The Otium Post

The Otium Post


2016 Market Meltdown - Time to put your savings in your matress?

2016 Market Meltdown: We Have Never Seen A Year Start Quite Like This…

Time Abstract - Public Domain

We are about three weeks into 2016, and we are witnessing things that we have never seen before. There were two emergency market shutdowns in China within the first four trading days of this year, the Dow Jones Industrial Average has never lost this many points within the first three weeks, and just yesterday we learned that global stocks had officially entered bear market territory. Overall, more than 15 trillion dollars of global stock market wealth has been wiped out since last June. And of course the markets are simply playing catch up with global economic reality. The Baltic Dry Index just hit another new all-time record low today, Wal-Mart has announced that they are shutting down 269 stores, and initial jobless claims in the U.S. just surged to their highest level in six months. So if things are this bad already, what will the rest of 2016 bring?

The Dow was up just a little bit on Thursday thankfully, but even with that gain we are still in unprecedented territory. According to CNBC, we have never seen a tougher start to the year for the Dow than we have in 2016…

The Dow Jones industrial average, which was created in 1896, has never begun a year with 12 worse trading days. Through Wednesday’s close, the Dow has fallen 9.5 percent. Even including the 1.3 percent gains as of noon Thursday, the Dow is still down nearly 8 percent in 2016.

But even with the carnage that we have seen so far, stocks are still wildly overpriced compared to historical averages. In order for stocks to no longer be in a “bubble”, they will still need to decline by about another one-third. The following comes from MarketWatch…

Data from the U.S. Federal Reserve, meanwhile, say U.S. nonfinancial corporate stocks are now valued at about 90% of the replacement cost of company assets, a metric known as “Tobin’s Q.” But the historic average, going back a century, is in the region of 60% of replacement costs. By this measure, stocks could fall by another third, taking the Dow all the way down toward 10,000. (On Wednesday it closed at 15,767.) Similar calculations could be reached by comparing share prices to average per-share earnings, a measure known as the cyclically adjusted price-to-earnings ratio, commonly known as CAPE, after Yale finance professor Robert Shiller, who made it famous.

Of course the mainstream media doesn’t seem to understand any of this. They seem to be under the impression that the bubble should have lasted forever, and this latest meltdown has taken them totally by surprise.

Ultimately, what is happening should not be a surprise to any of us. The financial markets always catch up with economic reality eventually, and right now evidence continues to mount that economic activity is significantly slowing down. Here is some analysis from Brandon Smith…

Trucking freight in the U.S. is in steep decline, with freight companies pointing to a “glut in inventories” and a fall in demand as the culprit.

Morgan Stanley’s freight transportation update indicates a collapse in freight demand worse than that seen during 2009.

The Baltic Dry Index, a measure of global freight rates and thus a measure of global demand for shipping of raw materials, has collapsed to even more dismal historic lows. Hucksters in the mainstream continue to push the lie that the fall in the BDI is due to an “overabundance of new ships.” However, the CEO of A.P. Moeller-Maersk, the world’s largest shipping line, put that nonsense to rest when he admitted in November that “global growth is slowing down” and “[t]rade is currently significantly weaker than it normally would be under the growth forecasts we see.”

In addition, another very troubling sign is the fact that initial jobless claims are starting to surge once again…

The number of Americans applying for unemployment benefits in mid-January reached seven-month highs, perhaps a sign that the rate of layoffs in the U.S. has risen slightly from record lows.

Initial jobless claims climbed a seasonally adjusted 10,000 to 293,000 in the seven days stretching from Jan. 10 to Jan 16, the government said Thursday. That’s the highest level since last July.

Since the last recession, the primary engine for the creation of good jobs in this country has been the energy industry.

Unfortunately, the “oil boomtowns” are now going bust, and workers are being laid off in droves. As I mentioned the other day, 42 North American oil companies have filed for bankruptcy and 130,000 good paying energy jobshave been lost in this country since the start of 2015. And as long as the price of oil stays in this neighborhood, the worse things are going to get.

A lot of people out there still seem to think that this is just going to be a temporary downturn. Many are convinced that we will just go through another tough recession and then we will come out okay on the other side. What they don’t realize is that a number of long-term trends are now reaching a crescendo.

For decades, we have been living wildly beyond our means. The federal government, state and local governments, corporations and consumers have all been going into debt far faster than our economy has been growing. Of course this was never going to be sustainable in the long run, but we had been doing it for so long that many of us had come to believe that our exceedingly reckless debt-fueled prosperity was somehow “normal”.

Unfortunately, the truth is that you can’t consume far more than you produce forever. Eventually reality catches up with you. This is a point that Simon Blackmade extremely well in one of his recent articles…

Economics isn’t complicated. The Universal Law of Prosperity is very simple: produce more than you consume.

Governments, corporations, and individuals all have to abide by it. Those who do will thrive. Those who don’t will fail, sooner or later.

When the entire financial system ignores this fundamental rule, it puts us all at risk.

And if you can understand that, you can take simple, sensible steps to prevent the consequences.

Sadly, the time for avoiding the consequences of our actions is now past.

We are now starting to pay the price for decades of incredibly bone-headed decisions, and anyone that is looking to Barack Obama, the Federal Reserve or anyone else in Washington D.C. to be our savior is going to be bitterly disappointed.

And as bad as things have been so far, just wait until you see what happens next.

2016 is the year when everything changes.


Banks Versus Insurance Companies, Which is Safer for Your Money?

Despite what you might think, banks are not the safest place to invest your money. Because banks work on a more commercial front, they present themselves as the go-to option, but what consumers don’t know is there is a much safer place for your money.
When considering a safe keeping for your money, banks are everyone’s first thought. Dating back to the days in the Wild West, we imagine banks having big steel safes and gun wielding cowboys there to protect our money. But are banks really the safest place for our money?
Banks are businesses, and businesses fail. The problem with banks failing is they are not only losing their money, but they are losing yours too. And bank failures are no rarity in our society. In fact, in the years following the 2008 financial crisis, over 400 banks have failed. It would be unfair to say depositors within these banks lost all of their money when the banks went down, because most banks are insured by the Federal Deposit Insurance Corporation(FDIC). But just how insured are they?
The FDIC currently only insures up to $250,000 per depositor per federally insured bank. To meet the obligation of insuring the countless depositors across all federally insured banks, the FDIC should theoretically maintain an insurance fund of trillions of dollars.
However, in a memorandum to his board of directors, the Chief Financial Officer of the FDIC reported the insurance deposit fund as having just $22.7 billion available at the end of the second quarter this year. In the event of any massive financial collapse to the banking industry, the $250,000 insurance would not be met by the funds currently held by the FDIC.
The insurance industry is regulated at the state level. Due to the design of state regulations, insurance companies are closely monitored and required to maintain adequate reserves to support the policies they have with investors. In fact, insurance companies cannot “fail” in the same manner that banks can. If an insurance company does begin to lose reserve funding, most states take over the company. If the state is unable to fulfill its obligation to pay policy holders, most states will then order the policies to be transferred to a stable insurance company, or cover the policy with state funding.
A key difference in safety between banks and insurance companies is how the investors are treated in the event of company failure. The banks have a partial safety net in place that has a limited ability to fulfill its obligation of protection. Insurance companies have a much more closely regulated protection system aimed at preventing the investor from taking the fall of a company’s failure. The system is known as statutory accounting, and it forces insurance companies to maintain a reserve fund that is equal to every dollar they are obligated to pay to policy holders. This effectively protects anyone invested in the insurance industry from losing money due to company failure.
Perhaps the most daunting threat to anyone’s dollar is the unpredictability of the economy in general. When banks are measured against insurance companies in an industry comparison of strength in a poor economy, the insurance industry is once again the victor.
As stated in the earlier figure, banks fail in alarming numbers when the economy is in a struggle. Investment portfolios tied to the banking industry drop across the board in recessions and financial crises. After the 2008 crisis, billions of dollars went towards a bailout for our banks, preventing a complete collapse of the American economy.
Insurance companies, on the other hand, don’t skip a beat when the economy is down. In fact, even during the Great Depression the insurance industry didn’t suffer, and in some cases posted record high dividend yields to policy holders.  After the 2008 crisis, the insurance industry did not ask for a penny in bailout funds.
This is due to the different natures of insurance companies and banks. It’s as simple as this:
Banks are designed to make money for their stockholders. To do so, they make risky bets on the stock market in hopes of achieving high profits and short term growth so that the stockholders can get paid.
Insurance companies do not have stockholders to appease, thus their sole obligation is to fulfill their promises to policy holders. They have no need to expose themselves to unnecessary risk, which can lead to bankruptcy.
Short of storing your life’s savings under a mattress, which still puts it at risk of being lost to inflation, the insurance industry is the brick house of financial security. It is important to recognize these two industries and use them for their best purpose. Banks, the stick house, are good for storing liquid cash for short term needs due to their accessibility. Insurance companies, the brick houses, are the strongholds that best protect your savings from the many dangers that exist within the financial industry.

Perhaps time to put your savings in your mattress??
Or, put your money in an insurance company?


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