When asset price gains are too much to last

Good perspective on the impact of bubblenomics and asset price gains, relative to income, courtesy of Patrick Watson today in Charts that Matter:

“More net worth is always good, right? Not necessarily. This chart from 13D Research shows US household net worth divided by average disposable personal income over the last 50 years.

If you do everything right and are lucky, your net worth should be greater than your income. But if it is too high relative to your income, it may be unsustainable. Peaks tend to coincide with recessions and bear markets. Today, the ratio is near an all-time high and very close to the last peak just ahead of the 2007–09 recession. That vicious bear market knocked the ratio back down to its long-term average. It has since crept higher again. In fact, much of the net worth was illusory in the first place. Housing accounts for a big part of it, with both banks and homeowners marking property values well above realistic selling prices. It may be happening again.”

It reminded me of this chart of the incredible leap in Canadian and Australian household wealth relative to other countries in 2016, courtesy of bubbling realty prices.  Since few cash out when asset prices are unreasonably high, most will keep holding as their net worth retreats through the mean reversion cycle once more.

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Individuals play a leading role in their poor financial outcomes

Another CBC update today on their whistle-blower investigation into predatory financial practices throughout Canadian banks.  See:  Go Public:  ‘I feel duped’:  Why bank employees with impressive titles could cost you big time.

The findings reiterate the case for why Glass-Steagall like divisions must be re-established between deposit taking banks–backed by taxpayer-funded insurance–and the financial/investment product sales franchises.  But this is not just in banks, it is financial sector wide.  Allowing the product sales side to dishonestly promote itself as ‘advisory services’ (with an ‘o’, as opposed to fiduciary adviser with an ‘e’) since the late 1990’s, has been a financially suicidal time for individuals, families and the global economy, now teetering once more on toxic debt and asset bubbles.

What the article misses however, is that individuals play a leading role in their own poor financial outcomes. It takes both a self-interested, sales rep and gullible, greedy, misinformed or undisciplined clients to enable destructive financial plans and execution.

In this article, the ex-RBC client Black, is set up for disappointment and frustration from inception by virtue of his own insufficient savings and unreasonable expectations about what returns he can safely earn, and when he can afford to retire (he has no pension).  Black makes the classic error of believing he can retire because he has “worked for 35 years”.  Years in the work force is not the test here folks!!  The test is:

    1. what are your income needs for retirement?
    2. how much savings have you accumulated to date?
    3. what income can your savings safely produce, without unduly risking the capital, given currently available yields?

When current yields on GIC’s, CD’s and government bonds are yielding less than 2%, rental incomes are increasingly negative, corporate debt and equities are dramatically over-priced and yielding very little in exchange for high capital risk, then we have to factor the reality of the environment into our financial plans.

We don’t get to put ourselves in different public markets.  We can’t pay higher fees to a sales person and expect that will somehow magically make our savings produce more safe income. To the contrary–paying higher fees in this environment is most likely to have the opposite effect–more risk, capital losses and even lower returns over time.  And this is all before we even get into the next bear market which is likely to remove anywhere from -25 to 55% from currently egregious asset prices.  This is not true because I say so, this is true because it is the math we all face in our present market cycle and current asset valuations.

One million dollars in this environment, without unreasonable capital risk, can safely produce 1 to 2% of income per year.  This will only improve, when asset prices mean revert lower so as to produce higher income yields with much less capital risk.  Until that happens, signing up with sales firms who say you can retire now, or produce returns that are 2, 3 or 4 times the rate of available yields, is pure folly and willful blindness.

Those who can see truth and control their financial choices and behavior accordingly, will earn much better returns ahead.  Those who cannot however, will earn the usual fate of undisciplined financial behavior:  lost money, lost time, insufficient capital and psychological anguish. Bad returns indeed.

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Danielle on The Financial Survival Network

Danielle was a guest today with Kerry Lutz, on The Financial Survival Network, talking about recent developments in the world economy and markets.  Here is a direct audio link.

Also see Ontario Finance Minister says Federal help needed to cool housing market:

“…as housing bubbles are allowed to expand, many are hurt or drawn into unsustainable financial situations. When housing bubbles unwind, there is major collateral damage, and people are hurt through little or no fault of their own. And the historical record is that they do unwind, essentially without fail.”

— Ryerson University, City Building Institute report, March 2017, recommending foreign-buyers’ tax or a property tax changes to deter continued speculation.

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Higher global leverage and financial risk in 2017 than 2007

Financial analyst, Author and former Goldman Sachs Managing Director, Nomi Prins sits down with EIR’s Paul Gallagher to discuss just how rotten the current financial system is, making a sobering case that we are far worse off today than we were before the 2007-08 crisis. Prins refers to her political and financial road map for 2017, (nomiprins.com) and discusses the important, combined role China and Japan can play in bringing the US back from the brink and into the new paradigm of investment in the real economy. Here is a direct video link.

Prins:  In investment banking, “If you are telling a client what their downside risk is…you might not make the sale…you’re not making money…so that wasn’t wanted.”

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Big corps running public policy making us sick and bankrupt

Big for-profit corps running our food and medical system (not health, but rather ‘sick-care’), while buying off government representatives and regulators, along with individuals abdicating personal responsibility for what we consume and feed our families, and how we care for our bodies…this is a toxic mix the world over, but the evidence is especially garish in America today.

Wendell Potter, a health insurance executive turned whistleblower, on the GOP failure to repeal Obamacare and what lessons the 2009 defeat of the public option – when Democrats controlled Congress – can offer today.  Here is a direct audio link.

All of this is connected to the need for thinking people to fight the industrial food system which is helping to make us sick and bankrupt. Above all else, we are what we consume.

It also connects with this chart, reminding that America spends far more on medical expenditures than other countries (measured at purchasing power parity), but US life expectancy is shorter than in many countries that spend far less.  See:  The problem with US health care in one chart.

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Waging a war on the industrial food system

If we are going to make our children and our nations strong and healthy, we have to start with how and what we are eating. Kimbal Musk is the founder of casual dining upstart The Kitchen, and is working to improve nutrition by expanding healthy and affordable dining options:

“[My brother] told me it was crazy to get into the food business; I told him it was crazy to get into the space business,” Kimbal jokes. “It’s working out fine.”  Here is a direct video link.

Indeed, Americans are facing a number of nutritional issues. More than a third of the country’s population is considered obese, while less than a quarter eat the recommended daily servings of fruits and vegetables, according to the Centers for Disease Control and Prevention. And being short on time or money can often lead families to settle for less nourishing options — a reality Musk is determined to change.

“It’s not as hard as people think. It’s just that people have lost the skill of cooking,” he says, adding that he keeps his own grocery budget low to understand what the average family can afford.  See:  Musk waging a war on America’s [industrial] food system.

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