With ultra-loose monetary policy coming to an end, it is best to tread carefull
IN HIS classic, “The Intelligent Investor”, first published in 1949, Benjamin Graham, a Wall Street sage, distilled what he called his secret of sound investment into three words: “margin of safety”. The price paid for a stock or a bond should allow for human error, bad luck or, indeed, many things going wrong at once. In a troubled world of trade tiffs and nuclear braggadocio, such advice should be especially worth heeding. Yet rarely have so many asset classes—from stocks to bonds to property to bitcoins—exhibited such a sense of invulnerability.
.. Rarely have creditors demanded so little insurance against default, even on the riskiest “junk” bonds. And rarely have property prices around the world towered so high. American house prices have bounced back since the financial crisis and are above their long-term average relative to rents.
.. If today’s asset prices have been propped up by central-bank largesse, its end could prompt a big correction. Second, signs are appearing that fund managers, desperate for higher yields, are becoming increasingly incautious. Consider, for instance, investors’ recent willingness to buy Eurobonds issued by Iraq, Ukraine and Egypt at yields of around 7%.
.. But look carefully at the broader picture, and there is some logic to the ongoing rise in asset prices. In part it is a response to an improving world economy.
.. A widespread concern is that the Fed and its peers have grossly distorted bond markets and, by extension, the price of all assets. Warren Buffett, the most famous disciple of Ben Graham, said this week that stocks would look cheap in three years’ time if interest rates were one percentage-point higher, but not if they were three percentage points higher.
.. But if interest rates and bond yields were unjustifiably low, inflation would take off—and puzzlingly it hasn’t. This suggests that factors beyond the realm of monetary policy have been a bigger cause of low long-term rates. The most important is an increase in the desire to save, as ageing populations set aside a larger share of income for retirement. Just as the supply of saving has risen, demand for it has fallen. Stagnant wages and the lower price of investment goods mean companies are flush with cash.
Study: Blacks’ Median Wealth Will Be Zero in 2053
That racial stereotyping hides the real cause and scale of economic damage to blue-collar and white-collar Americans families amid the rising wealth of the technocratic globalized elite which dominates the Democratic Party and at least half of the GOP.
.. That government failure is exemplified by the housing bubble, which destroyed a huge percentage of wealth held by black Americans.
A 2011 report by the Pew Research Center showed that the median wealth of black American households dropped by 53 percent because of the property bubble. The mid-point median of black American wealth crashed from $12,124 in 2005 to just $5,677 in 2009, according to the Pew report.
.. White Americans suffered far less from the bubble because many had already paid off their mortgages, because their debts were a small percentage of their income, and because whites had more assets in the stock market and other sectors outside the housing market. Still, the median wealth of white households also dropped by a huge 16 percent, from $134,992 in 2005 to $113,149 in 2009.
.. Meanwhile, wages for all men have remained flat for the past 44 years since 1973, according to the Census Bureau.
.. when Obama settled into the White House during the housing implosion, his economic policies helped very clever people invest their way back up to more wealth. The New York Post described the process:
The years 2008 through 2015 should be known as the Great Fleecing.
During that time, the greatest transfer of wealth in the history of the world occurred. Some $4.5 trillion was given to Wall Street banks through its Quantitative Easing program, with the American people picking up the IOU … Who did this help? The 1%, and pretty much only the 1%.
.. The report does not discuss how technology is concentrating wealth among higher-skilled people, and it omits any talk of globalized outsourcing. It also avoids family stability and it ignores the topic of immigration, which has flooded the nation’s marketplace with cheap labor that effectively imposes a 5 percent tax on labor — and then transfers $500 billion a year to company owners and investors.
.. the report then lists a series of unrealistic demands, including a massive tax increase on the wealthy, a massive financial grant to children that could be spent when they become adults, more house-buying aid for poor people, a higher minimum wage, and “a federal jobs guarantee [that] would function similarly to the Works Progress Administration of the 1930s.”
.. But many people of all colors who cannot get through college are falling behind because technology, work, and business are becoming more complex. This increasing complexity ensures that an increasing share of income and wealth goes to people who are smart enough to arbitrage the increasing social and technological diversity, regardless of color.
.. the Democratic elite prefers to import foreign voters rather than accept the equal social status of all blue-collar Americans... four million Americans turn 18 each year and begin looking for good jobs. However, the government imports roughly 1 million legal immigrants to compete against Americans for jobs... That Washington-imposed policy of mass-immigration floods the market with foreign labor, spikes profits and Wall Street values by cutting salaries for manual and skilled labor offered by blue-collar and white-collar employees. It also drives up real estate prices, widens wealth-gaps, reduces high-tech investment, increases state and local tax burdens, hurts kids’ schools and college education, pushes Americans away from high-tech careers, and sidelines at least 5 million marginalized Americans and their families, including many who are now struggling with opioid addictions.
Modern Economists: The Inept Firefighters’ Club
The problem is with the behavior and the incentive structure of the practitioners. There is overwhelming pressure to produce work that supports the status quo (i.e. redistributing to the rich), that doesn’t question authority, and that is needlessly complex. The result is a discipline in which much of the work is of little use, except to legitimate the existing power structure.
.. When I tried to raise these issues in years prior to the crash, my arguments were largely laughed off by a wide range of economists. I didn’t have the stature, and besides, the argument was far too simple.
.. I pointed out that his Administration’s assumed rates of return in the stock market were impossible given the current price-to-earnings (P/E) ratios in the market and the economic growth rates assumed by the Social Security trustees. This was an argument based on simple algebra.
.. it was necessary to have something more complex than simple algebra to be taken seriously at Brookings.
.. And how about a little accountability for economists when they mess up? There is a large literature on the importance of being able to dismiss workers who do not perform their jobs well. We all know and expect that a dishwasher who keeps breaking the dishes or a custodian who can’t clean the toilets loses his job.
.. I have suggested that economists who prescribe policies that turn out badly, or who can’t see multi-trillion dollar housing bubbles coming whose collapse sinks the economy, ought to pay a price in terms of their careers. Invariably people think I am joking. When they realize I am serious, they think I am crazy or vindictive.