Mish's Global Economic Trend Analysis

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• Illusion of Prosperity: Deflating the American Dream; No Recovery in "Real" Income
• Europe Hooked on Easy Money Too: ECB President Draghi Threatens Another LTRO, Sings Praises of Excess Liquidity
• Reflections on Conspiracy Theories and Sensible Accounting by Reader "Alice", 89 Years Young; True Meaning of Banking Safely

Illusion of Prosperity: Deflating the American Dream; No Recovery in "Real" Income Posted: 23 Sep 2013 12:20 PM PDT In The Morning After; Price Discovery is Zero; PUT on the Bond Market? Is Inflation Really Under 2%? I posted a chart with a caption of "wages" but the corresponding chart showed "income". The post is now fixed, but newer data has come in, and Doug Short at Advisor Perspectives has updated charts that I would like to share. click on any chart for a sharper image From Median Household Income Growth: Deflating the American Dream, by Doug Short. What is the single best indicator of the American Dream? Many would point to household income growth. My study of the Census Bureau's data shows a 600.7% growth in median household incomes from 1967 through 2012. The ride has been bumpy, but it equates to a 4.5% annualized growth rate. Sounds impressive, but if you adjust for inflation using the Census Bureau's method, that nominal 614.2% total growth shrinks to 18.8%, a "real" annualized growth rate of 0.39%. But if we dig a bit deeper into the method of inflation adjustment, the American Dream looks more like an illusion, as in "money illusion". The data for the charts is from Sentier Research. Sentier uses the CPI as the deflator for computing their real household income data series. The above chart goes back to 1968. It shows that income growth since 1968 is nearly all inflation. Closer scrutiny shows "real" income growth has been negative since the year 2000. Incredible Shrinking Income Please consider this chart from Real Median Household Incomes: Another Monthly Decline by Doug Short. Real median incomes are down 7.3% since 2000. That means at least half of the population is worse off now than 13 years ago! Think the CPI is a flawed measure? Doug Short has a comparison using different deflators, including the Alternate-CPI from John Williams' Shadowstats. Doug comments "The Alternate CPI is a rather bizarre outlier. What this deflator is telling us translates into something like this: The 1967 median household income of $7,143 chained in 2012 dollars would have had the purchasing power of $185,588." By the way, a close look at the above chart shows that the Williams' deflator is 72% since 1989, not all the way back 1967! Although it's easy to believe CPI is off somewhat, "bizarre"  is a polite description of how far off Williams is in the other direction. And Williams' views of hyperinflation in the US and when it is likely, go far beyond bizarre to the point of absolute ridiculousness. No Recovery in Real Economy While Bernanke can talk of "recovery" things started deteriorating badly, not in 2008 but all the way back in 2000. The stock market is back to previous highs, but the real economy sure isn't. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com  Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Europe Hooked on Easy Money Too: ECB President Draghi Threatens Another LTRO, Sings Praises of Excess Liquidity Posted: 23 Sep 2013 10:21 AM PDT ECB president Mario Draghi is in on the no-normalization act along with the Fed. Of course, a mere reduction in asset purchases by the Fed from $85 billion a month to $75 billion is not even a baby step towards normalization. Anyway, it's liquidity full throttle in the Eurozone as well because Draghi Says ECB Will Offer More Long-Term Loans If Needed. "We are ready to use any instrument, including another LTRO if needed, to maintain the short term money markets at the level that is warranted by our assessment of inflation in the medium term," Draghi said in response to questions from lawmakers in the European Parliament in Brussels today. Euro-area money-market rates rose to a level that Draghi described as "unwarranted" in July after the U.S. Federal Reserve signaled that it would begin to ease stimulus and signs emerged of a recovery in the 17-nation region. While those rates have since declined, excess liquidity in the financial system is approaching the 200 billion-euro ($270 billion) level the ECB has previously signaled as a lower limit. In his opening remarks at the hearing, Draghi said while repayment of central bank credit is "certainly a sign of normalization, the resulting reduction in excess liquidity can reinforce upward pressures on term money market rates." As the buffer of excess cash held by the financial system falls, the rates that banks charge each other for liquidity can rise as they shoulder more risk. In Praise of Excess Liquidity LTRO stands for Long-Term-Refinance-Operation. Here is a simple, easy to understand explanation:  The ECB is willing to offer unlimited loans against questionable collateral, at excessively low interest rates, to any bank that wants them.  Draghi wants to build back up the "buffer of excess cash" by any means if interest rates do not go where he wants them to go. Heaven forbid that any baby steps towards normalization reduce "excess liquidity" causing interest rates to rise, either in the US or Eurozone. The largest global-coordinated financial gambit in history shows no real signs yet of slowing down. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com  Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Reflections on Conspiracy Theories and Sensible Accounting by Reader "Alice", 89 Years Young; True Meaning of Banking Safely Posted: 23 Sep 2013 01:19 AM PDT I received several emails regarding my post on Risk-Free Banking and Fractional Reserve Lending that I would like to share. Reader Alice who travels the world at a ripe young age of 89, says ... Hello Mish It is wise always for professionals to stand aside from conspiracy theories,  There is no sense compromising the future because the past misread the tea leaves. Bernanke is doing what he was appointed to do....keep the money coming for the US Government to spend, thereby monetizing all expenditures no matter the purpose. The growing call from citizens for some form of fiscal sanity is beyond the purlieu of the Fed.  It never was established to settle accounts, or keep them within bounds.  The founder of modern international finance, Amschel Rothschild, gave the aims and direction of his enterprise simple instruction when he declared he cared not what governments did, all he wanted was the right to control, print their money. Governments took him at his word and his business grew exponentially so he must have been doing something right or as Lloyd Blankfein said "doing God's work!" Bernanke knows Obamacare may be "defunded" and other excesses curbed, and he doesn't like that. His stewardship of the Fed is not to maintain status quo but to expand its power, its "credit" base worldwide, to continue the momentum his predecessors started. He doesn't have to curry favor with politicians, since they love to spend and he provides the means to do so across national borders and in all commodities sold worldwide. So long as that function maintains any semblance of order, the Fed goes on and on, gathering more followers in every year. I would love to see a return to "sensible accounting" but I am hard pressed as to what constitutes "sensible" these days. When I began investing, one looked at the real property on balance sheets. In today's tech driven world, the definition of value is more cloudy than ever before, especially since all transactions and exchanges are literally fabricated from thin air and deposited in "The Cloud". The third dimension is printing money as if it was a magic wand to create everyone's dream. All I know is that when I travel the world, (and I do every year) I see people who have never lived so well in any other time in history, including the poor and downtrodden. I know the American Century has something to do with that but I also know the British Empire had almost the same effect in its time at bat and I am waiting to see what happens, progresses next. Alas, I don't have much time to assay such things. At coming of age at 89, I may have to settle down here in Florida in my small villa and get reports second hand. I do love your approach and you can be assured I will be reading you as you write. Thank you, Alice Maxwell Moral Hazards Reader Rick comments on the moral hazards of Fed policy. Hi Mish The title of Megan McArdle's article is "Banking Without Risk Is Impossible", yet she supports a policy that creates moral hazards. Instead of a system where both parties take a risk, one party is off the hook. This leads to bad lending policies because there are hardly any consequences to bad lending policies. Rick Indeed, as it stands banks are always bailed out at taxpayer expense, the very epitome of "moral hazard". In effect, the Fed encourages excess risk taking, and bubbles are the inevitable result. True Meaning of Banking Safely Reader Bruce pinged me with his thoughts on teaching his children the true meaning of "risk-free". Hello Mish I have tried to educate my children on this very subject. We as a family are working our way to being debt free. This is the only way I can see to bank safely. We have purchased rental property, business property, and are in the process of paying off our last home. We are also building up a large cash reserve (aware that inflation takes it toll). We also have gold reserves, and liquid assets. Owning property free and clear, especially income property, gives one options that those with mortgages don't have. Bruce Thanks to all who wrote regarding fractional reserve lending (whether I commented or replied). And also thanks to many of those who commented on Attack of the "Digger Bees". Yes, I knew that "digger bees" (yellow jackets) are not bees but wasps. Bees, as many readers pointed out are generally docile. I like bees actually and put out a "humble bumble" home and nests for mason bees. We are looking into the EpiPen antidote system, because this is now the third stinging event regarding yellow jackets on my property. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com  Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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