Billionaire investor Howard Marks compares the current market to the mid-2000s bubble, touts bitcoin’s staying power, and offers several tips in a new interview. Here are the 12 best quotes.

Howard Marks
Howard Marks.

  • Oaktree’s Howard Marks discussed stocks and bitcoin, and shared several tips for investors.
  • The investor highlighted similarities between the current market and the mid-2000s bubble.
  • Marks underlined the importance of managing risks, not panic-selling, and staying skeptical.
  • See more stories on Insider’s business page.

Howard Marks drew parallels between the current market and the asset bubble that preceded the global financial crisis, highlighted bitcoin’s longevity, and argued rock-bottom interest rates may justify higher stock valuations, speaking during the latest episode of the “We Study Billionaires” podcast.

The billionaire cofounder and co-chairman of Oaktree Capital Management advised investors to carefully manage their portfolio risk, resist the urge to buy high and sell low, and be skeptical of grand claims.

Here are Marks’ 12 best quotes, lightly edited and condensed for clarity:

1. “The pandemic was like a meteor hitting the Earth from outer space. The market decline was not born out of excess optimism. The recovery was not merely a bounce back from excess pessimism, it was the result of the greatest economic rescue effort in history.” – arguing the past 18 months shouldn’t be viewed as a traditional market cycle.

2. “There certainly are similarities that cause Jeremy Grantham and others to say ‘bubble territory’ and to blow the whistle of caution.” – comparing the hype around several assets in 2006 to the current market boom.

3. “If investors can think of an asset class and say, ‘Oh, for that, there’s no price too high’ – that’s one of the greatest indications of a bubble.”

4. “We have the lowest interest rates in history. That would simplistically argue for the highest asset valuations in history.”

5. “I came out very strongly against bitcoin in 2017. I was extremely negative, I was extremely outspoken. I had a knee-jerk reaction to something new. Now I prefer to say, ‘I don’t know enough about it to have a strong opinion.’

6. “Bitcoin has been around now for a dozen years. If it’s a flash in the pan, it’s an awful long pan.”

Read more: ‘It’s begging to be destroyed’: A stock trader who says he made more than $100,000 shorting the market during the 2008 crash just bet against the S&P 500 – and warns there’s a ‘fair chance’ stocks are about to drop 25%

7. “One of the most important aspects of being a good investor is you try to set things up so that if things go your way, you do great. But if things don’t go your way, you still do okay.”

8. “Good investing is not a matter of buying good things but buying things well. And if you don’t know the difference, then you shouldn’t be doing much investing.”

9. “Don’t get in the way of the compounding machine. Just get out of the way. Don’t screw it up.”

10. “When you’re in an area which is beset with uncertainty, variability, unpredictability, randomness, things like that – it just strikes me as folly to be confident that you know the future.”

11. “Active investors are in this business to buy low and sell high. But everything in our nature conspires to make us buy high and sell low. It is essential to combat those instincts.”

12. “Somebody comes into your office and says, ‘I’ve been managing money for 30 years, I’ve made 11% a year, and I’ve never had a down month.” Your job is to say, ‘That’s too good to be true, Mr. Madoff.'” – urging investors to always be skeptical of fantastic claims and promises.

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ECB slows pace of pandemic bond purchases after inflation jumps to decade high

Christine Lagarde European Central Bank ECB
Christine Lagarde is president of the European Central Bank.

  • The European Central Bank will dial down the pace of its pandemic bond purchases, it said Thursday.
  • The ECB move came after inflation hit a 10-year high in August and Q2 GDP growth beat expectations.
  • The central bank’s pandemic emergency purchase program is worth 1.85 trillion euros, or $2.2 trillion.
  • See more stories on Insider’s business page.

The European Central Bank has said it will slow the pace of its pandemic bond purchases after eurozone inflation jumped to a 10-year high in August.

It has been buying bonds at a pace of around 80 billion euros ($90 billion) a month under its 1.85 trillion euro ($2.2 trillion) pandemic emergency purchase program, known as PEPP.

But the eurozone’s central bank said Thursday it will now purchase bonds at a “moderately” slower rate heading toward the expected end of the scheme in spring next year. It left its main interest rate unchanged at the record-low level of -0.5%.

The ECB did not say what the new rate of purchases would be, but said it would buy bonds “flexibly according to market conditions and with a view to preventing a tightening of financing conditions.”

ECB President Christine Lagarde insisted that the central bank was keeping up its support for the economy. “The lady’s not tapering,” she said at the press conference, using the term for the winding-down of bond purchases.

She said the bank can adjust purchases as required, but gave little information about when exactly PEPP might end or what might happen afterwards.

Europe’s Stoxx 600 stock index rallied after the decision to stand roughly flat for the day, while the euro pared its gains against the dollar to trade at $1.182.

The ECB’s move comes after euro area inflation jumped to a decade-high of 3% year-on-year in August and GDP grew a stronger-than-expected 2.2% in the second quarter, as the rollout of coronavirus vaccines helped power a recovery in the single-currency bloc.

Rising inflation is causing headaches for central bankers around the world. The ECB has said it thinks strong price rises will be temporary, and are the result of the rapid reopening of economies.

Yet “hawks” on its governing council such as Germany’s Jens Weidmann appear keen to get a grip on inflation, fearing it could spiral upwards. “Doves” argue that strong stimulus is still needed as the bloc battles the Delta coronavirus variant.

The ECB said it expects inflation to average 2.2% in 2021 but cool to 1.5% in 2023, well below the central bank’s target rate of 2%.

The central bank’s bond-buying program differs from the US Federal Reserve’s, which is potentially unlimited. The ECB’s PEPP is capped at 1.85 trillion euros and was added to the existing asset purchase program (APP), which buys 20 billion euros of securities each month.

Investors are keen to hear more about what will happen when PEPP ends, but the ECB is not expected to give details until later this year.

“We expect the PEPP to end next year, potentially as early as March 2022, and expect the regular APP to be upsized from 20 billion euros to 60 billion euros per month in return,” Konstantin Veit, a portfolio manager at PIMCO, said.

Read the original article on Business Insider

ECB dials down pace of pandemic bond purchases after inflation jumps to decade high

Christine Lagarde European Central Bank ECB
Christine Lagarde is president of the European Central Bank.

  • The European Central Bank will dial down the pace of its pandemic bond purchases, it said on Thursday.
  • The ECB move came after inflation hit a 10-year high in August and Q2 GDP growth beat expectations.
  • The central bank’s pandemic emergency purchase program is worth 1.85 trillion euros, or $2.2 trillion.
  • See more stories on Insider’s business page.

The European Central Bank has said it will slow the pace of its pandemic bond purchases after eurozone inflation jumped to a 10-year high in August and economic growth came in stronger than expected in the second quarter.

It has been buying bonds at a pace of around 80 billion euros a month under its 1.85 trillion euro ($2.2 trillion) pandemic emergency scheme. The eurozone’s central bank said Thursday it will now purchase bonds at a slower rate heading toward the expected end of the scheme in spring next year.

“The Governing Council will purchase flexibly according to market conditions and with a view to preventing a tightening of financing conditions that is inconsistent with countering the downward impact of the pandemic on the projected path of inflation,” the ECB said in its statement.

The move comes after euro area inflation jumped to a decade-high of 3% year-on-year in August and GDP grew a stronger-than-expected 2.2% in the second quarter, as the rollout of coronavirus vaccines helped power a recovery in the single-currency bloc.

Europe’s Stoxx 600 stock index was down 0.44% after the decision, while the euro was up 0.12% against the dollar at $1.183.

Rising inflation is causing headaches for central bankers around the world. The ECB has said it thinks strong price rises will be temporary, and are the result of the rapid reopening of economies.

Yet “hawks” on the governing council such as Germany’s Jens Weidmann are keen to get a grip on inflation, fearing it could spiral upwards. “Doves” argue that strong stimulus is still needed as the bloc battles the Delta coronavirus variant.

The ECB will update its economic projections later on Thursday. The new inflation forecasts will be closely watched by investors.

The central bank’s bond-buying program differs from the US Federal Reserve’s, which is potentially unlimited. The ECB’s pandemic emergency purchase program (PEPP) is capped at 1.85 trillion euros and was added to the existing asset purchase program (APP), which buys 20 billion euros of securities each month.

Investors are keen to hear more about what will happen when PEPP ends, but the ECB is not expected to give details until later this year.

“We expect the PEPP to end next year, potentially as early as March 2022, and expect the regular APP to be upsized from 20 billion euros to 60 billion euros per month in return,” Konstantin Veit, a portfolio manager at PIMCO said.

Read the original article on Business Insider

The arguments for firing Jay Powell are tiresome and stupid

federal Reserve Chairman Jerome Powell
Federal Reserve Chair Jerome H. Powell announces a half percentage point interest rate cut during a speech on March 3, 2020 in Washington, DC.

  • Federal Reserve Chairman Jerome Powell’s term is coming to an end.
  • Some progressives are pushing President Joe Biden not to renominate Powell for a second term.
  • But Powell has been an adept, pro-worker Fed chair and all the reasons to oppose his renomination are bad.
  • This is an opinion column. The thoughts expressed are those of the author.
  • See more stories on Insider’s business page.

The Federal Reserve has a number of functions and responsibilities, but the most important thing the central bank does is set monetary policy. I feel weird even needing to write that sentence, but given the increasingly tedious arguments I’m seeing for replacing current Chairman Jerome Powell, apparently some people need a reminder.

The problem for Powell’s opponents is that he has done a truly excellent job leading monetary policymaking during his tenure – both in crafting an effective response to the COVID-driven economic crisis that prevented it from snowballing into a financial crisis, and in implementing a longer-run shift of the Fed’s priorities to tolerate more inflation and focus more on promoting full employment and wage growth.

A lot of progressive commentators recognize how good this record is, which is why Powell, a Republican, enjoys quite a bit of progressive support for his reappointment, and why President Biden, a Democrat, will probably nominate him for another term. Powell’s progressive support comes especially from the parts of the movement with close ties to organized labor, which has good reason to be clear-eyed about pro-worker Fed policies being the key issue in choosing a chair.

And even those who oppose Powell mostly admit he has succeeded at the central bank’s core mission, which has led to them to contend the choice of a Fed chair is not primarily about monetary policy. They characterize his monetary policies as areas of consensus that any Democrat-appointed Fed chair could and would continue, while doing better on whatever niche issues the critics care about. (Or, if you want to be creative like Berkeley economist Brad DeLong, you can simply invent the idea that Powell secretly disagrees with the monetary policies he’s implemented for the last four years and will become totally different if reappointed.)

The truth is that the Fed’s monetary policy achievements under Powell have been real and large, are not automatic, and are fragile. You need someone with a commitment to pro-worker monetary policy at the head of the bank in the face of concerns about rising inflation. Who better than Powell himself, who has demonstrated both a commitment to the policy and an ability to gather political support for it and get it implemented?

You risk workers’ livelihoods by being blasé about monetary policy

Before we get to the niche issues, let’s talk about why Powell’s progressive critics are wrong to be so confident about the durability of his monetary policies.

One, they overstate the extent of the consensus in favor of the new, more-inflation-tolerant framework. Inflation is currently well above target, and calls for tightening to stave off inflation are getting louder. Members of the Federal Open Market Committee cannot even agree on what it means that the Fed now targets “average” inflation, or on how long the Fed should wait to raise interest rates in the face of rising prices. So the question of how much of an inflation overshoot the Fed will accept in order to boost the labor market is an open one – one where the left’s preferred candidates to replace Powell could end up favoring tighter, less worker-friendly policy.

For example, Mark Carney, the former Bank of England governor who is The American Prospect editor David Dayen’s choice to replace Powell, told David Wessel of the Brookings Institution in June that the “balance of risks” has shifted toward the possibility of too much inflation, a remark that caused Wessel to observe that Carney would be on the hawkish side of the FOMC, were he to sit on it.

Then there is the issue of political support for unconventional monetary policy.

Powell’s new policies are controversial, and his political skill has been necessary to sell them

People who have drawn the baffling conclusion that Powell’s monetary policy actions reflect a broad consensus that any Fed chair could have followed may been fooled by the fact that Powell makes the politics look easy. Powell has worked assiduously to build respectful relationships on both sides of the aisle on Capitol Hill, and the personal trust he has built has quieted political criticism and given the Fed more room to operate. (In just the first six months of this year, Powell took meetings with 33 senators.) It also helps that Powell is a moderate Republican with a staid, bankerly image – he has overseen a bold shift in monetary policy and yet he does not come off as a radical to anyone.

If you fire Powell and replace him with a Democrat, many of the policy issues Powell has successfully depoliticized will become politicized. Republican calls for tighter money will get louder under a new chair, and they’ll be more listened to – including by the ideologically diverse FOMC the new chair would need to get to agree to a monetary policy agenda.

That’s all reason to worry that even a new chair with solidly dovish views would end up making more hawkish policy than Powell would.

Bank regulation is less important than monetary policy, and the Fed is just one of many bank regulators

Okay, so what about the other issues? The bank regulation-focused Powell critics are upset about certain moves in recent years they consider to have been too easy on banks, such as letting them resume share buybacks after the financial markets had stabilized but before the COVID pandemic was over.

Bank regulation used to be a top-tier economic policy issue. Banks and households both took on too much leverage in the lead-up to the 2008 financial crisis, and risky lending was a key factor that created a terrible global recession. But policy improvements, including the Dodd-Frank law, have greatly improved the financial condition of banks. Household finances are also currently unusually strong. And of course, the Fed’s bold monetary policy actions were themselves an important policy for promoting soundness of the financial system, because they made it possible for firms to roll over debt instead of defaulting.

Wall Street
Chinese career agencies promise to help students land top-tier internships

This overall environment of stability and soundness is why people whose personal brand is financial regulation have to hype the corporate debt markets so much: the most economically salient places for there to be too much leverage in the economy look fine, and you have to start looking under the cushions for sources of leverage-driven financial instability.

This is simply not a leading economic risk facing the country, especially in comparison to the risk that the Fed might choke off the labor market recovery by tightening monetary policy too soon. And the risks in this area can be addressed by other regulators, including the Fed’s own vice chair for supervision, a position that will be open for Biden to fill later this year.

The Fed is not a climate policy organ

As Matt Yglesias writes, there are a lot of professional activists, particularly in the climate change space, who seem to view their job as complaining about whatever the Democratic party is doing. If Democrats want Powell renominated, that must be a mistake, and there must be something more left-wing that can be found to do. This has led to a lot of Rube Goldberg thinking about how the Fed is supposed to be driving climate policy (as a reminder, we are talking about the central bank, not the EPA).

california wildfires approaching homes

There are some perfectly worthy proposals about how the Fed should consider climate related risks when evaluating the soundness of the financial system, but the idea that this would constitute a significant climate change policy is wrong. As the Roosevelt Institute’s Mike Konczal notes, you can improve banks’ resiliency against climate change without doing anything at all about climate change itself – all you have to do is change what sort of investments are financed where.

Many of the people now telling us that bank capital requirements can significantly affect fossil fuel-related behavior in the real economy are the same people who spent the last decade-plus telling us that higher bank capital requirements won’t much affect the real economy. They were right the first time.

And if the Fed implemented policies that really did move the needle on carbon emissions, those policies would necessarily conflict with the Fed’s mandate to promote maximum employment. The climate-focused critics won’t say this in so many words. But Erik Gerding admitted to the Atlantic’s Robinson Meyer that he objects to the Fed’s low-interest-rate policies – a cornerstone of the Fed’s pro-worker efforts – on the grounds that they encourage carbon-intensive cryptocurrency mining.

Think about that for a second: Low interest rates only encourage crypto speculation because they have been good for asset prices in general. The crypto bubble (and I do believe it’s a bubble) is part of the overall bullish environment for investment that has businesses growing and investing and hiring, which is what’s been creating relatively positive conditions for workers.

Trying to pop the crypto bubble with higher rates in an attempt to curtail carbon emissions would also discourage investment overall, cooling the labor market and possibly causing a recession. If that’s what you want, you oppose full employment. And if it’s not what you want, then you’re just fiddling around the edges with bank regulations that will have little effect on either climate or the real economy.

Finally, let’s be real about the politics of climate change: If you run around telling people the Fed’s full employment policies are actually, secretly climate policies, you’re only going to undermine support for full employment policies. Climate policy is best done through Secret Congress; announcing that the Fed is now a climate-policy organ is the opposite of that.

Monetary policy doesn’t care whether you think it’s interesting

If I sound contemptuous of the people who want Powell fired, that’s because I am. He led by far the most effective policy response to COVID of any US government agency and significantly improved the framework for monetary policymaking in the US and now they want to put those policies at risk by getting rid of him. I think these attacks can only be explained as a matter of emotional impulses.

As I noted at the top, progressive figures who conceive of their project as fighting for workers have generally gotten Powell right. You see this with Bill Spriggs of the AFL-CIO, or Dean Baker of the Center for Economic and Policy Research: they have strongly endorsed Powell’s reappointment.

The thinkers who have gotten Powell wrong are the ones who conceive of their project as fighting against powerful forces, and as a result are constitutionally incapable of caring about monetary policy, because monetary policy does not provide an adequate villain to oppose.

Federal Reserve Chairman Jerome Powell
Federal Reserve Board Chairman Jerome Powell testifies before the Senate Banking, Housing and Urban Affairs Committee July 15, 2021 in Washington, DC.

With bank regulation, you can fight reckless and greedy Wall Street fat cats. On climate change, you get to stand up to big oil and gas companies. A worker-focused monetary policy produces very large benefits for ordinary people without defeating any obvious opponent. It does not provide that emotional oomph that drove many left activists to get involved with policy in the first place.

Sure, you can identify hedge-fund managers who grumble that the Fed’s actions to boost the economy are creating inflation and making it hard for them to find corporations willing to borrow money at 15% interest. But the same companies that are forced to pay higher wages and offer better conditions to attract workers in a tight market also enjoy strong consumer demand and an environment with attractive opportunities to invest and grow.

You only need to look at the stock market alongside the wage and job growth data to see that a hot economy is good for workers and owners alike – and a lot of people on the left clearly just don’t find it emotionally satisfying to focus on an economic policy that does not pit the rich against the masses.

And I understand why people prefer emotionally satisfying arguments to arguments about monetary policy, which is admittedly a boring subject. But it’s a pretty dumb thing to gloss over when you’re picking the head of a central bank.

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Billionaire investor John Paulson blasts crypto as a worthless bubble, warns SPACs are overvalued, and predicts stubborn inflation in a new interview. Here are the 14 best quotes.

John Paulson
John Paulson.

  • John Paulson said crypto is a bubble, SPACs are overpriced, and inflation is here to stay.
  • The billionaire investor outlined why interest rates could jump and the gold price might soar.
  • Paulson shot to fame after making a fortune betting on the US housing market to collapse.
  • See more stories on Insider’s business page.

John Paulson dismissed cryptocurrencies as worthless, warned the SPAC market is overvalued, and sounded the inflation alarm in the latest episode of “Bloomberg Wealth with David Rubenstein.”

The billionaire investor is best known for betting against the housing bubble and making upwards of $15 billion for himself and his clients – a wager chronicled in the book “The Greatest Trade Ever.”

Paulson reflected on his big short, explained why he’s excited about gold and credit, and offered advice to novice investors in the Bloomberg interview.

Here are Paulson’s 14 best quotes, lightly edited and condensed for clarity:

1. “Mortgage-backed securities were viewed as the safest securities next to Treasuries, and that was essentially true up until that point. What they missed was the underwriting quality had never been as poor, so the fact that they hadn’t defaulted in the past had nothing to do with whether they would default in the future.” – explaining why other investors didn’t emulate his bet against the housing market.

2. “One of our investors called me. He said, ‘Uh, John, I just got the monthly results. I think there was a mistake, it said 66%, you meant 6.6%,’ and I said, ‘ No, it was 66%.’ He goes, ‘That’s impossible, I’ve invested with Soros, with Tudor Jones, with everyone. No one’s been up 66% in a year. How can you be up 66% in a month?’ I said, ‘Well, that’s what happened.'” – Paulson’s funds ended up returning close to 800% for the year in 2007.

3. “There’s a perception in the market that this inflation is transitory. Investors bought the Fed line that it’s just temporary due to the restart of the economy and it’s eventually gonna subside. Our viewpoint is the markets are currently too complacent regarding inflation. We have inflation coming well in excess of what the current expectations are.”

4. “The area that’s most mispriced today is credit. If inflation doesn’t subside, interest rates will catch up and bonds will fall, and various options strategies could offer very high returns.”

5. “As inflation picks up, people try and get out of fixed income, try and get out cash. The logical place to go is gold, especially if it starts to rise in inflationary times. But because the amount of money trying to move out of cash and fixed income dwarfs the amount of investable gold, the supply-and-demand imbalance causes gold to rise, and the more it rises – it sort of feeds on itself. It has the potential to go parabolic.”

6. “If inflation does prove to be higher than expectations, that will result in both higher gold prices and higher interest rates. If you get those two happening at the same time, we could set up positions that could return 25- or 50-to-1.”

7. “We went through probably the worst financial crisis imaginable with COVID, in which the entire economy shut down. If it wasn’t for the very aggressive policies of the Fed and the Treasury, we could have dove into a deep recession. But by providing all the monetary and fiscal stimulus that they did, they really minimized the downturn, resulting in a very rapid recovery.”

8. “The SPAC market is overvalued. It’s not quite a bubble but it clearly shows elements of a frothy market, there’s just too much liquidity. Investing in SPACS, on average, will be a losing proposition.” – discussing the outlook for special-purpose acquisition companies.

9. “I wouldn’t recommend anyone invest in cryptocurrencies. They’re a bubble, a limited supply of nothing. There’s no intrinsic value to any of the cryptocurrencies except that there’s a limited amount. They will eventually prove to be worthless. Once the exuberance wears off or liquidity dries up, they will go to zero.”

10. “There’s unlimited downside in crypto. It’s just too volatile to short. Even though I could be right over the long term, in the short term, bitcoin went from $5,000 to $45,000 – I would be wiped out on the short side.”

11. “Invest in areas that you know well. Anyone can be lucky in a particular investment, but that’s not a long-term strategy. If you invest in areas that you don’t know, ultimately you’re not going to do well. Concentrate on particular areas that you know better than other people, and that’s what gives you an advantage to succeed in investing.”

12. “They look for get-rich-quick schemes and they buy based on stories. They chase investments that are going up, but ultimately those investments deflate and they lose money.” – highlighting a common mistake among newbie investors.

13. “The best investment for an average individual is to buy their own home.” – Paulson emphasized that homeowners generally see their properties grow in value over time, boosting their return on investment.

14. “Do what you’re passionate about. You can be successful in music, dance, medicine, physics, math – the important thing is you pursue a career in what you’re naturally passionate about. That will improve your odds of achieving success.”

Read the original article on Business Insider

The wealthy – not the Fed – are to blame for low interest rates and rising inequality, study says

Trader Peter Tuchman smiles as he works on the floor of the New York Stock Exchange after the market opening in New York, December 23, 2013.

  • It’s inequality that dragged interest rates lower, not the other way around, NBER researchers said Friday.
  • Wealthy Americans’ ballooning savings over the last two decades fueled interest rates’ decline, they find.
  • Lower rates lift asset values and help the rich get richer, an expert says. Or in other words, “inequality begets inequality!”
  • See more stories on Insider’s business page.

Rock-bottom interest rates. They make it cheaper to borrow, less lucrative to save, and are meant to boost economic activity.

The Federal Reserve‘s benchmark interest rate has become its go-to tool for turning the dial up or down on spending as necessary. But the rate has been on a decades-long decline and currently sits near zero as the US emerges from recession. That long slide to record lows risks new headaches for the economy.

The problem, as Insider has previously reported, is that low interest rates not only support the economy, they help the wealthy enjoy significant appreciation of their investments. As the Fed padded against the pandemic’s fallout, the country’s top earners padded their wallets.

The Fed has taken flak for the trend, with economists warning that near-zero rates worsen inequality. But what if that narrative is wrong, and the wealthy are behind rates’ steady decline instead of the Fed?

The conventional argument should be flipped on its head, according to a study published Friday by the National Bureau for Economic Research. Wealthy Americans’ booming income powered the decades-long decline in interest rates, economists Atif Mian, Ludwig Straub, and Amir Sufi wrote. That downtrend then lifted stocks and most recently powered the market’s rebound from 2020 lows.

“It is a vicious cycle, and we are stuck in it,” Mian wrote in a Tuesday tweet. In other words, it may not be the Fed’s fault, which means it will be much harder to solve.

Read more: Everything you need to know about the Fed, America’s central bank, which probably helped you buy a house last year

The rich get richer because the rich save the most. The Fed can only watch.

The team of researchers focused on the natural rate of interest, or r* (r-star), which is meant to foster ideal hiring conditions while also keeping price growth under control.

The novel aspect of the research is the argument that this natural rate has steadily declined for nearly five decades due to ballooning savings piles around the world – after all, to keep massive savings from overstimulating the economy, the Fed had to keep rates at extraordinary lows.

That places the Fed in a precarious spot. Lifting interest rates to counter the decline would likely drag the economy into a recession by discouraging borrowing. But keeping rates at such low levels leaves the central bank with limited ability to further stimulate the economy in times of crisis.

That decline in r* worsened inequality by lifting stocks and other assets, but the wealth gap likely powered the downtrend in the first place, the researchers found. To start, rich Americans have counted for an increasingly large share of total earnings. The top 10% of earners took home roughly 45% of all US income by 2020, up from just 30% in the 1970s, according to the study.

The leap in earnings translated into larger cash piles. Roughly 40% of all private savings were held by the country’s top earners in 2019, up from 30% in 1995. That equates to trillions of dollars in cash.

The savings glut that’s dragging the natural rate lower, then, is largely held by the rich. And the rich have benefited from this situation they created.

“Since it is the very rich who own most of the assets, a fall in interest rates makes them richer,” Mian said. “Inequality begets inequality!”

To be sure, it’s unclear just how much the savings glut is powering the natural rate’s decline. The downtrend isn’t exclusive to the US, signaling factors other than income inequality are dragging on the rate.

The researchers only noted that data supports income inequality being “an important factor” in the decline, not the sole driver. They also somewhat hinged the hypothesis on forecasts, saying its “relative strength … is perhaps best measured by looking into the future.”

Regardless, the researchers’ study underscores just how difficult reversing inequality can be, and how ingrained the wealth gap has become in the modern American economy.

Read the original article on Business Insider

‘Murdered by the student-loan industry’: 2 borrowers describe the crushing interest that keeps them from paying off their debt

In this May 17, 2018, file photo, new graduates line up before the start of the Bergen Community College commencement at MetLife Stadium in East Rutherford, N.J.

  • High interest rates on student loans are keeping borrowers from paying off their initial debt loads.
  • Insider spoke to two borrowers who are dealing with “crippling” student debt, largely due to interest.
  • They both paid off nearly their full original debt amounts, but still owe thousands of dollars more.
  • See more stories on Insider’s business page.

Alexandria Mavin heard from her high-school teachers that there was a path to the American Dream. If she went to college, graduated, and got an office job, she would get there. She graduated with $117,000 in student debt as a down payment for that dream.

Now 32 years old and a property manager, she’s paid back $70,000 of it, but she still owes $98,000 from her undergraduate education, and she says she “absolutely” regrets seeking an education.

“I’ve paid back almost all of my loans, but I still owe the full amount,” Mavin told Insider. “It’s a never-ending cycle.”

Mavin is talking about interest. It’s why many borrowers have trouble staying on top of payments or eliminating their debt. The $1.7 trillion student debt crisis is largely due to interest that grows each year, so even borrowers who consistently repay their debt face high interest rates that keep their debt equal to what they initially borrowed – or higher.

After President Lyndon B. Johnson passed the Higher Education Act of 1965, banks began raising interest rates on student loans, and the system came to profit lenders at the expense of pushing more and more borrowers further into debt and default, Insider reported. It’s created a prison many borrowers feel they will never escape.

Alexandria Mavin
Alexandria Mavin.

Mavin’s student loans are owned by four servicers, and only one of them – FedLoan Servicing – was included in the federal pause on student-loan payments and interest during the pandemic. But even so, Mavin said being free from interest on even just one of her loans saved her $377 a month, which she put toward savings and helped her pay off, in full, her hospital bills from giving birth during the pandemic.

“It just shows how without student loans, I can afford life,” Mavin said.

‘I’m financially paralyzed by crippling debt’

Daniel Tapia, 41, graduated a decade ago with a bachelor’s degree in dental hygiene – the first in his family to do so. Since then, he told Insider, he’s been driving used cars, living in “crappy” apartments, and moved back in with his mom thanks to the growing student debt he’s been trying to pay off for 10 years.

“I’m financially paralyzed by crippling debt and I can’t get ahead in life,” Tapia said. “Murdered by the student-loan industry.”

Daniel Tapia
Daniel Tapia.

To afford his bachelor’s degree, Tapia borrowed $60,000 in private student loans with a 9% interest rate, and his student-debt load currently stands at just under $86,000, including $22,000 owned by the government, even after making a decade’s worth of monthly payments.

“What I don’t get is if I took out a certain amount, and I paid that amount already, and I still owe more than I originally owed, it’s just nuts,” Tapia said. “It’s mind boggling to me that this total amount is not going down. It’s not going away.”

Insider recently reported that even though federal student-loan payments have been on pause during the pandemic, many borrowers who made at least one payment during the pause were “underwater,” meaning they were not even $1 less in debt than their original balances, keeping some in an endless cycle of repayment.

For many, student-debt cancellation is the only way out

Although President Joe Biden campaigned on canceling $10,000 in student debt per borrower, Mavin said that wouldn’t even be “a drop in the bucket.” She said the alternate plan from Massachusetts Sen. Elizabeth Warren and Senate Majority Leader Chuck Schumer to cancel $50,000 per borrower would help “tremendously.”

Some colleges have been using stimulus funds from Biden’s American Rescue Plan to cancel institutional debt, or debt owed by students to schools, and Biden has even canceled student debt for certain groups of borrowers, but widescale student debt forgiveness has yet to occur.

Biden has asked the Education and Justice Departments to review his executive authority to cancel $50,000, but months have passed and there is still no word on where those reviews stand.

“I have gotten screwed with interest so hard that I’ve paid the majority of my loan back, but yet, the banks are the ones profiting, not me,” Mavin said. “I fear it’s a never-ending cycle where I can’t give my daughter the life I want to give her and I can’t give myself the life I want to give myself.”

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2 reasons why lumber prices will tumble another 28% from 13-month lows, according to one analyst

Logging wood for the Vyatsky Plywood Mill owned by Segezha Group in a forest in the Nema District. A subsidiary of AFK Sistema, Segezha Group is a fully and vertically integrated timber holding employing advanced wood processing technologies. Alexander Ryumin/TASS

The price of lumber slipped to a 13-month low on Wednesday and the commodity could see a further slide of 28% by the year-end, according to Naeem Aslam, chief market analyst at AvaTrade, an online broker.

Aslam said he sees lumber trading as low as $330 per thousand board feet by the end of 2021 or in the first quarter of next year, reflecting the 28% downside from current levels.

“Now is definitely not the time to fish that bottom,” Aslam told Insider. “There is a huge correction ahead … Prices will continue to fall from here.”

He gave two reasons for his outlook.

First, when the Federal Reserve starts to tighten its monetary policy, the housing market, he said, will cool as rates rise. Speculation that the central bank will taper assets sooner than expected has been rising amid a robust economic rebound this year.

“The housing sector has built up a massive backlog,” he told Insider. “How that backlog was built was because of extra cash which was injected.”

Aslam was referring to the three rounds of stimulus checks millions of Americans received in the wake of the pandemic. But now that a fourth stimulus check is unlikely given the accelerating pace of the recovery, demand, he said, will abate.

“The reality is that helicopter money really pumped up the massive demand in terms of material,” he said.

Aslam also noted the shortage of affordable homes for sale in the US has persisted for years.

Second, when China accelerates the pace at which it releases inventory from its strategic reserves, there will be an oversupply in the commodities market, which will push prices, including the price of lumber, down.

The Asian superpower has been trying to cool surging prices – including oil, coal, and metals – by releasing stockpiles as the world’s second-biggest economy looks to bring manufacturing costs down amid rising inflation.

“We see China cracking down massively,” he told Insider. “That is going to bring the prices lower for these sorts of assets.”

Lumber futures as of August 18 were hovering around $458 per thousand board feet – 73% lower than the record high of $1,711 achieved in May. In July last year, it was trading at $438 per thousand board feet.

Lumber prices skyrocketed more than 500% in the 15 months after the COVID-19 outbreak as supply-chain disruptions collided with a demand for housing and activity from homebuilders.

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A rise in long-term interest rates will be ‘kryptonite’ for a stock market that is already ‘in the biggest bubble of my career’ investment chief Richard Bernstein says

Richard Bernstein

Investment chief Richard Bernstein thinks if long term interest rates rise further, this could burst the bubble he sees in stock markets today – which could be the biggest one of his career, he said.

In an interview on CNBC’s Trading Nation, Bernstein said he believes investors have bought into long duration assets because of low long-term interest rates thanks to Federal Reserve policy, leading to a bubble in the stock market. Long-duration assets could include the far end of the Treasury yield curve, bitcoin, tech or even meme stocks, he said.

“The Fed has so distorted the long-end of the curve that we are seeing a very natural reaction among long-duration assets which is then taking on a life of its own. And I think anybody who’s out there in these long-duration assets has to be firmly convinced that long-term interest rates are not going to go up, because that’s the kryptonite for this bubble,” Bernstein said.

“I personally think we are right in maybe the biggest bubble of my career,” he added.

Stocks have been rising for well over a year and hit record high after record high, as the US economy has recovered from the fallout of the COVID-19 pandemic. This has led to widespread talks of a bubble and many investment experts have been urging caution about the potential for a crash.

Billionaire Jeremy Grantham’s investment firm GMO called the current environment a global growth bubble last month, while ‘Rich Dad Poor Dad’ author Robert Kiyosaki told investors to prepare for a market crash and even retail traders agree, with 40% of them saying there is a bubble – but they do not believe markets will actually crash.

Bernstein urged retail investors to diversify away from those highly frothy assets, while the market is still in a bubble and investing seems simple.

“For the same reason we carry a spare tyre in our trunk, for the same reason we have a fire extinguisher in our homes, that’s the reason why you have to diversify and when you get into a bubble, diversification becomes more important because we know the bubble is going to burst, but we don’t know when,” Bernstein said.

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Goldman Sachs raises its S&P 500 price target to highest on Wall Street as the bank sees earnings growth driving stocks to new highs

NYSE happy green chart
Traders work on the floor of the New York Stock Exchange.

  • Goldman Sachs increased its 2021 target on the S&P 500 to 4,700 from 4,300, implying further upside for the benchmark that’s already climbed 17% this year.
  • Strategists raised their per-share earnings view and see earnings growth as the primary driver for further S&P 500 gains.
  • Goldman also raised its price target and per-share earnings projection for 2022.
  • See more stories on Insider’s business page.

Goldman Sachs pushed up its target for the S&P 500 index on Thursday, saying growth in corporate earnings should in part drive the broad-equity market measure up by 7% by the end of 2021.

The investment bank now sees the index reaching 4,700, higher than its previous projection of 4,300. The call implies a 7% upside from current levels and full-year price returns of 25%, equity strategists led by David Kostin wrote in a note published Thursday.

The projection is the highest among Wall Street strategists, according to Bloomberg, citing its monthly survey. Goldman also increased its outlook for 2022.

The benchmark index closed at 4,402.66 on Wednesday, leaving its year-to-date gain at more than 17%.

“The combination of higher-than-expected S&P 500 earnings and lower-than-expected interest rates drive our upgraded price targets,” said Goldman.

The S&P 500 has risen for six straight months and has hit multiple record highs, bolstered by expectations for robust profit growth. Goldman said earnings growth — as it has been so far this year — will be the primary driver of US equity returns in the second half of this year and in 2022. It boosted its 2021 per-share earnings estimate to $207 from $193, which would represent a 45% surge in annual growth.

“Relative to consensus, we expect stronger revenue growth and more pre-tax profit margin expansion as firms successfully manage costs and as high-margin tech companies become a larger share of the index,” wrote Kostin.

Goldman said its price targets for the benchmark are highly sensitive to assumptions about interest rates and corporate tax reform, which have uncertain outlooks. Its baseline equity forecast assumes Congressional passage of tax reform and the 10-year Treasury yield rising modestly to 1.6% at year-end.

For 2022, the strategists expect the S&P 500 to reach 4,900, up from its previous outlook of 4,600, implying a full-year return of 4%. They also foresee 2% annual earnings growth in raising its per-share earnings estimate to $212 from $202. The earnings estimate for next year assumes the implementation of a narrower version of President Joe Biden’s tax plan.

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