2011-2031

an interesting article everyone must read.

Simon Hunt Strategic Services

Simon Hunt November/December Economic Report

"Four years into the crisis it is surely time to accept that the underlying problem is one of solvency not liquidity – solvency of banks and solvency of countries. Of course, the provision of additional liquidity support to countries and institutions in trouble can buy valuable time. But that time will prove valuable only if it is used to tackle the underlying problem.......But the underlying problems of excessive debt have not gone away. As a result, markets are now posing new questions about the solvency of banks and indeed governments themselves." Mervyn King, Governor of the Bank of England, 18th October 2011.

1. Summary

• The world is in a balance sheet depression which will make a second and perhaps more dangerous credit crisis almost inevitable. That should break out next year or in 2013.
• The three global pillars of the world economy, the USA, Europe and China each have their own problems, but their impact is global because of the feedback loops from the financial sector to the economy.
• The USA has a debt and deficit profile which is unsustainable; the Euro Zone has to decide whether it can forge a fully fiscal union or whether the costs are too great in which event membership will be restructured; and China is trying to put its economy on a more sustainable growth path at a time of leadership change.
• Debt and demographics will be the determining forces to global growth.
Markets will no longer countenance indecision and pushing debt problems under the table by lending more funds to indebted governments. Politicians want to postpone what they know is inevitable: debts must be repaid.
• European banks are under duress; government debt represents a large proportion of their asset base. They are also the largest lender to all the major regions of the world. To shore up their own balance sheets they will be cutting credits etc.
• The world will suffer from rolling recessions starting either next year or in 2013 lasting to about 2018. Global industrial production should fall by an average of 0.25% a year during this period.
• By then the process of deleveraging should have run its course. The world beyond 2018 will be a different place. World industrial production should average around 3% a year to 2030 compared with an average of 3.3% in the period 1990-2010. Monetary policy will also be quite different; global money supply will match global GDP, not the massive increase experienced since 2008.
• Asset inflation will be virtually non-existent as funds will experience solid long term growth in equities. CPI inflation will be contained at around 3% a year as a world average. This will be a golden period after the turmoil of the 2000 to 2018 years.

2. Introduction

Truth can be ugly and solutions often painful. The world is at the start of a balance sheet depression as Professor Rogoff stated in a German interview. But, policy makers will not own up to this simple description of the world economy, preferring to put band aids on gaping wounds. The truth, though both ugly and painful, is that the world is heading towards its second and, arguably, more serious global credit crisis within five years of the first.
Each of the three principal pillars of the world economy, the USA, Europe and China, has their own problems, but they boil down to two simple ingredients: debt and demographics. They may be special to their own countries/region but the impact is global because of the feedback loops from the financial sector, which is global in structure, into the world economy.
Few, if any, country will be spared from the rolling recessions and deflation which have started, will intensify and probably not end until around 2018. One example of this interrelationship is that European banks are and, have been, the principal providers of international lending. They account for more than 50% of international bank lending in all the major regions of the world, excepting Asia where it is just under 45%. These banks are under duress; they are probably already scaling back their international lending even to Asia. If this trend were to become significant, the contagion impact would be substantial.
This point was made by Mark Carney, the Bank of Canada governor and the first chairman of the Financial Stability Board. Market volatility is increasing and activity declining as global liquidity shrinks. He added, "The effect on the real economy will soon be felt." To meet tier 1 capital ratios by next June, European banks have to raise US$2.4 trillion with a good part being raised by asset sales. And this, of course, takes neither account of impaired sovereign, corporate or household loans nor the latest EMU guidelines "which ask banks to mark down distressed assets to better ascertain capital raising requirements", as GaveKal wrote yesterday.
The interdependency of governments and their banks is well and shrewdly described by Jim Millstein in today's FT.
"The financial fate of Europe's banks and its governments are inextricably linked: because the banks are the primary source of funding for government deficits, government debt represents a large proportion of the asset base of most eurozone banks. Insolvency of one therefore threatens the insolvency of the other...The truth, however, is that given the level of eurozone government indebtedness and the relative size of Europe's banks, Europe's largest banks are too big to save."
Such is the seriousness of the problems facing so many countries in Europe; their fate will have global repercussions. It is why a new, or, some would argue ongoing, global credit crisis is virtually inevitable.
Asia, so long thought of as the epicentre of global growth, will not be immune to the issues faced in the three pillars because exports to two of them will fall substantially and are likely to slow to the third, namely China. And, as the Euro Zone (EZ) becomes a more stressful region next year, European banks may well be forced to cut credit lines to corporates and governments in Asia even more.

3. Current Situation

As the global balance sheet depression takes hold, the world is moving from one crisis to another. It was only a few months ago that the market's focus was on the USA; then it was China and now it is the EZ.
Today's EZ's problems were caused by trying to cement together a ragbag of countries into the European Monetary Union which included Germany on the strong side and Greece, Ireland, Portugal, Spain and Italy on the weak side. The monetary assumption that was appropriate for Germany would be appropriate for all of the other members.
Herein lay the fault lines. The weak members were able to get a German credit rating which meant that they could borrow to consume goods and finance industry and infrastructure that otherwise would not have been possible. Banks, too, were happy to lend to the governments of these countries because they could take the loans to the ECB and use them as collateral for even more borrowing. A credit frenzy followed which has resulted in today's debt crisis.
Chart 1: Household, Corporate & Government Debt as % of Nominal GDP

Source: Bank for International Settlements
Now many of these countries are in a critical condition. This table produced by the BIS in their September report breaks down a country's total debt by household, corporate and government for some European countries plus the USA and Japan. There are three countries whose debt is above the BIS threshold level for all three categories – the UK, Canada and Portugal – and ten whose debt is above the threshold level for two of them.
Once again markets tend to focus on one culprit at a time starting with Greece, now to Italy and then perhaps to France, Spain and Belgium. The reality is that markets are going to have to focus on all of the weak countries because the numbers are just too large.
Chart 2: E1,500bn to be financed in peripheral euro area states between now and 2014

Source: Pictet, Decision Time for Monetary Union, November 2011
Sovereign refinancing by 2014 will be huge and this ignores the sums required to recapitalise the banks: in total we are talking of between E3trillion and E4trillion. As a percent of GDP, the refinancings are alarming for four of these five countries – Greece 30%, Italy 26%, Portugal 19% and Spain 16% for next year.
That is not the end of the story. Analysts conveniently forget the future liabilities such as pension funds. If these are added to the debt set out in the previous chart total government liabilities as a percent of GDP become quite extraordinary. As of last year they were:
Chart 3

Thanks to Niels Jensen of Absolute Return Partners in their November 2011 letter, our attention was drawn to the work of Egan-Jones, a credit rating company whose revenues originate from institutions and who have a powerful track record. They state that Greece cannot reasonably support more than E40bn in taxes, equivalent to only 10% of the amount outstanding. "That's why debt holders are likely to face a 90% haircut.....And unless trends reverse, Spain, Italy and Belgium will follow."
This brings us to an awful truth: will Germany allow the ECB and/or the EFSF to effectively print money to enable the weak members to repay their debts. The problem is that the Bundesbank and Germany's Constitutional Court will not allow Germany to participate in such a program for their own historic reasons and because, quite sensibly, printing money does not work. Future stability, together with fiscal and structural reforms, would disappear risking a substantial rise in the cost of living (CPI inflation) as well as asset inflation.
The choice before Germany is then simple but harsh. Either to throw caution to the winds and hope that by printing money the Euro Zone can be saved and stability created or to accept the painful truth that "the Euro is an incoherent nonsense which, in its current form, is doing far more harm than good", as Liam Halligan wrote on Sunday.
There are sign that German and other officials are quietly preparing for the possible departure of weak countries from the EZ. The heads of Germany and France have publically acknowledged that euro membership is not permanent. This could mean either that the weaker members leave or that the stronger leave and reconstitute the Euro around a smaller number of countries. Either way the cost would be considerable but arguably less than attempting to force the high spending countries into a German fiscal and monetary structure.
The prospect of a temporary return to sanity in Italian and Greek politics with the swearing in of Mario Monti as Italy's new Prime Minister and the appointment of lucas Papademus in Greece raises market expectations that both countries will begin the process of making their economies more competitive and in a position to repay debt etc. Both are well respected technocrats but both are unelected officials. Both countries will introduce some of the right measures but the question of implementation remains. For Greece, the arrival of the troika to help run the economy is likely to provoke anger in the country; and for Italy, whilst Berlusconi has lost office, his influence will still be felt in parliament via his party members who had supported him.
Implementation of the technocrats' policies will be the real problem. This is possibly the EU's last throw of the dice. If their policies are not fully implemented a change in the membership structure of the EZ will be unavoidable.
In summary, our best guess is that there will be a temporary honeymoon as markets react positively to the appointment of the two technocrats. Other problems will surface in some of the other weaker members of the EZ. Eventually, there will be a restructuring of the EZ centred on Germany, the northern members and France though the latter country might find the disciplined approach to fiscal and monetary policies of Germany too difficult for them to swallow.
Chart 4: Markit Eurozone PMI & GDP

Source: Markit, Eurostaat, GDP = gross domestic product
Meanwhile, business is falling sharply in Europe as has been clearly shown by the various PMIs and the IFO data. The latest OECD Composite Leading Indicators also show that business activity is falling in Europe. However, it is not only in Europe that business is weakening.
Chart 5: NBS China PMIs

Source: NBS
China's official GDP for the fourth quarter is likely to fall to around 8.5% in the fourth quarter and to remain at around that level in 2012. Its electricity production fell sharply in October (- 5.8%) versus September and by a massive 15% compared with August. Railway freight is growing by only 3.5% year-on-year and fell marginally month-on-month in October.
China is not immune to the twin global constraints of debt and demographics. We will expand on the latter later, but McKinsey estimated that China's total debt to GDP ratio was 159% at the end of 2008. It must now be considerably higher. A recent report, for instance, estimates that local government debt is as much as $473 billion or RMB 3 trillion when township government debt is included which was not the case under the nation's audit office.
Imbedded inflation is a growing problem due to rising cost inputs for foods, grains and soya for pigs and fertilizers for corn etc. Per capita meat consumption is rising; wages are increasing at a rate faster than productivity and soon the costs of water and electricity will have to be increased even faster.
Managing the transition from an export model to a domestically driven consumption one is proving difficult and will become even more so should the world economy slump into recession, a likely scenario. And managing the leadership transition is more fraught than usual. We suspect that once the new leadership takes full control in 2013 there will be a period of „clamp down' as government digests the hangovers from years of growth beyond sustainable rates.
Chart 6: IFO North American Economic Climate

Most forward-looking indicators are suggesting either that the US economy will slip into recession if not next year then in 2013. The just released OECD Composite Leading Indicators also signal a slowing economy. Rail freight data for October was up by only 1.7% on 2010 despite the fact that October is almost always the top month for intermodal traffic as it is the month when retailers do the bulk of their stocking for the holidays.
Debt, of course, is on an unsustainable path. Politicians seem incapable of devising a credible long-term deficit reduction program. Some foreign holders of Treasury paper are becoming frustrated by the antics of Washington. At some point over the coming six months a shock will be imposed which will bring down the US dollar; the index (DXY) could then fall below the 70 level so resulting in a full blown run on the currency. Markets will be sufficiently frozen that the politicians will be forced to devise a sensible long-term plan to reduce the deficit; the run on the US$ should also force the Federal Reserve to raise interest rates. The US dollar will then recover very sharply into 2013 at least, though we suspect that its recovery will be longer lasting.
In summary, current indicators suggest that at the very best global growth will be slow next year. There is a risk that the Federal Reserve will have another drive to pour liquidity into the system to be followed by the ECB having to act as lender of last resort. If this does occur asset prices will rise, but the impact of such monetary ease on the real economy will be anaemic. It is likely to be followed by a crash in 2013. We rate this scenario as a 40% chance.
The more likely outcome is that the ECB continues to operate under the Bundesbank mantra providing token relief to the weak members. Europe will remain in recession. The US economy, despite any action by the Federal Reserve (pushing on a string) will have very slow growth at best but will return to recession in 2013. Asia will be affected by banks in Europe having to raise capital together with much reduced exports outside the region. And in China growth will be slower so experiencing a reduction in exports. World industrial production will be very weak with a recession in 2013. We rate this outcome as a 60% chance.

4. The 2013 & Beyond

The period starting in 2013 – and it could be in 2012 – will be fraught as the world deleverages after a generation of governments promising more than they can pay for and in many countries households borrowing more than they can afford. This is a bad enough environment but it is made worse by society aging in so many countries: there will be far fewer workers to support retirees.
Professors Reinhardt and Rogoff have well documented what happens to economic activity in their book, "This Time is Different: Eight Centuries of Financial Folly." "The aftermath of systemic banking crises involves a protracted contraction in economic activity and puts significant strains on government resources." More recently they add that you can't get rid of debt quickly and you can't get rid of it nicely. The bullet has to be bitten meaning that debt must be repaid rather than one institution lending to another so that the latter can repay its debt.
Anyone who had listened to what the Bank for International Settlements was saying since 2005 would have been well prepared for the shocks that began towards the end of 2007 and then blew up in 2008. They are now issuing a new warning in their September 2011 report, The Real Effects of Debt. We should heed this warning. They conclude,
"Our examination of debt and economic activity in industrial countries leads us to conclude that there is a clear linkage: high debt is bad for growth. When public debt is in a range of 85% of GDP, further increases in debt may begin to have a significant impact on growth (in 1st qtr 2010 USA's debt: GDP ratio was 117%)....A clear implication of these results is that debt problems facing advanced economies are even worse than we thought. Given the benefits that governments have promised to their populations, ageing will sharply raise public debt to much higher levels in the next few decades. At the same time, ageing may reduce future growth and may raise interest rates, further undermining debt sustainability. So, as public debt rises and populations age, growth will fall. As growth falls, debt rises even more, reinforcing the downward impact on an already low growth rate."
They conclude, "In the end, the only way out is to increase saving." This is part of the process of deleveraging which is likely to take until around 2018 to run its course. These years will be characterised by rolling recessions and deflating asset prices interspaced by short periods of recovery.
The second dynamic which will help shape the world economy will be the demographic changes with so many countries' population age profiles changing for the worse and far outnumbering those that will continue to have positive demographic profiles, India, Indonesia and Brazil to name just three.
Chart 7: A Snapshot of Global Demographic Trends

Source: CIA, Long Term Global Demographics Trends: Reshaping the Geographical Landscape
Demographic change is not an abstract development; it will have serious consequences for future growth. The OECD, for instance, estimates that the impact of aging on GDP growth rates will be a decrease of growth in Europe to 0.5% a year, in Japan to 0.6% a year and in the USA to 1.5% a year in the period 2025-2050.
Chart 8: Aging Will Cause a Global Wealth Shortfall

Source: McKinsey & Company
Demographic changes will impact household wealth creation. In their report, The Coming Demographic Deficit: How Aging Populations will Reduce Global Savings, they wrote: "Aging will cause growth in household financial wealth to slow by more than two-thirds across countries we studied (USA, Japan, and W Europe), from 4.5% historically to 1.2% going forward. The slowing growth will cause the level of household financial wealth in 2024 to fall some 36% or by $31 trillion, below what it would have been had the higher historical growth rates persisted."
For Europe, the demographic profile is worrisome. According to data by Dr Clint Laurent and his team at Global Demographics, the number of 65+ aged group rises from around 19.6% of the population in 2011 to 29.1% in 2031 with the dependency ratio standing at just 2% by then.
Chart 9: Demographics of China & the USA

Source: Dr Clint Laurent, Global Demographics
A surprising development is that the demographic profile of the USA is so much better than that of China. Once the USA puts its financial house in better order, which it will if not willingly, its growth expectations will be better than China's. As we say in Yorkshire, "Think on".
For China, based on simple fundamentals, growth has peaked. The years of circa 10% growth are over because such growth is unsustainable and brings in its wake a package of problems. "One approach to forecasting total real GDP of a country is to combine the projected trend in the number of persons employed with the projected trend in the gross productivity per worker" writes Dr Laurent. He calculates that the trends in the education index of the country should give an expected productivity growth of 7.8% a year to 2016 and 5.8% a year to 2021. This equation gives a trend growth rate for real GDP growth of
• 7.5% a year to 2016
• 5.1% a year to 20121, and
• 3% a year to 2031
This slowdown will have a huge impact on China's future requirements of imported metals like copper. This trend is likely to be magnified also by US and other foreign companies vacating China and returning to their home bases – in the USA once the political system rolls back much of the red tape, health care costs and tax issues etc. There is a fundamental reason for companies to return home: it is that multinationals want their supplier chains adjacent to the market, not on the other side of the world.
Thus, demographics and debt will be huge constraints on world growth. In the 2020-30 period it will partially be made good by technology so enhancing productivity per worker. The chart below sets out our forecasts of world industrial production to 2035 with average annual growth rates shown for each decade.
Chart 10: World Industrial Production - % Growth Per Annum

Higher Education ROI Questioned

If you want to send your kid to college and he/she is just mediocre or barely scrap by to get through the exams, think twice and read the article below.

The ROI of Higher Education Questioned (and Exposed)

by Brett on October 29, 2011

Even before the Occupy Wall Street movement began, there were straws in the wind that “higher education” was starting to be sniffed out as a bit of a fraud…at least in the New Normal, where an undergrad or graduate degree does not guarantee anything, save for perhaps steep student loan debt.
I agree with the likes of Bill Bonner (see below), James Altucher, Jim Rogers, and Peter Thiel that a college degree is perhaps overrated these days.  Then again, easy for us to say (Altucher, Rogers, and Thiel went to Cornell, Yale, and Stanford respectively).  Still I think a structural shift is in motion.  Post WWII in America, the playbook was to get a college degree, and plug into the corporate/government machine for a nice career and pensioned retirement.
Now that the machine is starting to come unglued, the ability to create value through entrepreneurship may be once again on the rise (and I’m talking about actual entrepreneurship – creating stuff that people want and need – not the crony variety that is paraded around Silicon Valley these days).
For more insight on this subject, we turn to Agora’s Founder, Bill Bonner…
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Misguided by Higher Education
by Bill Bonner
When the financial crisis of 2008 hit, we saw how state-managed capitalism works. Favored companies are allowed to make as much money as they can. But they are protected from going broke.
Certain firms are deemed “too big to fail,” by virtue of the key role they play in the economy, or at least by the role they play in a politician’s plans for re-election or future employment. But state-managed capitalism is very different from the real thing. It is capitalism in a degenerate form.
Real capitalism progresses in fits and starts, described by Josef Schumpeter as “creative destruction.” It is like a jungle…not like a zoo. It cannot be managed. You cannot take out the predators or feed selected species without upsetting the balance of nature. Take out the destruction, and you block the creative process too.
Since the beginning of the Industrial Revolution, most real wealth has come from real capitalism. Not from “playing the market.” Not from getting a good job. Not by trying to cadge favors from the government.
So, what is real capitalism? It is what we’ve seen in the computer/Internet industry over the last 20 years. This was a new industry. It had not yet been tamed by the government. Regulations were few. There were no large, entrenched companies to block start-ups. There were no lobbyists to curry favor from the politicians. There were no subsidies…and no barriers. It was young, dynamic, chaotic…and very prone to blow-ups.
The whole industry blew up in January 2000. Mistakes were not bailed out. They were corrected. Money moved from weak hands to strong ones. Many companies failed. The companies that survived, and prospered…went on to glory. Amazon. Google. Microsoft. Apple.
And who was behind these new companies? College drop-outs, computer nerds, products of teenage mothers and broken marriages. They did not enter the ranks of existing technology companies, work their way up to senior management and then create new product lines. It is almost as if they succeeded not because of advanced American capitalism, but in spite of it. They created an entirely new industry…with new companies nobody had ever heard of. And then, they destroyed some of the biggest businesses in America.
Typically, in a correction, asset prices fall and unemployment goes up. Misallocated resources — including labor — needs to be re-priced and put back to work. But when markets are not allowed to work the bid and ask spread in the labor market can stay out of whack for years. Joblessness becomes a structural problem, not a cyclical problem. People do not find new jobs. Old businesses are not swept away and new businesses do not start up.
A zoo economy keeps the old animals alive as long as possible.
Let’s look at education. Now, there’s an industry — we can all agree — that adds value. You could look at it as a charitable activity. Or as a profit-making business. Either way, education has to be a plus for the individual and for the society, right?
Wrong on both points. Education is only a benefit when freely floating prices are allowed to determine what it is worth. First, let us look at the whole industry. Since the 1960s spending on education, in raw terms, in per capita terms, in terms adjusted for inflation, has soared. From the 1930s, when the first careful records were compiled, to the 1990s, real spending on education multiplied 5 times per student. It more than doubled from the ’60s.
Did this increase in spending do any good? Not on the available evidence. Test scores — measuring achievement — have not budged in 40 years. In other words, the additional investment over the last 40 years has been wasted. We might as well have thrown the money down a well.
But while tests of achievement have not moved…the tests of potential achievement have improved. For whatever reason, IQ tests and SAT tests show young people are getting smarter…or better able to take the tests. This may seem like good news. But not when it is set alongside the performance tests. What we see is that the investment in education over the last 4 decades has actually had a negative return. The raw material was better able to learn. But the investment in the teaching industry produced less in the way of actual learning.
Today, the US stands out for its educational spending, as it does for the bombs it makes and the drugs it distributes — it is on the top of the heap, by a wide margin. Spending per school aged child in the US is about $8,000 per year. In Japan, it is half that. France is in-between with about $6,000 spent per child per year.
Which country has the best scores? The one that spends the least — Japan. On math tests, Americans score 474 (out of 600). The French do a little better at 495. And the Japanese get a score of 523.
Science, the same thing. US students get an average score of 489. Japanese students are at 531.
There is nothing very surprising about these figures. Nearly thirty years ago, American researchers found that there was no connection between spending and educational results. They just looked at different school districts in the US. Spending was not correlated with results, they concluded.
And yet, studies continue to show that people with more education do better in life. We doubt these studies have much validity, at least as interpreted. It is surely true that people with a lot of education have lower unemployment levels and higher incomes, statistically, than those with little formal schooling. But we have no way of knowing whether any individual student would have been better staying in school…or dropping out like Steve Jobs or Bill Gates.
But we will take a guess: the typical young person would be better off getting out in to the real world and learning as much as possible from working, than he would by staying in school. After all, that’s how almost all the world’s great geniuses, inventors, scholars, and entrepreneurs learned. It has only been in the last 100 years that public education has been ubiquitous…and only in the last half a century that ordinary people felt they should go to college. But as more people went to college, the less dynamic…less creative…and less productive the US economy became.
Our colleague, Gary Gibson puts it this way:

College is not necessary for most people. It never was. In fact, the preoccupation with college has left America bereft of its former ability to create wealth.
An unhealthy cultural myth has flourished that says everyone must go to college and get an advanced degree, even if it’s something for which there is virtually zero market demand. Meanwhile, below-market interest rates and government-backed loans have lured a couple generations of Americans down the road to higher education.
Further, the kind of education colleges provide — indeed, all of American schooling from kindergarten onward — doesn’t produce innovators, entrepreneurs and job creators.
In a recent article for The New York Times titled “Will Dropouts Save America?” Michael Ellsberg writes:

• “American academia is good at producing writers, literary critics and historians. It is also good at producing professionals with degrees. But we don’t have a shortage of lawyers and professors. America has a shortage of job creators. And the people who create jobs aren’t traditional professionals, but startup entrepreneurs.

• “No business in America — and therefore, no job creation — happens without someone buying something.”

Wealth is only created when value is added (You didn’t think it was when money was printed, did you?) The Austrian school of thought reminds us that value is subjective. People, ultimately, buy what’s worth buying to them with the money they’ve earned.
We cannot put too fine a point on this. It doesn’t matter what the seller thinks the item is worth. It doesn’t matter how much time, energy and material went into making the product or service. You can waste a lot of time, energy and material producing something no one will want to buy. The buyer determines the ultimate value…and whether he will part with his money for it.
There can be misallocations of resources. And when the central bank and government get involved, these allocations can grow very large and go on for a very long time before violently correcting.
So it is that, increasingly over the past couple of generations, there has been a gross misallocation of time and resources into higher education, aided and abetted by the central bank and the federal government.
Millions have been misled into pouring their young adulthood into endeavors that won’t pay off…and going deeply into debt for it. The federal government has encouraged this higher “education,” much like it did home “ownership.” The central bank made the borrowing easy with low interest rates — which powered the real estate bubble as well as the higher education bubble — while government entities backed the loans.
Now the education bubble is bursting. The bubble’s start can be traced to the GI Bill, whereby the government got into the business of shoving more people into college than the market would bear. Over time, the same easy loans and guarantees got extended to most of the population.
Over time, some bad notions gained traction. College came to be seen as the ticket to the good life as opposed to something that people already destined for greater things might undertake to help get them there. As often happens, causation became confused with correlation.
In the last 30 years, higher education has come to be viewed as a human right, something that governments are obliged to guarantee. Lost is the notion that a higher education is a path for the exceptional, particularly those exceptional people going into the hard sciences.
Of course, this doesn’t do anything to change the essential ability of the people now being shoved through the system. All it’s done is water down the quality of what’s being offered so that everyone can join in.
Exceptional people still become scientists and engineers. Everyone else gets a master’s in some field that was recently invented to meet the artificial demand for advanced degrees, for people who couldn’t be scientists or engineers, but who had a head full of misguided notions and a boatload of borrowed money.
Worse, this “education” came to supplant things like entrepreneurship, initiative, the willingness to take risk, to accept and learn from failure. As Ellsberg says in his article:
“But most students learn nothing about sales in college; they are more likely to take a course on why sales (and capitalism) are evil.”
Indeed. We hate to keep turning to the Occupy movement, but it is full of the poster children for this. They came out on the other side of the system unemployable and in debt. They feel lost and angry, unable to think of life past the burden of their student loans. And many of them (not all) feel that “capitalism” is somehow to blame, that the world of profits is somehow divorced from the well-being of people.
It’s criminal when “profits” are doled out to banks and “too big to fail” businesses by the government, with money taken from the taxpayers. But what about the real profits — not stolen goods — in which entrepreneurs take risks and business people add value, when the profits are the reward for serving people’s needs?
So the bamboozled have taken to the street. They would like their student debts to be wiped out, that “the people” be bailed out like the bankers and crony big businesses were. Or even worse, they get it in their heads that all higher education, henceforth, should be paid for by the government. It doesn’t matter whether there is a market demand for expertise in a course of study or not.
A system has grown up that encouraged enormous debt for nonperforming assets, namely, schooling in things that won’t pay off. People are still falling for it. But markets aren’t mocked forever. There has to be some painful write-down in central bank-distorted asset values before the economy can regain solid footing. This is just as true for higher education as it is for real estate.
It won’t be pretty. We’re not sure how this will play out for those who’ve misallocated their time and energy based on false signals, and with nothing but debt to show for it. But the stories that we told ourselves about what’s valuable were built on distortions that are now coming to an end.
Reality is asserting itself. And the reality is that entrepreneurship is what drives wealth creation, not going into debt to be taught that wealth creation is secondary to cultural studies or worse, that wealth creation is downright evil.

The education industry has been corrupted by too much easy money. It is now zombified. Sclerotic. And parasitic. It now subtracts value. It takes valuable resources…not the least of which are the minds and bodies of people at their most energetic stage in life…and squanders them, making us all poorer.
Still, parents are terrified of the idea that their children may not get the “education that they need” and may be condemned forever to the lower rungs of the socio-economic ladder. The unemployment rate for college graduates, for example, is only half that of the rate for the rest of the population — less than 5%, even in the high-unemployment slump since 2008. Parents are afraid an uneducated child will not only be a failure, but will be forced by joblessness and poverty to move back in with mom and dad.
Yes, they will tell you, a degree from a Podunk University in the Midwest maybe be worthless. But get a degree from Harvard or Yale and you are on the train to status and prosperity. They are prepared to mortgage the house…and take out hundreds of thousands in student loans to buy the kid a ticket.
And they may be right. But only because the whole society has been corrupted by the same zombie virus. It has shifted the economy from one that cares if you can produce…to one that cares if your papers are in order. A small businessman will not particularly care if you have a college degree or not. He only cares if you can do the job. But big government and the big businesses it manages are different. They use education as a qualifier. Anyone who can sit still in class for 16 years — without questioning the nonsense that passes for knowledge — is a good candidate for bureaucracy.
What have been the growth industries of the last 10 years? Government is the main one. Obviously, government doesn’t care if you can produce or not. Who’s measuring? Its output is un-priced. Who’s to know if you handled your paperwork well…or made the right decision? Likewise, in the education industry, who’s to know if you are productive? What does it mean to be productive? Imagine that you have a job at a major university. You are an assistant director of its Local Community Outreach Program…or its Special Gender Enabling Group…or even its Career Placement Office. Who’s to know…or care…if you are doing a good job? All you have to do is to look and act in a presentable professional way. The rest is BS.
In the absence of any market-based test, you can get away with anything. All you need is a bright smile and a good line of talk. And a college degree, of course!
In non-market sectors, mistakes are eventually corrected, but only…like the Soviet Union…after decades of misery, and a final breakdown or revolution. In the meantime, the mistakes compound. The education industry takes more and more of the national resources while producing less and less real output. And if you want a job, you are better off as a well-credentialed zombie than as an energetic (often disruptive) producer.
But what if you were to start up a new business…a private school, with a clear profit-oriented, market priced output? With modern e-learning tools, you could reduce the cost of a real university education, to a fraction of the price people currently pay.
Mr. David Van Zandt of the New School in New York:
“I apologize to anyone here from Nebraska, but there is no reason to teach introductory chemistry in Nebraska in a classroom of 500 students. Not when you can pump in, say, someone from Harvard,” to give the lecture on video.
It is just a matter of time before the cushy, over-rich education industry meets destruction at the hands of new technology and new entrepreneurs. But don’t expect it to go gently into that good night. It has lobbyists by the score. It has money by the billions. It has its men and women in Washington…who will continue rewarding the failed, zombie schools, while regulating, squeezing out and crushing start-up competition.
That’s why, sometimes, it takes a revolution.
Regards,
Bill Bonner

29 banks too big to fail

with the additional requirement tagged onto these 29 banks on tier 1 core capital of 1-2.5%, dont expect stocks to rally.

1. bank of america
2. bank of new york mellon
3. goldman sachs
4. jp morgan chase
5. morgan stanley
6. citibank
7. state street bank
8. wells fargo
9. lloyds bank group
10. royal bank of scotland
11. barclays
12. hsbc
13. credit agricole
14. societe generale
15. bnp paribas
16. banque populaire
17. deutsche bank
18. commerzbank
19. unicredit
20. ubs
21. credit suisse
22. dexia
23. ing
24. santander
25. nordea
26. mitsubishi ufj
27. mizhuo financial group
28. sumitomo mitsui
29. bank of china

more on MF Global

The Trade That Killed MF Global

Getty Images Jon Corzine

We now have a lot more details about the European debt trade that destroyed MF Global.

What’s clear is that Jon Corzine’s firm was not shooting for the moon with some high-risk trade. Instead, it was taking what it viewed as a nearly risk-free trade, hoping to make money in a very old fashioned way — skimming the spread as a middle man.

The MF Global trade is a version of what is known as a “repo-to-maturity” trade.  Repos are a common financing technique that involve an agreement to sell and later repurchase of a security.  Most commonly, these are very short-term agreements, often overnight.

But in a repo-to-maturity, the trade doesn't close until the maturity date of the underlying bond. This takes away "refinancing risk" that comes from having to find new financing to rollover earlier repos.

Financial journalists Izabella Kaminska and Felix Salmon have both done an excellent job at describing how this trade works. And Bethany McLean’s column explains the accounting gimmickry involved.

Basically, a repo-to-maturity created an implicit loan between MF Global and its counterparty, with the loans as collateral.  MF Global received the coupon payments on the bonds, making money because those payments exceeded the interest it owed on the loan.

Note, there’s very likely a detail that I don’t think anyone else has really focused on.

There’s a strong possibility that the MF Global repos weren’t really repos at all.

In a typical repo, MF Global would sell a security in exchange for cash equal to the value of the security less a haircut. At a set later date, it would be obligated to buy back the security with that cash plus interest.

Often in a repo-to-maturity, there’s no real obligation to repurchase anything. As I understand things, this is one reason they can be used to move the securities permanently off the balance sheet.

Instead, when the bonds matured, the purchaser of the repo’d bonds would receive the final payment directly from the issuer of bonds. He would then net out the amount of the original repo loan plus interest, and hand the rest of the payment over to MF Global.

Because the loans matured in 2012 and the European Financial Stability Facility was backing them through that date, there really wasn’t much issuer risk involved. The only real risk was contained in the contractual obligation on the part of MF Global to provide additional collateral if the market value of the sovereign bonds declined by more than the original haircut.

Let’s use a quick example. Suppose MF Global repos $10 million of Italian bonds with Goliath National Bank. Both sides would agree on a haircut to the bonds, say 5 percent. So MF Global would get $9.5 million in exchange for the $10 million worth of bonds.  They would also agree to an interest rate, the amount beyond the $9.5 million MF Global would owe when the repo closed.  Let’s say this was 2 percent.

At maturity, GNB would receive $10 million from the Italian government. It would then net out what MF Global owes — $9.5 million plus $200,000 in interest — and send the remaining $300,000 to MF Global.

If the value of the bonds dropped prior to maturity, however, MF Global might owe GNB additional collateral. Let’s say the market price of the bonds drops by 8 percent. GNB would find itself under-collateralized. It had lent out $9.5 million and only held bonds valued at $9.2 million. In this situation, GNB would have the right to demand MF Global top up the collateral, providing cash or cash equivalents so that the combined cash and bonds equaled or exceeded the cash lent out.

What happened here is that MF Global’s regulators worried the firm didn’t have enough capital to meet likely margin calls and demanded it raise more capital and disclose more about the size of its positions. These disclosures worried the ratings agencies, which downgraded the company. Which made the creditors demand more collateral. Izabella Kaminska, again, does an excellent job of describing this process.

It’s hard for me to believe MF Global did not realize that it faced exactly this kind of risk.  It’s very similar to the kinds of risks that brought down American International Group [AIG  23.91    -0.72  (-2.92%)   ]. How could they be so dumb?

AUD CAD NZD

are rallies of the above currencies coming to an end?

aud

• the first round bottom, spanning a period of 16 years [90-07], with neckline at 0.8, bottom at 0.48 suggests it will reach 1.12, it did with a fall first from 0.98 to 0.6, then a sharp rally back up to 1.12. this took only 3 years, less than 1/3 the time of formation. this coincides with the period that reforms taken in china requires ever more of the mining metals sourced from australia.
• there are now four tops at around 1.10 and two tops at 1.07.
• however, the two year bottom formed between aug08 - aug10, neckline at 94 [this is the level citic engaged in long term accumulator of aud] suggests a top at 1.30 [94 + (94-60)]. this should usually realize in 1/3-1/2 of the time of formation [2 yrs]. yet by aug11, it did not materialize so it likely would not.
• the long term support level is at 0.8, but it may overshoot a bit if it does come that much down.

cad

• two bottoms have been formed with rsi also rising, this suggests the uptrend of the usd is confirmed
• a falling wedge has also formed with the high point at 1.17
• the first resistance will be 1.11, a low that is reached in 1991

nzd

• this is the most difficult to decipher.
• it has a rising neckline over many years [1998-2007] and is still above it
• but look at each time it formed a top, two lines at about same level with the third month's top way down, this happened in feb/mar08 and again in jul/aug11
• a rising wedge has formed that may take it down to 0.65

we have not heard about QE3 yet, maybe any such a move will again has a further disruption in the short term trend, but it could only be a fluctuation from the longer term trend.

usd should form at least 40-50% of your cash/bond portfolio, increasing it along with any rise in value of the above currencies.

if you hold properties based in usd or the likes, your usd cash position % should be even higher.

Referendum

Referendum - the buzz word and black swan of yesterday.

Make an analogy of Iceland and Greece when both are in deep shit.

Iceland once agreed with IMF and UK on a bailout agreement and its parliament voted for it, when it was handed to the President to sign, he calls for a referendum and the result is history.  Greece is a bit different as it wasn't even voted yet in parliament, but the PM already calls for referendum.

If Greece does go down the way of Iceland, expect a messy exit of Greece from Euroland and financial markets to correct much deeper.

Revisit to hsi recent low is not improbable if Greece continue down the road of no return.

Unload half your stocks and buy call options of the stock or hsi index as a hedge in case it is resolved in a more friendly manner.

Greenspan's Long-Lost Thesis

an article from Barron's illustrating the controversy of an ex-Fed chairman who requested his doctorate thesis be removed from the university library - to avoid paparazzi or hiding incompetence?

in fact he long knew about housing bubbles, but he chose not to intervene - again is this ignorance or some hidden agenda?

Looking at Greenspan's Long-Lost Thesis

By JIM MCTAGUE | MORE ARTICLES BY AUTHOR

Barron's gets a rare glimpse at the Maestro's long-lost NYU doctoral thesis, and his long-ago view of, yes, a housing debacle.

WE'VE FOUND IT -- A COPY OF ALAN Greenspan's long-lost Ph.D. thesis! Or, more accurately, a rare copy of the elusive document, in Lassie-Come-Home-fashion, found us.

The dissertation, written in 1977 when Greenspan received his coveted degree from New York University, had been tucked away on a professor's sagging bookshelf for 31 years.

"There is no perpetual motion machine which generates an ever-rising path for the prices of homes," wrote Greenspan in his dissertation.

There are only two known copies: the Maestro's own and the one we viewed. As far as we can tell, Barron's is the only news organization ever to have seen the thesis since a third and now missing copy was removed from the public shelves of NYU's Bobst library at Greenspan's request in 1987, the year that Ronald Reagan appointed him chairman of the Federal Reserve Board. Glancing at the document, we momentarily felt like Indiana Jones at the dramatic moment in which he discovers the Lost Ark of the Covenant.

Greenspan purportedly was trying to deter news coverage of his personal life when he ordered the thesis into hiding. His anti-paparazzi subterfuge backfired: The stealth thesis became red meat for his critics, who smelled a cover-up. Magazine articles and a new book, Deception and Abuse at the Fed (reviewed here on March 31), have suggested that his degree was largely honorary and that the thesis was a cut-and-paste job, comprised of previously published, non-academic articles wrapped in a flimsy introduction.

TWO MAGAZINE ARTICLES IN THE late 1990s suggested that the thesis was entirely the work of Greenspan's staff at the Council of Economic Advisers, which he chaired from 1974-1977.

Not true, says Paul Wachtel, an NYU economics professor who was on Greenspan's thesis committee. Though the work is, in fact, a collection of previously published articles, he says that it is hardly unusual, as some critics assert, for a collection of articles to be submitted as a thesis. "There's no requirement that a Ph.D. thesis be a single magnum opus, based on the German 19th-century model," Wachtel maintains, noting that Greenspan also had to vigorously defend his work to earn his degree. (Greenspan wouldn't comment publicly to Barron's on the matter.)

The thesis, which runs close to 180 pages, isn't for the casual reader. Two chapters that had been published as articles in the American Statistical Association's annual proceedings contain several pages of algebraic equations that, frankly, made our head ache.

We were tickled to find that the work's introduction includes a discussion of soaring housing prices and their effect on consumer spending; it even anticipates a bursting housing bubble. Writes Greenspan: "There is no perpetual motion machine which generates an ever-rising path for the prices of homes."

Greenspan, however, didn't foresee a housing mania spilling into the general economy, toppling banks and brokerage houses and paralyzing key portions of the credit system. The worst he could anticipate was that a sharp "break in prices of existing homes would pull down the prices of new homes to the level of construction costs or below, inducing a sharp contraction in building." Back then, there were no home-equity lines of credit, derivatives or subprime mortgages. Mortgages were largely concentrated at savings and loans. Credit was harder to come by, too, because conventional mortgage rates were about 8.5% and headed significantly higher. Still, the thesis shows that the former Fed boss was focused on housing very early in his career. Thus, it casts doubt on his recent assertions about being surprised by the Mesozoic-era-size impact of this decade's housing mania.

Greenspan wrote: "This thesis endeavors to develop an area of theory and application which, in recent years of inflation and stagnation, has taken on increasing importance: the factors which govern market prices of assets and the impact they and other key balance sheet variables have on the aggregate investment process. Econometric models have tended generally to give short shrift to such variables, either on the grounds that their impact on effective demand is negligible or that their influence was largely reflected in other macro variables and, hence, an appropriate reduced form would factor them out."

Greenspan anticipated the current generation of five-year college seniors by taking a slow and winding road to a doctorate. He snagged the sheepskin 18 years after starting down the Ph.D. path at another university -- Columbia. His first distraction was Greenspan Associates, a consulting firm he founded in 1959. Launching this enterprise consumed much of his time and energy. Then he went to Washington to chair the Council of Economic Advisers during the Nixon and Ford years.

WHEN HE LEFT THE CEA IN January 1977, he was urged to finish his degree by legendary NYU economics professor Bob Kavesh, a boyhood friend. Wachtel said that Greenspan had to fulfill some course requirements, in addition to completing his thesis. Wachtel, an assistant professor at the time, pleaded to be on the dissertation committee for Greenspan, a glamorous figure in academic circles. He recalls that, following the defense of the thesis, Greenspan had dinner with celebrity reporter Barbara Walters, whom he was then dating. "I was hoping he'd invite us all along," jokes Wachtel.

In his dissertations abstract, Greenspan wrote: "This thesis incorporates a series of articles, written since 1959, which attempt to develop a number of issues relating to balance-sheet effects on economic activity, and, hence, on economic policy."

Sure to draw snickers from snarky critics is chapter five on economic policy and outlook -- part of 1977's unsigned Economic Report of the President. Greenspan claims to have authored it as CEA chairman. The general policy principles discussed in the chapter include the following: "Stimulus should be provided by tax reduction rather than by increases in government spending; tax reduction should be permanent rather than in the form of a temporary rebate; economic initiatives should be balanced between measures to stimulate consumption and those designed to increase business investment."

Other chapters in the thesis previously had appeared in Business Economics, published by the National Association for Business Economics; the annual proceedings of the American Statistical Association; Across the Board (a Conference Board publication) and The Economist.

Wachtel says the chapter written by Greenspan in 1959 on investment risk and stock prices anticipated by 10 years the Q ratio developed in 1969 by the late James Tobin to determine whether a company's shares are overvalued or undervalued, relative to the replacement cost of the company's assets. Tobin became a Nobel laureate.

The Bottom Line:

The ex-Fed chief's Ph.D thesis seems legitimate. And it indicates that he's long underestimated the potential effects of a popped housing bubble.

Greenspan also broke new ground in the introduction to his thesis, where he noted that homeowners were refinancing for larger amounts than their original mortgage, in essence monetizing increases in their home's market value and spending the excess cash on goods and services or putting it into savings. Economic models at the time had missed the trend.

In the late 1990s, Wachtel wrote letters to two magazines that had published critical articles about the hidden thesis. Although he says he told them he had a copy, he maintains that no one contacted him about it. He also says that he wrote to Greenspan about it and that the ex-Fed chief, through a press spokesman, requested that he keep it to himself.

Wachtel came to us after we reviewed Deception and Abuse at the Fed, a book in which Robert Auerbach, a University of Texas professor, asserts that the Greenspan Ph.D. is, de facto, an honorary degree. Wachtel says that the book wrongly impugns New York University's reputation and that Auerbach's accusations are "a flight of fancy."

80's Generation and the flouting of the rule of law

People these days are preplexed by the events happening in the financial markets, the political sphere and the many family problems.

All these can be explained:
Greed
Democracy has led the developed world down the road of no return, incurring debt to the brink of economic collapse as politicians have entrenched interest to stay in power and giving away benefits to get votes. This is no better than totalitarian regimes, just that in those regimes, it is a struggle between the ruling and the ruled. In developed world, it is a class struggle between who can influence the voted to get them tax breaks and those who have limited say.
Both voters and voted do not want to give away their interests.

Legislative Vacuum

White collar mistakes in many cases are crimes but go unpunished, this is creating even more frustration for the public.
Imagine why would you as a financial institution grant loans at 100% of the property value to potential buyers with even more loans extended to them for purchase of furniture, they are risking the hard earned deposits of the public placed with them as when property values tank or sink, the whole financial system is in jeopardy . The regulatory body should never allow such loans in the first place, error of Alan Greenspan. Do not forget such subprime loans are extended at a frantic pace near the end so as to feed Wall Street's voracious appetite to sell the synthetic CDOs to get more bonuses.
The rule of law in the old days do protect the public and make the society fairer, it no longer is now because the legislative system gets only too complex to punish people who committed white collar crimes. The Enron and Worldcom are good examples of white collar crimes, yet the CEO denies having read the financial statements in detail and this is why the Sarbane Oxley Act comes about.
There are many white collar mistakes which should be treated as crimes but there is no legislation in the area to get them punished. The 2008 crisis has shifted the debt burden of the Wall Street to the US government [i.e. the general public], but then Wall St executives keep on reaping big paychecks in the years that follow. The public deserves to be angry with such treatment and injustice.
80's Generation
In the late 90s when internet becomes more commonplace, this generation is the first to be able to access info not just in their local communities but the whole world, they are computer savvy, addicted to msn, qq, all messengers type communications, thus they have become more short tempered than earlier generations. The parents especially those in Asia, have on too many occasions take away their child(ren) independence by arranging too much for them in their daily life as well as not preparing them financially to be independent, this is why this generation is never frugal [rare if found] and want the same consumption patterns as their parents. Because of their short temper, they want it now not later.

Conclusion
Expect even more public disorder like that of the UK when the economy goes slow or sink because the modern world is mistreating their citizens at large.

Get prepared before the crisis

this is a good article on not how to get rich, but how to get prepared before times of crisis:

After the stock market lost 20% of its value in October 1987, Sam Walton, then one of America's richest men, was unfazed.

In less than a week, the value of his Wal-Mart Stores stock had dropped almost $3 billion, reducing his wealth to a mere $4.8 billion. "It's paper anyway," he told the Associated Press. "It was paper when we started and it's paper afterward."

Given the wrenching swings of the past two weeks, many of us may wish we could be so sanguine about our own losses. But even without a few extra billion dollars in the bank, there are useful lessons to be gleaned from the way the Waltons and other ultrarich families cope with investments and market volatility.

Sam Walton, who died in 1992, was famously frugal, driving an old pickup truck and flying coach.

Just like us, the rich want to maintain their lifestyle, preserve wealth and have money for their heirs or philanthropy. And when it comes to investing, there are several ways the rest of us should take a cue from them:

• The very wealthy have a plan. Sam Walton's plan started in the early 1950s, when, on the advice of his father-in-law, he set up a family partnership, made up of him, his wife, Helen, and their four children, to own his two variety stores. By doing that, he began planning his estate and building family wealth years before he opened the first Wal-Mart in 1962.

Nowadays, most very wealthy people have a team of advisers and an investing strategy in place that should work even when the worst imaginary case becomes real. Small investors, too, should have a comfortable investment process that works in good times and bad.

A financial adviser can be invaluable in helping you with this, but so can a trusted family member or friend who will help you stick to your plan when you start to doubt it.

• The very wealthy live below their means. Walton, who died in 1992, was famously frugal, driving an old pickup truck and flying coach. Many very wealthy people spend much more extravagantly, but even so, "most of our ultrawealthy clients have a lifestyle that is well below their means," says Craig Rawlins, president of Harris myCFO Investment Advisory Services, which serves wealthy families.

When you don't spend everything, he says, "you have a better opportunity to weather this volatility because you know there's a cushion there."

• The very wealthy value cash flow. One of the most painful lessons of 2008 was the recognition that we need to keep enough in cash or liquid investments to weather a stretch when the value of everything else is in flux. Martin Halbfinger, managing director, wealth management, at UBS, says every investor should have a "SWAN" account—for "sleep well at night."

"That's a different number for every investor," he says, but you should have enough in bank accounts, bonds or other liquid investments that you can leave your stocks alone when market volatility defies logic.

Sturdy, dividend-paying stocks also can help. Annual dividends on the Walton family's 1.68 billion shares of Wal-Mart stock add up to $2.45 billion a year, enough to buy plenty of groceries and just about anything else.

• The very wealthy focus on risk, not return. Larry Palmer, managing director, private wealth management, at Morgan Stanley Smith Barney, said he has never had a client say, "My objective is to have my family wealth beat the S&P 500." Rather, he says, clients focus on what kinds of risks they are taking with their portfolio.

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The Walton family wealth long has been tied to its Wal-Mart stock, now valued at $83.6 billion. But Sam also bought the tiny Bank of Bentonville in 1961, and it is now part of the family-owned Arvest Bank, an $11.5 billion banking company. Walton Enterprises also owns a chain of small newspapers that, along with other interests, offer diversification and push the family's estimated combined wealth close to $100 billion.

Small investors need to similarly manage their portfolios, making sure that their holdings of stock and other volatile investments aren't so great that they are putting more at risk than they intended to.

• The very wealthy hang on. The super-rich don't sell because they are fearful—though some may be selling right now for investment reasons, such as cutting the tax bite on holdings with big gains. The Walton family ownership of Wal-Mart stock hasn't changed since late 2002, when some shares were transferred to charitable funds.

In that sense, Sam was spot on. Though the Walton family's Wal-Mart shares have dropped by more than $10 billion since mid-May, until the stock is actually sold, the losses really are nothing more than paper

AGING a major factor to recovery

check article below:

Boomer Retirement Could Slow US Recovery: Fed Study

Published: Monday, 22 Aug 2011 | 1:39 PM ET

Text Size

By: Reuters

The aging of the U.S. baby boom generation may slow an already weak recovery as boomers sell stocks to pay for retirement, according to research released Monday from the San Francisco Federal Reserve Bank.

Many baby boomers have already sold some assets in preparation for retirement, research adviser Zheng Liu and Mark Spiegel, vice president of economic research, said in the latest San Francisco Fed Economic Letter.

"Still, it is disconcerting that the retirement of the baby boom generation, which has long been expected to place downward pressure on U.S. equity values, is beginning in earnest just as the stock market is recovering from the recent financial crisis, potentially slowing down the pace of that recovery," the two wrote.

Demand for U.S. stocks from overseas, especially China and other fast-growing countries, could alleviate the pressure from the expected baby boomer equity sell-off.

But the tight historic correlation between demographic trends and the stock market "portends poorly for equity values," the researchers said.

Real stock prices will likely decline until 2021, to about 13 percent below the 2010 levels and will not return to their 2010 levels until 2027, according to the researchers' model, based on historical patterns.

From there, they said, stocks should rise to about 20 percent higher than 2010 levels by 2030.

foreclosures - CELEBRITIES not immuned

http://www.cnbc.com/id/44193985

click the link, it may not last longer than a week, month and not much longer.

read the details to know how to avoid pitfalls in life.

Dow and HSI

the dow support at 10800 is very important, if it breaks to the south, all hell broke loose.

hsi will not climb above 21040 for a long while, even if it does, it will fall back very fast as a very big island top has formed [aug10-aug11]

hsi should have good support for 19000, however it could reach as low as 16400 if the following supports are broken:
supports - 18947 [first rebound], 17514, 15786, 11900 and then god knows.

how PLUSH can a 60th birthday party be?

are politicians giving too much away towards the financial industries?

Birthdays Are Still Big in Buyout Land

Published: Friday, 19 Aug 2011 | 10:39 AM ET

By: Peter Lattman
The New York Times

When the billionaire buyout titan Stephen A. Schwarzman gave himself a boom-era-defining 60th birthday party in 2007, the global economy was soaring.

Four years and one financial crisis later, the world looks very different. But not much has changed in the private equity world — at least when it comes to birthday parties.

Last Saturday night, the financier Leon D. Black celebrated his 60th with a blowout at his oceanfront estate in Southampton, on Long Island. After a buffet dinner featuring a seared foie gras station, some 200 guests took in a show by Elton John. The pop music legend, who closed with “Crocodile Rock,” was paid at least $1 million for the hour-and-a-half performance.

“The great Sir Elton John performing at my friend Leon Black’s fabulous 60th bday,” wrote the fashion designer Vera Wang on her Facebook page. “I had the honor of dressing his wife, my friend, Debra Black, the hostess! If there was ever a great family … this was it! Xx Vera”

The stars of music and fashion collided with a who’s who of Wall Street. Revelers included Michael R. Milken, the junk-bond pioneer and Mr. Black’s boss at Drexel Burnham Lambert in the 1980s; Julian H. Robertson Jr. , the hedge fund investor; Lloyd C. Blankfein, the chief executive of Goldman Sachs; and Mr. Schwarzman, head of the Blackstone Group.

Rounding out the guest list were politicians including Mayor Michael R. Bloomberg and Senator Charles E. Schumer of New York, who rubbed elbows with media celebrities like Martha Stewart and Howard Stern.

“Leon throws some good parties, because Leon’s worth like twenty gazillion, like twenty billion or something crazy, and for him, you know, a billion dollars is like ten dollars to us,” Mr. Stern said on his Monday show on SiriusXM Radio. Mr. Black sits on the company’s board.

Opulent celebrations thrown by the rich and famous are de rigueur in New York and Hamptons society. And in buyout land, there is something about private equity bosses and 60th birthdays: In 2002, David Bonderman, co-founder of TPG, had the Rolling Stones and John Mellencamp play at his celebration at the Hard Rock in Las Vegas.

But where Mr. Schwarzman’s $3 million birthday party came to be seen as a symbol of a new Gilded Age, a party like Mr. Black’s — at this moment in time — appears to some to be something else.

“It displays a kind of moral bad taste given the vast economic problems in the country,” said Michael M. Thomas, a former Lehman Brothers partner who writes novels about Wall Street. “This behavior suggests they are isolated from the rest of the world, living behind these great big hedges, and in a way they are.”

Mr. Black is no parvenu, having been a fixture on Wall Street for decades. When Drexel collapsed in the late 1980s, Mr. Black started a firm to buy stakes in troubled companies. Today, that firm, Apollo Global Management, manages $72 billion in assets and is publicly traded. Its holdings include Caesars Entertainment, the world’s largest casino company, and LyondellBasell, a big plastics and chemicals business.

Mr. Black, a major philanthropist to various scholastic, medical and cultural institutions, has also used his riches to amass a world-class art collection. In 2009, at a Christie’s auction, he paid about $47 million for a chalk drawing by Raphael of a woman’s head.

While much of the nation’s economy has struggled to recover from the financial crisis, Mr. Black’s firm — and the rest of the private equity industry — has snapped back. Though their deals are a far cry from the record takeovers struck in the last decade, multibillion-dollar buyouts have returned as banks extend corporate loans again. And pension funds and global sovereign wealth funds, faced with poor performance in stocks and bonds, continue to commit billions to private equity in the hopes of juicing their returns.

Apollo has long been considered one of Wall Street’s most skilled investors. The firm made a killing during the financial crisis. Its big bet on distressed debt at the market bottom in 2009 earned the firm and its clients billions of dollars in profits.

The industry’s continued success has made it a target in Washington. At issue is the low 15 percent tax rate paid by private equity executives on “carried interest,” or the share of profits that fund managers receive as part of their compensation. Eliminating this provision would raise $21 billion over the next decade, according to the Congressional Budget Office.

Mr. Black, speaking at a conference early last year, said he was resigned to a tax increase, saying that “it wouldn’t be the worst thing in the world for some adjustment.”

Yet he has also been an outspoken opponent of certain proposals that would raise taxes on him and the private equity industry. Last year, Mr. Black visited Capitol Hill to meet with lawmakers and make his case.

Mr. Black, through a spokeswoman, declined to comment.

On Saturday night, to be sure, there was little talk of carried interest at the Blacks’ home on Meadow Lane, one of the Hamptons most desirable addresses for its panoramic views of the Atlantic Ocean and Shinnecock Bay. He counts among his neighbors Calvin Klein and David H. Koch, the billionaire industrialist.

Mr. Black had his backyard transformed into a faux nightclub setting, constructing a wooden deck over his swimming pool and building a tent for Mr. John’s concert. After a buffet of crab cakes and steak, partygoers sat on couches with big puffy pillows. They watched Mr. Black’s four grown children deliver touching toasts to their father, including a poem by the youngest son.

“Oh, I wish I was Leon Black’s child,” Mr. Stern said on Monday.

Mr. John then took the stage and performed many of his hits, including “Your Song,” “Benny and the Jets” and “Candle in the Wind.” He joked that he knew how important 60th birthday parties were because he recently had one. (He is 64.)

Before the concert, around 8 p.m., as a full moon rose over the Atlantic, Mr. Blankfein and Mr. Schwarzman stood at the foot of the stairs leading down to the beach. Guests overheard Mr. Blankfein playfully ribbing Mr. Schwarzman about his fin de siècle affair.

“Your 60th got us into the financial crisis,” Mr. Blankfein is said to have told the private equity titan. “Let’s hope this party gets us out of it.”