| May 12, 2014 | | | | |  | | | Beware the Coming Liquidity Drain! | | | - The federal government booked a budget surplus in April… but don't fool yourself. It wasn't because Congress has changed its ways...
- In fact, investors could have the wool pulled over their eyes right now and be blind to a potential stock market crash in the next two quarters...
- Plus, Vern Gowdie investigates what's wrong with Fed's policies, how it's distorted income in the U.S. and how it flopped big-time in its assumptions about the so-called "wealth effect."
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What you definitely do NOT know about your neighbors
Do you know how your neighbors will react in a real survival crisis?
A small town near Boston recently found out. And after you see what happened to these folks, you may never look at your neighbors the same way again. Full story here… | | | | | | | | Baltimore, Md.
May 12, 2014
 Peter Coyne, with two seemingly unrelated statements...
Beware extreme stock market volatility-- the federal government ran a budget surplus in April. Allow us to explain... We know you don't hear it often -- but the federal government did in fact run a budget surplus in April. Today, the Treasury published that it took in $106 billion more in April than it spent. Overall, spending last month dropped by 2% but mostly, the surplus was because taxes rolled in. Year over year, individual income taxes collected were up 7%... payroll taxes were up 15%... and the Federal Reserve paid 37% more to the Treasury. There were some weird accounting tricks that contributed too -- where payments from Fannie Mae and Freddie Mac to the government were considered "negative spending," whatever that means. So what does this have to do with stock market volatility? Glad you asked. The answer is a lot. And it's because of the amount of the liquidity in the market. The key concept to remember is liquidity moves the markets. When liquidity rises, asset prices tend to rise, and vice versa. Budget surpluses, the Federal Reserve's quantitative easing and dollars that foreign central banks (foreign exchange reserves) reinvest in the U.S. all lead to more liquidity in the market and higher asset prices. The point was made to us by Richard Duncan, author of The Dollar Crisis, The Corruption of Capitalism and most recently The New Depression. Because of this key concept, says Richard, investors need "a simple way to measure and forecast liquidity, a liquidity gauge." Via his quarterly video newsletter called Macro Watch, Richard has assembled such a gauge to measure those three components: government spending, Fed printing and foreign reserves. Here's what he gets: Note the bubbles that cropped up in times of excess liquidity. Note too that in 2013, excess liquidity was at a record level. As you can see, Richard estimates more excess liquidity in 2014 -- albeit much less. You might think that that means asset prices like stocks are still headed higher in 2014. But excess liquidity in 2014 masks the change in liquidity from quarter to quarter. The first half of the year wasn't a problem. In the first quarter of 2014, there was about $115 billion in excess liquidity. This quarter, there's roughly $235 billion in excess liquidity (a $106 billion budget surplus, $55 billion in QE and about $74 billion in foreign reserves). In the next two quarters, however, Richard forecasts a liquidity drain. Next quarter, he reasons, the government will deficit spend once again and will need to borrow money from the market -- draining liquidity. Likewise, the Fed will taper even more. According to his estimates, liquidity will dry up and there will be a $145 billion liquidity drain over the next two quarters. "I'm concerned," says Richard, "that that means that as liquidity leaves the market, interest rates will start to rise and the stock and property market will begin to fall." His advice to investors: Beware the second half of 2014. If he's right, keep your eyes peeled for a midsummer pause in the taper -- or maybe even a reversal. Moving along to today's featured essay -- Vern Gowdie, our friend Down Under, investigates what's wrong with Fed's policies, how they've distorted income in the U.S. and how the Fed flopped big-time in its assumptions about the so-called "wealth effect." Read on... [Ed. note: If you want to check out Richard Duncan's video newsletter for yourself, he's graciously agreed to issue a 50% off coupon for you to access his service, Macro Watch. (Simply go here and enter the coupon "daily.")] | | | | | | | | | The Most Lethal Arm of the United States Government
What do you think is the most lethal arm of the United States government? It's not the military. It's not the CIA or NSA. It's not the ATF or Border Patrol. It's more lethal than all of them.
CLICK HERE for the spine-chilling truth.
And even more importantly, HERE'S how to defend yourself against the most lethal organization within the United States government. | | | | | | | | | The Daily Reckoning Presents... At this point, it's fairly obvious -- even to the Fed -- that the U.S. economy is experiencing a "disappointingly slow recovery." But is that really such a surprise? Today, Vern Gowdie examines why the U.S. is struggling to get back on its feet and why so much of the blame lies at the feet of the Federal Reserve. Read on... ****************************** | | | | The Federal Reserve: Using Creative Data | | | | by Vern Gowdie | | | | 'So we have, indeed, had a disappointingly slow recovery, and our consistent expectations for a pickup in growth have been dashed over a number of years... And the labor market is behaving in some perplexing ways and showing patterns that are novel.' -- Janet Yellen in a speech to the Economic Club of New York on April 15  We certainly agree on the first acknowledgment -- 'a disappointingly slow recovery'. This has been the most agonising post-recession recovery since The Great Depression, in spite of record stimulus efforts including zero bound interest rates.
We definitely agree with expectations being consistently dashed. The people at the Fed couldn't hit a target (any number: employment, GDP, CPI) if their lives depended on it. Why? Simple, the Fed still believes in an economic model fuelled by high-octane consumer credit. However, the new post Great Financial Crisis model is running on unleaded cautious consumption. Little wonder the economic motor is sputtering. Thirdly, the US labor market is apparently behaving in perplexing ways. Really? Only someone completely devoid of contact with the real world (and Janet's life of academia definitely qualifies her for this) could describe the goings-on in the US labour market as 'perplexing and novel'. From where we write -- on the distant shores of Australia we'll help Janet unravel the 'mystery' confounding her. The Washington Post recently tracked the decline in real (after inflation) median earnings for US males (based on education levels) between 1969 and 2009. The 'real' income for the lowest skilled workers is 65% lower compared to 45 years ago. Michael Greenstone and Adam Looney of the Hamilton Project went deeper into the median income numbers and discovered this rather depressing finding: '[M]edian earnings for men in 2009 were lower than they were in the early 1970s. And it gets worse... Between 1960 and 2009, the share of men working full-time fell from 83% to 66%, and the share not making formal wages tripled from 6% to 18%. When you take all men, not just those working full-time, [you see] a plummet of 28% in median real wages from 1969 to 2009.' There are a couple of assumptions you can draw from this: - As income declined over the forty-year period, credit became the substitute to maintain living standards -- especially as the cost of credit became increasingly cheaper from 1980 onwards via falling interest rates. The credit bubble that started to implode in 2008 was a result of income substitution and investment speculation.
- Declining real incomes meant employment gradually lost its attractiveness compared to welfare. More people opted out of workforce participation and into the social security office.
In 1977, US Congress amended the Federal Reserve Act, outlining the Fed's new and improved mission in life: '...long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.' During the period that the Fed was charged with the responsibility of 'maximum employment', real incomes fell and eventually, workforce participation declined. Well done. The clueless Fed is now scratching its head over the workings of the jobs market. They never understood it in the good times, why should they be any better informed in the tough times? The US workforce participation rate has fallen back to levels last seen in 1975. Perhaps baby boomers influence these numbers by opting for early retirement. Most likely the greater influence is the anaemic recovery post Great Financial Crisis. The diminished ranks of US taxpayers bear the cost this workforce exodus. The Heritage Foundation produced a graphic on how a US tax dollar is spent. Major entitlements -- Medicare, Medicaid, and Social Security -- take the lion's share at 49%. Income security and other benefits -- federal employee retirement and disability, unemployment benefits, welfare programs (food and housing assistance) -- account for a further 20%. (NOTE - the cost of Obamacare is NOT in these figures). Nearly 70% of every tax dollar is going in entitlement spending. When you consider the government provides you with a fortnightly income cheque, access to medical services, food stamps and housing, where's the incentive for an unskilled or even semi-skilled worker to actively seek employment? | | | | | | |
| How You Could Claim "President-Sized" Retirement Savings
Did you know Obama is set to retire with at least $8 million in his pension plan?
Meanwhile, 90% of elderly Americans receive Social Security as their only source of retirement income.
Luckily, this "weird" strategy shows anyone how to get a "president-sized" retirement, even starting with less than $1,000.
It's incredible, but true. Check it out here. | | | | | | | | According to a recent study by Greg Kaplan, Assistant Professor of Economics at Princeton University, there are over 16 million US families where no one has a job: A family, as defined by the BLS, 'is a group of two or more people who live together and who are related by birth, adoption or marriage. In 2013, there were 80,445,000 families in the United States and in 16,127,000 -- or 20 percent -- no one had a job.' One in five families where no one is employed. That is a truly appalling statistic for the once great US economy. This employment and income negativity is feeding into social mood and how people see themselves. The Pew Research Center released the findings of their latest research on 'what class people consider they belong to'. Armed with the knowledge above, the results are not that surprising. Pre-GFC only 25% perceived themselves as 'lower class', today it's 40%. Surprisingly, the so-called 'wealth effect' has not had the desired psychological impact the Fed was hoping for. After six years of pumping up asset values, less people see themselves in the 'upper class' category. The only 'trickle down' effect the Fed has created is people cascading into poverty, whether real or imagined. The jobs market is not that perplexing -- an economy bereft of high octane credit is shrinking. The more an economy contracts the less likely 'budget-squeezed' consumers are to borrow, thus a self-feeding loop is created. While you have a government that is prepared to underwrite the budgetary cost of its grand social programs with printed dollars, more people will opt for entitlement over employment. What really perplexes me is how long this whole unproductive and artificial charade can continue before there is large scale social unrest or the system buckles under its own idle weight. The only certainty and consistency in all of this is that the Fed will remain as clueless as they have been. Regards, Vern Gowdie
for The Daily Reckoning [Ed. note: One Wall Street "insider" who's come to us has blown the lid off a true wealth effect -- one that average Americans like you and we can join in. He's revealed how you can make a boatload with as little as $500. You should hear what he has to tell you right here. It's bound to change your view on economics, as it should. Click here now to learn the investment strategy he's uncovered. What he has to say could change your view on economics… and might leave you smiling all the way to the bank.] | | | | | | | | |  Vern Gowdie has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia's Top 50 financial planners. His previous firm, Gowdie Financial Planning, was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top 5 financial planning firms in Australia. He is currently an editor for Port Phillip Publishing. | | | | | | | | | BE SURE TO ADD dr@dailyreckoning.com to your address book.
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