Wealth and Taxes

I thought that “wealth and taxes” would be a short blog post. It turned in to a 5 part series. Here’s an overview, or table of contents in case the whole thing looks a bit indimidating. The most important one, really I think is Part V, “it’s all political.” The others build bit by bit, well, this can’t be the answer and that can’t be the answer, so what is the answer, and Part V finds it.

Read More: https://johnhcochrane.blogspot.com/2020/01/wealth-and-taxes-overview.html

Bias with Big Data

Statistics is a extremely valuable tool in research and in business today. It helps in forecasting sales, market analysis, elections, and so on. Since we are moving into the world of big data, everything can be quantified…so it seems. Well, that is the attempt: To quantify everything.

In this zeal to quantify everything, it can be helpful, and provide some benefit, this quest does come with some huge drawbacks. The end result can potentially lead the analysis down some fallacious conclusions. Does this mean stats analysis should not be used? No. It just means that the analysis is one aspect of the story.

Key excerpt:

“Among experts it’s well understood that “big data” doesn’t solve problems of bias. But how much should one trust an estimate from a big but possibly biased data set compared to a much smaller random sample? In Statistical paradises and paradoxes in big data, Xiao-Li Meng provides some answers which are shocking, even to experts.”

Read more here: https://marginalrevolution.com/marginalrevolution/2020/01/big-datasmall-bias.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+marginalrevolution%2Ffeed+%28Marginal+Revolution%29

Inflation: The High Class Robber

 “Over the last 100 years, it(US Dollar) has lost over 96 percent of its value.”

Stop. Re read this statement. How does this impact your daily living? How does it impact your ability to build wealth?

With regards to daily living, the ability acquire goods and services has become increasingly more difficult. Prices of these goods and services are on the rise, but in reality, that isn’t the case. The reality: As more fiat currency units are being printed, the value of each unit declines. This means it takes more currency to purchase the same goods. Since goods are sold in terms of prices, it gives the illusion prices are rising.

When the value of the currency is in decline, concomitantly causing rising prices, people have a shortfall when it comes to purchasing goods and services. Banks have provided a remedy to this problem: The expansion of consumer credit. The proliferation of consumer credit has expanded, to wit, sub prime credit. The expansion of sub prime credit has allowed individuals to bridge the financial gap between their income and the rising prices of goods. Since wages are not rising at the same pace as goods and services, for many this is a major issue. Sub prime default rates are on the rise, and individual savings are almost nonexistent. When emergencies occur, the use of credit is the norm, not savings.

Wealth accumulation is a treacherous endeavor in an inflationary environment. When individuals take the newly minted fiat currency and purchase assets, the prices of those assets are subject to the same increase as consumer goods. For example, when one purchases over the counter equities, as an investment, the price is relative to the declining value of the currency.(along with other economic factors.) In reality, the gains, for these paper assets are nominal, as the price increases simply reflect the devalued currency. Millions of middle class Americans are placing their retirement savings at risk, yet have no risk mitigation strategy against this thief known as inflation.

Oh, let us not forget taxation. Taxes are assessed on the prices of the goods or assets. As prices investment equities rise, people are excited…until taxes are levied. The net impact, price gains of the assets with taxes, is negligible…making it more difficult to invest for the long term.



Year End Repo Crisis Ends…but with Liquidity Glut

It was supposed to usher in a market crisis that would prompt the Fed to launch QE4 according to repo guru Zoltan Pozsar. In the end, the preemptive liquidity tsunami unleashed by the Fed in mid-December which backstopped just shy of $500 billion in liquidity, proved enough to keep any latent repo market crisis at bay.

The year’s final overnight repo operation, which the Fed expanded to as much as $150 billion ended up being just 17% subscribed, as Dealers submitted only $25.6 billion in securities ($15.2BN in TSYs, $2BN in Agencies, $8.35BN in MBS) in the year, and decade’s, final overnight repo meant to bridge the financial system’s short-term funding needs into 2020.

Read More: https://www.zerohedge.com/markets/year-end-repo-crisis-ends-whimper-amid-massive-liquidity-glut

Decade of Debt: Has the Decade of Easy Money Translated into Success?

With interest rates locked in at rock-bottom levels courtesy of the Federal Reserve’s easy-money policy after the financial crisis, companies found it cheaper than ever to tap the corporate bond market to load up on cash. 

Bond issuance by American companies topped $1 trillion in each year of the decade that began on Jan. 1, 2010, and ends on Tuesday at midnight, an unmatched run, according to SIFMA, the securities industry trade group. 

In all, corporate bond debt outstanding rocketed more than 50% and will soon top $10 trillion, versus about $6 trillion at the end of the previous decade. The largest U.S. companies – those in the S&P 500 Index .SPX – account for roughly 70% of that, nearly $7 trillion.

Read More here: https://www.reuters.com/article/us-global-markets-decade-credit-idUSKBN1YY09Y

Monetary Policy and The Stock Market Boom

Stock market booms are often based on a “good” story or a narrative of better things to come. Excess liquidity usually provides the fuel for bull market runs, as fundamentals of growth and profits usually don’t play a major role, at least not initially.

In the past 5 years, the S&P 500 stock index has risen over 50% and during that period operating profits for non-financial companies have declined over 15%, a drop that has always been associated with economic recessions.

Read More here: https://www.zerohedge.com/markets/feds-irrational-exuberant-bull-market

Manufacturing Report: Production and New Orders Fall

US manufacturing took a turn from lousy to worse in December, according to the Manufacturing ISM Report On Business, released today, with employment, new orders and new export orders, production, backlog of orders, and inventories all contracting.

The overall Purchasing Managers Index (PMI) dropped 0.9 percentage points from November to 47.2% in December 2019, the fifth month in a row of contraction, and the fastest contraction since June 2009.

More Proof of Inflation: Automobiles

More discussions about inflation? Yes, of course.. This monetary phenomenon impacts everything. It’s surreptitious nature traverses through the marketplace impacting individuals’ ability to purchase goods and services in the marketplace. I have found another example of inflation, and it’s influence on the purchasing power of goods. This example is in the auto sales market. Although I have made reference to this market before, mainly though how subprime lending usage has risen over the last six years, I haven’t discussed anything specific in how inflation impacts goods…until now. I am not going to take credit for the technical analysis presented(see the links below), I’m just going to continue to make my case regarding our inflation slowly impacts and erodes savings.

A Revisit of Inflation

Inflation is a monetary phenomenon. As more units of currency are printed, expanded via credit, and other means, the monetary base begin to decline in value. Mainstream economists will use indices like the Consumer Price Index to state price level to validate the appearance of inflation. The CPI is a useful tool, but it does not really capture the impact of inflation. With inflation, it is possible for the price of goods stay relatively the same(albeit the forces of supply and demand can play a role in price increases). It appears prices are rising, but that isn’t the case. The real key to understand this phenomenon is this: It takes more monetary units to buy the same set of goods.

But, But wages?

Of course, wages have risen over time. The issue is, as it relates to inflation, is two fold: (1) Wages are not increased uniformly, and (2) Wage increases have not kept pace with inflation. First of all, the labor market is a heterogeneous mix of individuals with a variety of skills, talents, and abilities. Those talents will have a relative amount of demand in the marketplace, based upon many factors, mainly due to scarcity. Since wages are not homogeneous, therefore, other laborers will not see the sharp rise in their wages, as others. (Contrast someone who is a fast food worker to a person working in information technology.) Next, wages have not kept pace with the inflationary impact of goods in the marketplace. There are laborers that can obtain items that have kept pace with inflation, yet many, mainly income earners who make $33,000/year and less, can not keep pace. Many are leaning toward the use of more credit, as the increased use of sub prime lending is proof of this.


With autos, an argument is being made that the CPI, doesn’t accurately demonstrate the inflationary impact on this industry. A key excerpt from an article produced by Wolf Street(link to the article is provided below):

“While wages have grown in nominal terms, “real” wages adjusted for CPI have been flat for men since the 1970s, and have grown only for women, but from a much lower base. In terms of our time frame here since 1990, “real” household incomes have only grown 22% since 1990, but the cost of a Camry LE has soared 70%.

This is the difference between “inflation” and “cost of living.” Things get better but they get more expensive. But the problem in the logic is that you cannot buy a new 1990 Camry anymore, even if you don’t want all the improvements, and you just want a cheaper car. In other words, wages rose with inflation, but the increase was not sufficient to pay for the quality improvements of everything around us, which makes a big part of the population feel increasingly impoverished.”

This finding isn’t shocking. Inflation strikes again.