Could the U.S. Government Take Part of My Retirement Savings?

I have seen this movie before, Maestro – and I don’t like how it ends!


I received a notice today from a retail broker informing me that under new federal regulations our company cash reserves can no longer be invested in money market mutual funds that maintain a stable $1 net asset value.

I had to choose whether to receive a check for the funds or move them to a money market fund that invests in US Treasury obligations.  Simple enough, I chose the UST fund and went on with my day.

bloomberg 81814Then a friend sent me an article about a rumored tax on retirement funds.  Sure, I had seen these articles before, we all have.  The financial press has written amply about the prospect of a European “bail in” but here, in the U.S., come on, no way.  Yes, Argentina, Hungary, Poland, Portugal, Bulgaria and Russia have all “nationalized” private pensions and retirement savings, but here, in the gold old U S of A?  No way.argentine

Then it hit me.  This is exactly how we started down the slippery slope that plunged us all into the Great Recession.  It started with innocuous little changes.  Greenspan advocating 65% then eventually 85% home ownership.  Social engineering, not monetary policy, to be sure, but for a great and noble cause: greater stability and bank bail ininvestment in communities that comes with home ownership.

Then came the financial creativity.  No longer would mortgage lenders be bound by the decades old strictures of 20% down (or 10% with PMI) and maximum 36% debt ratios.  Mortgage lenders were loosed to run amok in society, preying on any group unsophisticated enough to know the dangers they were signing up for.  Greenspan, Clinton’s “Maestro”, changed federal policy to allow banks to invest Tier 1 capital in mortgage-backed securities, flooding the secondary mortgage market with trillions of dollars in liquidity.  He changed the net capital rule for broker-dealers, essentially allowing infinite leverage and exposure to risk.

Greenspan set the stage for the catastrophe, then, as the economic bloodbath raged, the henchmen slammed us with mountains of new regulations and flooded the markets with trillions of dollars printed out of thin air.  Although he largely denies personal culpability for the Great Recession, he sheepishly, once upon a time did admit that some of his models may have been wrong:

greenspan testifying

The parallels of the precursors to the 2008-2010 Great Recession to what we are experiencing today are there, sure enough.  Innocuous government regulation aimed at improving the markets but with serious ramifications when the economy hits the inevitable rough patch.

I have seen this movie before, Maestro – and I don’t like how it ends!

Where’s the safe zone?

That will be the topic of a future blog.

The Great $550 Trillion Bet of 2016 – And how it will impact YOU within a year

falling off cliffA college student asked me today, “a group just did a presentation on the last crisis and they just didn’t seem to think it would happen again or at least to that level because of the regulations in place – what do you think?”

Wow.  Loaded question.  How to answer and not sound like a cantankerous old WASP?  (52 is ancient to millennials).

We can start by taking a look at how we are creating the next recession before it has even officially started.  We are not getting into this recession the way we get into most recessions.  Most recessions represent a cooling off period after the economy overheats – – inflation caused by expansionary monetary policy is followed by a period of higher interest rates and contraction, a.k.a. a recession.

The 2008-2010 “Great Recession” was different.  The Fed embarked on a bold new plan of social engineering, increasing home ownership by encouraging creative financing alternatives in the residential mortgage lending market and allowing banks to invest trillions of dollars of Tier 1 capital into mortgage backed bonds, among other systemic changes.  This caused the “housing bubble” which when it burst, rained $4 billion on John Paulson personally, enabling Michael Lewis to write the New York Times bestseller (and later a movie based on the book), The Big Short.  (This is the abbreviated version – call me if you would like to schedule the 4-hour lecture.  Seriously, call me.  I have one).

The next recession will be a totally new breed of economic disaster.  It is a hairy, monstrous beast being fed a steady diet of ever increasing sovereign nation debt and corporate debt, most of which is producing no new output of any kind.  And the debt is being juiced with steroids made of derivatives, over $550 trillion of them worldwide according to the Bank for International Settlements.  Amazingly, U.S. banks have exposure to $247 trillion of them!

As I wrote in a previous blog, the CIA World Factbook indicates that the Global GDP (OK, it’s GNP when talking globally, forgive me professor Tutterow) is only $107.5 trillion.  So why do we need to hedge every economic transaction five times over?   We don’t.  It is all speculation.  And when speculation turns to panic triggering a full-blown collapse, guess what?  We get a singularity!  Everything will go down because nothing will hold its value.  No one wants to buy anything, no matter the price.

What might the first step down the slippery slope be?

How about Japan.  Japan’s national debt has grown 94% in the last 10 years (from USD$1.55 trillion to $3.02 trillion) and now stands at 229% of its GDP despite no real growth in nearly three decades and yet the yen is still one of the strongest currencies in the world.  Why?  Because almost everything else is worse!    Japan’s only solution is debt monetization, a fancy economics term for paying off corporate debt with even more sovereign debt.  And with its low borrowing rates, it has long been a favored source for traders to obtain low-cost funds to place their bets in riskier markets offering higher yields (known as the carry trade).  What happens when traders no longer want to play this game?  That could be the first slippery step.

aug 4 graph

Or how about Italy?  The average Italian bank has 18% non-performing loans and 8% capital.  If they recover 50% of every non-performing loan, the capital base of the entire Italian banking system will be wiped out.  Greece at 34% non-performing loans and Ireland at 19% are even worse.  Portugal at 12% is technically bankrupt as well.

And don’t forget the $247 trillion of derivatives held by US banks.  During the great recession some of these instruments had nearly infinite (at least very difficult to calculate with any accuracy) negative values.

These are only a few potential flashpoints built into the global economic system.  There are myriad others that could be the last snowflake that triggers the avalanche.  I don’t see a soft landing under any scenario.  Having learned nothing from the worst recession in nearly a century, we have levered up in every way imaginable.  We have dialed up the risk to a point that no individual, corporation, government or intergovernmental entity can manage.  The powder keg is busting at the seams.  One spark is all it will take.

As we wrote about earlier, the best way to protect yourself is to have ample cash on hand to weather the storm.  Or as more aptly spoken streets quoteby Baron Rothschild in the panic that followed Napoleon’s defeat at the Battle of Waterloo, “Buy when there’s blood in the streets, even if the blood is your own”.

$550 Trillion Global Derivatives:

Japan External Debt as of 8/3/16: USD$8.978 trillion per

Japan External Debt as of 2006:

Japan Debt as a Percent of GDP: and