Weekly Article 10-12-2017
I have written many times about how most of the numbers that we see are manipulated to look better than they are in reality. To me this is extremely dangerous as it leads to malinvestments and judgements on the viability of companies, etc. This issue is not just an issue for those at the top but throughout our entire society.
Starting at the top- our Federal government, to make deficits “look” lower, just doesn’t count some spending items and instead lists these expenses as “investments”. The result of these actions is to understate the gravity of our debt situation. An example would be that for the last 3 years we have been told that the cumulative deficit for the past 3 years was $1.7 Trillion. In reality, the Federal deficit was raised by $3.2 trillion in the past 3 years. That is nearly half of the deficit that was added and not reported on “official” numbers. How do you make $1.5 trillion disappear? A government accountant. Too bad we still owe it in reality.
Similarly, many pension plans- both public and private- use return expectations (6-8%) that make the solvency of those plans appear to be more stable and better capitalized than may be true. There are many public and private pensions that are woefully underfunded even with the help of the massaged numbers. This has led to even more underfunding over the years as many people just read the numbers and shrug.
Many cities and states are bumping up against their pension plans not being viable long term and taxpayers balking at bailing them out. Actually the taxpayers have been giving stealth bailouts for years with higher taxes and fees for virtually everything. Even this is not enough anymore.
Many companies that I have written about right here have had declining sales for a decade but yet their stock prices have risen because of financial games- namely share buybacks and cutting expenses (firing employees and moving operations overseas).
Another form of manipulation is when an entity has enough size and scope to move markets in any direction they would like it to go. My belief is that hedge fund managers didn’t just become dumb overnight. Many have lagged in performance for some time now. My take is that they were large enough to make investments that could move the price of a few stocks and lead to outsized gains.
The underperformance seems to have started when the central banks, sovereign wealth funds and global banks started really getting involved in buying stocks and bonds. This led to a larger player in the market and the ability to move markets with outsized trades traded hands to these new players.
I have had people ask me why they would buy an asset and let the price fall. Good question.
First of all, if you are a central bank engaging in QE your cost was virtually NOTHING. The price really doesn’t matter. The “money” was keystroked into existence with a click of a mouse. It could be that sovereign wealth funds and major banks are just along for the ride. Of course, these entities actually have to expend real assets to buy the new assets whether they be loaned funds or surplus funds.
In the case of the sovereign wealth funds and major banks you can be sure that they want their purchased assets to rise as long as they hold them. (Whoops- unless you are JP Morgan who, according to Ted Butler, have amassed around 600 tons of silver for themselves as prices have declined in the past few years) I guess there are no absolutes in manipulation land.
However, if the central banks ultimate plan is to be in control of everything- and everything I read suggests to me that this IS the end game, what better way than to create booms and busts where you buy when the assets are cheap and sell them when they are high?
My belief is that when the next crisis unfolds (the third in the last 20 years) it appears central banks will have used up all of the gimmicks and games to extend this current system any longer.
It appears what will be left will be the IMF (International Monetary Fund) and BIS (Bank of International Settlements) to provide liquidity and restart the economy. Of course, China and their allies, mainly Russia have been working on an alternative system for some time now as they have grown weary of the US’s use of the dollar as a weapon and as a threat.
Notice that I have said in my opinion either the IMF and BIS will restart the economy or a Chinese bloc may.
I fully expect that some sort of a major incident will likely occur at some point. It could be a war, it could be a financial accident, a hacking of our financial system, etc. This could lead to a major bust in asset prices and a deep downdraft. Keep in mind, however, that after this plays out there will be a restarting of our economy. There will likely be a recovery. I don’t think anyone knows what that looks like right now but my question is “What assets will give me the best shot at starting over and hopefully provide me purchasing power when assets that are overvalued today go on sale tomorrow?”
You may notice that I questioned what “assets” not asset as we probably can’t be sure exactly how things will play out.
Using history as a guide I would say that real assets will likely outperform paper assets after a shock to the system as confidence in paper assets are likely to be severely tested. I think it would be likely that many companies would fold, bonds default and currencies would lose purchasing power as central banks may provide unlimited liquidity to try and stem the rout.
While many solutions may be no more than a guess I am pretty sure that if all of your financial assets are in one asset class- regardless of what it may be you will likely be either rich or poor. Possibly extremely wealthy or wiped out. Most people I know can’t afford to roll the dice that way. This is a major reason I have been advising people to be as diversified as you can possibly be.
Many families that transfer wealth from generation to generation have historically done it with art, real estate and gold. I’ll bet not many are holding these assets in size in relation to their financial assets unless they specialize in these areas.
Mike Savage, Financial Advisor
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