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Druckenmiller: Fed robbing poor to pay rich Why the Fed 'blew it': Druckenmiller
Thursday, 19 Sep 2013

Stanley Druckenmiller, former chairman of Duquesne Capital, and Jimmy Dunne of Sandler O'Neill discuss the decision to delay tapering. CNBC's Steve Liesman reports.
The Federal Reserve isn't just inflating markets but is shifting a massive amount of wealth from the middle class and poor to the rich, according to billionaire hedge fund manager Stanley Druckenmiller.
In an interview on "Squawk Box," the founder of Duquesne Capital said the Fed's policy of quantitative easing was inflating stocks and other assets held by wealthy investors like himself. But the price of making the rich richer will be paid by future generations.
"This is fantastic for every rich person," he said Thursday, a day after the Fed's stunning decision to delay tightening its monetary policy. "This is the biggest redistribution of wealth from the middle class and the poor to the rich ever."
"Who owns assets—the rich, the billionaires. You think Warren Buffett hates this stuff? You think I hate this stuff? I had a very good day yesterday."
Druckenmiller, whose net worth is estimated at more than $2 billion, said that the implication of the Fed's policy is that the rich will spend their wealth and create jobs—essentially betting on "trickle-down economics."
"I mean, maybe this trickle-down monetary policy that gives money to billionaires and hopefully we go spend it is going to work," he said. "But it hasn't worked for five years."
The big debate
Economists and academics are divided on whether the Fed's policies have truly helped the rich at the expense of the rest of America. Many point out that the policies have lowered interest rates for all Americans, which have helped boost housing sales and values. They also say unemployment and the economy would be a lot worse if the central bank didn't continue its huge monthly bond purchases.
Yet others say the policies have mainly juiced asset prices—and the wealthy hold most of the assets. There is no reliable data on the wealth of the top 1 percent for the past two years, when markets have surged. But as of 2010, the mean and median net worth of Americans was still down 50 percent from the precrisis peak, mainly because of the decline in home values, according to Edward Wolff, an economics professor at New York University.

By contrast, the number of millionaires—households worth $1 million or more, including homes—hit an all-time record in 2010, according to Wolff. Separate studies of millionaire populations from Spectrem Group and Capgemini also show that the population of millionaires hit an all-time record in 2012.
The top 1 percent of Americans hold 35 percent of the nation's wealth—up slightly since 2007. The top 10 percent own more than 80 percent of all stocks and more than half of all individual financial assets in the U.S., according to the Federal Reserve and Wolff.
1 percent gets 95 percent
A stream of new data on inequality also suggest that the gap between the wealthy and the nonwealthy is growing, largely becaue of rising stock markets. New data from Emmanuel Saez, an economist at the University of California at Berkeley, found that the top 1 percent captured 95 percent of the gains during the recovery.
According to the Census Bureau, incomes for the middle class have largely remained flat while the wealthy have gained. The income top 10 percent earns nearly 12 times as much as the bottom 10 percent, up from a little more than 10 percent in 1999.
A recent report from The Associated Press found that unemployment remains much higher for the middle and lower classes than for higher-income groups.
The wealth of America's top 400 billionaires grew by $300 billion in the past year, hitting $2 trillion, according to Forbes.
A study by the Bank of England found that its quantitative easing policies—akin to the Fed's—were mainly helping the wealthy. It found that 40 percent of the gains from easing went to the top 5 percent of British households.
Economist Anthony Randazzo of the Reason Foundation wrote last year that QE "is fundamentally a regressive redistribution program that has been boosting wealth for those already engaged in the financial sector or those who already own homes, but passing little along to the rest of the economy. It is a primary driver of income inequality."
And then there's Donald Trump—not usually one for distributional analyses of monetary policy. He said on CNBC last year that "people like me will benefit from this."

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A reset for the bond markets
Jun 27, 2013

Roger Young is responsible for managing Fidelity Capital Markets' fixed income support functions for the retail, correspondent banking, and precious metals trading units. He is a 30-year financial services veteran with extensive experience in institutional banking, portfolio management, trading, and research in the U.S. debt markets.
It may be time for bond investors to reset their expectations. The past month has been one of change for the bond market. Early in the month, bonds experienced the biggest one-month rise in rates since March 2012. Then came a bout of selling after the June 19 Fed meeting, which pushed rates even higher, and pushed the value of bonds down.
Viewpoints checked in with Roger Young, senior vice president in Fidelity’s Capital Markets fixed income division, about recent developments in the bond market and implications for investors.
What happened to the bond market after the Fed meeting?
Young: A few key parts of the Fed’s statement on June 19 suggested that it may be getting ready to end its program of bond buying. That was enough to cause the second major bout of selling in the bond market this year. The Barclays U.S. Aggregate Bond Index, a diversified bond index, which was still positive in May, is now down 2.9% year to date. The impact has been more pronounced on 10-year securities and longer-dated funds, which are more sensitive to rates and have posted 9%–10% negative returns year to date.
What is surprising is how quickly rates have changed in recent weeks. The 10-year Treasury yield rose from 1.60% on April 26 to 2.53% on June 26, surpassing the high yields reached in the spring of 2012, and the mid-range yields of 2011.
Liquidity and leverage also are contributing to this. Recent New York Fed data shows that inventories of corporate bonds among the large banks has shrunk dramatically, from $200 billion at their 2007 peak, to just over $50 billion. This is due in part to the ban on banks’ proprietary trading instituted by Dodd-Frank, the post-crisis financial-reform law. Global markets have been impacted as well. Emerging markets have recently experienced a large increase in rates, and many sovereign issues have been unable to come to market or have had failed auctions. In developed countries, problems still exist in parts of Europe, which continue to face continued economic challenges.
Did anything change in the Fed outlook?
Young: The notes from the June 18–19 Federal Reserve Bank’s Open Market Committee (FOMC) meeting didn’t give the impression that the Fed is abandoning its policy of extraordinary accommodative monetary policy through ultra-low short term interest rates and quantitative easing. The Fed’s overall assessment was modest improvement. However, a sentence in the FOMC statement that “downside risks to the outlook and the labor market have diminished,” along with the committee’s view that lower inflation is due to “transitory factors,” seemed to be a signal to many that a tapering of bond buying by the Fed would start sooner rather than later, and that was the catalyst the market reacted to.
So, the market seemed to have a very quick change in the perception that there was “no set target date” after the third round of QE in the fall of 2012 (dubbed by many as “QE infinity”) to, suddenly, “QE ending.” After the Fed meeting, at least 44% of economists polled by Bloomberg felt the Fed will taper purchases by September of this year and 59% felt the Fed would wind down the program entirely by June or July of 2014. That’s an interesting perspective, given that the Fed has reaffirmed its QE and said it won't raise short-term rates before unemployment drops to 6.5%, which it doesn’t expect to happen until 2015.
What does it all mean for investors?
Young: I think investors should keep several things in mind.
No. 1: The Fed is not tightening yet and the market is trying to “normalize” the interest rate environment, given less Fed buying through QE.
No. 2: While the economy has improved—consumer sentiment, housing, and other areas of the economy are at post-recovery highs—GDP came in at a revised 1.8%, down from 2.4%. Fed Chairman Ben Bernanke said reducing bond purchases would depend on the economy growing in line with the central bank’s projections. Policymakers are forecasting growth of as much as 2.6% this year and 3.5 % next year.
No. 3: A lot of money has been invested in bonds since 2009, almost $1 trillion according to TrimTabs Investment Research,—a record—so the outflows may be due to those who are overallocated or worried about losses as rates rise. And while it is not unusual to see rates rise well before the Fed removes accommodative policies, many sub–asset classes, such as longer-dated munis, at 5%, are starting to look more attractive. On a historical basis, yields on longer-dated munis are well above the yields of Treasuries—even taking into account the tax-free income—and rates are close to their longer term averages.
No. 4: Eventually, higher rates can have a negative impact on the market. For example, mortgage rates—e.g., 30-year conventionals—are now at 4.5%, up from 3.5% in April. This could have an impact on home affordability and affect the housing recovery.
No. 5: A 100-basis-point move (one percentage point) in the bond markets is not uncommon—it’s happened two times prior to this move in the post-2008 Great Recession. In 2009, rates went from 2.30% to 3.80% in six months. In 2010, 10-year yields went from 2.30% to 3.60% in five months. What is unusual is to see this happen in two months. That said, we are settling in at 2.60% on 10-year Treasury yields, and the average on yields for this maturity since January 2008 is 2.84%. Thus, maybe we are close to a level that is more consistent with where interest rates should be, given current fundamentals in the economy and inflation, and an eventual easing of the Fed’s loose monetary policy.
What about investors whose bonds lost value?
Young: Bond investors need to think about the purpose of fixed income in their portfolios. Some people just want income from individual securities like municipal bonds, and these price movements from month to month may not bother them. Other people may be in a variety of mutual funds, some of which give broader diversification and lower exposure to rate movements. Now is a great time to review your portfolio to see what kinds of bonds you own, and to see the duration mix and the level of diversification in different types of bonds.
Volatility will probably be here to stay. If you are uncomfortable with it, consider diversifying and shortening duration. Or, if you think rates are going to rise more dramatically, consider bonds that adjust to rates, like floating-rate issues.

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Dr. Doom: Most Americans missed stock market wealth
By Lawrence Lewitinn | Talking Numbers
Marc Faber, Editor and Publisher of the Gloom, Boom & Doom Report, discusses why he thinks recent highs in the stock market mean nothing for most Americans.
Recent record highs in the stock market mean absolutely nothing to the vast majority of Americans. That's what noted contrarian investor Dr. Marc Faber, Editor and Publisher of the Gloom, Boom & Doom Report, says to Talking Numbers.
What's more, any deal coming from Washington will likely mean those who benefitted least from the markets' success will pay the most.
"The world is upside down and I think that basically any deal is not favorable from a longer-term perspective," says Faber. "It allows the US government to spend more and to increase its government debt. Someone, somewhere, at some point will have to pay for it. It will be either through more inflation [or] through more monetization. But there is always a price for whatever happens."
While the Federal Reserve Bank's policy of buying $85 billion per month in US Treasury and mortgage bonds may have helped lowered interest rates and boost the market to an all-time high, that doesn't mean all have shared in the boom.
"Just the fact that the market makes a new high doesn't change the lifestyle of 80% of Americans that basically are struggling," says Faber. "The market has gone up and it is now higher than it was in 2007. And, it's higher by 70% compared to 2011. In October 2011, at the low, we were at 1074 [on the S&amp 500 index]. We are now at 1720. But, this is not the lifestyle of most Americans."
To prove his point, Faber cites the most recent Federal Reserve's "Survey of Consumer Finance". Faber finds the table "Household Net Worth", which breaks everything down by wealth percentiles, to be particularly interesting.
"For the bottom 50% of the households, their household wealth compared to 2007 is still down 44% because they don't own any shares – or very little shares," says Faber. "The stock market reflects 1% or 2% of the population. It's like if you tell me an Andy Warhol [painting] has reached a record price. It doesn't touch the lifestyle of ordinary people."
While Faber may have personally profited from the markets, he feel there's a bigger picture that needs to be addressed.
"I'm not complaining about it as an investor, because I'm also holding assets," notes Faber. "I'm complaining about it as a social observer and as an economist because a sound economy boosts the standard of living of everybody, not just the few."
So, what should investors do in this environment? Watch the video above to hear what Marc Faber believes is next for the markets and where the best values are now.

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Where Jim Rogers Is Investing Now

By KOPIN TAN | MORE ARTICLES BY AUTHOR OCTOBER 12, 2013

An interview with investor and author Jim Rogers in Singapore. Why he likes agriculture and Chinese airlines, is concerned about currency turmoil and thinks young Americans should learn a foreign language.



Stepping off a 19-hour flight to visit Jim Rogers in Singapore is a daunting proposition. First, you must locate his home, nestled in a particularly private, verdant nook nuzzling the 183-acre Singapore Botanic Gardens. Next, his remarkably poised 10-year-old daughter—the blond-haired, blue-eyed Hilton Augusta Parker Rogers, or Happy Rogers to her friends—quizzes you in flawless Mandarin to see if your language skills are up to snuff. Then, Rogers invites you to exercise with him while chatting about the markets.
Rogers, who will turn 71 this week, has always been a multitasker. The co-founder (with George Soros) of the Quantum Fund famously retired at 37 to travel the world, and is today a venerable investor, author of six books, and doting dad. Convinced of Asia's ascendance but put off by China's pollution, he moved his family from New York to Singapore seven years ago so his two young daughters can grow up speaking Mandarin. Today, Oriental antiques jostle Barbie dollhouses for pride of place in his spacious home. He takes his daughters to school on a bicycle, even though a gleaming Mercedes with an 8888 license plate—eight being the most auspicious number to the Chinese since it sounds like the word for "prosper"—sits in the driveway.
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"I cannot invest the way I want the world to be; I have to invest the way the world is." -- Jim Rogers
What follows is our very sweaty conversation—me from the equatorial humidity, Rogers from pedaling a recumbent stationary bike on the patio, a laptop dripping stock quotes propped on his handlebars. A tantalizing pool beckons from 10 feet away, but he did not once slow down.
Barron's: How do you like living in Singapore, and do you miss New York?
Rogers: Singapore has the best of everything—great education, great health care, everything works here. It's been an astonishing success story over the past 40 years. We're very pleased here.
When I was selling my New York house, I almost backed out; I just couldn't bear the thought of leaving. But now I'm very happy here. I fly to New York and I realize I'm in a Third World airport. Then I get into a Third World taxi onto a Third World highway. The difference now just slaps me in the face. New York is a wonderful place, with the people and the vibrancy, but I can find the same vibrancy, if not more, in Asia.
You've been a big proponent of China and emerging markets. What's your world view these days?
This is the first time in recorded history that we have all the major central banks, all the major governments actively debasing their currencies. Japan has said it will print unlimited amounts of money. So Ben Bernanke said, "Wait a minute, we can throw in a trillion dollars a year." And the Europeans said they'll do "whatever it takes." There's a gigantic ocean of liquidity, and the people getting that liquidity are having a wonderful time. But it's totally artificial, and it's going to end badly when it ends, I assure you.
Can't such policies go on for a while? After all, we still don't have inflation…
According to the U.S. government! But you must buy some things: insurance, food, even paper. The price of nearly everything is going up. We have inflation in India, China, Norway, Australia—everywhere but the U.S. Bureau of Labor Statistics.
I'm telling you they're lying. Go to a restaurant in New York, or a grocery store, and tell me that there's no inflation. [Rogers starts tapping on his laptop]. Look here: In 2001, it cost $9 to go to the top of the Empire State Building. Now it's $27 to go to the 86th floor, $44 to go to the top, and $67 to go express. The Museum of Modern Art in 2001 was $10, now it's $25. A cab from Kennedy airport to Manhattan in 2001 was $30 plus tolls. Now it starts at $52.
Should the market be near record highs? Or has it run ahead of the economy?
Staggering amounts of money being printed has to go somewhere, and it frequently goes into financial markets. But the advance is getting narrower. Fewer and fewer big stocks are going up, which is what happened near the end of the last bubble in 1999. Now, I don't know how long this will go on, but it can't go on forever. That said, you can't really short this market either.
Are you bullish about anything?
I think agriculture is going to be one of the best investments over the next few decades. The world has consumed more than it has produced for much of the last decade, so inventories are near historic lows. The average farmer is 58 in the U.S. and Australia, 66 in Japan. Old farmers are dying or retiring, and young people aren't going into agriculture. Young Americans go into PR, not agriculture. Prices have to go much higher to attract labor, management, capital or we're not going to have enough food in the long run.
So how do you invest in agriculture?
I could buy farmland and become a farmer—although I would be hopeless at it—or buy farmland and lease it out. Buy shares in farms, farm equipment, fertilizer and seed companies that trade on exchanges around the world. Stock markets in agriculture-producing countries should do better than those in agriculture-importing ones. Retailers, restaurants, banks in agricultural areas will do well. Buy a vacation home on a lake in Iowa, not Massachusetts. And there are listed indexes like the RJA or the RGRA. [The RJA, or Elements Rogers Agriculture Total Return exchange-traded note, tracks the Rogers International Commodity Index, which Rogers designed. The RGRA is the RBS Rogers Enhanced Agriculture ETN].
Capital has fled emerging markets as U.S. interest rates rise. Is it time to nibble?
I've been shorting some emerging markets like India and Turkey. If you can only visit one country in your life, I urge you, plead with you, to go to India. It's the most extraordinary country in the world for historic sights, breadth of culture, etc. But, boy, it's a hopelessly managed place. Countries like India, Turkey, Indonesia that have big balance-of-trade deficits could easily finance things when there's all this free money. But when people realize there won't always be this artificial liquidity, then there'll be problems.
Other than that, emerging markets are doing OK. I was pessimistic about Russia for 46 years, and I think it's becoming the second most-hated market in the world, after Argentina. But I see positive changes taking place, so I'm looking. I bought a few shares of an index, and a few shares of Aeroflot [ticker: AFLT.Russia] because I see positive changes taking place in airlines. I also like Myanmar. There aren't many stocks you can buy there, and they're just building a stock market. But Nok Airlines [NOK.Thailand] is a regional airline making inroads there. In the long run I'm excited about Myanmar.
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Among the Chinese companies I bought shares of after I became a director is New York-listed FAB Universal [FU], a small digital media company. [The company offers copyright-protected audio and video products, while a licensing segment lets consumers download copyrighted media.] The Chinese government has decided to promote and support its rich culture. One way to do that, and it's a big job, is to become stricter about enforcing intellectual-property rights.
Investors have become skeptical about China—the shadow banking system, infrastructure spending, etc. The market is well off its 2007 high. Are you concerned?
In general, I don't like to buy China except when it collapses. The last time I bought China in any significant way was in October, November of 2008. But if and when the market falls, I'll buy.
I've read all those skeptical stories about China for many years, and so far they haven't come true. There will be setbacks: In the 19th century, as America was rising to power and glory, we had 15 depressions, virtually no human rights, little rule of law, massacres in the streets. We had a horrible civil war. You could buy and sell Congressmen in those days—you can still buy and sell Congressmen, but in those days they were a lot cheaper. Sure, China will have problems. But I'm not going to tell my children to switch over to Danish, because China is going to be the next great country in the world. You'll see problems and setbacks, but if you can find the right industries, companies, people, you will do well.
So where are those "right" industries and companies in China?
Besides Chinese culture and copyright, the government is giving incentives to support agriculture and food production. Pollution is a nightmare in China, and they know it, so they're spending lots of money trying to clean up the environment. Water is another huge problem—big shortages in the Northeast, it's dirty and there's not enough of it.
Then there's travel. For a long time, the Chinese haven't been able to travel. Now, it's easier to get a passport. When I first drove across China there were no highways, hotels, gas stations. Now you can get into a car and actually go somewhere. There's still a high savings rate, but people are starting to spend more. Chinese tourism—both domestic and international—is going to be a staggering growth business for years to come. I own six or seven Chinese airlines because of that.
The Chinese also are spending huge amounts of money on railroads, and their know-how is better than most people realize. So it's an export market as well, and one company I like is Hollysys Automation Technologies [HOLI]. [Based in Beijing and listed on Nasdaq, Hollysys provides automation and control technology for railways, subways and other industrial customers in Asia and the Middle East.]
With China slowly liberalizing its financial system, will you buy "dim sum" bonds, which are renminbi bonds offered in offshore markets like Hong Kong?
I wouldn't buy bonds because I expect interest rates everywhere will be going higher. I'm not optimistic about bonds long-term, although short-term they'll probably be OK.
I'd rather buy the renminbi directly. Even the Chinese are starting to loosen up their interest-rate structure; they have to. So interest rates in China are headed higher.
You can also buy commodities because most people, myself included, find it difficult to get to know specific Chinese companies. With cotton or sugar you don't have to worry about management teams. Sugar prices have fallen some 75% from their all-time highs. Consumption is rising as economies grow and as more people use sugar for fuel. Yes, there's been a glut, which is why sugar farmers are producing less of it and prices are down. But you should buy low and sell high, and I'm buying sugar as we speak.
Recovering sugar prices will also help companies like MSM Malaysia Holdings [MSM.Malaysia; which runs refineries and produces sugar products].
Speaking of commodities, gold is 32% off its record high of $1,921 a troy ounce. Are you buying?
I own gold but I'm not buying any more at the moment. Gold went up for 12 straight years, which is an extraordinary anomaly. I know of nothing that has gone up for 12 years without a decline. So gold is now having its correction, but I'd also expect the correction to be different from normal.
I've said in TV interviews that gold could go to $1,200, and when it did I bought some. But a 50% retracement from its peak would take gold near $960, and 50% corrections can be quite normal. Don't forget, India is the world's largest consumer of gold. It's their second-largest import, after oil. They can't do much about oil, but Indian politicians are blaming their problems on gold, and they keep putting taxes and restrictions on gold imports. I expect I might get another chance to buy more gold in the next year or two, so I'm waiting. But I'm not selling what I have, and I expect gold to go well over $2,000 eventually.
What about Japan?
I sold Japan in May. Yes, after it had run up. It was probably too soon, and Japanese stocks could well go up more because of all this liquidity. But I'm not at the party anymore. I'm figuring out if I should go back to the party, but I'm usually not very good at getting involved with something that I'm skeptical about.
What's the longer-term issue with Japan?
The fundamental problem in Japan is demographics. If they would let in immigrants or if they would have babies, then Japan could be very exciting. But they're not doing that, and they've got to stop spending money. Domestically, Japan is the world's largest debtor nation, and [Prime Minister Shinzo Abe] says he's going to spend even more. It's astonishing to me that in the last decade or so, politicians all over the world have said the problem of having too much debt should be solved with even more debt!
Given your concerns about artificial liquidity, what warning cues are you looking for?
I'm most concerned about currency turmoil coming. Look, the yen has declined 25% [against the dollar] in less than a year, a staggering move for one of the world's most important currencies. The euro is a fabulous concept, but its execution has been bad. And the dollar is tied to the largest debtor nation in world history.
I own the renminbi. I also own the dollar, not because I have such confidence in the U.S., but because I've got to invest somewhere, and if turmoil comes, people will flock to the dollar. It's not a safe haven, but it's considered that way. I cannot invest the way I want the world to be; I have to invest the way the world is.
I also own the Singapore dollar because I have expenses here. Singapore has allowed its currency to appreciate as a way to attack inflation—and it's an export economy. It doesn't have cotton fields or oil or natural resources, and everything is imported. The Chinese should learn from Singapore. There are 1.3 billion Chinese, and they would be better off if its currency went up, because the cost of living would go down. Yes, some people, like the exporters, would have to adjust. But remember, the Japanese yen has gone up a lot against the dollar over the decades, and Japan still has a trade surplus with the U.S. But China does things its own way, and I think this is one of their mistakes.
You wrote a book about life lessons you'd like to pass on to your kids. What would you tell young Americans today?
You've got to learn a foreign language. At least one! This is not 1953. America's relative position in the world will continue to decline, and Americans must know about and engage the rest of the world. If I can do just one thing, I would shake up the American education system and make Americans learn more about the world. We have the largest debt in the world. The days when we can get away with not caring about the world are coming to an end.

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Budget drama just tip of the iceberg: Yoshikami
Published: Tuesday, 1 Oct 2013
By: Michael Yoshikami

The U.S. Capitol building in Washington D.C.
Here we go again. Our beloved elected officials posture as a budget impasse looms. While the market seems to be taking the latest noise from Washington in stride, that could change.
It's important to recognize that the contentious discussions highlight a greater problem for the U.S. economy: a massive federal deficit that currently counts in the trillions of dollars.
To be sure, as economic growth continues to stumble forward, the budget deficit will decrease in size simply because of higher tax revenues. But remember, this potential reduction comes on the backs of millions of investors that currently earn nothing in money market accounts and certificates of deposits. Just imagine those living on a fixed income alone and you can see the massive negative impact of our current fiscal woes.

Interest rates are low because economic activity requires that they be at attractive levels to spur economic activity. While mortgage holders celebrate, those that rely on interest instruments do not share in that joy. This really is indicative of a greater long-term challenge facing the U.S. economy and underscores why we are conservative as we invest: there doesn't appear to be a set path to solve the nation's budget woes.
We think it's unlikely that there will be any meaningful deficit reduction efforts or any significant tax increases; the status quo will likely remain in place. Just think about the sequestration drama and how contentious that debate was. The amount of sequestration cuts – $85.4 billion in spending cuts for 2013 with similar cuts through 2021 – was a drop in the bucket relative to the overall U.S. deficit.
We continue to believe that the budget deficit will be attacked by inflating the debt ceiling, something that has happened before. Inflating the debt ceiling means letting inflation run to increase tax revenues. The cost of cars, food and other items rise thereby increasing tax revenues. While this may sound rosy, the truth is it will have negative consequences on the standard of living in the U.S.

This is not to say that we're headed towards an economic collapse; I don't believe that's the case. However, I do believe the standard of living in the U.S. will be under pressure as a result of inaction in Washington and the easy path to inflate the deficit.
What does this mean from an investment standpoint?
1) It makes sense to have companies that have strong cash flow, pay dividends, and possess solid balance in your portfolio.
2) A sprinkling of emerging market assets (not an over-concentration) is a good way to capture higher growth rates in other countries (a long-term strategy to be sure).
3) Because of impending inflation, fixed durations should remain fairly low until interest rates rise. Until emerging market growth restarts, commodities will likely be negatively affected by slower global growth rates.
Portfolios need to be invested in a way that assumes that slower growth is on the horizon as Washington is clearly moving along a path of stagnation.
—Michael Yoshikami is the CEO and founder of the investment committee of Destination Wealth Management.

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U.S. May Join Germany of 1933 in Pantheon of Defaults
By John Glover - Oct 14,
The Five Scenarios of a Debt Ceiling Breach
Reneging on its debt obligations would make the U.S. the first major Western government to default since Nazi Germany 80 years ago.
On a rainy 13th day of a government shutdown with a possible debt default looming, the Senate comes into session but the House is closed, on Capitol Hill on October 13, 2013.

Oct. 14 (Bloomberg) -- U.S. Representative Scott Rigell, a Virginia Republican, talks about the outlook for negotiations over the U.S. budget and debt ceiling. Rigell speaks with Betty Liu on Bloomberg Television's "In the Loop." (Source: Bloomberg)
Germany unilaterally ceased payments on long-term borrowings on May 6, 1933, three months after Adolf Hitler was installed as Chancellor. The default helped cement Hitler’s power base following years of political instability as the Weimar Republic struggled with its crushing debts.
“These are generally catastrophic economic events,” said Professor Eugene N. White, an economics historian at Rutgers University in New Brunswick, New Jersey. “There is no happy ending.”
The debt reparations piled onto Germany, which in 1913 was the world’s third-biggest economy, sparked the hyperinflation, borrowings and political deadlock that brought the Nazis to power, and the default. It shows how excessive debt has capricious results, such as the civil war and despotism that ravaged Florence after England’s Edward III refused to pay his obligations from the city-state’s banks in 1339, and the Revolution of 1789 that followed the French Crown’s defaults in 1770 and 1788.
Failure by the world’s biggest economy to pay its debt in an interconnected, globalized world risks an array of devastating consequences that could lay waste to stock markets from Brazil to Zurich and bring the $5 trillion market in Treasury-backed loans to a halt. Borrowing costs would soar, the dollar’s role as the world’s reserve currency would be in doubt and the U.S. and world economies would risk plunging into recession -- and potentially depression.
Senate Talks
Senate leaders of both parties are negotiating to avert a U.S. default after a lapse in borrowing authority takes effect Oct. 17, even as senators block legislation to prevent one and talks between the White House and House Republicans have hit an impasse. Democratic lawmakers said Oct. 12 that the lack of movement may have an effect on financial markets. After Oct. 17, the U.S. will have $30 billion plus incoming revenue and would start missing payments sometime between Oct. 22 and Oct. 31, according to the Congressional Budget Office.
Serial Defaulter
Germany, staggering under the weight of 132 billion gold marks in war reparations and not permitted to export to the victors’ markets, was a serial defaulter from 1922, according to Albrecht Ritschl, a professor of economic history at the London School of Economics. That forced the country to borrow to pay its creditors, in what Ritschl calls a Ponzi scheme.
At the Root of It All
“Reparations were at the heart of the issue in the interwar years,” Ritschl said in a telephone interview. “The big question is why anyone lent a dime to Germany with those hanging over them. The assumption must have been that reparations would eventually go away.”
While a delinquent corporation may go out of business, be broken up, sold to a competitor, or otherwise change its shape, sovereign defaulters are different. Weimar Germany deferred payments, stopped transfers, reformed the currency and wrote down debt, wringing a series of agreements from its creditors before the Nazis repudiated the obligations in 1933.
It took until the 1953 London Debt Agreement to lay to rest the nation’s reparations difficulties, essentially by postponing any payments until after reunification in 1990 of East and West Germany, according to Timothy Guinnane, Professor of Economic History at Yale University in New Haven, Connecticut. The U.S., eager to ensure Germany was a bulwark against communism, pressured creditors to agree to debt relief, according to Guinnane.
‘Economic Strain’
“The U.S. was not being generous or magnanimous in the London Debt Agreement, it rarely is,” Guinnane said in an e-mail. “Rather, it understood that if Germany was forced to repay all the debts it technically owed, it would put the new Federal Republic under intolerable political and economic strain.”
Payments on about 150 million euros ($203 million) of bonds issued to fund reparations ended in October 2003, according to the Associated Press.
After sovereign defaults and before a nation is allowed to borrow again, some sort of repayment is typically made, Carmen Reinhart and Kenneth Rogoff wrote in their 2009 book on sovereign bankruptcies “This Time Is Different.” While Russia’s Bolshevik government refused to pay Tsarist debts, when the country re-entered debt markets it negotiated a token payment on the debt, according to the book.
Germany, France
Germany and France have both defaulted eight times since 1800, according to Reinhart and Rogoff. While Germany was sufficiently big and strategically important to be helped to peaceful prosperity by its creditors, default typically doesn’t end well for smaller nations.
The U.S. has even failed to honor its obligations to the letter in the past. In 1979 it was late making payments on about $122 million of bills, blaming technical difficulties that the Treasury said stemmed from a failure in word processing equipment, Terry Zivney and Richard Marcus wrote in August 1989 in “The Financial Review.”
In 1935, the Supreme Court ruled the federal government was within its rights to reject claims for payment in gold on bonds that gave holders the option to demand the metal. Because the terms of the contract weren’t fully honored, some would argue that was tantamount to a default.
In 1790, the U.S. deferred interest payments on debt assumed by the new federal government until 1801, according to Reinhart and Rogoff.
Court Pursuit
Serial defaulters Argentina and Greece have retained political, if not economic independence. The Latin American nation failed to meet its commitments five times since 1951 and in 2001 gained the record for the largest-ever restructuring, a distinction it held until overtaken by Greece in 2012. Argentina’s bondholders are still pursuing the nation through the courts.
Including 2012, Greece has defaulted six times since 1826, three years before it gained independence, and has spent more than half the years since 1800 in default, according to Reinhart and Rogoff.
The biggest emerging-markets defaults in the past 15 years illustrate the cycle of contagion that typically marks sovereign debt crises.
Russian Restructuring
Russia halted payments on $40 billion of local debt in 1998 after oil, its main export, plunged 42 percent amid a global economic slowdown triggered by the Asian financial crisis. By the time it devalued the ruble and defaulted that August, the government had drained about half its foreign reserves and made an unsuccessful bid to increase the $22.6 billion international aid package it had received.
Russia’s debt restructuring prompted investors to pull out of emerging markets, plunging Argentina into recession. By December 2001, when the South American country halted payments on $95 billion of bonds, the economy had contracted three successive years, cutting into tax revenue and pushing foreign reserves down to almost a six-year low.
Those defaults took place because events had rendered the nations insolvent, something that doesn’t apply to the U.S., said the LSE’s Ritschl.
“The only situation that really parallels the U.S. situation at present is the U.S. situation,” he said. “There’s really no doubt about the solvency of the U.S. Treasury.”

他山砍玉

What follows this Congressional deal?

Published: Wednesday, 16 Oct 2013
By: Mohamed A. El-Erian |

The good news — and it is very good news — is that Congress seems to have finally struck a deal that would reopen the government and dodge a debt default. In doing so, lawmakers have avoided (at least for now) a crisis of their own creation that would have tipped the country into recession, caused substantial job losses, and further eroded America's global standing — all of which would have also undermined national security.
Yet the good news is not the result of a visionary solution that reconciles, even in a limited fashion, material differences of views on the size and scope of government; nor does it fundamentally realign political incentives in a constructive manner.
What emerged from Congress on Wednesday speaks to stop-gap measures born of exhaustion and political miscalculations, and prompted by national (and global) outrage.

By kicking the can down the road, our bickering Congress has created a temporary window for — at least in theory — more rational debate and decision-making. According to available information, the government would now be funded until January 15th and the debt ceiling would be pushed back to February 7th (with the ability to use extraordinary measures pushing that deadline to the spring).
Global markets are right to celebrate the removal of a potential economic catastrophe. Soon they will look beyond the clipping of this horrid "left tail," hoping that lawmakers:
1 ) Will not squander the opportunity presented by the December budget conference committee to agree on measures that enhance short-term growth prospects and longer-term fiscal reforms, while simultaneously removing a recurrent threat of government shutdown and default;
2) Will re-invigorate other important (and, critically, pro-growth) legislative initiatives, starting with bi-partisan immigration reform; and
3) Approve important nominations, including Janet Yellen as chair of the Federal Reserve.
Meanwhile, and notwithstanding the earlier taper talk, the Fed may now have no choice but to stay longer in its intense policy experimental mode – due both to the likelihood of weaker data and to a perceived need to take out insurance for the economy against future political dysfunction.

Markets will soon join the central bank in assessing the extent of lasting damage to the U.S. economy. Their initial hope was that the disruptions to demand from the government shutdown would prove both temporary and fully reversible. This is now tempered by the fact that lawmakers have postponed rather than resolved their differences.
Past experiences suggest that the next round of negotiations will not be easy. Moreover, in a few months, Congress will be that much closer to the November 2014 elections and, perhaps more importantly, the local primaries.
We should not be surprised if both companies and individuals were to consider postponing some important decisions, with a few even opting for greater "self-insurance." This speaks to the risks of lower consumption, less buoyant hiring and fewer investments in new plant and equipment – all ahead of the important holiday purchase season.
Then there is the international angle.
Unfortunately, it is not an exaggeration to say that many foreigners – and particularly governments and central banks who use Treasuries in size to anchor their precautionary savings – were taken aback by what they regard as Congressional irresponsibility (if not recklessness). Moreover, as China illustrates – where some have recently called for a "de-Americanized world" - there are also domestic constituents there that are eager to look for better ways to safeguard their countries' financial reserves and wealth.
The more the world looks to dis-engage from the dollar-centric construct, the greater threat to America's economic power and influence. And while this is not something that happens quickly, the risk of cumulative erosion should not be lightly discarded.
The message from the American private sector (and international community) to Congress may best be thought of as a simple and urgent plea: Please put decisively behind you the shenanigans of the last few weeks and embark on constructive economic and financial governance – for neither our economy nor the plumbing of the global financial system would easily handle yet another set of self-inflicted crises in the next few months.

湖畔居士

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wangting

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狍子

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现下借他人水滴自己额头惑众者猖獗, 和村娘潜心求道者寡. 叹一妇道人家独自搬山砍玉码砖搭瓦, 砌此高楼.  狍子有幸宝地一游, 甚是欣喜, 离庄前加盖一薄层, 略表敬意.