the next real big problem

[gharghur2]

I quote my economic guru: John Rutledge

"There are two developing stories in this regard worth watching. One is the descent of vulture buyers on US manufacturers. The other is the growing equity stake the PBGC is taking in companies after bankruptcy.

The inexorable margin pressure put on American companies by global price arbitrage systematically erodes their ability to service the (pension and health care) liabilities on their balance sheets. This pushes them into bankruptcy court, where these liabilities are transformed into equity securities held by the PBGC, which is becoming the airline owner of last resort in America.

The companies, themselves, fall into the hands of vulture buyers, who operate without the burden of debt service during reorganization. this produces further pressure on prices and margins, further failures, further consolidations.

This pressure is the force keeping inflation and bond yields from rising and what will ultimately break the back of the Fed's current policy. It is not going to go away."

This is probably the next major problem we will face, and will eventually affect the stock market: large companies, overloaded with overpaid unionized workers and huge pension/health care obligations. Would advise checking your portfolio...

 

[drsteph]

Quote from gharghur2:

I quote my economic guru: John Rutledge

"There are two developing stories in this regard worth watching. One is the descent of vulture buyers on US manufacturers. <snip>

This pressure is the force keeping inflation and bond yields from rising and what will ultimately break the back of the Fed's current policy. It is not going to go away."

Agree with the first part of this statement - much of the industrial equipment being bought at auction is going to China. Its one thing to mothball the facilities so they can be started up again when labor costs or foreign exchange rates cause a revaluation and a potential re-increase in american manufacturing. It is another to strip yourself of your production capability.

This has serious consequences for national defense. I really hope those $500 hammers are being paid for to keep some sort of national production capability and know-how, just in case. That's a good use of taxpayer's money.

The second statement is more problematic. There is a titanic struggle happening currently between the forces of deflation and inflation, and the fed/government have been tied together since 2001 to aggressively reinflate the economy to keep the momentum of world economic growth going forward with moderate inflation. However, the deflationary forces are not contained by any means and this battle is not over. The debt position of our society cannot tolerate significant and severe deflation, so it would stand to reason that almost anything would be tried to avoid this situation.

 

[gharghur2]

Quote from drsteph:

Agree with the first part of this statement - much of the industrial equipment being bought at auction is going to China. Its one thing to mothball the facilities so they can be started up again when labor costs or foreign exchange rates cause a revaluation and a potential re-increase in american manufacturing. It is another to strip yourself of your production capability.

This has serious consequences for national defense. I really hope those $500 hammers are being paid for to keep some sort of national production capability and know-how, just in case. That's a good use of taxpayer's money.

The second statement is more problematic. There is a titanic struggle happening currently between the forces of deflation and inflation, and the fed/government have been tied together since 2001 to aggressively reinflate the economy to keep the momentum of world economic growth going forward with moderate inflation. However, the deflationary forces are not contained by any means and this battle is not over. The debt position of our society cannot tolerate significant and severe deflation, so it would stand to reason that almost anything would be tried to avoid this situation.

Hey Doc,

It is obvious, that as a nation we are no longer an industrial country. As the cost of labor here, has forced companies to outsource/export their production overseas. Thank you unions.
Thus, in regard to goods, we have become a middle man: import/distribution.

On the deflationary front. We are in an economic cycle, that has in the past, caused severe deflation. The past being 80 years ago: the 1930's, the last time this type of cycle bottomed. The FED, in the meantime, has learned how to do it's job.

They recognized immediately the potential deflationary impact of the stock market crash of 1987. They provided massive liquidity, and supported the stock market with aggressive buying in the futures market. The economy survived, but we did have a banking crisis, just like in the 1930's. Economic history does repeat itself, but it does not necessarily have to have the same results.

In 2000 the dotcom bubble burst, ala the railroad frenzy in 1929. The 80 year economic cycle had peaked, and again massive deflationary pressure. The FED acted aggressively again: quickly dropping rates to where they needed to be 1%, providing massive liquidity, aggressive manipulation in the index futures, and as you mentioned, working with the government to reflate the economy by lowering taxes, etc. But there had to be additional fallout. We have seen it: the dotcom demise, the telecom collapse, the deflation in the technology sector, etc.

And now, as the economy reinflates somewhat, (notice how the FED has not interfered with the rising price of Crude Oil and Gold, which historically they have done), there is additional fallout. Essentially, the labor tool used in the last economic cycle to secure a steady income and retirement benefits (organized labor) is now a deathknell to the companies that subjected themselves to that sort of manipulation: the Airlines and the Auto Industries are the most obvious. What about our Governments: Federal, State and Local? Aren't they also subjected to organized labor? And look, they are outsourcing some of their functions overseas, and becoming less dependant on organized labor.

In the end, deflation will take hold in this country. But it will be very moderate. Wages are already in a gradual decline, prices for consumables have already come down, and eventually big ticket items will also have to soften. But the FED again is doing it's job of moderating the effects of a bottoming long-term economic cycle. IMO of course

 

[Lawrence Chan]

One of the more disturbing trend in developed countries is the trend of salary growth.

In the 50s, if you are willing to work hard, you can make a living.

In the 60s to 70s, if you have not completed high school, you became the no future class, where your yearly wage stay far behind inflation.

In the 80s to 90s, if you have not completed some college, you became the no future class.

And now, we already know that college grads real earning never increased at all over the past ten years.

All those studies saying that you should finish college to get a better job are no longer valid, because they take the average of the established individuals (who could be at their 60s) together with the mix of new college grads.

Middle class is shrinking at a fast pace relative to the overall population. The reason why it is not declining faster is an interesting topic as we are seeing a wave of inheritance happening to the late boomers, that created quite a number of new middle class population.

If the college grads real income starts to decline, just like what happened not too long ago to those who never got the chance to go to college in the 80s and 90s, we are going to see real trouble ahead. This time, the boomers will not have enough money to leave to their children.

 

[nononsense]

Quote from Lawrence Chan:

...

Middle class is shrinking at a fast pace relative to the overall population. ...

You remember what happened in Europe after the Middle-class got "wiped out" roughly between 1915-1925 in countries like Germany? Russia?

 

[gharghur2]

Quote from Lawrence Chan:

One of the more disturbing trend in developed countries is the trend of salary growth.

If the college grads real income starts to decline, just like what happened not too long ago to those who never got the chance to go to college in the 80s and 90s, we are going to see real trouble ahead. This time, the boomers will not have enough money to leave to their children.

Hi Lawrence,

I'll provide you with a statistic that is not often talked about in this country. Why? Because it is amazingly depressing and no one wants to address it.

In the post war late 1940's - early 1970's, jobs were plentiful and nearly everyone could afford a house no matter where they worked. I believe the housing affordability ratio was about 4:1 (price verses annual wages). My father was a laborer, and bought a house in NYC for $18,000 in the early 1960's. His earnings at the time were probably about $6,000 annually.

Over the past thirty years I've observed the steady decline of earnings in relation to housing prices. I would guestimate it is probably around 10:1 now. In the same example: the same house today is worth $700,000. How many laborers do you know make $70,000 per year?

There has been, over the past 30 years, a gradual erosion of earnings power, and thus, standard of living in this country. Our children are far worse off financially than we ever were. And, as you mentioned: the educational requirements have continually risen without any benefit, except of course to the companies that employ them.

 

[gharghur2]

Quote from nononsense:

You remember what happened in Europe after the Middle-class got "wiped out" roughly between 1915-1925 in countries like Germany? Russia?

Please, I choose not to remember that segment of history

 

[dividend]

Quote from gharghur2:

Hi Lawrence,

Over the past thirty years I've observed the steady decline of earnings in relation to housing prices. I would guestimate it is probably around 10:1 now. In the same example: the same house today is worth $700,000. How many laborers do you know make $70,000 per year?

did your mother also work? in the past, women stayed home to be a housewife... today, most households earn (combined) $80,000 - $100,000

 

[gharghur2]

Quote from dividend:

did your mother also work? in the past, women stayed home to be a housewife... today, most households earn (combined) $80,000 - $100,000

She worked in the 1940's and that was it.
In those days, women stayed at home to raise the family, and there was only ONE provider.
A result of the women's LIB movement of the 1970's, created the two income family, and surely added to the mess we are leaving to our children.

 

[killATwill]

Quote from Lawrence Chan:



If the college grads real income starts to decline, just like what happened not too long ago to those who never got the chance to go to college in the 80s and 90s, we are going to see real trouble ahead. This time, the boomers will not have enough money to leave to their children.

If you look at the National debt and our social security and medicare obligations, any money that boomers can provide to their children will not help recent college grads at all.