What's Killing the Middle Class

We all know the middle class that actually owns capital and wields political influence is shrinking. As I noted last week in Redefining the Middle Class: It Isn't What You Earn and Owe, It's What You Own That Generates Income, defining the middle class by household income alone is a misleading metric, as it leaves out the critical factors of debt and ownership of productive assets.

DYI:  We’ve all heard the saying “it’s not what you earn but what you keep!”  To be successful it is the conversion of your earned income into business’, stocks, bonds, precious metals, and real estate.

A household may have an income of $150,000 and appear well-off by that metric, but if they are mired in debt and own virtually no productive assets or wealth that can be passed on to future generations, they aren't middle class--they're well-paid proletariats.

Definition of proletariat

1. 1:  the laboring class; especially :  the class of industrial workers who lack their own means of production and hence sell their labor to live
2. 2:  the lowest social or economic class of a community

So what's killing the middle class? If you read the dozens of articles on the decline of the middle class in the mainstream (corporate) media, you soon discover there's a short list of the usual suspects:

1. Globalization / outsourcing

2. Technological changes / automation

3. "Winner take all" asymmetry in rewards for specialized skills

A worker at a steel mill who earned $28/hour plus benefits could, with frugality and long-term planning, eventually own a home free and clear and acquire a nest-egg of assets.

When that worker's job was outsourced, and his next job paid $9.25/hour, the opportunities to amass capital fell precipitously. 

A middle-skill worker replaced by automation had the same life-changing experience if he didn't acquire much higher level skills and move to a stronger job market--both difficult tasks with highly uncertain outcomes. (No wonder secure government jobs from which jobholders can't be fired are so sought after.)

DYI:  Years ago I went to a party with folks from all walks of life; one individual relatively high up (GS-15) in government working for one of its many agencies – Department of Education.  After plying him with numerous shots of whisky - 5 plus - he admitted that his job was total BS that could be easily be eliminated (along with the entire agency) and what little benefit there was could easily accomplished in the private sector.  What drove him to his government job?  FEAR!  Fear of going through bouts of unemployment and fear of not achieving middle to upper middle class lifestyle.  The path of least resistance!

This is the biggest reason for the drop off in our birth rate parents who hope that their children will achieve a middle class lifestyle requires a ton of education along with a ton of money; hence smaller families on average of two children.  Many don’t leave the nest until age 25 for their first “real” career job.  Mom and Dad are spending for 25 years and if the younger sibling is 5 years younger a total of 30 years!  Ouch!  This stat is before the great recession many due to the downturn are still at home at the age of 30 plus.   

DYI

DYI: A quick snap shot from the BLS – The Great Recession Continues…

16,350,000

April 2017

Bureau of Labor Statistics

(Department of Labor)

(Men 16 to 64)

17.6%

Unemployed!

*********

27,994,000

April 2017

Bureau of Labor Statistics

(Department of Labor)

(Women 16 to 64)

29.1%

Unemployed!

*********

Workers

To

Total Population

(Labor Participation Rate -  Employment / Population Ratio)

60.2%

DYI

The

Mother of All Bubbles

A Problem Emerges: Central Banks Injected A Record $1 Trillion In 2017... It's Not Enough

Two weeks ago Bank of America caused a stir when it calculated that central banks (mostly the ECB & BoJ) have bought $1 trillion of financial assets just in the first four months of 2017, which amounts to $3.6 trillion annualized, "the largest CB buying on record." 

Which means that when stocks realize just how insufficient the record $1 trillion in central bank liquidity has become, central banks - which have stepped into every single market correction over the past 7 years with some "liquidity supernova" - will, for the first time since the financial crisis - be out of tools... something Janet Yellen appears to have realized some time ago.

Could this be the Straw that Breaks the Market’s Back?

Today, investors are stepping into the same traps that burned them in prior market cycles. Specifically, the margin-debt trap.As calculated by the New York Stock Exchange, margin debt is at an all-time high.All. Time. High.

Today, credit balances are consistently 10-times higher from month to month than they were leading up to the Financial Crisis!

TEN TIMES!

We are in the mother of all bubbles.And under these circumstances, it only takes a small hiccup to empty the tea cup and wipe out investors’ accounts.Margin calls exacerbate the downside. Always have. Always will.

DYI:  My model portfolio continues to stand very defensive with 78% in short term bonds (cash) and 22% in precious metals mining companies.  Which direction will the physical metals go?  I don’t know – nor does anyone else – they are priced at or slightly below fair value hence DYI’s 22% allocation.  The mining companies have gone through a brutal bear market from peak to trough of around 80%!  All said the mining companies are the better value than physical gold having their downside potential mitigated during any market smash and possibly rise as investors seek defensive assets. 

   Updated Monthly

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 5/1/17

Active Allocation Bands (excluding cash) 0% to 60%

78% - Cash -Short Term Bond Index - VBIRX

22% -Gold- Precious Metals & Mining - VGPMX

 0% -Lt. Bonds- Long Term Bond Index - VBLTX

 0% -Stocks- Total Stock Market Index - VTSAX

[See Disclaimer]

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This site strives for the highest standards of accuracy; however ERRORS AND OMISSIONS ARE ACCEPTED!

The Dividend Yield Investor is a blog site for entertainment and educational purposes ONLY.

The Dividend Yield Investor shall not be held liable for any loss and/or damages from the information herein.

Use this site at your own risk.

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.

DYI

Canada will have a debt real estate crash resulting in massive unemployment that will take 10 to 15 years to work off! The crash has begun!

Canada

Is Going Bust!

Canada Housing Bubble Pops and Looks Similar to US Housing Bubble: Canada’s Largest Alternative Mortgage Lender Crashes in Dramatic Fashion.

The Canadian housing market is now facing a crisis like moment as the United States did in 2007.  While the U.S. housing market did undergo a correction, the Canadian housing market just kept moving up.  

Canada has one of the largest housing bubbles ever witnessed in North America.  People may recall that in the U.S. we had mortgage lenders like toxic junk pusher New Century Financial that imploded in grandiose fashion because of their corrupt and mathematically dubious products that they were peddling to the market.  Well in Canada, the tip of the iceberg is now being exposed.  Home Capital Group tanked by 60 percent after announcing that it needed emergency liquidity.  Of course this is just the start of the correction for our neighbors in the north.

DYI

Turf

Wars

Exclusive: Uber faces criminal probe over software used to evade authorities

The U.S. Department of Justice has begun a criminal investigation into Uber Technologies Inc's use of a software tool that helped its drivers evade local transportation regulators, two sources familiar with the situation said. 

Uber has acknowledged the software, known as "Greyball," helped it identify and circumvent government officials who were trying to clamp down on Uber in areas where its service had not yet been approved, such as Portland, Oregon.

 The technology was used partly to prevent fraud and protect drivers from harm, the company blog post said. If a ride request was deemed illegitimate, Uber's app showed bogus information and the requester would not be picked up, the employees told Reuters. 

However, the Greyball technique was also used against suspected local officials who could have been looking to fine drivers, impound cars or otherwise prevent Uber from operating, the employees said.

DYI:  Nothing more than turf wars as existing cab companies come under fierce competition something they haven’t experienced in years.  Also the regulating governmental body wants their share of the bounty (profits) in the form of taxes.  Uber and other companies that follow are disruptive technology changing one industry after another.

I suppose the law is the law, however it seems like a big waste a time and resources for the U.S. Department of Justice when they could easily go after the Medical Industrial Complex who collude in order to price fix and form monopolies, up to and including outright fraudulent billings all costing the insurance premium payers and governmental programs Medicare and Medicaid in the billions.  But no let’s coddle a bunch of cab drivers and local governments who want to maintain the status quo with local cab company monopolies and the government having a known stream of tax dollars all at the expense of the consumer.

DYI

50

Year

Treasury Bonds?

Mnuchin to Wall Street: U.S. Is Serious About Ultra-Long Bonds

But it seems Mnuchin has different ideas. Since taking office as Treasury Secretary in February, he’s repeatedly indicated that ultra-long issuance was something the administration was looking at. Last month, he had his staff query bond dealers about how they might structure and price maturities beyond the current 30-year limit. And on Monday, Mnuchin provided the clearest signal yet, saying on Bloomberg TV that it “could absolutely make sense.” 

It’s not without precedent. In 1911, the U.S. sold 50-year bonds to fund the construction of the Panama Canal -- the most expensive construction project in American history at that time. Gary Cohn, Trump’s top economic adviser, talked up in an interview on CNBC the “enormous amount” of ultra-long bonds the government could issue to finance spending on infrastructure, an area of chronic under-investment for decades. 

“It’s a reasonable probability that the Treasury will issue these bonds,” said Scott Mather, chief investment officer for core strategies at Pimco, which oversees $1.5 trillion. The argument is that the U.S. “won’t have to pay much to gain more certainty and the ability to lock-in low rates for a long time.” 

Fisher, who is now a senior lecturer at Dartmouth College, says a good argument for the U.S. government to consider issuing ultra-long bonds is that it would help push financing needs past the droves of baby boomers who are currently retiring and drawing Social Security. 

“I had hoped to come back and eventually issue 60- or 100-year maturities, but we didn’t get around to it,” he said, referring to his tenure at the Treasury.

DYI:  With the Boomer generation tapping into Social Security and Medicare at an average rate of 10,000 per day ultra long term financing is highly probable especially since no one in Congress or the White House (past or present) has the stomach to reform these programs.

Social Security could have been modified years ago by simply moving up the retirement age one month – one year at a time.  By slowly increasing the retirement age the need for draconian measures (50⁺yr bonds) would be averted saving the social Security system billions of dollars.

 

Medicare is the biggest problem as the underlining health care costs are rising at a 9% to 10% rate devastating this program.  It is not due to an ageing population as Medicaid – those who are poor under the age of 65 – is rising at the same rate.  It is the Medical Industrial Complex who colludes in order to price fix and form monopolies (at least locally) to force continuous price increases. Enforcing 100⁺ plus year old laws – Robinson Patman, Clayton, and Sherman Antitrust Acts would drop this industry’s cost by 75% - that is NOT a typo.  Push through Congress allowing for reimportation of ethical drugs dropping newly developed drugs by 50% and generics by 70%-80% with older drugs that are still viable by 90⁺%!

The biggest infrastructure build out and repair is our national freeway system.  I’m not a fan of tax increases but I’m far less buoyant of increasing our national debt upon us currently and our future generations especially debts stretching out as long as 50 to 100 years.  With the choice between the two devils a tax increase wins.  A 10 cent per gallon increase would do the trick; at the 15 cent increase grant money on a dollar for dollar matching basis for State roads and selective mass transit is achievable.

All told most of our infrastructure is at the State level.  The most efficient method to achieve this goal is to reduce the size of the Federal government thus dropping the costs freeing up monies both private and government for these development projects at the State and local level.  There is some optimism as more and more of our citizens direr of Washington DC and push for more State rights.

DYI

           

EU’s

Arrogant Decision

Gift to Le Pen!

BORDER BOMBSHELL: 

Brussels orders EU countries to SCRAP internal checks within six months

BRUSSELS today ordered European countries to drop internal border checks originally introduced to bring the migrant crisis under control within the next six months.

The diktat means that Austria, Germany, Denmark, Sweden and Norway will all have to swiftly find alternative ways to police irregular movements of people across their borders.

DYI:  The heavy hand of Brussel’s dispensing their autocratic directive no matter how destructive resulting in the end result of blowing apart the European Union.  This shows how out of touch Brussel’s is with the common man or women that will devastate low population countries with north African migrants such as Norway (5.2 million) or Sweden (9.8 million) and could very possibly throw France’s presidential election straight into Le Pen lap.

More and more autocratic directive from Brussel’s will swiftly end the European Union as we know it.  Of course what happens if one or more countries decides to ignore the European Commission and maintain their border check points – what then?

DYI 

Canadian

Bubble

News

Chilling Thing Insiders Said about Canada’s House Price Bubble

Home Capital Group, Canada’s biggest “alternative” mortgage lender, is not a bank – which today is part of its problem because it cannot create money to lend out; it has to obtain it first by attracting deposits and borrowing money through other channels. Through its subsidiary, Home Trust, it specializes in high-profit mortgages to risky borrowers, with dented credit or unreliable incomes who don’t qualify for mortgage insurance and were turned down by the banks. This includes subprime borrowers. 

Since revelations of liar loans – What, liar loans in Canada?! – surfaced in 2015, things have gone to heck. Now it’s experiencing a run on its deposits. Teetering at the abyss, it obtained a $2 billion bailout loan on Thursday. The terms are onerous. And on Friday, the crux of the deal emerged – the amount of mortgages it has to post as collateral. It’s a doozie. 

It sheds some light on what insiders think mortgages and the homes that back them are worth when push comes to shove. A bone-chilling wake-up call for the Canadian housing and mortgage market. 

The fact that the price of these “alternative” mortgages has been set at 50 cents on the dollar when push comes to shove – a reflection of the potential prices of the homes backing these mortgages – gives some clues about what insiders think the outcome might be of Canada’s magnificent no-holds-barred housing bubble.

DYI:  Canada is only a few steps away from an economic train wreck of biblical proportion.  Admittedly I’ve been saying this for the past 5 years as a clear example that markets can and often do stay far more irrational than we believe is possible.  Nevertheless the seeds are piling up for a debt real estate smash causing massive unemployment that will take about 10 to 15 years to work off.  I wish the Canadians well and the best of luck they are going to need it!

DYI

Make America Great

7

Sisters

Of

Institutional Change

1.)   End the Federal Reserve

2.)   Repeal 17^th Amendment – Reinstate Federal Senators chosen by State Legislators.

1. Term Limits – Constitutional Amendment

A. Two six year terms for Senators

B. Three terms House of Representatives

3.)   Repeal 16^th Amendment – Income tax replace with value added tax.

4.)   Pass the Balanced Budget Amendment

5.)   Exit the United Nations

6.)   Reign in the Medical Industrial Complex

a. Enforce Anti-Trust Laws

b. Pass Legislation for re-importation of ethical drugs

7.)   End Federal and Private Student Loans

Half of American families are living paycheck to paycheck

Some 50% of people is woefully unprepared for a financial emergency, new research finds. Nearly 1 in 5 (19%) Americans have nothing set aside to cover an unexpected emergency, while nearly 1 in 3 (31%) Americans don’t have at least $500 set aside to cover an unexpected emergency expense, according to a survey released Tuesday by HomeServe USA, a home repair service. A separate survey released Monday by insurance company MetLife found that 49% of employees are “concerned, anxious or fearful about their current financial well-being.” 

 DYI:  The next recession these folks are toast!

One explanation: Americans are crippled under the same amount of debt as they had during the recession. The New York Federal Reserve on Monday predicted that total household debt will reach its previous peak of $12.68 trillion in 2017. The last time it reached that level was in the third quarter of 2008, during the depths of the Great Recession. Indeed, it’s already close: Total household debt in the fourth quarter of 2016 was $12.58 trillion. Fewer borrowers have housing-related debt in 2017 and, instead, have taken on auto and student loans.

DYI:  The cost of universities and colleges has sky rocketed all due to student loans for the money never stayed with the student but went to the school.  The schools went on a building boom; pumped up administration costs that translated into higher and higher tuition all paid for by ever increasing loans.  The fastest way to drop the cost of schooling is to do away with student loans ending the universities/colleges cash cow.  Tuition costs will drop like a rock; the schools will cry as if the world of higher education is coming to an end; all that will happen in order to bring in students tuition will have to drop.  Simple as that.  The student loan program may have started with best of intentions but has now morphed into a scam imprisoning our youth with unworldly amounts of debt.

One illness can push people to the brink of financial ruin. Wanda Battle, a registered nurse for four decades, was recently hit with a $100,000 medical bill. She has visited her local emergency room on more than one occasion due to severe migraines and mini-strokes. Battle, who is based near Nashville, Tenn., managed to reduce her latest hospital bill to $32,000 based on her relatively low income, but still faces $650 monthly payments for a previous $22,000 medical bill. “There were times I couldn’t work,” she told MarketWatch. “I have not held a job that is continuous.”

DYI:  For migraines and mini – strokes creating $100,000 thousand dollar bill?  Where did they treat her at the penthouse of Trump Tower in New York City??  This is a clear case where the hospital is bilking their customer/patient with a fraudulent bill!  Amazing how Market Watch doesn’t even note the extreme bill.  This is a clear example of the Medical Industrial Complex simply taking advantage.

 On the upside, President Trump inherited an economy that is far healthier in many respects than the one his predecessor inherited in 2008. The unemployment rate when President Obama took office, in January 2009, was 7.8% compared to 4.8% in January 2017, MarketWatch reported, and hit 4.5% in March 2017. What’s more, the U.S. lost 793,000 jobs during the month Obama was sworn into office, while it gained 227,000 positions in January when Trump took office. However, in March 2017, the U.S. economy only added 98,000 jobs.

DYI:  4.5% unemployment rate?  Such balderdash (I have much stronger language but I’ll keep this blog family friendly)!  Below is the ultimate in employment/unemployment straight from the Fed’s; the labor participation rate which clearly show able bodied adults working at 63% or 37% unemployed. 

DYI

When and at what level will stocks peak?? No one knows! When it does expect a 45% to 60% decline from peak to trough!

Massive

Over Valuation

Margin of Safety!

Central Concept of Investment for the purchase of Common Stocks.

"The danger to investors lies in concentrating their purchases in the upper levels of the market..."

Stocks compared to bonds:

Earnings Yield Coverage Ratio - [EYC Ratio]

EYC Ratio = [ (1/PE10) x 100] x 1.1] / Bond Rate

1.75 plus: Safe for large lump sums & DCA

1.30 plus: Safe for DCA

1.29 or less: Mid-Point - Hold stocks and purchase bonds.

1.00 or less: Sell stocks - rebalance portfolio - Re-think stock/bond allocation.

Current EYC Ratio: 0.97

As of 5-1-17
Updated Monthly

PE10 as report by Multpl.com

Bond Rate is the rate as reported by

Vanguard Long-Term Investment-Grade Fund Investor Shares (VWESX)

DCA is Dollar Cost Averaging.
Lump Sum any amount greater than yearly salary.

PE10  .........29.29
Bond Rate...3.86%

Over a ten-year period the typical excess of stock earnings power over bond interest may aggregate 4/3 of the price paid. This figure is sufficient to provide a very real margin of safety--which, under favorable conditions, will prevent or minimize a loss......If the purchases are made at the average level of the market over a span of years, the prices paid should carry with them assurance of an adequate margin of safety.  The danger to investors lies in concentrating their purchases in the upper levels of the market.....

Common Sense Investing:
The Papers of Benjamin Graham
Benjamin Graham