Saturday, March 27, 2010

Retirement Train Wreck

There was an excellent article written recently by Stephanie Pomboy for Macro Mavens. It focused on the findings of a retirement survey conducted by the Employee Benefit Research Institute (EBRI).

I must admit I was shocked by the article. The article discussed how delusional ordinary people are about their future and their retirement plans.

The EBRI itself said in its survey commentary that workers are "clueless" about their retirement needs.

The first thing Ms. Pomboy discovered was that although workers felt greater confidence in their ability to afford retirement, the number of people saving toward retirement in 2009 actually shrank to 60 per cent.

That is down from 65 per cent of the people the year before, the sharpest drop in the history of the survey.

Ms. Pomboy thinks that the 40 per cent of the people who didn't save toward retirement last year believe that assets - their houses or stocks - will once again increase sharply in value.

If the Federal Reserve is unable to reflate the housing and stock market bubbles - and that is extremely unlikely over the long term - she says "we're in a dilly of a pickle".

And the price of delusion, she fears, will be dear. After all, according to the EBRI survey, a "staggering 27 per cent of workers have saved less than $1000 toward retirement!"

The survey did not give the age bracket of these 27 per cent who were in la-la land. If they are young people, it's not so bad.

If, by chance, the survey respondents are representative of the nation as a whole - with 54 per cent of the labor force over 40 - then we have a rather big problem.

As Ms. Pomboy said, "the figures are truly alarming. Doubly so given the increasingly retractable nature of pension promises."

The disconnect between reality and what people seem to believe about their retirement is simply breath-taking to me. Workers seem to have an unwarranted expectation of living a comfortable retirement without having saved for it...that somehow, it will all work out.

And when it does not work out, I suspect it is these people who will be looking toward that "sugar daddy", Uncle Sam, to somehow change Social Security and bail them out.

But by then, the government cupboard may be bare.

Saturday, March 20, 2010

Life in 21st Century America

The ancient Chinese curse said that "may you live in interesting times." We are living in interesting times right now and there is no doubt that it will get more interesting in the years ahead.

The origins of our "interesting times" began in the 1930s with the economic theory of economist John Maynard Keynes which has become dogma in all American political and economic thought.

Keynes thought that consumer spending was the key to economic prosperity and that savings was a threat to economic health. His theory led to the push to make the United States a consumer economy with more than 70 per cent of economic activity coming from consumer spending.

But Keynes had it wrong. Consumer spending is made possible by savings, investment and hard work. Not the other way around.

And there was also the Philips curve from economist William Phillips. He saw a direct positive correlation between higher inflation and higher employment. So policy makers set about creating inflation and devaluing the US dollar. Another bogus economic theory.

But everyone loved these theories because it gave them what they wanted. Politicians could spend even more money that didn't belong to them. Consumers could enjoy a standard of living they couldn't afford. And the financial industry could earn huge money by selling debt to people who couldn't pay it back.

Never before had so many people been so happily engaged in acts of larceny and legerdemain!

As time wore on, more and more people lived at someone else's expense. Lobbying and lawyering became lucrative professions. Bankers and brokers became respected professionals.

Every imperfection in society became a call for new legislation. Every traffic accident became an opportunity for wealth redistribution.

And if there is anyone still solvent in America in the 21st century, it's not the fault of the banks. They invented subprime loans and other products so that even jobless people could get themselves into debt.

The bankers also helped insolvent governments hide their debt (Greece and Goldman Sachs) so that they could borrow even more.

As long as people thought they were getting something for nothing, everyone was happy. But now that they are getting nothing for something, there is a revolt stirring among the masses.

Half the US states are insolvent. Nearly all of them are planning to increase taxes while cutting back on government services.

And the country as a whole is in bad shape too. Even if America taxed 100 per cent of all household wealth, it would not be enough to put its balance sheet in the black.

And on top of it all, taxpayers are being asked to pay for losses at the bankers' casino. And pay interest on money spent years ago.....

Until now, everyone was borrowing money that would have to be repaid sometime in the future. But today is the tomorrow that no one worried about yesterday.

And with the status quo and entrenched interests in our two-party political system, it means that the sort of change needed is unlikely to come easily. The politicians will keep doing what they've been doing until the whole system just quits working.

Saturday, March 13, 2010

US Financial Market Truisms

It has been one year since the stock market started its rally. This was after a terrible bear market following the collapse of Wall Street firm Lehman Brothers.

You remember that time...Wall Street, drunk with greed, drove the nation's economy to the brink of financial Armageddon.

To save Wall Street from losing their license to dangle the nation's economy off a cliff, the Federal Reserve and country's elected elite and their minions at their Treasury Department threw Wall Street a huge bailout party.

Treasury secretary Tim Geithner, while head of the New York Fed, approved billions of taxpayers dollars to go to Goldman Sachs through the AIG conduit.

Most of the details of that deal have been sealed for a decade by the government due to "national security concerns". What a joke!

Then the government allowed Wall Street banks to replace mark-to-market accounting. Mark-to-market means that banks had to value assets (loans, etc.) at what they are really worth in the marketplace.

This was replaced with mark-to-model accounting which valued assets at some number based on some theoretical model of what the assets should be worth. In effect, this is mark-so-I-get-a-bonus accounting.


Just this week, we had the bankruptcy report on Lehman Brothers. It was a damning report.

Once again the investing public learns, after the fact, the basic truisms of modern US financial markets.

We had already learned that the ratings agencies - Moody's and Standard & Poor's were worthless. Since they were paid by Wall Street, they would rate almost anything put out by Wall Street as AAA. No matter what kind of snake oil Wall Street was selling to investors.

Now with the Lehman bankruptcy report, we've learned that major accounting firms are also worthless to investors. They were either unable or unwilling to detract fraud at Lehman amounting to $50 billion dollars!

Based on the bankruptcy court report, Lehman was technically insolvent for years before it collapsed.

Yet former Lehman CEO Dick Fuld claims he knew nothing about the billions of dollars being hidden by Lehman 'off balance sheet'. Yeah, right. That tells you something about the ethics of Wall Street.

This report should also tell investors that the Securities and Exchange Commission (SEC) is also worthless. Their list of failures includes Bernie Madoff and now Lehman Brothers.

They are supposed to protect investors, but they don't. The SEC seems to believe the criminal executives who commit the fraud, and ignore the whistle-blowers who uncover the fraud.

Finally, this should tell investors something about stock market analysts and the financial media. There is no real analysis being done...they are just cheerleaders and mouthpieces for Wall Street.

It's no wonder that faith globally in the American brand of capitalism is at an all-time low.

Saturday, March 6, 2010

Our Financial System Is Broken

It looks like hopes for much-needed reform of the US financial system are sinking like the Titanic.

A prime example is that the idea of an independent "financial consumer protection agency" is dead. Due to intense Congressional lobbying by Wall Street, the "consumer protection agency" is going to be placed inside the Federal Reserve.

That is about leaving the fox guarding the hen house!

We should adopt regulations something along the lines of our neighbors to the north - Canada. Canada has a strong regulatory system governing financial firms and an independent financial consumer protection agency.

It is notable that during the financial crisis, NO Canadian banks required a bailout and no taxpayer dollars were wasted. No wonder that Canadian banks are considered to be the soundest among the industrialized countries.

Even former World Bank and Nobel Prize winning economist Joseph Stiglitz recently called the Federal Reserve system "corrupt".

He said that if a country applied for aid with a financial regulatory system similar to our Federal Reserve system, it would have raised alarms. He said,

"If we had seen a goverance structure that corresponds to our Federal Reserve system, we would have been yelling and screaming and saying that country does not deserve any assistance, this a corrupt governing structure."

To Stiglitz, the core issue is that regional Fed banks, such as the New York Fed, have clear conflicts of interest. This is a result of the banks being partly governed by a board of directors that includes executives of the very banks they are supposed to be overseeing.

One only has to think back to Treasury secretary Tim Geithner's term as head of the New York Fed. He gladly approved hundreds of billions of dollars of taxpayer bailouts to Wall Street firms like Goldman Sachs, JP Morgan Chase, Citigroup and AIG.

And speaking of Goldman Sachs, the company made $100 million in net trading revenues on each of 131 trading days last year! That is the equivalent to once every other trading day. And it only lost money on 19 trading days.

I don't care how "smart" Goldman traders are, my near 30 years of experience in the financial markets tells me that its track record is impossible. That is, if it's fair and free market and not a "rigged" one.

It is looking more and more than the US financial system cannot be reformed from within.