- Please, no more “high-speed” rail!
- David Stockman on the end of an era
- Finding a decent yield in a zero interest rate world
- Jobs! The Fed! Sell!
- In defense of Jim Rickards
The trip was supposed to take a little over two hours. It took more than 3½. Your editor’s first experience on “high-speed rail” was anything but.
Yesterday, I went from Baltimore to New York and back with our fearless leader, Addison Wiggin; The Daily Reckoning’s Peter Coyne; and Dan Amoss of our macro research unit. We met with former White House budget director David Stockman to discuss the next phase of his storied career — about which more later.
We took the Acela Express. The trip up was uneventful. The trip back was a fiasco. Slow to begin with, we came to a full stop in Philadelphia. Trouble with the front engine, we were told. We needed the back engine to get us home, but that required moving the wrong way for about 15 minutes until we could shift to another track.
When it works properly, Acela is a government project of East Coast elites, by East Coast elites, for East Coast elites.
Imagine the government building and running an air-travel network that served only first- and business-class passengers. That’s Acela. It’s welfare for the rich. Amtrak’s own figures show only 29% of riders in the “Northeast Corridor” use Acela. That’s about 9,200 rides on an average day, in a region that’s home to 45 million people.
Of course, East Coast elites think it’d be just swell if we had more high-speed rail projects. A few years ago, the Obama administration proposed high-speed rail systems for 13 urban corridors — a project that could have easily cost north of $200 billion. California is proceeding with a Los Angeles-San Francisco project that’s already blown one budget estimate after another.
“We’re at the end of an era,” David Stockman told us in his Manhattan apartment overlooking the East River.
The Federal Reserve has blown three epic bubbles in the last 20 years — the tech bubble of the late ’90s, the housing bubble of the mid-2000s and an asset bubble now.
The present bubble — inflating stocks and bonds alike — has been fueled by near-zero interest rates going back to the Panic of 2008.
The resulting “punishment of savers” has become a cliche. But the damage is all too real. Take out a one-year CD today and you’ll be paid a paltry 1.2%. Back in April, we told you about an authoritative estimate that American savers have lost $470 billion in interest income since late 2008.
With the hard-won experience of decades in Washington and on Wall Street, Mr. Stockman believes he has hit upon a method in which savers can stop the punishment.
As a young man, Stockman was an iconoclast. He was Reagan’s boy wonder budget director, kicked to the curb after five years because he wouldn’t play nice with the “deficits don’t matter” crowd that ruled the Republican Party roost.
In middle age, he pursued a more conventional career on Wall Street — joining Salomon Bros., becoming a partner in Blackstone Group, running his own private equity outfit. Like everyone else on Wall Street, he used leverage — sometimes recklessly. By his own admission, he got sucked into the debt-addled vortex of Wall Street culture, egged on by easy-money policies at the Federal Reserve. When the Panic of 2008 hit, he recognized he was part of the problem.
Now in his late ’60s, Mr. Stockman has regained his iconoclastic mojo. In the spring of 2013, he came out with a book called The Great Deformation: The Corruption of Capitalism in America. Forbes called it “one of the most comprehensive narratives of the financial system’s history in years.”
Early last year, he launched a blog called Contra Corner — a daily real-time afterword to the book, where he lobs verbal artillery at Wall Street and Washington alike. (Sample from yesterday: “In the face of this oncoming economic storm, honest financial markets would have been selling off long ago, and, in fact, would never have approached today’s absurd levels of overvaluation. But financial markets have been hopelessly corrupted by two decades of massive central bank intrusion and falsification of asset prices.”)
Now comes the next logical step in Stockman’s evolution — showing people like you how to safely generate income as the bubble bursts amid still-low interest rates.
He’s done it in his own portfolio in recent months — generating an effective yield of 22% so far this year.
It’s the revenge of the savers. We’ll take the wraps off this strategy in the weeks to come.
We’re not at liberty to say much more at this time. But we were heartened when he told us he’s designing specifically for people “who’ve been taken hostage by the bubble-finance system.”
Watch this space for updates…
To the markets, which are in a will-they-or-won’t-they tizzy.
The August job numbers came out this morning. They were a decidedly mixed bag. But they were just strong enough that traders who were certain the Fed would leave the fed funds rate near zero at its next meeting Sept. 17 are having second thoughts.
Thus is the Dow down 270 points, a shade above 16,100. The Nasdaq and the small-cap Russell 2000 are showing a little more resilience, the Russell down only three-quarters of a percent.
Hot money is flooding into bonds, pushing the yield on the 10-year note down to 2.13%. It’s not flooding into gold — the Midas metal is adding onto yesterday’s losses at $1,121.
To be sure, the job numbers do not indicate a “robust recovery,” or anything like it.
The statisticians at the Bureau of Labor Statistics conjured only 173,000 new jobs for August — way off the “expert consensus” of 223,000. But one month does not a trend make, and the June and July numbers were revised upward.
The number the Wall Street worrywarts appear fixated on is unemployment at 5.1%, the lowest since April 2008. We don’t get it. The number fell because 261,000 Americans left the labor force last month. It’s a safe bet few of them retired with a gold watch and most of them gave up looking for work.
The number of working-age Americans not in the labor force stands at a record 94 million. The labor-force participation rate — the percentage of the working-age population in the labor force — still sits at a 38-year low.
The real-world unemployment rate from Shadow Government Statistics — measuring unemployment the way it was during the Carter administration — comes in at 22.9%. That’s the lowest since March 2013… but the number has oscillated around 23% since the spring of 2012.
“We should instead expect some seriously choppy action before we get a potential retest of the lows,” writes Greg Guenthner of our trading desk.
Even with today’s swoon, the Dow remains 300 points above its recent low close on Aug. 25. “Plenty of market watchers are going to try to call a bottom over the next few weeks,” says Greg. “But remember: It’s still early in the correction game. And it’s been a long time since investors felt any real pain in the stock market.
“All three major averages remain below their respective 200-day moving averages. That means we have to give choppy and/or lower prices the benefit of the doubt until the market begins to give us clues that it has repaired the damage. It also means we might have to endure strong rallies that give us zero follow-through and plenty of fake-outs in both directions.”
“Come on, guys!” writes a reader once again questioning our Googling skills — which have come into question in certain quarters this week.
“Oh, frack it! I’ll just post the search link and let you figure it out and dance around why you could not find anything.”
The 5: Are you just trying to be difficult? Of course you can find something, but not something relevant.
Sure, you can find online sellers of Bear Grylls-branded gear for National Preparedness Month. But none of those links makes a connection between Bear Grylls and National Preparedness Month in the context of Obama’s visit to Alaska this week — well, other than the ones your editor wrote, heh.
“Given the state of the economy and how the U.S. is becoming (increasingly) a police state,” a reader writes, “do you guys recommend (if not recommend, would you say it is wise) to move out of the country and set up shop in another country, or will the U.S. fare well after the collapse happens and the monetary system is restructured?
“I currently work as a computer programmer and would like to go back to school to obtain a graduate degree in mathematics that would take anywhere from two-three years. I believe by then the collapse/economic restructuring/whatever will take place, and given that possibility/likelihood, should I just not go back to school or will schools still be functioning even after a collapse?
“As you can tell, I do not really know what to expect things to look like. Listening to the various experts, including you guys, the picture seems all over the place, ranging from ‘not that bad’ to ‘really bad.’”
The 5: We’re not leaving. We can tell you that much.
Jim Rickards isn’t leaving. He’s the one whose forecasts usually bring forth such inquiries. “I travel, I give speeches, I still live my life,” he told us last year.
We’re not in the habit of giving life advice to our friends, much less strangers. But if you’re going to go back to school, we’d gently suggest finding a way to do it without taking on debt. The return on investment is becoming increasingly questionable.
“Is the same Mr. Rickards the one involved in the crash of LTCM?” reads an email we’d understand more if it arrived a year ago when Jim joined our team.
“How much capital was lost in that debacle? And now he is trying to reinvent himself?”
The 5: That’s harsh.
We’ve told the story before, but we don’t mind retelling it. Jim’s totally upfront about it. He was lead counsel for Long Term Capital Management — the hedge fund run by Nobel Prize winners that collapsed in 1998 and nearly took down the global financial system with it.
“I was at every executive committee meeting during the height of the crisis that August and September. We were losing hundreds of millions of dollars per day. Total losses over the two-month span were almost $4 billion. But that wasn’t the most dangerous part.
“Our losses were trivial compared with to the $1 trillion of derivatives trades we had on our books with the biggest Wall Street banks. If LTCM failed, those trillion dollars of trades would not have paid off and the Wall Street banks would have fallen like dominoes. Global markets would have completely collapsed.”
Jim negotiated a bailout with the Federal Reserve and the 14 biggest U.S. banks: “We got $4 billion of new capital from Wall Street, the Federal Reserve cut interest rates and the situation stabilized.”
He also lost a substantial amount of his personal fortune — which he’d invested in LTCM. It was a painful lesson about what happens if you’re not working with a good model, even one developed by Nobel Prize winners.
In the 17 years since, Jim has dedicated his career to uncovering better models. He’s one of only a dozen or so people who’ve mastered “complexity theory” as applied to capital markets. And among that dozen, he has the most extensive background in finance, as opposed to, say, physics.
Here’s how he explained it to me last year: “Let’s say I’ve got a 35-pound block of enriched uranium sitting in front of me that’s shaped like a big cube. That’s a complex system. There’s a lot going on behind the scenes. At the subatomic level, neutrons are firing off, a lot going on. But it’s not dangerous. You’d actually have to eat it to get sick.
“But now I take the same 35 pounds, I shape part of it into sort of a grapefruit, and I take the rest of it and shape it into a bat. I put it in the tube and I fire it together with high explosives. I kill 300,000 people. I just engineered an atomic bomb. It’s the same uranium.
“The point is the same basic conditions arrayed in a different way, what physicists call self-organized criticality, can go critical, blow up and destroy the world or destroy the financial system. That dynamic, which is the way the world works, is not understood by central bankers.”
Which is why Jim says the Fed will one day be undone by “the biggest accounting scandal since Enron.”
If you still wish to scoff at Jim, you’re welcome to do so. You can scoff at David Stockman, too, if you like. But we think you’re better off listening to “macro” gurus who’ve seen up close how the financial sausage is made. Most of the others seem to have made their mark predicting a hyperinflation that’s at least four years behind schedule and still nowhere in sight.
Have a good weekend,
Dave Gonigam
The 5 Min. Forecast
P.S. We’re back as usual tomorrow with our Saturday wrap-up, 5 Things You Need to Know. U.S markets are closed Monday for Labor Day. The weekday edition of The 5 returns on Tuesday.
