriters didn't even support the stock on its Day 1 of trading, presumably because they don't like Ackman, and possibly also because he upped the number of shares to be issued after the prospectus came out.
Cartels tend to break is another rule. With crude oil prices in a rout there are two ways that Opec can react. Traditionally, the lynchpin producer, Saudi Arabia, cuts its home-grown output enough to boost the price.
This time the Saudis instead say they will just learn to live with crude oil priced at $80 per barrel. There are a bunch of reasons for the new tactic. Saudi Arabia has managed to persuade Kuwait to join the acceptance of $80/barrel.
I think the Gulf royals are simply fed up with some of the fellow-cartel members, like leftist Venezuela. And they don't want to cut output only to allow Shi'ite Iran to fill the crude gap while also developing a nuclear threat to the region.
Then too, Opec's share of the oil market is down in any case. The largest producer of hydrocarbons now is not Saudi Araboa, but the USA. Outsider non-cartel producers are the likeliest to gain from a production cut hitting only the Middle East, as they (and us) can fill the gap.
Saudi Arabia by tradition keeps its contact lines open both to the US major oil producers and to Washington Arabists in the Dept of State. The decision to let prices drop has been approved. Cutting back Gulf output would not stop the swing to US production, growing as much for geopolitical reasons as for cutting costs.
In fact, the US is better able to live with cheap oil than many Opec countries and outsiders, above all Putin's Russia, which both Saudi and Yankee oil men want to hurt.
Newer oil sources are also coming on: from Mexico and Brazil offshore, and eventually from the Athabasca oil sands where a rump Republican congress might vote as soon as December to allow the construction of a Keystone XL pipeline to link the Canadian fields to the US Gulf ports. Our expert, Martin Ferera, thinks even if a joint bill is passed, Pres. Obama will either veto it or procrastinate. But at some point the pipeline will begin piping.
Moreover for the Opec countries, cutting off the markets where the Persion Gulf states have a geographic edge (in Asia) would have long-term repercussions when oil prices rise. US light crude is already being shipped to South Korea under a loophole in the US rules against exporting crude.
Meanwhile, Saudi Arabia's antiquated monarchs face new financial demands, ranging from far more people at home to support for loyal Sunni Moslems around the region. To sacrifice these goals to keep the cartel together is harder than it used to be.
What comes next? Iraq so far appears to be on board for the lower price regime, but as a Shia Arab ally of Iran, it may switch to flat-out production whenever there is a gap in the civil war. The same may apply to Iran if it is prepared to dismantle its nuclear program to gain traction in the oil business. Non-Opec Russia, and cartel membersVenezuela and Ecuador will produce flat-out to the extent that their creaky infrastructure allow. And the new producers (the USA, Canada, Brazil, Mexico, Argentina) will go ahead whatever the price of crude is right now.
Energy-saving zeal will not end even if crude prices fall. We still have global warming to deal with and dirty fuel is on the outs.
In my opinion, the Opec cartel is finished. Peak oil has been reached and the world will benefit from lower prices in future decades. If only for this reason I am relatively optimistic about a pickup in global growth.
A final rule is "sticks and stones will break my bones, but words will never harm me." That is for paid subscribers only, who should read on. Today's blog is late because I had to deal with an electrician doing an estimate. I have a life and a wonky chandelier in my dining room. More for paid subscribers follows from Panama, Korea, Israel, Japan, Brazil, Switzerland, Germany, Australia, Portugal, Brazil, and Canada.
Plague, Sword, Famine
Fiat-Chrysler relisted on the US market with an IPO today. FCAU is the unfortunate ticker symbol.
Also from Italy, the NY Times reports that bishops are moving toward easing the strictures against remarriage of divorced Catholics and homosexuality in their current Vatican synod.
Still Plenty To Worry About
Since the 9th century, Jews list the perils of the day and the terrors of the night they ask God to spare them from. This occurs both in the Avinu Malkeinu (Our Father and Our Ruler) prayer during the High Holy Days and in evening prayers called “Hashkiveinu” (May We Lie Down.)
The lists vary but always include: plague, the sword, and famine. In modern translations the terms have been watered down to “harmful things.” It may be appropriate to restore the original text and also the music of Italian Renaissance composer Salomone de Rossi.
The first two things Jews pray against are here already. The current plagues are Ebola and Marburg, and the remaining depredations of SARS, TB, AIDS, polio, measles, whatever. There is no fear of a comeback of smallpox, cholera, bubonic and pneumonic plague, typhus and typhoid unless terrorists get a hold of the germs.
The sword is a metaphor for war, which has made an unexpected comeback in Europe (not only Ukraine), the Middle East (not only Islamic State in Syria and Iraq), and Asia. Not counting terrorists which can strike virutally anywhere.
Famine is next on the list.
Resiliant In Parts
You don't have to wait for Hallowe'en to be frightened. Columbus Day will do. However today's stock markets are proving to be resiliant, if only in parts like the curate's egg. Perhaps famine will be averted as three of our shares are up smartly today.
Just to scare you some more there is another Jewish holiday Thursday when you will again not get a blog. It is called Simchat Torah-Shmini Atzereth in the Reform Jewish canon. That stands for: Joy of the Torah plus Eighth Day of Assembly. For Reform Jews it also includes Hoshanah Rabbah, the great Hosanah, when the fate of the new year of 5775 is sealed. This traditional Jews observe on Wednesday.
More for paid subscribers from Brazil, India, China (where famine hit during my lifetime) plus Denmark, Colombia, Spain, Panama, Holland, Portugal, Finland, Australia, Mexico, and Korea.