Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Silver Notches Best Month Since 1979 - 12th Aug 20
Silver Shorts Get Squeezed Hard… What’s Next? - 12th Aug 20
A Tale of Two Precious Metal Bulls - 12th Aug 20
Stock Market Melt-Up Continues While Precious Metals Warn of Risks - 12th Aug 20
How Does the Gold Fit the Corona World? - 12th Aug 20
3 (free) ways to ride next big wave in EURUSD, USDJPY, gold, silver and more - 12th Aug 20
A Simple Way to Preserve Your Wealth Amid Uncertainty - 11th Aug 20
Precious Metals Complex Impulse Move : Where Is next Resistance? - 11th Aug 20
Gold Miners Junior Stcks Buying Spree - 11th Aug 20
Has the Fed Let the Inflation Genie Out of the Bottle? - 10th Aug 20
The Strange Food Trend That’s Making Investors Rich - 10th Aug 20
Supply & Demand For Money – The End of Inflation? - 10th Aug 20
Revisiting Our Silver and Gold Predictions – Get Ready For Higher Prices - 10th Aug 20
Storm Clouds Are Gathering for a Major Stock and Commodity Markets Downturn - 10th Aug 20
A 90-Year-Old Stock Market Investment Insight That's Relevant in 2020 - 10th Aug 20
Debt and Dollar Collapse Leading to Potential Stock Market Melt-Up, - 10th Aug 20
Coronavirus: UK Parents Demand ALL Schools OPEN September, 7 Million Children Abandoned by Teachers - 9th Aug 20
Computer GPU Fans Not Spinning Quick FIX - Sticky Fans Solution - 9th Aug 20
Find the Best Speech Converter for You - 9th Aug 20
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
NATURAL GAS BEGINS UPSIDE BREAKOUT MOVE - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Prepare for Slim Pension Annuities

Stock-Markets / Pensions & Retirement Feb 25, 2010 - 04:12 PM GMT

By: Fred_Sheehan

Stock-Markets

Best Financial Markets Analysis ArticleBarclays Capital recently published its annual Equity Gilt Study. The paper includes data for asset returns in the United Kingdom back to 1899 and in the United States since 1925.

In the February 12, 2010 edition of the Financial Times, columnist John Authers wrote a summary of Barclays' conclusions. In Authers' words: "Barclays chose to look at how the bubbles of the past 10 years developed. Economic factors do not much help.... Rather, these bubbles were driven by shifts in the demand for equities and other assets - and these, in turn, were driven by demographics." Barclays misses the elephant trumpeting in the middle of the room. It is no wonder the People are still dazed by the world's financial meltdown.


Authers continued: "[T]he baby boomers aged, and the long bull market made them more confident, so they 'over-invested' in assets around the world." Barclays explains the source of this overinvestment: "[T]he size of the pool of capital available to pour into Asian stock markets, or into internet stocks, was disproportionate to the availability of investment opportunities."

There is no need to go on. The source of the bubbles is simple but not part on a college economics' curriculum, nor taught in business school, nor explained by Wall Street. The overflow of funds invested by the baby boomers is a product of too much money and credit. Governments hold a monopoly on money. A private citizen (or company, including a bank) would go to jail for producing alternative and additional money. In the United States, the Federal Reserve, in concert with the Treasury Department, prints the money.

Credit is produced by the banking system (by and large, this explanation covers most of the ammunition that has brought the U.S., and the rest of the world, to such a state.) The Federal Reserve sets reserve requirements for banks. For instance, a 10% reserve requirement would limit a bank's lending to $100 for every $10 on deposit. The Federal Reserve has the authority to increase or reduce bank reserve requirements at any time.

During the late, great bank meltdown, the abuse of credit was barely discussed. Nor, was it a topic at Ben Bernanke's recent confirmation hearing. It was never mentioned by a member of the Federal Reserve in a public comment. It is still the rare commentator who addresses this fertilizer to bubbles, a great disservice since central banks around the world continue to overproduce money.

During the housing, commercial property, hedge fund, private-equity boom, banks had run out of proper projects to fund, so they financed subprime mortgage lenders, commercial property speculators who did not put a penny of their own money into a development, investment banks that wanted to leverage their portfolios at 30:1, hedge funds that wanted to leverage their portfolios at 40:1, and private-equity firms that bought companies and then leveraged their balance sheets at 6:1.

To whip all this finance into a soufflé, banks ballooned the world derivative trade to several hundred trillion dollars (note: trillion, not billion,). This expansion was (and continues to be) hugely profitable for banks. They lent money to a mortgage lender (mortgage companies such as New Century were not banks themselves; they needed a bank to fund loans). Commercial banks also lent to investment banks (such as Lehman Brothers), which then funded mortgage lenders.

The next step was for New Century to ship mortgages en masse to Lehman Brothers, Citigroup or any of the other too-big-to-fail banks. The banks then packaged several thousand home loans into an asset-backed security (ABS). This mortgage derivative was then sold to an investment manager. Despite talk today about the danger of derivatives, banks still are not required to hold one penny of reserves against these rumbling volcanoes.

Such relatively unimportant subjects as bank bonuses fill the air while the lethal state of finance is left to boil over.

Barclays proposes that aging demographics will reduce the number of bubbles in the years ahead. With this misdiagnosis, and central banks printing away, and without any apparent intention to tighten reserve requirements, we need to look elsewhere for a seer.

Sam Zell, who sold his property kingdom for $39 billion in 2006, sent out a holiday present to friends in 2005. He prefaced the theme of his gift: "The enormous monetization of hard assets has created a massive amount of liquidity....Together with [the rising demand for income in the developed world], these factors...are reducing the relative expectations on equity...."

A large part of the monetization Zell spoke of is the derivatives market: the ability of a bank to collect almost any object or receivable, securitize it, then sell it. A home loan or funeral-parlor receivable no longer sits on a bank's books. It whirs its way to a pension fund manager's portfolio, in the form of a derivative, where it may be leveraged (from credit originally lent by a commercial bank), then traded again, and possibly rolled into an even more leveraged and even more profitable derivative.

Zell's holiday present included a song, the lyrics set to the tune of "Raindrops Keep Falling on My Head."

It opened:

"Capital is raining on my head.
Everything is liquid, we're awash with cash to spend
The flood has drowned returns,
'Cause assets keep liquefying, monetizing, raining...

So I just did me some Econ 101
Seems like we've gotten out of
Equilibrium:
Liquidity abounds,
But relative yields keep falling as capital keeps raining...."

This basic "Econ 101" lesson is not part of the American college curriculum. As Federal Reserve chairman, Alan Greenspan never mentioned the possibility of too much credit creation. As a private citizen prior in 1959, Greenspan clearly understood the phenomenon. He explained to the New York Times: "[Greenspan's] general conclusion was that instability of the general economy results from the flexibility of the banking system, which supplies credit for the stock market." And sometimes, too much credit.

The current Federal Reserve chairman, Ben Bernanke, has never mentioned excess credit either. Unlike Greenspan, he probably never has nor will comprehend it. Thus, as long as he is chairman, Bernanke will continue to think he is solving a problem. Later in his song, Sam Zell explained the consequences of the current Fed chairman's ignorance:

"The world is monetizing faster every day,
Illiquid assets alchemized
To currency in play
Competing for return.
Black gold prices rising, still more money chasing assets...
And this is one thing I know
To get things back to normal.
It's a long haul
That's global.
Yields won't improve 'til growth soaks up this liquid free fall...."

The consequence? Bubbles (if that's the right word, it's been so overused) and crashes galore, whether the average age of the population is 10 or 90. If it's 10, too much money and credit will boost bubble gum prices to $100 a pack. If it's 90, Lawrence Welk DVDs will sell for $1,000 apiece. Since the median age is in between, it may be the prices of stocks, gold, barbequed chicken, or parking tickets that rise.

It is difficult to know what and when but this much is simple: when the amount of money and credit produced exceeds the needs of the real, non-financial economy, these excess claims on goods and services cause price distortions. Some pockets of prices inflate while others deflate (since overinvestment in an area causes widespread losses, credit write-offs, and fire sales).

Whatever the case, it will be very difficult for the real return on investments to keep up with rising prices of necessities.

The final lines from Sam Zell's warning:

"It's going to be a long time 'til returns meet expectations,
We need to be prepared for slim annuities...."

We can thank our central bankers for this future and their camp followers who make it so difficult for the average person to understand his own predicament.

By Frederick Sheehan

See his blog at www.aucontrarian.com

Frederick Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, November 2009).

© 2010 Copyright Frederick Sheehan - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules