Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
CATHY WOOD ARK GARBAGE ARK Funds Heading for 90% STOCK CRASH! - 22nd Jan 22
Gold Is the Belle of the Ball. Will Its Dance Turn Bearish? - 22nd Jan 22
Best Neighborhoods to Buy Real Estate in San Diego - 22nd Jan 22
Stock Market January PANIC AI Tech Stocks Buying Opp - Trend Forecast 2022 - 21st Jan 21
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
WARNING - AI STOCK MARKET CRASH / BEAR SWITCH TRIGGERED! - 19th Jan 22
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22
Best Metaverse Tech Stocks Investing for 2022 and Beyond - 14th Jan 22
Gold Price Lagging Inflation - 14th Jan 22
Get Your Startup Idea Up And Running With These 7 Tips - 14th Jan 22
What Happens When Your Flight Gets Cancelled in the UK? - 14th Jan 22
How to Profit from 2022’s Biggest Trend Reversal - 11th Jan 22
Stock Market Sentiment Speaks: Are We Ready To Drop To 4400SPX? - 11th Jan 22
What's the Role of an Affiliate Marketer? - 11th Jan 22
Essential Things To Know Before You Set Up A Limited Liability Company - 11th Jan 22
NVIDIA THE KING OF THE METAVERSE! - 10th Jan 22
Fiscal and Monetary Cliffs Have Arrived - 10th Jan 22
The Meteoric Rise of Investing in Trading Cards - 10th Jan 22
IBM The REAL Quantum Metaverse STOCK! - 9th Jan 22
WARNING Failing NVME2 M2 SSD Drives Can Prevent Systems From Booting - Corsair MP600 - 9th Jan 22
The Fed’s inflated cake and a ‘quant’ of history - 9th Jan 22
NVME M2 SSD FAILURE WARNING Signs - Corsair MP600 1tb Drive - 9th Jan 22
Meadowhall Sheffield Christmas Lights 2021 Shopping - Before the Switch on - 9th Jan 22
How Does Insurance Work In Europe? Find Out Here - 9th Jan 22
MATTERPORT (MTTR) - DIGITIZING THE REAL WORLD - METAVERSE INVESTING 2022 - 7th Jan 22
Effect of Deflation On The Gold Price - 7th Jan 22
Stock Market 2022 Requires Different Strategies For Traders/Investors - 7th Jan 22
Old Man Winter Will Stimulate Natural Gas and Heating Oil Demand - 7th Jan 22
Is The Lazy Stock Market Bull Strategy Worth Considering? - 7th Jan 22
METAVERSE - NEW LIFE FOR SONY AGEING GAMING GIANT? - 6th Jan 2022
What Elliott Waves Show for Asia Pacific Stock and Financial Markets 2022 - 6th Jan 2022
Why You Should Register Your Company - 6th Jan 2022
4 Ways to Invest in Silver for 2022 - 6th Jan 2022
UNITY (U) - Metaverse Stock Analysis Investing for 2022 and Beyond - 5th Jan 2022
Stock Market Staving Off Risk-Off - 5th Jan 2022
Gold and Silver Still Hungover After New Year’s Eve - 5th Jan 2022
S&P 500 In an Uncharted Territory, But Is Sky the Limit? - 5th Jan 2022

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

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