Stock market today

[CA renter]

[quote=livinincali][quote=SK in CV]
Deleveraging of what? Household debt? It’s been happening for the last 6 years. By some measurements, it’s at the lowest level in decades.[/quote]

There’s been a little deleveraging in household debt but it’s not nearly as big as everybody thinks it is. Just go look at the Fed Z-1 and you’ll see that household debt peaked at 13.968 trillion in Q1 2008 and it’s currently at 13.083 trillion Q3 2013. Is a 6% decrease in household leverage a massive deleverging event. 10 years ago (2003) it was 9.463 trillion.

Take 1980 until 2013.

1980 Nominal Median Income = $16,542
2013 Nominal Median Income = $50,099
Increase of = 308%

1980 CPI = 77.8
2013 CPI = 232.9
Increase of = 299%

1980 Total Household debt = 1.3960 trillion
2013 Total Household debt = 13.083 trillion
Increase of = 1067%

All leveraged assets will get hit if their really is a deleveraging.[/quote]

Yes. BTW, are you using nominal CPI numbers (I haven’t fact-checked your numbers)? If so, the way they calculate CPI means that the inflation number here is understated, too.

Personally, I think that housing, healthcare, food, energy prices, and education costs need to be weighted more heavily than they are. We should also include other asset prices like stocks or bonds, because that’s the only way for most people to climb out of their paycheck-to-paycheck reality. I don’t really give a damn about the price of an iPod or a computer if I can’t afford food or healthcare.

And, as spdrun already noted, margin debt…

————

The first chart shows the two series in real terms — adjusted for inflation to today’s dollar using the Consumer Price Index as the deflator. I picked 1995 as an arbitrary start date. We were well into the Boomer Bull Market that began in 1982 and approaching the start of the Tech Bubble that shaped investor sentiment during the second half of the decade. The astonishing surge in leverage in late 1999 peaked in March 2000, the same month that the S&P 500 hit its all-time daily high, although the highest monthly close for that year was five months later in August. A similar surge began in 2006, peaking in July, 2007, three months before the market peak.

Nominal margin debt is at an all-time high. In real (inflation-adjusted) terms, the latest margin debt is at an interim high, 0.7% below the all-time real high in July 2007.

http://www.businessinsider.com/nyse-margin-debt-2013-12

————

They have been piling leverage on top of leverage on top of leverage. The credit bubble is alive and well. This is almost always what has caused the bubbles — and ensuing collapses — in the past. The Fed/govt fixed nothing with all of their manipulations over the past few years. To the contrary, they have made things much worse, IMHO.

Here’s a better link to some of the above information with more charts and explanations:

http://www.advisorperspectives.com/dshort/updates/NYSE-Margin-Debt-and-the-SPX.php

[CA renter]

This is a good post about how the debt-to-income ratios are being ignored because the debt servicing ratio looks more benign. This particular write-up is about household debt, but we can look at govt debt the same way.

I just don’t see any easy ways out. We should have taken our medicine in 2008-2012 as this would have let those who caused the crisis (both foolish borrowers and foolish lenders) take the brunt of the hit. With what they’ve done, we will ALL be taking a huge hit. Meanwhile, those who caused the crisis have been busy protecting themselves and putting more and more distance between themselves and the damage they’ve caused.

—–

This focus uniquely on debt service costs with no regard to debt to income or debt to GDP levels – what I call “The debt servicing cost mentality” – is extremely dangerous. What I see – and what Roach seems to be pointing to – is the less steep falloff in debt to income ratios. And this makes sense because policy rates are at or near zero percent, meaning that the next recession will not witness such a large divergence in debt service cost and debt-to-incme ratios. For debt service ratios to recede in the next downturn, debt to income ratios must be reduced at the same rate, whether through lower debt from default and debt forgiveness or increased income. Likely, default will play the overwhelming role, at least initially.

As I outlined over two years ago, the origins of the next crisis are the simultaneous attempt for the public and private sector to deleverage simultaneously across a broad swathe of large industrialised countries. What we should anticipate – and what we have already seen in the euro zone – is failure and debt deflation because you must have massive defaults and debt forgiveness to effect simultaneous deleveraging in the public and private spheres. If and when the United States joins the party, that’s when the full ramifications of our policies will become evident.

Chart of the day: US household debt-to-income versus debt servicing cost ratios

[livinincali]

[quote=CA renter]
Yes. BTW, are you using nominal CPI numbers (I haven’t fact-checked your numbers)? If so, the way they calculate CPI means that the inflation number here is understated, too.
[/quote]

Isn’t CPI nominal by definition. It’s just an index that measures what the BLS thinks inflation is. Certainly it’s flawed/understated based on the typical house hold budget. It certainly misses asset price bubbles. Your led to 2 conclusions when the fed says they didn’t see the bubbles. Either they are too dumb to look outside of CPI or they are lying.

[The-Shoveler]

I really don’t think the fed looks at assets

or if they do it is only in relation to pensions and local municipal coffers.

IMO anyway.

[CA renter]

[quote=livinincali][quote=CA renter]
Yes. BTW, are you using nominal CPI numbers (I haven’t fact-checked your numbers)? If so, the way they calculate CPI means that the inflation number here is understated, too.
[/quote]

Isn’t CPI nominal by definition. It’s just an index that measures what the BLS thinks inflation is. Certainly it’s flawed/understated based on the typical house hold budget. It certainly misses asset price bubbles. Your led to 2 conclusions when the fed says they didn’t see the bubbles. Either they are too dumb to look outside of CPI or they are lying.[/quote]

You’re right, I worded that incorrectly. What I meant is that the way they calculate CPI has changed over time, and understates inflation today (IMO). In other words, if they were using the same metrics today as they were 30-40 years ago, what would these numbers look like?

———-

The Controversy
Originally, the CPI was determined by comparing the price of a fixed basket of goods and services in two different periods. Determined as such, the CPI was a cost of goods index (COGI). However, over time, the U.S. Congress embraced the view that the CPI should reflect changes in the cost to maintain a constant standard of living. Consequently, the CPI has been moving toward becoming a cost of living index (COLI).

Over the years, the methodology used to calculate the CPI has also undergone numerous revisions. According to the BLS, the changes removed biases that caused the CPI to overstate the inflation rate. The new methodology takes into account changes in the quality of goods and substitution. Substitution, the change in purchases by consumers in response to price changes, changes the relative weighting of the goods in the basket. The overall result tends to be a lower CPI. However, critics view the methodological changes and the switch from a COGI to a COLI focus as a purposeful manipulation that allows the U.S. government to report a lower CPI.

John Williams, a U.S. economist, described his view of this manipulation when he was interviewed in early 2006. Williams prefers a CPI, or inflation measure, calculated using the original methodology based on a basket of goods having quantities and qualities fixed.

http://www.investopedia.com/articles/07/consumerpriceindex.asp

[CA renter]

[quote=The-Shoveler]I really don’t think the fed looks at assets

or if they do it is only in relation to pensions and local municipal coffers.

IMO anyway.[/quote]

The Fed works for the banks/financial sector and the financial elite. They are far less interested in Joe Sixpack, the govt worker, and his pension than they are about the well-being of the banking sector. While the two are certainly interrelated (the whole economy is interrelated), they don’t give a damn about govt workers and their pensions.

[The-Shoveler]

The fed is NOT a private bank.

I wish I had time to get a chart showing Local gov coffers and major downturns you would see the correlation very obviously esp with L.A. City.

[kev374]

this is not a big deal… a small correction and then the market is going to resume it’s upward trend. We had a 26% gain in the market last year so what’s a 5-6% retraction, nothing really.

[spdrun]

Dow was already down over 9% from peak yesterday, not 5-6% 🙂 Wonder what kind of retraction would be needed to start generating margin calls en masse — I’m hearing that margin debt is at historical highs.

[CA renter]

[quote=The-Shoveler]The fed is NOT a private bank.

I wish I had time to get a chart showing Local gov coffers and major downturns you would see the correlation very obviously esp with L.A. City.[/quote]

Of course there’s a correlation. The pension plans rely on asset price inflation, just like most other retirement vehicles. That does NOT mean that the Fed is manipulating the market on behalf of pension plans. They aren’t.

And the Federal Reserve does not need to be a “private bank” in order to benefit the banking/financial system. (FWIW, it’s not a publicly owned bank, either.)

——-

Who owns the Federal Reserve?

The Federal Reserve System fulfills its public mission as an independent entity within government. It is not “owned” by anyone and is not a private, profit-making institution.

As the nation’s central bank, the Federal Reserve derives its authority from the Congress of the United States. It is considered an independent central bank because its monetary policy decisions do not have to be approved by the President or anyone else in the executive or legislative branches of government, it does not receive funding appropriated by the Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms.

However, the Federal Reserve is subject to oversight by the Congress, which often reviews the Federal Reserve’s activities and can alter its responsibilities by statute. Therefore, the Federal Reserve can be more accurately described as “independent within the government” rather than “independent of government.”

The 12 regional Federal Reserve Banks, which were established by the Congress as the operating arms of the nation’s central banking system, are organized similarly to private corporations–possibly leading to some confusion about “ownership.” For example, the Reserve Banks issue shares of stock to member banks. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold, traded, or pledged as security for a loan; dividends are, by law, 6 percent per year.

http://www.federalreserve.gov/faqs/about_14986.htm

[CA renter]

[quote=spdrun]Dow was already down over 9% from peak yesterday, not 5-6% 🙂 Wonder what kind of retraction would be needed to start generating margin calls en masse — I’m hearing that margin debt is at historical highs.[/quote]

Yep. See my post with the links, above.

[The-Shoveler]

unless I got my math wrong it was closer to 6% maybe 6.5.

OK maybe closer to 7% yeaterday.

[spdrun]

unless I got my math wrong it was closer to 6% maybe 6.5.
OK maybe closer to 7% yeaterday.

Agreed: I think we both got it wrong. -7.5% from top to yesterday’s lowest number.

Peak: 16588
Yesterday: 15356

15356/16588 ~= 92.5% of peak.

[paramount]

Harvard Economist: Get your money out of US Banks

Last week I had over $1,000,000 in a checking account at Bank of America. Next week, I will have $10,000.

Why am I getting in line to take my money out of Bank of America? Because of Ben Bernanke and Janet Yellen, who officially begins her term as chairwoman on Feb. 1.

Before I explain, let me disclose that I have been a stopped clock of criticism of the Federal Reserve for half a decade. That’s because I believe that when the Fed intervenes in markets, it has two effects — both negative. First, it decreases overall wealth by distorting markets and causing bad investment decisions. Second, the members of the Fed become reverse Robin Hoods as they take from the poor (and unsophisticated) investors and give to the rich (and politically connected).

[CA renter]

[quote=paramount]Harvard Economist: Get your money out of US Banks

Last week I had over $1,000,000 in a checking account at Bank of America. Next week, I will have $10,000.

Why am I getting in line to take my money out of Bank of America? Because of Ben Bernanke and Janet Yellen, who officially begins her term as chairwoman on Feb. 1.

Before I explain, let me disclose that I have been a stopped clock of criticism of the Federal Reserve for half a decade. That’s because I believe that when the Fed intervenes in markets, it has two effects — both negative. First, it decreases overall wealth by distorting markets and causing bad investment decisions. Second, the members of the Fed become reverse Robin Hoods as they take from the poor (and unsophisticated) investors and give to the rich (and politically connected).[/quote]

Yes, I saw this today on CNBC. Agree very much with him about the effects of the Fed’s manipulations.

[Author]

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