Washington, DC -- (ReleaseWire) -- 03/08/2016 --Last week brought us a lot of heavy-hitting financial news. Continued speculation and controversy about a possible British exit from the European Union; reports from and hopes for the G20 meeting in Shanghai; bizarre movement in the equities markets; even Warren Buffett's annual letter to Berkshire Hathaway investors was published last week. All that news, and every bit of it suspect when you look below the surface.
Buffett's missive is perhaps the perfect metaphor for the entire week. The world's richest and most famous imbiber of Cherry Coke was, as usual, relentlessly upbeat. Here's a quote: "For 240 years it's been a terrible mistake to bet against America, and now is no time to start. America's golden goose of commerce and innovation will continue to lay more and larger eggs. America's social security promises will be honored and perhaps made more generous. And, yes, America's kids will live far better than their parents did."
What world is Warren Buffett living in? I really don't know, especially when the per-share market value of Berkshire Hathaway fell 12.5% in 2015, while the Standard & Poor 500 was up 1.4%. But Buffett has advantages that we don't, advantages that go beyond his exponentially greater resources. Think about this: days before the bailout of Goldman Sachs, at the height of the last crisis, Buffett put $5 billion of Berkshire Hathaway funds into Goldman. This from a man who claims in his folksy way to be a defender of tradition and stability. What a risk, and how it paid off! I think we can summon up Buffett's advantages in a simple two-word phrase: "crony capitalism."
Let's look at some of the claims from the quote above, starting with the claim that it's a mistake to bet against America, and that in fact the American goose is going to lay bigger and bigger golden eggs. Last Friday, the Audited Financial Statements of the U.S. Government were delivered by the Treasury Department. The reports are supposed to give us an accurate accounting, and once again the 2015 report shows that the financial position of the government has declined significantly. We have $3.2 trillion in total assets, but $1.2 trillion is in student loans owed to the government by graduates that can't find jobs or afford to pay that back. That's pretty extraordinary: 37% of the government's reported assets are student loans, one of the most precarious bubbles in finance. On the other side of the equation are 21.5 trillion in liabilities, leaving the government with a net worth of -$18.2 trillion. Down from last year's negative of $17.7 trillion, and $16.9 trillion in the prior year, 2013. It doesn't take much to see that this trend line doesn't show us a goose with bigger and bigger eggs.
Since 1998 America's global dominance has begun to tumble, and this is reflected in the increasing push for de-dollarization worldwide. The dollar is slowly losing its status as the world's undisputed reserve currency, and Buffett must realize this. In the scope of history, this isn't even a particularly unusual event. In fact, almost every century or so, since the Renaissance, the global currency has shifted. Portugal once had the international reserve currency of choice; Spain did; the Netherlands, France, and even Britain. They've all been dominant reserve currencies at different times. With fewer countries and organizations using the dollar to settle international transactions today, the hegemony of the dollar is being eroded away. This makes the United States weaker, not stronger. We're in the midst of a currency war, and combined with central bank policies that also means a war on cash. And that is going to start encroaching on our individual privacy and freedom.
Not only that, but Social Security funding is collapsing despite what Buffett says. The 2015 Annual Report from the Social Security Board of Trustees shows that the program's disability component is in immediate trouble. Data shows that Disability Fund could be depleted as soon as next year and unable to pay full benefits to beneficiaries. The Trust Fund has been running under a deficit since 2009, with an ever growing gap between payments and receipts. This deficit has been funded by redeeming non- marketable government securities that have accumulated over the years when the Social Security program was bringing in more revenue than it paid out. These surpluses were spent on other government programs and the Fund was credited with these securities, but because the securities are not marketable the government now has to had to use general revenue to redeem them since the fund started to run deficits. Given the 42 Trillion dollar funding gap in these programs, it's mathematically impossible for Social Security to continue funding the national debt, which puts the government in a very tight spot. It already takes nearly 100% of revenues to pay mandatory entitlements and interest on the debt, which the government itself estimates will hit $30 trillion in the next 10 years. It must be very tempting for them to think about the $7.3 trillion sitting in our IRAs and the money in our other retirement accounts and pensions. You'd think it would be impossible for the government to access that money, but the amount is too large to ignore. They'll find a way to borrow that money if they decide it's needful.
They may not be drinking much Cherry Coke at the G20 meeting going on in Shanghai, a gathering of the most important finance officials from the world's 20 largest economies, but it is similarly an illusion, in this case an illusion of cooperation. In the face of historically high volatility in the markets since the beginning of 2016, anticipation has been high that this meeting would produce some coordinated policy response to address that volatility, along with low global growth and subdued inflation. It's almost as if the markets are hoping for something on the scale of the 1985 Plaza Accord, when the U.S., West Germany, France, Japan and the U.K. agreed on a structure to weaken the U.S. dollar against the other nations' currencies, to shore up American trade and growth.
All these issues, plus the collapse in oil prices, jitters about the Chinese renminbi, worries that the central banks simply have no bullets left in their clips for the next crisis, surely the G20 will come up with something? Well, we've seen nothing serious to indicate that they're buying it. None of their responses seem to indicate any coordinated effort so far. It still seems to be every country for itself. One saving grace was Bank of America's statement last week, which at least managed to be reported in the media. They said, "We remain sellers into strength in coming weeks and months of risk assets at least until a coordinated and aggressive global policy response begins to reverse the deterioration in global profit." What a benchmark to set! A "coordinated and aggressive" response.
Ask yourself a question. Even if the G20 did come up with a response to our global economic woes, even if the central banks came up with another scheme, would you want to live with it? Central banks and government planners keep trying to help, but it seems to keep making things worse rather than better. There's no question that the Federal Reserve's bare knuckles fight against the Great Recession in 2008 has been long and arduous and their quantitative easing and aggressive bond purchasing program, which ballooned our balance sheets, really just has never helped in any way that makes any difference in the lives of real Americans. What if, instead of "help," they tried to stay out of the way, to allow real free market capitalism to run the show? Cut down on punitive regulation and interference? Balancing big government against current market forces isn't a debate that's just going on in the United States. It's a developed economy question, showing up in Europe and everywhere at the Shanghai G20 meeting, where big government and central banks are scratching each others' backs.
This is showing up in talk about the possible so-called "Brexit," the United Kingdom's reconsideration of its role in the European Union, which will come to a referendum on June 23rd. The rhetoric is heating up on both sides since Prime Minister David Cameron announced the date of the referendum on February 20th, with many (including the British Cabinet Office) saying that a Brexit would be devastating to both the UK and the EU. Britain produces 16% of the EU's GDP, after all, and many British citizens have jobs in other EU countries along with claims to pensions. The voices on the other side, say that the doomsday rhetoric is ludicrous. Britain is largely its own economy, with only 10% of British GDP being exported to the rest of the EU, and they don't use the Euro. Lord Nigel Lawson, Chancellor of the Exchequer under Margaret Thatcher, scoffed that the idea of a Brexit causing a financial shock was absurd and stated that the British people would not stand for being told what to do by the G20 or the EU. For certain, it seems Lord Lawson has not been drinking whatever flavor of Cherry Coke is being sipped in Shanghai these days.
Let's take a moment to focus down on last week's market. On Wednesday, there was an intraday rally of 2%, seemingly spurred by… nothing. There was no economic news, no political news, other than very light secondary data about the oil market. It was a session that looked like no other, which is a clear red flag that something was going on. There are three particular assets and indices that can be good indicators of monkey business in a manipulated markets, oil, the yen, and the VIX, a measure of expected volatility in S&P 500 futures sometimes referred to as the "fear index." Movement in any of these seems to lead to panic buying, manipulation by the Fed, or reaction by the algorithms at high frequency traders like Citadel. Or, some combination of all three. Last Wednesday really did look like the market being fed some tasty carbonated-and-caffeinated cherry-flavored cola to prop it up, but remember about the crash that comes after the sugar and caffeine wears off.
What do we do? Turn down the Cherry Coke. Soda's supposedly bad for you, and in this context the metaphorical soda certainly is. As always, do your own reading and research, think for yourself, make your own decisions.
For over a quarter century, the experienced advisors of Bennett Group Financial Services, LLC have been successfully guiding clients through the complexities of wealth management. Bennett Group Financial Services provides individual investors, corporations and foundations with holistic investment strategies using unique portfolio solutions across a breadth of asset classes. Our unique vision and insight into market trends makes Bennett Group Financial Services a much sought after expert resource with regular appearances on Fox News Channel, CNBC, Bloomberg TV, and MSNBC as well as being featured in Business Week, Fortune, The NY Times, The NY Sun, Washington Business Journal in addition to our highly regarded weekly talk radio program - Financial Mythbusting. Through attentive service and prudent, thoughtful advice, Bennett Group Financial Services, LLC strives to consistently provide its clients with the highest quality of guidance and personalized service available.
About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting http://www.financialmythbusting.com.
She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included rock legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN a as well as take podcasts on the road and forums for interaction.
She can be reached on Twitter @DawnBennettFMB or on Facebook Financial Myth Busting with Dawn Bennett.