This isn’t a temporary setback, writes Jeremy Grantham, the 3% U.S. GDP growth rate average of the last century is gone forever. Be wary of Fed policy – set by a man who didn’t recognize a 1-in-1200 year housing bubble – and premised on the idea 3% growth is normal.
from Business Insider:
Famed investor Jeremy Grantham just released his new quarterly letter to GMO clients, and it’s depressing.
He writes that US economic growth will be less than 1 percent for the next 40 years. This is in contrast to the above 3 percent growth the economy has experienced for as long as we can remember.
People take Grantham seriously because he predicted bubbles in Japanese stocks in 1989, U.S. stocks in 2000, and most risk assets in 2007.
In his words:
The U.S. GDP growth rate that we have become accustomed to for over a hundred years – in excess of 3% a year – is not just hiding behind temporary setbacks. It is gone forever. Yet most business people (and the Fed) assume that economic growth will recover to its old rates.
Going forward, GDP growth (conventionally measured) for the U.S. is likely to be about only 1.4% a year, and adjusted growth about 0.9%.
The bottom line for U.S. real growth, according to our forecast, is 0.9% a year through 2030, decreasing to 0.4% from 2030 to 2050 (see table on Page 16). This is all done presuming no unexpected disasters, but also no heroics, just normal “muddling through.
Here are some of the reasons he cites for low future growth:
- Population growth peaked in the 1970s, and man-hours worked will grow at around 0.2% per year.
- Manufacturing productivity is high, but manufacturing is falling as a share of GDP. Currently it’s around 9 percent of GDP. He expects it to fall to around 5 percent by 2040.
- Service productivity is low and declining.
- Resource costs are rising, and are likely to accelerate. “If resources increase their costs at 9% a year, the U.S. will reach a point where all of the growth generated by the economy is used up in simply obtaining enough resources to run the system.”
- Climate change will become increasingly unfavorable. He sees more floods and more damage to crops.
Grantham warns that policies that assume 3 percent growth should be taken with skepticism:
Investors should be wary of a Fed whose policy is premised on the idea that 3% growth for the U.S. is normal. Remember, it is led by a guy who couldn’t see a 1-in-1200-year housing bubble! Keeping rates down until productivity surges above its last 30-year average or until American fertility rates leap upwards could be a very long wait!
Here’s the table from the GMO letter:
Obama or Romney, stock market loses 20% by 2016. Recession, more taxes no matter who wins
from Paul B. Farrell:
“2013 is gonna be a bummer,” warns Bloomberg BusinessWeek. “Whether it’s Barack Obama or Mitt Romney … someone will have the misfortune of overseeing an economy” with “low growth, persistently high unemployment and huge amounts of debt.”
Worse, the magazine’s poll of 79 economists warns GDP growth will fall further, to 2.1%, with a real “chance the U.S. will be in recession.”
Flash forward through 2016: Politicians still warring, spending billions on re-elections. Recession? Yes. And Wall Street losing another 20% in the new presidential term.
How? Remember, between 2000 and 2010 Wall Street lost an inflation-adjusted 20% of the retirement portfolios of 95 million Americans as the Dow swung violently between a bottom of 6,470 and a top of 14,164. And it’ll do it again this decade, according to many reports we’ve covered in recent years predicting down markets this decade, probably before the end of the next presidential term.
Why? As BusinessWeek put it, economic trends are so bad, “fixing them will be beyond the immediate grasp of an Obama or Romney administration.” You must plan on a recession, inflation, retirement losses, higher taxes.
4. Fed policies keep blowing a bigger bubble
Economist Marc Faber hits hard: “The world is heading toward a major crisis.” The coming collapse will be “caused by Federal Reserve Chairman Ben Bernanke and the Federal Reserve’s continuous printing of new money.” All the Fed’s bailouts, loans, credits and money printing since the 2008 Wall Street meltdown did “not create any long-lasting wealth or create healthy growth.”
These Fed policies began a couple decades ago with former Chairman Alan Greenspan’s free-market ideology funneling endless cheap money to prop up too-greedy-too-fail Wall Street banks. Now Bernanke’s blowing a new, bigger. more toxic credit bubble than 2008.
10. Casino odds guarantee you’ll just keep losing
Reminder: Between 2000 and 2010 Wall Street’s casino was in fact a loser’s game for Main Street investors. The Dow dropped below 6,400 in early 2002, later collapsed from a peak of 14,164 in 2007. Still, between 2000 and 2010 Wall Street lost an inflation-adjusted 20% of the retirement assets of 95 million investors.
Warning: Wall Street will repeat its failed performance, lose another 20% of your hard-earned money this decade. Their game’s fixed. Wall Street’s a loser.
Bottom line, Jack Bogle’s now warned that over 50% of Americans will never make it into a comfortable retirement. You’re stuck in Wall Street’s fantasy casino, a new version of Michael Lewis’s “Liar’s Poker” that’s just a recycled version of Charlie Ellis’ old “Loser’s Game.” In short, the odds are high they will lose a lot of your money again in the coming decade.
We Are In A Depression
from Kirk Spano:
As my last column pointed out, I maintain that we are in a depression. This depression started much like the Great Depression, with a massive collapse of financial markets. The collapse has been followed by high unemployment and underemployment, again similar to the Great Depression. Aggregate demand has fallen off as a result and is unlikely to rebound soon due to demographic factors and persistently high debt.
However, there is one major difference between the depressions. Unlike the Great Depression, this depression is marked by extremely accommodative monetary policy. Helicopter Ben has delivered and he has had backup from other central banks. As a result, money supply and monetary base have increased dramatically in the United States and abroad.
This list of Obamacare taxes will slam the rich, the middle class, and the poor
Courtesy of Business Insider, some of those new Obamacare taxes!
- A 3.8% surtax on “investment income” when your adjusted gross income is more than $200,000 ($250,000 for joint-filers). What is “investment income?” Dividends, interest, rent, capital gains, annuities, house sales, partnerships, etc. Taxes on dividends will rise from 15% to 18.8%–if Congress extends the Bush tax cuts. If Congress does not extend the Bush tax cuts, taxes on dividends will rise from 15% to a shocking 43.8%. (WSJ)
- A 0.9% surtax on Medicare taxes for those making $200,000 or more ($250,000 joint). You already pay Medicare tax of 1.45%, and your employer pays another 1.45% for you (unless you’re self-employed, in which case you pay the whole 2.9% yourself). Next year, your Medicare bill will be 2.35%. (WSJ)
- Flexible Spending Account contributions will be capped at $2,500. Currently, there is no tax-related limit on how much you can set aside pre-tax to pay for medical expenses. Next year, there will be. If you have been socking away, say, $10,000 in your FSA to pay medical bills, you’ll have to cut that to $2,500. (ATR.org)
- The itemized-deduction hurdle for medical expenses is going up to 10% of adjusted gross income. Right now, any medical expenses over 7.5% of AGI are deductible. Next year, that hurdle will be 10%. (ATR.org)
- The penalty on non-medical withdrawals from Healthcare Savings Accounts is now 20% instead of 10%. That’s twice the penalty that applies to annuities, IRAs, and other tax-free vehicles. (ATR.org)
- A tax of 10% on indoor tanning services. This has been in place for two years, since the summer of 2010. (ATR.org)
- A 40% tax on “Cadillac Health Care Plans” starting in 2018.Those whose employers pay for all or most of comprehensive healthcare plans (costing $10,200 for an individual or $27,500 for families) will have to pay a 40% tax on the amount their employer pays. The 2018 start date is said to have been a gift to unions, which often have comprehensive plans. (ATR.org)
- A”Medicine Cabinet Tax” that eliminates the ability to pay for over-the-counter medicines from a pre-tax Flexible Spending Account. This started in January 2011. (ATR.org)
- A “penalty” tax for those who don’t buy health insurance. This will phase in from 2014-2016. It will range from $695 per person to about $4,700 per person, depending on your income. (More details here.)
- A tax on medical devices costing more than $100. Starting in 2013, medical device manufacturers will have to pay a 2.3% excise tax on medical equipment. This is expected to raise the cost of medical procedures. (Breitbart.com) (Source)
TAXMAGEDDON: LARGEST TAX HIKES IN HISTORY
First Wave: Expiration of 2001 and 2003 Tax Relief
In 2001 and 2003, the GOP Congress enacted several tax cuts for small business owners, families, and investors (later re-upped by President Obama and Democrat Congress in 2010). The following tax hikes will occur on January 1, 2013:
Personal income tax rates will rise on January 1, 2013. The top income tax rate will rise from 35 to 39.6 percent (this is also the rate at which the majority of small business profits are taxed). The lowest rate will rise from 10 to 15 percent. All the rates in between will also rise. Itemized deductions and personal exemptions will again phase out, which has the same mathematical effect as higher marginal tax rates. The full list of marginal rate hikes is below:
-The 10% bracket rises to a new and expanded 15%
-The 25% bracket rises to 28%
-The 28% bracket rises to 31%
-The 33% bracket rises to 36%
-The 35% bracket rises to 39.6%
Higher taxes on marriage and family coming on January 1, 2013. The “marriage penalty” (narrower tax brackets for married couples) will return from the first dollar of taxable income. The child tax credit will be cut in half from $1000 to $500 per child. The standard deduction will no longer be doubled for married couples relative to the single level.
Just How Bad Is The Drop From The Fiscal Cliff?
New Meltdown Inevitable: Shadow Banking System Larger than at the Start of the Financial Crisis
One of the Main Indicators of Financial Danger Has Increased
The failure to regulate the shadow banking system was one of the causes of the financial crisis.
As we noted in 2009, the Bank for International Settlements – often described as a central bank for central banks (BIS) – slammed the Federal Reserve for failing to rein in the shadow banking system:
How could such a huge shadow banking system emerge without provoking clear statements of official concern?
Years later, the Fed and other regulators have allowed the shadow banking system to grow even bigger.
As Reuters notes today:
The system of so-called “shadow banking,” blamed by some for aggravating the global financial crisis, grew to a new high of $67 trillion globally last year, a top regulatory group said, calling for tighter control of the sector.
A report by the Financial Stability Board (FSB) on Sunday appeared to confirm fears among policymakers that shadow banking is set to thrive, beyond the reach of a regulatory net tightening around traditional banks and banking activities.
The study by the FSB said shadow banking around the world more than doubled to $62 trillion in the five years to 2007 before the crisis struck.
But the size of the total system had grown to $67 trillion in 2011 — more than the total economic output of all the countries in the study.
The United States had the largest shadow banking system, said the FSB, with assets of $23 trillion in 2011, followed by the euro area — with $22 trillion — and the United Kingdom — at $9 trillion.
The U.S. share of the global shadow banking system has declined in recent years, the FSB said, while the shares of the United Kingdom and the euro area have increased.
from Capital Account:
Ben Bernanke: Despite the aggressive loosening of policy, there hasn’t been a willingness on the part of lenders to loosen standards.
Perhaps the most interesting part is where he talks about specifics that are holding the economy back still.
“Recently, the housing market has shown some clear signs of improvement, as home sales, prices, and construction have all moved up since early this year. These developments are encouraging, and it seems likely that, on net, residential investment will be a source of economic growth and new jobs over the next couple of years. However, while historically low mortgage interest rates and the drop in home prices have made housing exceptionally affordable, a number of factors continue to prevent the sort of powerful housing recovery that has typically occurred in the past. Notably, lenders have maintained tight terms and conditions on mortgage loans, even for potential borrowers with relatively good credit.8 Lenders cite a number of factors affecting their decisions to extend credit, including ongoing uncertainties about the course of the economy, the housing market, and the regulatory environment. Unfortunately, while some tightening of the terms of mortgage credit was certainly an appropriate response to the earlier excesses, the pendulum appears to have swung too far, restraining the pace of recovery in the housing sector.”
This is really the big issue that Bernanke sees. Despite the aggressive loosening of policy, there hasn’t been a willingness on the part of lenders to loosen standards.
‘Global markets will implode.’
Marc Faber on Squawk Box this morning.
“We will all be lucky to have 50% of the asset values that we have today.”
Watch at least the first minute of this clip for the swipe at CNBC permabulls.