Debt Rattle Aug 17 2014: America Can See Its Future In The Mirror

Source: The Automatic Earth

Leslie Jones The Hindenburg over Boston Common 1936 

If Americans were less prone to self-deceit, they would have long since realized that the American Dream is over, for good, and that continuing to chase it is the worst of the few remaining options they get to choose between.

They could then look at themselves in the mirror and see their future.

As things are, however, the future is creeping up on them in small, slow and silent steps, until one day it will simply be there, no longer deniable or avoidable, and it will find them woefully unprepared.

This is not true only for Americans, the entire formerly rich world will undergo the same transformation. But it will be very pronounced stateside.

It’s impossible to follow events in Ferguson, Missouri and not recognize that there are thousands of – potential – Fergusons in-waiting spread across the USA. You don’t have to be particularly clever to recognize the patterns.

Segregation by race – a.k.a. racism – has never left the country, even though the courage of true American heroes like Martin Luther King and Muhammad Ali changed many things for the better.

Segregation by race has always remained inevitably linked to segregation by wealth and income. As a hugely disproportionate number of black kids continue to be incarcerated under a prison system that locks away more citizens than in any other country.

You could be forgiven for thinking that America went looking for trouble. And is now finding it. Like so many things, that trouble doesn’t stand out or float to the top in times of plenty. But when those times are over, trouble is the only thing remaining.

As long as the illusion of the American Dream, and the illusion of economic growth, can be kept alive, people will be inclined to take a lot of things for granted. When their eyes open and these illusions are shattered, matters can turn on a dime.

Bloomberg provides some of the background to Ferguson and all those other American communities. What’s happening in Ferguson shouldn’t come as a surprise, what’s surprising is that it’s not much more widespread yet.

Ferguson Unrest Shows Poverty Grows Fastest in Suburbs

• “We’ve passed this tipping point and there are now more poor people in the suburbs than the cities,” said Elizabeth Kneebone, author of [a July 31 Brookings Institution report]. “In those communities, we see things like poorer health outcomes, failing schools and higher crime rates.”

• [..] the city – which has lost more than 40% of its white population since 2000 – [has] a mostly white city council and police force. [..] The St. Louis metropolitan area ranks as one of the most segregated in the U.S. Ferguson, once a majority white community that’s now about two-thirds black, highlights that dynamic.

• Coinciding with the decline in white population is a rapid rise in poverty since 2000 [..]

• “Looking at the neighborhood poverty rates, it’s striking how much has changed over a decade,” Kneebone said. “In Ferguson in 2000, none of the neighborhoods had hit that 20% poverty rate. By the end of the 2000s, almost every census tract met or exceeded that poverty rate.

• The poverty rate in Ferguson was 22% in 2012, the most recent available, up from 10.2% in 2000. Suburban locales from the outskirts of Atlanta to Colorado Springs have seen similar trends. The number of poor people living in impoverished U.S. suburbs has more than doubled since 2000, comparing to a 50% rise in cities. More than half of the 46 million Americans in poverty now live in suburbs ..

• “The median income is so low in Ferguson that people are really struggling, living from check to check, and they’re even behind checks,” state Senator Maria Chappelle-Nadal said.

• “For much of the latter half of the 20th century, it was a pattern of segregation by race, and that’s been displaced somewhat by a segregation by income, which is growing starker and starker in cities like St. Louis.”

While Americans have been – and still are – waiting for the recovery to come that the government and the media promise, their world is not standing still; it’s deteriorating at a fast pace. It just takes them a long time to notice, focused as they are on the illusions.

That is a dangerous dynamic in a country so loaded to the hilt with firearms. Something that the government, at all levels, has been acutely aware of for many years. The calls, in the wake of Ferguson, to de-militarize police forces, look somewhat less than timely or honest or genuine in that light.

The militarization of American police forces has been a very conscious choice by those who long since sensed a threat to their positions, their way of life, and their powers. Not everyone feels they can afford to stare blindly into illusions.

Another aspect of the demise of America as we once knew it, and one very much connected to Ferguson, because it’s economics that drives the whole machinery, is pensions. An amazing graph posted by Tyler Durden, along with some apt comments, explain.

Why The Fed Can’t, And Won’t, Let The Stock Market Crash

… it is not the 1% that would suffer the most should the S&P have a post-Lehman like 50%+ wipe out, which also means that the Federal Reserve’s only mandate of pushing asset prices to ever higher levels while pretending it does so to boost employment and keep inflation at 2% is no longer for the benefit of the uber-wealthy.

So why can’t, or rather won’t, the Fed let the bubble market collapse once again? Simple – as the following chart shows, the illusion of wealth is now most critical when preserving the myth of the welfare state: some 50% of all US pension fund assets are invested in stocks and only 20% in Treasurys.

This compares to less than 10% for Japan which also explains why for Abe, the only lifeline left is pushing pension funds out of their existing asset allocation sweet spot and forcing them to buy stocks.

What is known is that in a country like Germany between 2005 and 2012 the Pension funds asset rotation out of stocks and into bonds has been truly unprecedented, with stocks plummeting from 30%+ of total exposure to less than 5%! It also explains why Germany was, is and always will be leery of allowing the ECB to pursue asset bubble-inflating policies which would barely benefit pension funds on the equity side …

But back to the US: while the 1%’s paper fungible, market-driven wealth has been long converted into other hard asset formats, it is the paper gains for the future retirees that are on the chopping block should the S&P 500 “get it.”

As such, it is the fate of future retirement funds, and in fact, the very core of the US welfare state that is at stake should there be a massive market crash. In which case what happened in Ferguson will be a polite stroll in the park compared to the chaos that would ensue should another generation of Americans wake up with half or more of their paper wealth wiped out overnight.

… will the Fed be able to avoid a market crash? The answer of course is no. But we will give the podium to Fred Hickey, aka the High-Tech Strategist, who gives a very poetic summary of what the Fed’s endgame will look like:

The Fed hasn’t made the world a better place with its interventions. It has created moral hazard, encouraged the formation of asset bubbles that eventually pop (leaving economic messes), widened the wealth inequality gap to record levels, discouraged savings and investment, severely penalized retirees on fixed incomes, encouraged spending, funded massive government deficit spending by monetizing the debts, lengthened the recession and likely reduced the number of jobs that would have been created if the economy had been allowed to take its normal course.


What Durden forgets to mention is that, given the incredibly outsized exposure US pensions funds have built up to stocks, it’s no wonder the S&P 500 has been setting records.

Another issue he omits is while one may claim the Fed can’t let the stock market crash, it has no such control, if only since because of that same outsized exposure pension funds have to the S&P, they are set and certain to cause their own demise by moving out of stocks and back into bonds.

Recent developments in geopolitics are not a one-off incident. They are merely a first step in the real battle for oil and gas, equals energy, equals power. It’s not going to stop if Ukraine and Russia sign some deal, or if Shi’ites beat Sunnis or the other way around. Every party that sees an opening to increase their share of oil and gas will do so, and increasingly with blunt force. That’s the geopolitics which will be a part of the global – and financial – landscape for the rest of our lives.

That necessarily means that the Fed controlled quiet boom in stocks is over. Volatility is back to stay. And volatility doesn’t rhyme with pension funds. Risk and potential losses are too great to even consider. So the funds will have to move back into Treasurys. A move that will hurt both stocks AND bonds. And cause more volatility. Rinse and repeat.

It would be suicide for pension funds to stay where they are. It will also be suicidal to move. They’re hugely overexposed to a market that’s only seemingly under control. They purchased themselves into a bind.

Just like America developed itself into a bind. By building an infrastructure around its city cores that is increasingly, and rapidly, becoming an expansive layer of cemeteries for the hopes and dreams of large numbers of its citizens, where millions of poorly constructed and insulated overpaid homes play the part of so many underwater mausoleums.

There is still time to take another look in the mirror. To see what is actually there in your reflection, not what you would like there to be. And make your decisions based on what you see when you do. But that time is not measured in decades, perhaps not even years.

TLB recommends you visit The Automatic Earth for more great articles and pertinent information.

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