The Warren Buffet Economy——Why Its Days Are Numbered (Part 1)

During the 27 years after Alan Greenspan became Fed chairman in August 1987, the balance sheet of the Fed exploded from $200 billion to $4.5 trillion. Call it 23X.

Let’s see what else happened over that 27 year span. Well, according to Forbes, Warren Buffet’s net worth was $2.1 billion back in 1987 and it is now $73 billion. Call that 35X.

During those same years, the value of non-financial corporate equities rose from $2.6 trillion to $36.6 trillion. That’s on the hefty side, too—- about 14X.

Corporate Equities and GDP - Click to enlarge

When we move to the underlying economy that purportedly gave rise to these fabulous gains, the X-factor is not so generous. As shown above, nominal GDP rose from $5.0 trillion to $17.7 trillion during the same 27-year period. But that was only 3.5X

Next we have wage and salary compensation, which rose from $2.5 trillion to $7.5 trillion over the period. Make that 3.0X.

Then comes the median nominal income of US households. That measurement increased from $26K to $54K over the period. Call it 2.0X.

Digging deeper, we have the sum of aggregate labor hours supplied to the nonfarm economy. That metric of real work by real people rose from 185 billion to 235 billion during those same 27 years. Call it 1.27X.

Further down the Greenspan era rabbit hole, we have the average weekly wage of full-time workers in inflation adjusted dollars. That was $330 per week in 1987 and is currently $340 (1982=100). Call that 1.03X Continue reading

We Salute You, Rand Paul

Submitted by William Bonner, Chairman – Bonner & Partners

Deadwood in Charge

The question on the table is whether your editor is a “dolt” for wishing for a short, sharp depression

Writes Diary reader Steve S.:

“Bill, you’re a dolt. For some inexplicable reason you believe a system crash will “fix” everything. Why on earth would a crash do anything but make us all poor and have to start over?

Surely, you aren’t suggesting something/anything will be “learned” by the credit-happy idiots in charge that could result in a bona fide recovery.


Image credit: Warner Bros

Reading the email, we find opinions mixed. Even we can’t make up our mind. Some readers are sure that wanting a depression is just about the dumbest thing they have ever heard.

Others are more open-minded: Maybe a depression would be a good, quick, and clean way to clear out the deadwood. But we don’t really have to worry about it. The deadwood is in charge – in Washington and at central banks all around the world.

And it is not about to permit an episode of what economist Joseph Schumpeter called “creative destruction” – not when it is what needs to be destroyed. Instead, it will rage, rage, rage against the dying of the light … and cause even worse mischief.

On this subject, when we venture onto subjects other than the markets, readers will often complain. “You should stick with something you know something about,” they write. Today, we reassure dear readers that we don’t know anything about the markets either.

So, with an equal measure of ignorance, we take up a three-part series on something only distantly related to the markets: The Good, the Bad, and the Ugly. It’s a lesson in how to spot the real criminals in a world where everyone is a law-breaker.

vegan-terrorist cartoonWhy vegans must be terrorists – the logic of the “national security” police state.

Cartoon by Peyyer

Fools and Knaves

What prompted this was Senator Rand Paul’s performance in the Capitol last weekend. Single-handedly, he blocked an extension of the NSA’s snooping program. You can divide Congress into two groups: the fools, who are just not clever enough to understand what is going on, and the knaves, who are too clever by half.

Between them, the cronies have a field day… duping the former and conniving with the latter. Rand Paul’s father, Ron, never fit into either group. Maybe Rand doesn’t fit either…

rand paul-1Rand Paul: the only major politician who actually tried to do something about keeping the burgeoning surveillance state in check

Photo credit: AP

Ron Paul couldn’t be bought. And he was smart enough to see that the do-gooders weren’t doing any good – except for themselves. If we had a beef with Ron, it was that he lacked cynicism. We often wanted to ask: What’s a nice guy like you doing in a place like this? Continue reading

Redrawing European Credit

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

The Agence France Trésor of the French government reported on May 7 that its bond auction of Obligations Assimilables du Trésor (OAT) across three maturities was lightly subscribed. That wasn’t their assessment, of course, as the government simply reports the figures and the credit market makes value judgments. The October 2023’s were bid-to-cover of only 1.58; the May 2025’s were bit-to-cover 1.69; and, the October 2027’s were bid-to-cover 1.89. The stop price on the 2025’s was just 95.35%, even though the €8.5 billion or so for the total auction lift wasn’t in any way out of line with recent borrowing trends.

The overall European bond market took the weak auction as another in a series of indications for the weak bond market that has developed since mid-April. On April 29, a German bund auction was technically uncovered, though that isn’t as rare an occurrence. But in the context of the growing nervousness about the ECB, ECB QE irregularities and a whole host of economic muddle, these auction results appear to be self-reinforcing of the negative trend.

Just two weeks later, Agence France Trésor issued much more well-received paper, as European yields were somewhat more settled in mid-May, but their last auction on June 4 was maybe as bad or worse than their first in May: May 2025’s (again) were bid-to-cover 1.76 with a stop price of only 92.72%; May 2030’s were bid-to-cover only 1.58.

ABOOK June 2015 Eonia Bund 10s

Clearly the auction process is being unsettled by the broader disruption in credit markets as a whole. We have been told that is just these markets adjusting to QE’s positive effects, where “inflation” will be better, the economy is already picking up, and the “fear trade” unwinding (again). I doubt any of those are true, as more likely there is Greek all over this process in a manner far different than the rehearsals in 2011 and 2012. Back then, as now, the economy was supposed to be doing the exact same, only with massive LTRO’s standing in for the massive QE that occurs this time around. Continue reading

U.S. State Finances – Lack “Truth and Integrity” – Volcker Warns

U.S. state budgets rely on “faulty practices” – Volcker
– Shoddy budget practices push costs to future generations
– Faulty budget practices lead to poor policy making
– “Problems hidden by lack of truth and integrity” – Volcker
– No common definition of balanced budget allows for gimmicks

The highly regarded former chairman of the Federal Reserve, Paul Volcker, has severely criticized the State Governments in the U.S. over “faulty practices” used to devise budgets which mask the true financial position of those states.

Mr. Volcker, who as Fed chair reined in escalating inflation and stabilised the economy during Ronald Reagan’s tenure, announced in 2013 his intention to form the Volcker Alliance to focus on reforming democracy in the U.S.

It was in a report from the Volcker Alliance that the criticisms were published.

“The palpable erosion of trust in our democratic institutions of government demands a response,” he was quoted as saying.

Mounting fiscal problems in Obama’s Illinois, Detroit’s bankruptcy and the financial troubles coming to a head in Puerto Rico demonstrate the importance of developing better financial policies according to the report.

The dire state of finances in many states has intensified in recent years due to drastic cuts in federal funding following the recession. As a result state budgets are recklessly pushing the costs of current expenditure onto future generations.

“The continued fiscal stress is tempting states to continue, and even intensify, budgeting and accounting practices that obscure their true financial position, shift current costs on to future generations, and push off the need to make hard choices on spending priorities and revenue practices,” the report states.

States are on a constant emergency footing where their budgets are concerned as they try to fund current expenditure with transient sources of revenue. As a result policy making is haphazard and short-sighted.

“The never-ending sense of crisis leads to stop-and-go funding of vital programmes and stifles the need for serious discussions about policy,” according to the report.

As a consequence infrastructure is crumbling, public schools and state lack funding, “rainy day” funds are being depleted, and public workers rely on pension plans that may evaporate.

Volcker believes that there is a lack of honesty in budgeting. “There are problems hidden by a lack of truth and integrity”, he said. The absence of an agreed definition of “balanced budget” allowed States to engage in gimmicks that gave the appearance that spending had not exceeded revenue.

“Techniques include shifting the timing of receipts and expenditures across years, borrowing long-term to pay for current bills, using non-recurring revenues to cover recurring costs and delaying funding of pension and healthcare retirement benefits,” reported the FT.

The report paid particular attention to three states selected at random. They were Virginia, California and New Jersey. Volcker believes that Virginia’s methodology is good, using impartial outside economists. It was still heavily reliant on federal funding however.

The current governor of California has acknowledged the “wall of debt” that was hidden behind budgetary gimmicks and has reduced the debt significantly since 2010.

New Jersey, however, is a case study in bad budgetary practices. The New York Times reports,

“In contrast to California, New Jersey is still producing structural imbalances, according to the report. It has been struggling from year to year by, among other things, taking money out of special dedicated funds and spending it on unrelated activities.” Continue reading

The Daily Debt Rattle

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

The Troika Is Supposed To Build Greece Up, Not Blow It Apart (Guardian)
Greece Updating Proposals It Sent To Lenders (Kathimerini)
Young Greek Radicals Don’t Just Want Power – They Want To Remake The World (PM)
VAT Rate Hikes Always Reduce State Revenues (Thanos Tsiros)
Juncker Vents Fury Over Greek Bailout Talks At G7 Summit (Guardian)
If You Think Greece’s Crisis Will End Any Time Soon, Think Again (Bloomberg)
103 Years Later, Wall Street Turned Out Just As One Man Predicted (Zero Hedge)
Obama Sidelines Kerry On Ukraine Policy (Eric Zuesse)
Masked Attackers Break Up Tent Camp On Kiev’s Maidan (RT)
Literally, Your ATM Won’t Work… (Bill Bonner)
Banks’ Post-Crisis Legal Costs Hit $300 Billion (FT)
Will China’s Stock Market Explode On Wednesday? (MarketWatch)
China Imports Fall 17.6%, Exports Decline 2.5% (AFP)
Deutsche Bank CEO’s Forced to Resign Over Imminent Derivatives Melt-Down? (Doc)
The Bristol Pound Is Giving Sterling A Run For Its Money (Guardian)
Max Keiser’s Bitcoin Capital Continues to Attract Investors (NBTC)
Canada to Train Ukrainian Police as Russia Conflict Worsens (Bloomberg)
Greek Island Gateway To EU As Thousands Flee Homelands (Irish Times)

Much more here: Debt Rattle June 8 2015 –