I had a bunch of high coupon NYS GO Muni’s. Almost all of them have been called. I had 5 and 5 1/2% Agency MBS. I knew that was subject to prepay, but I never expected to get 80% cashed out. The corporate’s were high yield so I kept the maturities short. Most have been paid off.
Net-net my fixed income is down a cool $150, 000. I have managed equities and at my age I am not going overboard on that. I think all preff stock is junk. I will not buy JNJ for a 3% yield and lose a 1/3 of my equity. And I am not going out far on the curve when there is no payback. So I am screwed. Losing this much income makes it hard to plan for expenditures. Relying on the equity market to earn a stable income is not possible.
So if you lose that much income what do you do? I cut fixed and variable costs.
-I left my high-end golf club. Saved $30k on that. Last I checked there were 70 out of 270 members looking to do the same thing. Talk about a leading indicator.
-I had my eye on a new A-6. Call that $30k with the trade. I nixed that plan so a few folks in Wolfsburg have a car less to build.
-My farm pickup has gone to work six days a week for the past 12 years. The help, the rust and the big loads have beaten it to pieces. I need something that will push snow, so that is another $40k. Screw that, we will drive the piece of crap until it dies.
-I was thinking of asking a lady to come with me for a few weeks to Europe. Saved at least $10k there when I never brought the topic up. Funny thing is, she’s there now with another guy. Possibly he does not have a “duration” problem.
-I have an endless list of trades working for me. Plumbers, carpenters, masons, electricians. I usually budget 30k for this. These guys are all calling me up to see if I am okay and do I have some work? I tell them, “Next year”.
-My apple orchard needs pruning and the tree guy came over to talk about it. I also told him next year. The risk is we have heavy wet snows and I will lose trees so I am taking a gamble. Another 10g saved.
-I give 10% of my income to various forms of charity. I am not doing so this year. $15k to the plus, but I don’t feel so good about it.
That adds up to $165,000. But I know something will break and I am hoping to come in at the $150,000 that I lost to the bond market. If nothing breaks I will find something “good” to do with the extra.
Ben Bernanke does not give a rat’s ass about me. Nor should he. There are plenty of situations that are screaming for help that are much more important than I am. I have no problem with those priorities.
Ben is probably going to be working on his speech as he flies out to Jackson Hole. It will be an important presentation that many will focus on. I am sure that he will acknowledge the weakness in the economy. He will point to the recent steps he has taken and he will promise to do more “as necessary”. In other words, ZIRP will be with us for a long time yet to come.
Bernanke has a better handle on the numbers than anyone. He knows we are hitting an economic wall. But he can’t figure out what to do so he looks in a college textbook and reaffirms his belief in Keynesian economics and voodoo monetary policy. The only medicine he understands: zero interest rates. The poor guy must be wondering why his efforts have failed so miserably. He is now looking at a questionable future. If he steps on the gas with QE2 and fails, he will go down in the books as the worst fed governor in history. I think is going to fail miserably.
How many people look like me? A million? Three million? Five million? It is many more than you might think. If it is 3mm then it translates to a drop in consumption of $450 billion or 3-¼% of GDP. So without the me’s of this country contributing to consumption we have a tremendous drag. We need 3-1/4% growth or the social obligations/debt will eat us alive in a few years. We’re not going to see that growth. QE is the culprit. And Bernanke does not get it.
Note: The NY Times had a front-page story by Sewell Chan that spelled out his thoughts on the dilemma Bernanke faces. He started the column with these words:
Bernanke to Offer Outlook as Fed Weighs Bolder Steps
On Friday Ben Bernanke will offer his outlook on the economy and explain the Fed’s recent modest move.
This is a dangerous understatement by Mr. Chan. Until very recently Bernanke and the bulk of the board members had been signaling that the next move in monetary policy was going to be a return to normalcy. The Fed’s recent move to initiate the first step in QE-2 is a 100% u-turn on what has been said/promised for the past year. There is nothing modest about that step. The markets have shown they don't like it. Every additional measure that Bernanke takes will lead to more dissatisfaction. Ben can’t connect these dots. He thinks the solution to our problem is to create free money so the commercial banks can generate big income to absorb the big losses. It is a dead end policy for the real economy.
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Thanks for the honest and thorough post. I know plenty of people with the same bond problem as you (albeit with less capital). The real trick for BB will be to admit that he can't do any more, and that the federal government needs to step in with much higher deficits (preferably with a payroll tax holiday) if we are to get the machine going again. As for the deficit--in an emergency (like WWII) nobody cares about the deficit.
ReplyDeleteThe Powers-That-Be in Washington can fight this forever, but the only way out of this is a currency devaluation (and a corresponding reduction in the American standard of living). If the Chinese won't let our currency devalue then we should just make more of it and shovel it out to the working classes (hence the payroll tax cut.) That will get the money spent.
If BB were such an astute student of the Great Depression he would realize that the countries who devalued first did best.
It going to hurt though!
I know this sounds stupid now, but in a few years it will be received wisdon.
From the outside, this is called consumer deleveraging. People saying that have not a clue.
ReplyDeleteBruce.. care to venture a guess as to what the next QE will look like ? Treasuries, MBS.. or something more exotic ?
ReplyDeleteThanks..
BK, you're someone I respect for having a grasp on the big numbers, but I am confused about the assertion that lower bond yields is a "drag" on the economy.
ReplyDeleteSeems to me that with the skimmers taking it in the pants, the productive sector of the economy getting money at a lower cost is not a bad thing.
Your capital is still present, you can keep it in coffee cans, or in a bank, or be more aggressive in chasing yield.
Household debt rose from $8T in 2001 to $14.4T in mid-2007. That was Peak Debt, and the 2004-2006 period was when the major economic mistakes were made, a $4T debt overhang that has yet to be liquidated.
Having lived in Japan in the 90s, I've seen this movie before. So did my grandfather, who turned 18 in 1929.
"the only way out of this is a currency devaluation"
ReplyDeleteThis is an exceedingly dangerous thing to do.. first off, the values of Bonds held by the Chinese and others are immediately devalued. They won't be happy with this to say the least.. and will immediately boycott any further bond auctions.
Second, as prices begin to rise for the serfs, they get very scared and do a couple of things.. first, empty their bank accounts {rich foreigners do this electronically en masse}. Second, they call their broker and sell equities. Third, they stop paying "silly bills" like credit cards. Fourth and perhaps most dangerous, they begin to "forward buy" things like gas and food in anticipation of yet more inflation.. thus ensuring more of it and with it perhaps even hyperinflation in commodities. Ultimately as people stop paying bills and withdrawing money from banks, the banks begin tanking.. and this in some cases triggers credit default swaps, thus leading to more banking collapses.. and shortly thereafter a systemic collapse.
Sorry to hear about your 'duration' problem. I got a good laugh out of that. Double entendres are the bomb.
ReplyDeleteI think that Ben Bernanke would love to devalue the dollar. But he can't. That market does what it wants to, not what a central banker wants it to. What Ben can do is continue policies that undermine the dollar as store of wealth. ZIRP will accomplish that. It will just take a bit more time.
ReplyDeleteAs a reality check: according to Wikipedia there were 1.7 million households with an income > 250k in 2005. (I assume you were one of them, while most of them are probably not making that kind of money from clipping coupons alone). So, scratch the "Three million? Five million?" questions. They sound like reality distortion field.
ReplyDeletehttp://en.wikipedia.org/wiki/Household_income_in_the_United_States
I know a couple of people who retired in their early sixties who did the CD ladder thing with between $500K and $1000K. One (the poorer one) has gone back to work simply because her nut was going to generate only about $5000 in the coming year, and the other one told me will probably start drawing down the principle by about $10-20K in the coming year rather than try chasing higher yields.
ReplyDeleteIt sounds reasonable except for economizing on the apple trees. Spend a little money on the pruning and maybe save a couple of trees; I thought that would be in the realm of Yankee thrift.
ReplyDelete@Mr. Kowalski
ReplyDeleteI don't disagree with you that currency devaluation would be a bad thing that would lower the American standard of living--but can we get past the "Chinese won't show up to buy Treasuries" canard? The Fed can "buy" those Treasuries until the cows come home--that's what they did in WWII. As for them being unhappy--well, I imagine a US currency collapse would make them very happy.
@BK: I'm sure that's what BB thinks, but ZIRP won't necessarily cause currency depreciation, even in the long run. The Japanese have had it for years: have you seen the long-term chart of the yen/dollar and yen/euro?
Bruce,
ReplyDeleteyou're against any more QE, which is understandable. My question then is do you believe that something/anything should be done now? Personally, I think the treasury should just start printing directly. Pay the bills without issuing any debt. Just print.
Your blog is clearly one of my favorites; always a pleasure to read. "Duration" problem...that's some good stuff. ;-)
Steve
IF I am not sure how many look like me. But I think the number you cite is wrong.
ReplyDeleteThe census is looking at wage income. This also referred to as earned income. This is captured by payroll tax and income tax numbers.
What I am referring to is unearned income, or passive income from investments. That number is quite different than the one you point to.
Mr. K
ReplyDeleteI am not sure what the next Fed move will be. I think the traditional idea that they are going to beef up their existing balance sheet is in the cards.
I am looking for something different. I think a change of the language from the Fed is the next step we shall see.
I look for them to say:
Interest rates will remain at 0% for at least the next 18 months. This would remove any doubt as to how long (at a minimum) this will last.
I would be very grateful if someone here could provide me with a compelling rational for devaluing the dollar. I just do not see how it helps in our current situation.
ReplyDeleteIt is one thing to devalue your current debt, but what does that do in the face of your stated intention/need to borrow roughly one trillion annually for the next ten years? It would seem to bake in an increase in the nominal amount you will need to borrow as well as raise the cost of that borrowing. That alone seems to me to be a compelling reason not to devalue.
Nor do I clearly see how devaluation would necessarily improve the trade imbalances of a structurally net-importing/value-added exporting country like the US. The increase in our energy costs alone might offset any value to that policy.
There seems to me to remain some inexplicable worldwide confidence in the US dollar regardless of the fact that there is no rational cause for confidence about the US economy or government, and that that very inexplicable belief in the value of the dollar is the only thing keeping us afloat. Take that away and what is left? If someone would take the time to point out what I am missing I would appreciate it. Thanks, John B.
John B:
ReplyDeleteThe entire world is short "yield" today. So if you are chasing yield where do you go? You go to the place that has the most paper to buy. So you go to the USD and buy treasury securities.
The dollar benefits from the capital flows. When does this change? I wish I knew. I would make a bundle by calling "the top". But I will not do that. No one does. These tops creep up on you.
The pendulum will swing. It always does. The pendulum is already at an an extreme level. But it could easily continue to an even more extreme level. With it could go a longer period of an overvalued dollar and very low interest rates.
It will not last. We are already defying gravity with ZIRP and QE-1 and 2.
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ReplyDeletenice post!
ReplyDelete