Charles Hugh Smith
by
charleshughsmith
Executive Summary
- Treat your household as a business enterprise; the rules for financial resilience are the same
- The 5 Rules of Financial Resilience
- Eliminating vulnerabilities
- Focusing on value creating and income diversification
- The number of options for increasing your financial resilience is much larger than you likely expect. Your challenge is first truly understanding this, and then having the courage to see a few of them through.
If you have not yet read Don’t Worry, Be Resilient available free to all readers, please click here to read it first.
In Part I, we sought to understand what financial resilience means, and found that reliance on debt for consumption and on speculation for collateral, and an inflexible, high cost basis were the characteristics of fragile finances for households, enterprises, and nations.
In Part II, we ask the question, what are the characteristics of a financially resilient household? What strategies can we pursue to increase the resilience of our own households?
How to Increase Your Financial Resilience
PREVIEW by charleshughsmithExecutive Summary
- Treat your household as a business enterprise; the rules for financial resilience are the same
- The 5 Rules of Financial Resilience
- Eliminating vulnerabilities
- Focusing on value creating and income diversification
- The number of options for increasing your financial resilience is much larger than you likely expect. Your challenge is first truly understanding this, and then having the courage to see a few of them through.
If you have not yet read Don’t Worry, Be Resilient available free to all readers, please click here to read it first.
In Part I, we sought to understand what financial resilience means, and found that reliance on debt for consumption and on speculation for collateral, and an inflexible, high cost basis were the characteristics of fragile finances for households, enterprises, and nations.
In Part II, we ask the question, what are the characteristics of a financially resilient household? What strategies can we pursue to increase the resilience of our own households?
by
charleshughsmith
Executive Summary
- Paper wealth will revert to its intrinsic value
- Risk will continue to be transferred onto the taxpaying public
- Moral hazard and fraud will by the norm, not the exception
- Complexity will be used to mask failure
- Individuals will increasingly opt out of the system through means both covert and overt
If you have not yet read The Trends to Watch in 2013, available free to all readers, please click here to read it first.
In Part I, we examined eight dynamics which will likely influence society, politics, and finance in the next few years. In Part II, we examine different manifestations of the one dynamic that counts: the inability of the Status Quo to make meaningful structural reforms. This inability has many facets, but only one root: political sclerosis caused by entrenched, vested interests seeking to protect their perquisites and power.
An economy that is controlled by the government is one in which political power, not the market, controls the distribution of national income. A government in which political power is for sale to the highest bidder puts the wealthy at an extreme advantage, as they have the means to buy political power to protect and expand their share of the national income.
In order to do the bidding of the financial Elite, the political Elite redistributes enough national income to the bottom 50% and retirees to buy their complicity in the arrangement.
A nation in which political power is for sale is one in which the rule of law is bent to serve those with power.
This is the U.S. in a nutshell.
Among the many manifestations of this arrangement, I have selected these as prominent examples of systemic financial and political rot:
Understanding the Outcomes that Will Matter Most
PREVIEW by charleshughsmithExecutive Summary
- Paper wealth will revert to its intrinsic value
- Risk will continue to be transferred onto the taxpaying public
- Moral hazard and fraud will by the norm, not the exception
- Complexity will be used to mask failure
- Individuals will increasingly opt out of the system through means both covert and overt
If you have not yet read The Trends to Watch in 2013, available free to all readers, please click here to read it first.
In Part I, we examined eight dynamics which will likely influence society, politics, and finance in the next few years. In Part II, we examine different manifestations of the one dynamic that counts: the inability of the Status Quo to make meaningful structural reforms. This inability has many facets, but only one root: political sclerosis caused by entrenched, vested interests seeking to protect their perquisites and power.
An economy that is controlled by the government is one in which political power, not the market, controls the distribution of national income. A government in which political power is for sale to the highest bidder puts the wealthy at an extreme advantage, as they have the means to buy political power to protect and expand their share of the national income.
In order to do the bidding of the financial Elite, the political Elite redistributes enough national income to the bottom 50% and retirees to buy their complicity in the arrangement.
A nation in which political power is for sale is one in which the rule of law is bent to serve those with power.
This is the U.S. in a nutshell.
Among the many manifestations of this arrangement, I have selected these as prominent examples of systemic financial and political rot:
by
charleshughsmith
Executive Summary
- A rising dollar would negatively impact stock market profits and valuations
- Interest rates ultimately will rise, and that will be a game-changer
- Investors will eventually realize that "risk-free" assets (e.g., U.S. Treasurys) are NOT safe havens
- Why there will be few places for financial capital to find shelter in 2013
If you have not yet read Part I: The Structural Endgame of the Fiscal Cliff, available free to all readers, please click here to read it first.
In Part I, we covered the basics of wealth and political power in the U.S. and found that the Fiscal Cliff is only a symptom of a structural endgame in which the imbalance between what has been promised and what can be collected in taxes will continue growing until it triggers a financially driven political crisis that I believe will inevitably become a full-blown Constitutional crisis.
Though there are many facets of this long-term political crisis that are worthy of further exploration, we will to start with three financial aspects that could start impacting households in 2013: a rise in interest rates and a resultant destruction of bond valuations, a rise in the U.S. dollar that negatively impacts U.S. corporate profits and thus stock market valuations, and a reduction in upper-income households’ spending as a result of higher taxes that depress discretionary consumer spending.
A Rising Dollar Negatively Impacts Stock Market Profits and Valuations
Let’s start with a topic that I have covered in depth over the past year, the structural reasons behind the rise of the U.S. dollar (USD). The recurring fantasy that Europe’s fiscal and debt crises are “fixed” and the Federal Reserve’s money-printing/Treasury bond purchases have recently depressed the USD, but in the longer term, the USD has been tracing out an unmistakably bullish pattern of higher highs and higher lows since May 2011…
What Will Happen When We Hit the Cliff
PREVIEW by charleshughsmithExecutive Summary
- A rising dollar would negatively impact stock market profits and valuations
- Interest rates ultimately will rise, and that will be a game-changer
- Investors will eventually realize that "risk-free" assets (e.g., U.S. Treasurys) are NOT safe havens
- Why there will be few places for financial capital to find shelter in 2013
If you have not yet read Part I: The Structural Endgame of the Fiscal Cliff, available free to all readers, please click here to read it first.
In Part I, we covered the basics of wealth and political power in the U.S. and found that the Fiscal Cliff is only a symptom of a structural endgame in which the imbalance between what has been promised and what can be collected in taxes will continue growing until it triggers a financially driven political crisis that I believe will inevitably become a full-blown Constitutional crisis.
Though there are many facets of this long-term political crisis that are worthy of further exploration, we will to start with three financial aspects that could start impacting households in 2013: a rise in interest rates and a resultant destruction of bond valuations, a rise in the U.S. dollar that negatively impacts U.S. corporate profits and thus stock market valuations, and a reduction in upper-income households’ spending as a result of higher taxes that depress discretionary consumer spending.
A Rising Dollar Negatively Impacts Stock Market Profits and Valuations
Let’s start with a topic that I have covered in depth over the past year, the structural reasons behind the rise of the U.S. dollar (USD). The recurring fantasy that Europe’s fiscal and debt crises are “fixed” and the Federal Reserve’s money-printing/Treasury bond purchases have recently depressed the USD, but in the longer term, the USD has been tracing out an unmistakably bullish pattern of higher highs and higher lows since May 2011…
by
charleshughsmith
Executive Summary
- Why the momentum for household formation is still downwards, despite the gains in recent years
- Why "rental price fatigue" is putting today's increasingly rosy housing valuations at jeopardy
- Why the fiscal and monetary stimulus that has boosted the housing market in recent years cannot continue further
- How housing may turn from the “can’t lose” investment into an anchor of debt and a “now I can’t move to a better job” debacle
If you have not yet read Real Estate: Is the Bottom In, or Is This a Head-Fake?, available free to all readers, please click here to read it first.
In Part I, we reviewed the fundamentals that have been pushing housing prices higher in 2012. Many of these forces are the result of explicit real estate-supportive Federal and Federal Reserve policies, while others, such as restricting the number of defaulted properties on the market, are implicit policies of the financial cartel that has much to gain from a recovery in housing.
What, if anything, could derail this manufactured housing recovery?
Before we get to specifics, we should start by discussing unintended consequences. What happens when politically expedient policies are imposed with a simplistic goal?
Exhibit #1 is the Federal Reserve policy of lowering interest rates and increasing liquidity to boost “risk assets” such as stocks. This had the unintended consequence of inflating a stock bubble that burst with painful consequences in 2000-02.
Like all central-planning agencies, the Fed followed this policy error by doing more of what had failed: It lowered rates even more, enabling an unprecedented bubble in housing, which subsequently burst in 2007-08 with even more devastating consequences, as that implosion nearly took down the global financial system.
With FHA having replaced the bankrupt Fannie Mae and Freddie Mac agencies as the mortgage-guarantor of last resort, the Federal government has also doubled down on the failed subsidies that enabled the housing bubble.
What are the unintended consequences of pushing investors into the “crowded trade” of rental housing? If we answer this, we will be closer to understanding whether housing has bottomed or not.
Let’s start by reviewing the fundamentals of supply and demand that influence housing and rentals.
Forecasting the Future of Rental Housing and Home Valuations
PREVIEW by charleshughsmithExecutive Summary
- Why the momentum for household formation is still downwards, despite the gains in recent years
- Why "rental price fatigue" is putting today's increasingly rosy housing valuations at jeopardy
- Why the fiscal and monetary stimulus that has boosted the housing market in recent years cannot continue further
- How housing may turn from the “can’t lose” investment into an anchor of debt and a “now I can’t move to a better job” debacle
If you have not yet read Real Estate: Is the Bottom In, or Is This a Head-Fake?, available free to all readers, please click here to read it first.
In Part I, we reviewed the fundamentals that have been pushing housing prices higher in 2012. Many of these forces are the result of explicit real estate-supportive Federal and Federal Reserve policies, while others, such as restricting the number of defaulted properties on the market, are implicit policies of the financial cartel that has much to gain from a recovery in housing.
What, if anything, could derail this manufactured housing recovery?
Before we get to specifics, we should start by discussing unintended consequences. What happens when politically expedient policies are imposed with a simplistic goal?
Exhibit #1 is the Federal Reserve policy of lowering interest rates and increasing liquidity to boost “risk assets” such as stocks. This had the unintended consequence of inflating a stock bubble that burst with painful consequences in 2000-02.
Like all central-planning agencies, the Fed followed this policy error by doing more of what had failed: It lowered rates even more, enabling an unprecedented bubble in housing, which subsequently burst in 2007-08 with even more devastating consequences, as that implosion nearly took down the global financial system.
With FHA having replaced the bankrupt Fannie Mae and Freddie Mac agencies as the mortgage-guarantor of last resort, the Federal government has also doubled down on the failed subsidies that enabled the housing bubble.
What are the unintended consequences of pushing investors into the “crowded trade” of rental housing? If we answer this, we will be closer to understanding whether housing has bottomed or not.
Let’s start by reviewing the fundamentals of supply and demand that influence housing and rentals.
by
charleshughsmith
Executive Summary
- Triffin's Paradox leads to four principal conclusions that indicate why the U.S. dollar may well continue to strengthen from here
- Why the euro's troubles have been good for the price of gold
- Why the dollar can strengthen despite the United States' wishes
- Why the future may well see the price of both gold and the U.S. dollar rise
If you have not yet read Part I: Gold & the Dollar are Less Correlated then Everyone Thinks, available free to all readers, please click here to read it first.
In Part I, we examined the commonly offered correlations between the dollar, gold, interest rates, and the monetary base, and found no consistent correlations between any of these and the domestic economy. Clearly, the trade-weighted value of the dollar and the value of gold have at best marginal impact on the domestic economy.
Perhaps the dollar’s primary impact is on the international economy, as suggested by Triffin’s Paradox, which begins with the premise that the needs of the global trading community are different from the needs of domestic policy makers.
Prior to 1971, the dollar was backed by gold, which acted as a supra-national anchor to the dollar's reserve status. As the U.S. monetary base expanded while gold remained artificially pegged at $35 an ounce, roughly half of America’s gold reserves were shipped overseas before the policy was jettisoned.
Here is the Wikipedia entry on Triffin’s Paradox:
The Triffin paradox is a theory that when a national currency also serves as an international reserve currency, there could be conflicts of interest between short-term domestic and long-term international economic objectives. This dilemma was first identified by Belgian-American economist Robert Triffin in the 1960s, who pointed out that the country whose currency foreign nations wish to hold (the global reserve currency) must be willing to supply the world with an extra supply of its currency to fulfill world demand for this 'reserve' currency (foreign exchange reserves) and thus cause a trade deficit. (emphasis added)
The use of a national currency (i.e. the U.S. dollar) as global reserve currency leads to a tension between national monetary policy and global monetary policy. This is reflected in fundamental imbalances in the balance of payments, specifically the current account: some goals require an overall flow of dollars out of the United States, while others require an overall flow of dollars in to the United States. Net currency inflows and outflows cannot both happen at once.
This leads to some startling conclusions that many have great difficulty accepting…
Why Gold & the Dollar May Both Rise from Here
PREVIEW by charleshughsmithExecutive Summary
- Triffin's Paradox leads to four principal conclusions that indicate why the U.S. dollar may well continue to strengthen from here
- Why the euro's troubles have been good for the price of gold
- Why the dollar can strengthen despite the United States' wishes
- Why the future may well see the price of both gold and the U.S. dollar rise
If you have not yet read Part I: Gold & the Dollar are Less Correlated then Everyone Thinks, available free to all readers, please click here to read it first.
In Part I, we examined the commonly offered correlations between the dollar, gold, interest rates, and the monetary base, and found no consistent correlations between any of these and the domestic economy. Clearly, the trade-weighted value of the dollar and the value of gold have at best marginal impact on the domestic economy.
Perhaps the dollar’s primary impact is on the international economy, as suggested by Triffin’s Paradox, which begins with the premise that the needs of the global trading community are different from the needs of domestic policy makers.
Prior to 1971, the dollar was backed by gold, which acted as a supra-national anchor to the dollar's reserve status. As the U.S. monetary base expanded while gold remained artificially pegged at $35 an ounce, roughly half of America’s gold reserves were shipped overseas before the policy was jettisoned.
Here is the Wikipedia entry on Triffin’s Paradox:
The Triffin paradox is a theory that when a national currency also serves as an international reserve currency, there could be conflicts of interest between short-term domestic and long-term international economic objectives. This dilemma was first identified by Belgian-American economist Robert Triffin in the 1960s, who pointed out that the country whose currency foreign nations wish to hold (the global reserve currency) must be willing to supply the world with an extra supply of its currency to fulfill world demand for this 'reserve' currency (foreign exchange reserves) and thus cause a trade deficit. (emphasis added)
The use of a national currency (i.e. the U.S. dollar) as global reserve currency leads to a tension between national monetary policy and global monetary policy. This is reflected in fundamental imbalances in the balance of payments, specifically the current account: some goals require an overall flow of dollars out of the United States, while others require an overall flow of dollars in to the United States. Net currency inflows and outflows cannot both happen at once.
This leads to some startling conclusions that many have great difficulty accepting…
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