Financial Bubbles | timiacono.com - Part 3

It appears that the absence of an obvious catalyst for yesterday’s brutal stock market sell-off (that is, aside from the belated realization that prices have already risen too high) has a lot of people uncomfortably scratching their heads today about whether to buy or sell and this story and video segment below from USA Today captures the sentiment fairly well.

Admittedly, I try not to read too much about this sort of thing from the mainstream financial media (yes, CNBC trotted out Marc Faber again yesterday after stocks tumbled), but a cursory review of what was being offered revealed the distinct lack of one talking point that has been popular so far this year as stocks have struggled, namely, the thinking that we should “just get this correction out of the way”, presumably so that stocks can go on to achieve their full potential, preferably sooner rather than later.

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Bridgewater Warns on Pensions

Since the financial crisis, there haven’t been too many warnings about the dim prospects for pension funds living up to their long-term promises as a result of their overly optimistic assumptions about rate of return, however, Bridgewater reinvigorated the debate as recounted in this USA Today story today that might make some Holiday Inn Express patrons choking on their cinnamon rolls.

Influential and well-regarded hedge fund Bridgewater Associates Wednesday warns public pensions are likely to achieve 4% returns on their assets, or worse. If Bridgewater is right, that means 85% of public pension funds will be going bankrupt in three decades.

Bridgewater came to these conclusions by stress testing the nation’s public pension plans, much the way banks need to be evaluated on what could happen given a wide range out outcomes.

Public pensions have just $3 trillion in assets to invest to cover future retirement payments of $10 trillion over the next many decades, Bridgewater says. An investment return of roughly 9% a year is needed to meet those onerous obligations.

This is just one more reason why the U.S. has a national imperative, ably assisted by the folks at the Federal Reserve,  to create bigger and bigger asset bubbles.

How else are pension funds going to pull this off?

Get Your Ticket Punched at the SEC

Retiring Securities and Exchange Commission trial attorney James Kidney, a key participant in the 2008 suit against Goldman Sachs, used his farewell luncheon as an opportunity to air some grievances about how the organization treats Wall Street bigwigs with kid gloves. Some of his most illuminating remarks were recorded in this story at Businessweek.

The SEC has become “an agency that polices the broken windows on the street level and rarely goes to the penthouse floors,” Kidney said, according to a copy of his remarks obtained by Bloomberg News. “On the rare occasions when enforcement does go to the penthouse, good manners are paramount. Tough enforcement, risky enforcement, is subject to extensive negotiation and weakening.”

Kidney said his superiors were more focused on getting high-paying jobs after their government service than on bringing difficult cases. The agency’s penalties, Kidney said, have become “at most a tollbooth on the bankster turnpike.”

In his speech, Kidney also hit the agency for using misleading statistics to showcase its enforcement efforts. The SEC should focus on the quality of its actions, rather than try to file as many as possible just to tout its record to lawmakers and the media, he said.

“It is a cancer,” Kidney said of the agency’s use of numbers. “It should be changed.”

“I don’t think we did a very aggressive job with all the major players in the crash of ’08,” he said, noting that as a civil enforcement agency, the commission does not need to prove its cases beyond a reasonable doubt like the Justice Department does. “The SEC has a lower burden of proof and we should be pushing the envelope a bit.”

“I have had bosses, and bosses of my bosses, who made little secret that they were here to punch their ticket,” Kidney said. “They mouthed serious regard for the mission of the commission, but their actions were tentative and fearful in many instances.”

Also see yesterday’s quote of the day from Matt Taibbi: “There’s this really, kind of scary psychological moment that we’ve crossed in America where we no longer think of a certain kind of offender as appropriate for jail”.

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Beef Prices Reach Record High

The LA Times reports that it’s going to be pretty expensive to cook out this summer as beef prices have risen to all-time highs as shown below via TradingCharts.com as extreme weather and smaller herd have combined to limit supply.

One deli owner (think pastrami and corned beef ) noted that his costs are up 45 percent in recent years, a figure that appears to be consistent with the slope of the curve below.

We haven’t bought any steaks since last summer, so, I’m sure there will be some sticker shock the next time we pick up a four-pack at Costco, all the more reason to stick with chicken and pork where, as far as I can tell, prices haven’t seen the same kind of escalation.

One casualty of higher beef prices is that the popular $1 value meals at some fast food restaurants might go the way of the dinosaurs.

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