Why oil is crashing and the black swan event of 2014: The price of oil is down by 40 percent in six months and hardly anyone saw this coming.
Black swan events are bound to happen in financial markets. It appeared that 2014 would be a year where stock markets gained footing in the world of supposedly low volatility until oil prices came crashing down. The crash in oil is enormous. It has sent many countries into panic mode including Russia where interest rates were hiked up to 17 percent. This produced little result since the change in oil prices has come so abruptly. Oil is down over 40 percent in the last six months. The current price of a barrel of oil is $55.40. What so many analysts got wrong is the assumption that high cost oil was here indefinitely and that somehow the global economy would be on perma-debt growth. Obviously things can change dramatically over night. As we saw with the recent spending bill, sneaky provisions for derivatives were popped in for the next financial bailout. But with oil, this is a global commodity with massive market implications. This is the financial story of the year and it will setup 2015 for an interesting period.
Cronyism and ensuring American taxpayers bailout the finance industry during the next crash: Nostradamus like spending bill will ensure big banks never fail with your money.
Do you smell what is in the air? Pine trees? No. Something with a more pungent smell. There is a wonderful whiff of cronyism floating around Washington D.C. In the latest government kabuki theater there was some interesting items being passed. There were major protections given to banks should trillions of dollars in derivatives blow up during the next market correction. While the public is enjoying a few dollars off in gasoline prices so they can spend more money they don’t have during this holiday season, the latest government/banking spending bill was passed by slim margins but puts the taxpayer on the hook for trillions of dollars of risky derivative bets. Great timing given the energy markets are imploding so we know some hedge funds are taking it in the shorts and will likely come to D.C. hat in hand to cash in on those generous campaign donations. Central banks have done very little to help US households because incomes simply are not keeping up in the face of inflation. The latest bill is something to behold.
The American Dream deferred for young Americans: Living in rentals, inflated college tuition, and low wages await millions of young Americans.
The Americans Dream was largely built on a few simple ideals. One was the ability to purchase your own home without needing artificially low rates and dangerously low down payments. Another key aspect of the dream was allowing young Americans to receive a college education to pursue their future. While more Americans are going to college, many are taking on dangerously high levels of debt to embark on this journey. Another key component of the American Dream was having the ability to have a job that paid well enough to have a good standard of living. That standard of living is eroding as inflation is eating away purchasing power. It is hard to come to terms but the upcoming generation may not have it as good as that of the baby boomers. There is no fast and hard rule saying that each generation should be better. That is why the middle class rising in the US was a historical anomaly. Something worth aspiring and investing in. Yet if we look at history, you largely have one of a small wealthy elite and the rest. The fact that we are looking more like the Gilded Age is not a positive sign. For many, dreams are being deferred.
Social Security helps keep half of elderly Americans from poverty: Social Security has become the de facto retirement plan for millions of Americans.
Social Security was never designed as a long-term retirement plan for millions of Americans. Yet Social Security has become the default retirement plan for many elderly Americans. In fact, if it were not for Social Security roughly 44 percent of elderly Americans would be in poverty. This is calculated by how many Americans receive Social Security and the standard poverty income cutoff created by Census figures. The middle class continues to struggle and falls further behind the curve. Since Social Security is adjusted via the CPI, it is problematic when the CPI fails to account for bigger changes in prices. As we’ve highlighted before, inflation is here in big ways. For older Americans healthcare costs are soaring and this eats deep into their monthly budgets. Social Security in various forms is now being received by 64million Americans. This is a big deal especially with so many Americans hitting retirement age in the years to come.
No inflation they say: Increases from 2007 include rent going up by 27 percent, food increasing 12 percent, health insurance 42 percent.
Inflation has a slow methodical pattern of crushing every little dollar you have in your wallet. Even a moderate level of inflation is an enormous change when incomes go stagnant. There is talk about how spending this year isn’t all that great. This is a big deal considering that our economy runs on non-stop spending and a large part of spending happens during the holiday months. But Americans are still constrained from the Great Recession’s echo impact. The lingering financial problems remain and many Americans have swapped good paying jobs with many in low wage service jobs. The end result should not be a surprise but there is less to spend even with credit card access and more debt being thrown on cash strapped households. We keep hearing about how controlled inflation is but in reality, we are seeing price increases in many important segments of our society. No inflation they say. Let us look at some key items.
What happens when 100 million Americans are not in the labor force? More pressure is being added on the one-third of working Americans supporting two-thirds of the population.
It is hard to believe but we have over 92 million Americans not in the labor force. I’ve paid close attention as to how the media presents this group and they usually attribute it to older Americans retiring. The problem with this narrative is that it gives the impression that many have the means to retire and also, that many of these are older people. That is not true. Many older Americans are dropping out and fully relying on Social Security so they do not fall into a life of financial destitute. Many others including younger workers are oscillating in and out of the low wage economy. This entire shadow group which is getting close to one-third of our nation is largely discounted in the media. The unemployment rate looks fantastic because every month, we have more Americans simply being erased off the financial ledger. At this current rate, we will have 100 million Americans not in the labor force by 2020.
Economic goals of young and old pulling in diverging directions: times will only get tougher for young Americans.
Older Americans tend to vote in larger numbers and are more interested in politics than younger Americans. In the past the older voting cohort was not as large so politicians were cautious about deviating too far for one group alone. Today, we are having a large number of older Americans living longer into old age. Social Security has become the default retirement plan for many older Americans. It should come as no surprise that priorities of the young and the old diverge dramatically. Younger Americans are interested in education while older Americans are interested in Social Security and military defense. Yet each group needs each other to accomplish their goals. The young fight wars and Social Security is paid out via current payroll taxes. Education requires teachers and those willing to enlighten future generations. Unfortunately people vote myopically and in many cases, setup systems that are detrimental to their own children.