Nasdaq Crashes To 6-Month Lows

Semis, FANGs, all getting slaughtered as Nasdaq tumbles 2.6% on the day to its lowest in almost 6 months…

A brief post-EU close bounce has been eviscerated as stocks are collapsing…

‘Chipwreck’ continues with SOX at 13-mo lows – confirming that double top… (worst month in 6 years)

S&P’s tech back at 6-month lows…

FANG stocks tumbled to 6-month lows… (down 17% from the July highs)

Nasdaq blew through its 200DMA and never looked back…

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The Nightmare Scenario: JPMorgan Warns Of $7.4 Trillion In ETF Selling During Next Downturn

When it comes to sleepless night involving the great unknowns locked in the Pandora’s box that was created by central bankers and which will be unleashed during next financial crisis, one nightmare is among the most recurring: what happens when the ETFs, which have been buying stocks for the past decade, begin to sell?

The answer, according to JPMorgan, would be nothing short of catastrophic.

According to a new report from JPM equity strategist, Eduardo Lecubarri, passive investing (i.e., ETFs and index funds) – which was not a big driver of equity returns in the last recession as it accounted for less than 30% of the AUM in actively managed funds back then, “should bring big selling pressure to large caps and US small and mid caps during the next downturn”, Lechubarri writes, as a result of the staggering increase in Passive AUM over the past decade which, as a % of active AUM, has nearly reached parity, and was around 83% as of 2018; Passive AUM is widely expected to surpass Active AUM over the next two years.

How much selling pressure? JPMorgan calculates that some $7.4 trillion in stocks would be subject to forced selling by passive funds during the next downturn.

“This is something worth noting at this late stage of a cycle given that passive investing seems to be trend following, with inflows pushing equities higher during bull markets, and outflows likely to magnify their fall during corrections” Lechubarri warns.

Lecubarri also notes that passive investing is far more skewed to Large-Caps than what their market caps would command, “making this asset class far more exposed to momentum selling during market downturns.”

So what does JPM do with this information? Simple: it tells clients to sell all those names, industries and geographic regions which are overexposed to passive investors:

We find Real Estate, Telecom, Utilities, Financials, and Industrials are most exposed to passive investing within US SMid-Caps, while Healthcare and Energy are the most clear safe havens. As for SMid outside the US, all sector exposure to passive investing is within a tight range, and thus unlikely to be a key driver of relative returns.

Of course, while JPM may have come up with some hiding places ahead of the ETF liquidation deluge, the truth is that if and when some $7.4 trillion in selling starts without central bank backstops to soak it all up, there will be no place to hide.

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Three Stages Of Gold

Authored by Jeffrey Snider via Alhambra Investment Partners,

For days after China shocked the world in August 2015, “devaluing” its currency seemingly out of nowhere, there was only confusion as to what had just happened. Going by nothing more than the mainstream media and economic narrative fed to it by central bankers and Economists (redundant), you wouldn’t have known anything was wrong at all. Manipulating currency for an unfair advantage, probably.

The US economy was booming. The oil price crash that had similarly appeared out of nowhere was a good thing, they said, a tax cut-like effect that would only make the good times better. Never mind the appearance of “overseas turmoil”, that was someone else’s problem.

None of that was true, obviously, and if you were paying attention you could see it coming. There were warnings all over the place, consistent in their direction (deflation, not inflation) spreading throughout markets. CNY wasn’t an outlier, it was perfectly consistent. I wrote on August 14, 2015, just a few days after:

That does not mean, however, that all this is over; far from it. These tremors are warnings that the “dollar” system’s decay is reaching critical points. The mainstream will tender that this is really no big deal, just a tantrum of spoiled markets unwilling to easily treat the coming end of ZIRP and accommodation; that is simply and flat out false. There is a systemic liquidity problem that is and has been fatal, exposed to a greater degree by the continued withdrawal of eurodollar bank participation – the real “printing press.”

Just ten days later, on Monday, August 24, Wall Street flash crashed. It was, for that day, a gruesome session. True to form, the mainstream downplayed it. Here’s but one contemporary example.

Stock markets around the world recorded dramatic declines. It’s ugly. But before you panic, let’s put this in perspective. This is hardly the worst day ever for stocks. This pullback also comes after six years of stellar stock market gains.

Like 2008, it is absolutely stunning how anyone can realize “markets around the world” all doing the same thing at the same time and not wonder about the connection. And then falling only two weeks after CNY, the dots should’ve been quite easy to connect.

One way to have connected them was with something like gold. The precious metal had been falling for years by then, admittedly, which made it easy to dismiss and ignore. Still, in the months leading up to summer 2015 there was a whole bunch of interesting fireworks in the pits.

From March on through August, the PBOC had pegged CNY making it seem like all that noise in 2014 had been skillfully handled. But from mid-June 2015 forward, gold markets signaled another deflationary wave, likely originating in stalled collateral flow blocked by restricting balance sheet capacity (swap spreads turning negative was pretty conclusive evidence in that regard). Going back to what I wrote on the 14th:

In short, the actions of the PBOC, seen in light of what was a convertibility mini-crisis, a “run” of sorts, make sense where the yuan fix as some kind of “stimulus” in devaluation does not (or is at least far too inconsistent to be explanatory). The PBOC held the yuan steady to a near plateau for five months hoping for cessation of “dollar” pressure, but, like a coiled spring, it only intensified until there was no holding back anymore.

That was the message from the gold market – only, after the “devaluation” the direction completely changed. Instead of continuing its deflationary move lower, gold popped.

A rising gold price is often considered an inflationary, or reflationary, sign. In this case, however, the jump especially during that particular two-week period was hardly of the same variety. It was raw, unadulterated fear permeating the entire global system. Something snapped and though it was never written into the conventional record it still happened all the same.

It was in this window that America finally noticed “overseas turmoil” in their 401k’s.

Then, as if to prove these points, the process was repeated in almost exactly the same fashion a second time in a matter of mere months. And to further demonstrate how clueless and useless central bankers are and can be, the Federal Reserve actually kicked off its “rate hike” program in the middle of all this still at that late date believing in that earlier “strong” economy fairy tale.

This second deflationary wave ultimately proved more devastating than the first, even if Wall Street never fully accounted for it. In Asia as in other far-flung economies, the eurodollar damage was so severe that they still haven’t recovered from it even after suffering 2008-levels of contraction and shrinking. In many ways, the US economy hasn’t either (labor market, corporate profits), no matter how much the current economy is called strong.

This review is made relevant by gold’s behavior over the past two weeks.

After being pounded all year, collateral, gold is up sharply since a few days after China reopened from its National Day Golden Week – under liquidation. For good measure, the PBOC has been practically begging markets to understand its continued dollar warnings.

The collateral part, deflation, is easy. All that re-emerging “overseas turmoil” in emerging markets set off a chain reaction against all collateral forms (haircuts and transformations, EM corporates in particular). Gold stabilized in mid-August and then finally jumps in the middle of October.

Is that the end of the deflation for 2018? Or is it, like August 2015, the transition from cursory warnings to more comprehensively negative signals? Systemic fear in sentiment eventually overcoming the mechanics of collateral in gold.

“Markets around the world” might wish to make that determination. Something, something liquidity. From today’s roller coaster trading session:

At its session lows, the Dow had fallen 548.62 points, while the S&P 500 and Nasdaq had lost more than 2 percent each… The S&P 500 posted its fifth straight decline and briefly dipped below the lows hit earlier in October during this ongoing sell-off. The major indexes are all down at least 4.8 percent for October.

This time it is, apparently, “rising global tensions” rather than overseas turmoil. No matter, it’s all the same thing underneath. It should be clear by now that something’s off about 2018. It can’t be rate hikes, there were those in 2017, too. The question going forward toward 2019 is whether what’s not right is itself evolving even more unfavorably.

The three stages of gold: reflation, collateral, fear. The last does seem more consistent with overseas turmoil that isn’t so far away.

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Volkswagen Tumbles After Slashing Outlook For Chinese Auto Demand

Volkswagen shares tumbled as much as 6% on Wednesday, after the President and CEO of Volkswagen China told Nikkei that the company will likely end the year with flat or lower sales volume in China compared to last year. Previously, Volkswagen had expected 4% growth in China this year; the sharp downward revision makes Volkswagen the latest in a line of car manufacturers and dealers to paint a dismal demand picture in the global automotive industry. 

China is the Volkswagen’s largest single market, contributing more than 40% to global sales last year, inclusive of Hong Kong.

Jochem Heizmann, CEO of Volkswagen China, tried to make the point that the automobile market in China was still a ways from hitting its ceiling, saying that low single digit growth, should it occur, still represented a significant amount of business for any carmaker in such a large country. The company’s shareholders did not agree.

Speaking to Bloomberg, Heizmann said that “hopefully, the decline of the market in connection with the China-U.S. problems is temporary.” Because if it’s not, the world’s auto OEMs will have major problems.

He then stated that he thought VW had “good chances” to grow faster than the industry for the rest of the year on account of its numerous coming SUV launches. 

These concerns about China echo concerns Renault raised on its recent earnings report. Renault just posted a larger drop in third-quarter sales than analysts expected. Renault blamed the poor numbers on a global slowdown in sales in places like China and Iran, as well as on new emissions standards.

Needless to say, if virtually every single automaker is now cursing they day they decided to expand into China, one can only imagine what China’s real, not fabricated 6.5%, GDP number must be if the middle class, at least as measured by its auto purchases, has hit a brick wall.

Meanwhile, just yesterday, we discussed  how the U.S. automobile industry decline was accelerating during the month of October. 

Scott Adams, the owner of a Toyota dealership in Lee’s Summit, Missouri, told CNBC: “We are definitely seeing business pull back. September was off some, but this month our car sales are down 12 percent and our truck sales are down 23 percent.”

Mark Scarpelli, president of Raymond Chevrolet and Kia in Antioch, Illinois stated that “Customer traffic has moderated. There is a little bit more of a pause because of the higher interest rates.” He said that although sales are keeping pace with the prior year, people are taking longer to buy.

So between sharp declines in auto demand in China, Europe and the US, how long before the phrase “automotive recession” becomes watercooler talk.

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Iran’s Rouhani: ‘Saudi Wouldn’t Have Killed Khashoggi Without US Approval’

With roughly one week left before the US reimposes sanctions on Iranian exports that could hamper Iranian crude-oil exports, Hassan Rouhani, the president of the Islamic Republic, accused the US of officially sanctioning the murder of Saudi journalist-turned-critic Jamal Khashoggi, arguing that no country would carry out such a heinous crime “without the protection of America.”

While the US probably won’t bother to dignify Rouhani’s allegations with a response, reports that US intelligence agencies had intercepted communications about the plot to ambush Khashoggi suggest that the US had an idea that Khashoggi might be killed upon returning to the consulate. And knowing this, they did nothing to warn Khashoggi or the Saudis, despite Khashoggi’s status as a US resident writing for a prominent national newspaper. 

Rouhani

According to Reuters, which cited a transcript from the official Iranian news agency, Rouhani said that such a brutal killing taking place at a foreign consulate was almost “unthinkable”.

“No one would imagine that in today’s world and a new century that we would witness such an organized murder and a system would plan out such a heinous murder,” Rouhani said, according to IRNA.

“I don’t think that a country would dare commit such a crime without the protection of America.”

And as Rouhani pointed out, US protection has allowed KSA to continue its brutal bombing campaign in Yemen, while Crown Prince Mohammad bin Salman has engaged in an authoritarian crackdown on domestic dissent.

“If there was no American protection, would the people of Yemen still have faced the same brutal bombing?” Rouhani said.

On a separate note, Rouhani declared that Iran would “defeat” US sanctions on Iranian exports.

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Bizarre Direct Bid Collapse Continues In Today’s Tailing 5Y Auction

Similar to yesterday’s sale of 2Y paper, moments ago the Treasury sold $39 billion in 5Y paper at a high yield of 2.977%, below last month’s 2.997%, and tailing the When Issued 2.971% by 0.6 bps.

The bid to cover dropped from 2.39 in September to just 2.30, below the 6 auction average of 2.51 and the lowest since February 2017.

But it was the internals were the biggest similarity to yesterday’s auction was found, because for the second day in a row, Direct Bidders were engaged in a full blown boycott, tendering only $2.227BN in bids, and were hit on only $727MM, a take down of only 1.9%, which was the lowest since July 2009. It is unclear what has spooked Direct bidders so much but whatever it is, it continues.

Meanwhile, Indirects took down 59.0% of the auction, which while above last month’s 57.9% was below the six auction average of 61.6%. Dealers were left with 39.1% of the allotment, a sharp increase from the 28.3% recorded in the prior 6 auctions.

Overall, not a bad auction but the collapse in Direct demand is perplexing and if it continues, may be an indication that a key buyer group for Treasury paper may have left the building.

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In NYT Op-Ed, George Soros’ Son Blames Trump And “Demonization Of Opponents” For Bomb Packages

In what must be one of the most rapidly written, edited, and published op-eds in New York Times history, Alexander Soros, son of billionaire globalist puppet-master George Soros, has penned a blame-scaping piece pointing directly at president Trump’s “politics of demonizing opponents” as responsible for the bombing of his father, The Clintons, The Obamas, and well anyone else who has received a suspicious package in the last few days and is not in any way right-leaning.

The article, with a title so ironic it has to be farce, “The Hate That Is Consuming Us” runs the gamut from ‘saintly’ McCain defending Obama’s virtue in 2008 to President Trump and Prime Minister Orban’s “extremist fringes” to “the poison of anti-semitism” (which given many of the stories about his father’s behavior is somewhat surprising).

We strongly suggest removing all sharp objects and ensuring no fluids are present in your mouth before reading the following…

Via The New York Times,

On Monday afternoon an explosive device was delivered to my father’s home north of New York City. An alert member of our staff recognized the threat and called the police. Fortunately, the authorities were able to detonate the device safely. On Wednesday, the Secret Service said it had intercepted similar devices sent to the offices of former President Barack Obama and former Secretary of State Hillary Clinton.

We are all grateful that no one was injured, and grateful to those who kept us safe. But the incident was profoundly disturbing – as a threat not just to the safety of our family, neighbors, colleagues and friends, but also to the future of American democracy.

My family is no stranger to the hostilities of those who reject our philosophy, our politics and our very identity. My father grew up in the shadow of the Nazi regime in Hungary. My grandfather secured papers with false names so that they could survive the onslaught against Budapest’s Jews; he helped many others do the same. After the war, as the Communists took power, my father escaped to London, where he studied at the London School of Economics before embarking on what ultimately became a hugely successful career in finance.

But the lessons of his early life never left him. His biggest philanthropic endeavor, the Open Society Foundations, played a leading role in supporting the transition from Communism to more democratic societies in parts of the former Soviet Union and then expanded to protect democratic practices in existing democracies. My father acknowledges that his philanthropic work, while nonpartisan, is “political” in a broad sense: It seeks to support those who promote societies where everyone has a voice.

There is a long list of people who find that proposition unacceptable, and my father has faced plenty of attacks along the way, many dripping with the poison of anti-Semitism.

But something changed in 2016. Before that, the vitriol he faced was largely confined to the extremist fringes, among white supremacists and nationalists who sought to undermine the very foundations of democracy.

But with Donald Trump’s presidential campaign, things got worse. White supremacists and anti-Semites like David Duke endorsed his campaign. Mr. Trump’s final TV ad famously featured my father; Janet Yellen, chairwoman of the Federal Reserve; and Lloyd Blankfein, chairman of Goldman Sachs — all of them Jewish — amid dog-whistle language about “special interests” and “global special interests.”

A genie was let out of the bottle, which may take generations to put back in, and it wasn’t confined to the United States.

In Hungary, Prime Minister Viktor Orbán launched an anti-Semitic poster campaign falsely accusing my father of wanting to flood Hungary with migrants. This included plastering my father’s face onto the floor of trams in Budapest so that people would walk on it, all to serve Mr. Orbán’s political agenda.

Now we have attempted bomb attacks. While the responsibility lies with the individual or individuals who sent these lethal devices to my family home and Mr. Obama’s and Ms. Clinton’s offices, I cannot see it divorced from the new normal of political demonization that plagues us today.

I am under no illusion that the hatred directed at us is unique. There are too many people in the United States and around the world who have felt the force of this malign spirit. It is now all too “normal” that people who speak their minds are routinely subjected to personal hostility, hateful messages on social media and death threats.

It is also all too normal that organizations doing important pro-democracy work face existential threats simply because they accept support from the foundations my father started. And all too normal that political leaders who swear an oath of office to protect all citizens instead pursue politics of division and hate.

We are far removed from the days when Senator John McCain rebuffed his own supporters during the 2008 election to patriotically defend his opponent, Mr. Obama — all because he believed that the health of our democracy was more important than his personal political gain.

We must find our way to a new political discourse that shuns the demonization of all political opponents. A first step would be to cast our ballots to reject those politicians cynically responsible for undermining the institutions of our democracy. And we must do it now, before it is too late.

Alexander Soros is the deputy chairman of the Open Society Foundations.

*  *  *

Was it really just a few short weeks ago that every liberal politician was falling over themselves to proclaim any Kavanaugh-supporting Republican a co-rapist, demanding physical confrontation, and revving up the hate? Lucky that memories are short for the weak-minded.

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Lone SC Ticket-Holder Takes Stunning $1.54 Billion Lottery Prize But Government’s The Big Winner

One lucky Mega Millions player has become America’s newest multimillionaire after winning a $1.537 billion prize – the second-largest US lottery prize on record – after hitting the five magic numbers plus the Mega Ball on Tuesday night. The winning ticket was purchased at a convenience store in South Carolina.

Though the identity of the lucky winner hasn’t been revealed, should they choose to walk away with the one-time cash option, they will win a cool $913.7 million, per CNN.  Qualifying for second-prize winnings, 36 tickets nationwide matched five of of the six numbers.

Mega

The winning numbers? 5, 28, 62, 65, 70, while the Mega Ball was 5. The odds of winning the jackpot were about one in 302 million. Mega Millions tickets are sold in 44 states, Washington DC and the US Virgin Islands, per CNN.

“This is truly a historic occasion. We’re so happy for the winner, and we know the South Carolina Education Lottery can’t wait to meet the lucky ticket holder,” said Gordon Medenica, lead director of the Mega Millions group.

The jackpot had been building since July, when a California office pool of 11 co-workers shared a $543 million prize. Before Wednesday, the Mega Millions record was a $656 million jackpot in March 2012. While Tuesday’s prize is huge, it’s not the largest lottery jackpot on record. That title belongs to a $1.586 billion Powerball jackpot from January 2016. However, this prize was split among three winners. Tuesday’s Mega Millions draw is the largest to belong to just one person.

Looking ahead, the Powerball jackpot has climbed to $620 million since the last winning ticket was drawn in New York back in August. Powerball has had 20 drawings since, all without a winner. If somebody wins on Wednesday, it would be the third-largest jackpot in Powerball history.

To put the winning take in context, if the ticketholder accepted the cash-up-front prize and invested the entire sum in Treasury bonds, they would earn roughly $30 million in annual income from the interest alone.

The Mega Millions jackpot will now reset to $40 million – or $22.8 million cash – for Friday’s drawing.

And while that lone victor – now richer than Taylor Swift (and many others) – will dominate the headlines for a news cycle, as Reason.com’s Joe Setyon notes, when it comes to the lottery, the biggest winner will be the government.

First, the majority of lottery revenue goes back to the government. In 2015, The Atlantic estimated that 40 percent of all lottery ticket sales are allocated to state governments. As Steven Greenhut, western region director for the R Street Institute, explained in a 2016 piece for Reason, this “voluntary tax” to support education is supposed to be a positive. But politicians often use lottery revenues to supplant school budgets. As Greenhut put it: “Money is fungible, so the education element mainly is a public-relations ploy to help people feel good about the dollars they spend on tickets.”

Direct ticket sales aren’t the only way the government profits from the lottery system. Say I were the sole winner of the $1.6 billion jackpot (lucky me). I could opt to receive either a lump sum payment of about $905 million or 30 annual payments averaging about $53,333,333 each, according to the Mega Millions website.

Either way, I’d get hit with a 24 percent federal withholding tax. That would subtract nearly $13 million from each of my annual payments or $217 million from the lump sum. And the top income tax rate is 37 percent, so I’d have to pay the difference between the two rates as well. That would leave me with “just” over $570 million, assuming I took the lump sum.

Then there are the state taxes. A total of nine states don’t take a cut of lottery prizes, but the tax rates for the remaining 41 vary. New York’s 8.82 percent tax on lottery winnings—the highest in the country—means my final lump sum payout would be about $490 million. The remaining $1.11 billion, plus the 40 percent of ticket sales supposedly allocated to education and other causes, would end up in the hands of the federal and New York state governments.

Meanwhile, some states that allow lotteries crush their competition with strict gambling regulations. In Texas, for instance, most forms of gambling are illegal. This means the government has a near-monopoly. The double standard for public and private gambling operations is obvious.

Ultimately, the lottery system is a kind of regressive tax on low-income earners.

“If the promised return is by far illusory—and it is—it would be hard to argue that those purchases do not constitute a tax on those who believe the state’s hype,” Fiscal Policy Institute research associate Brent Kramer wrote in 2010, according to MarketWatch.

As Reason‘s Katherine Mangu-Ward noted in a 2012 appearance on NBC, “The people who can afford it the least are the people who are dumping the most money into the lottery.” Poor people, of course, have every right to dream big.

But while the lottery promises a chance—albeit a small one—to gain untold riches, it’s always going to be the government that benefits the most.

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Suspicious Devices Sent to Clintons, Obamas, CNN, Soros Spark Bomb Scares

Authorities are investigating multiple reports of explosive packages sent to the offices or homes of several public figures, as well as the news outlet CNN.

WABC reports an explosive device was discovered in the middle of the night near the home of former President Bill Clinton and his wife, Hillary Clinton. The device, which was screened by the Secret Service, was addressed to Hillary Clinton, who was not at the couple’s home in Chappaqua, New York, at the time. A source familiar with Bill Clinton’s location told CNN the former president was home, though the device never made it there.

Also this morning, the Secret Service said it intercepted an explosive device addressed to former President Barack Obama. He was probably never in danger, as the Secret Service screens his packages from a facility in Washington, D.C., according to The New York Times.

Another suspicious package with an explosive device in it was sent to CNN’s offices at the Time Warner Center in New York City. A police bomb squad was deployed to the scene, and the newsroom had to be evacuated, according to the Associated Press. CNN reported that the package was addressed to former CIA Director John Brennan. The network’s president, Jeff Zucker, said in a statement that employees should “refrain from sharing any images or geo tags that would reveal” their locations. “We have no particular reason to be concerned, but just think it would be the most cautious approach,” he said. Police were soon able to remove the device from the area.

Florida police, meanwhile, are investigating a suspicious package sent to the Sunrise, Florida, office of Rep. Debbie Wasserman Schultz (R–Fla.), former chair of the Democratic National Committee.

The cluster of bomb threats comes one day after another explosive device was found outside the compound of liberal megadonor George Soros in Westchester County, New York.

According to CNN, which cited a law enforcement official, the devices sent to the media outlet, the Clintons, the Obamas, and Soros are similar to each other.

The San Diego Union-Tribune said several suspicious packages were found the newspaper’s offices, leaiding to an evacuation of the building. It’s not immediately clear if the packages contained explosives. The paper shares a building with one of Sen. Kamala Harris’ (D–Calif.) field offices.

There were initial reports that additional explosive devices had been found that were addressed to the White House and New York Governor Andrew Cuomo. Both reports appear to have been untrue.

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Inside The Fed’s Survey Of Economic (Un)Well-Being

Authored by Richard Rosso via RealInvestmentAdvice.com,

The Federal Reserve Report on the Economic Well-Being of U.S. Households in 2017 was recently released.

The Federal Reserve Board’s Division of Consumer Affairs 5th annual Survey of Household Economics and Decision-making is designed to gain understanding of how adults in the U.S. feel about the state of their finances.

A sample of 12,000 received the survey in late 2017. What’s unique about the study in my opinion, is that it tackles subjective well-being from a financial perspective and emerging issues that may be formidable obstacles in the future. For example, this year for the first time the study included questions related to opioids.

Overall, respondents feel better about their overall financial situation as the economy has improved since the genesis of the survey. However, the continued rapid growth in wealth disparity threads throughout the analysis. Also, the disappointing state of retirement preparation and the cancerous effects of financial illiteracy remain chronic for the Americans surveyed.

Direct-from-the-survey positive highlights:

  • When asked about their finances, 74 percent of adults said they were either doing okay or living comfortably in 2017—over 10 percentage points more than in the first survey in 2013.

  • Individuals of all education levels have shared in the improvement over the past five years, though the more educated still report greater well-being than those less educated.

  • Less than one-fifth of non-retired adults are pessimistic about their future employment opportunities, although pessimism is greater among those looking for work or working part time for economic reasons.

  • Slightly over 7 in 10 adults keep track of their spending and over half follow a budget or spending plan.

  • The 7 percent of adults in 2017 who find it difficult to get by financially is about half of what was seen in 2013.This decline in financial hardship is consistent with the decline in the national unemployment rate over this period.

  • Nearly three-quarters of adults say they are either living comfortably (33 percent) or doing okay (40 percent), when asked to describe how they are managing financially. The share who are at least managing okay has risen consistently over the past five years and is over 10 percentage points higher than in 2013 when this survey began.

Areas of concern or importance:

  • About one-fifth of adults (and one-quarter of white adults) personally know someone who has been addicted to opioids. Exposure to opioid addiction was much more common among whites—at all education levels—than minorities. Those who have been exposed to addiction have somewhat less favorable assessments of economic conditions than those who have not been exposed.

  • Three in 10 adults participated in the gig economy in 2017. This is up slightly from 2016 due to an increase in gig activities that are not computer or internet-based, such as child care or house cleaning.

  • Four in 10 adults, if faced with an unexpected expense of $400, would either not be able to cover it or would cover it by selling something or borrowing money. This is an improvement from half of adults in 2013 being ill-prepared for such an expense.

  • Over one-fourth of adults skipped necessary medical care in 2017 due to being unable to afford the cost.

  • Less than two-fifths of non-retired adults think that their retirement savings are on track, and one fourth have no retirement savings or pension whatsoever.

  • Older adults are more likely to have retirement savings and to view their savings as on track than younger adults.Nevertheless, even among non-retirees in their 50s and 60s, one in eight lacks any retirement savings and less than half think their retirement savings are on track.

  • Three-fifths of non-retirees with self-directed retirement savings accounts, such as a 401(k) or IRA, have little or no comfort in managing their investments.

  • Many adults are struggling to save for retirement, and less than two-fifths feel that they are on track with their savings. While preparedness for retirement increases with age, concerns about inadequate savings are still common for those near retirement age.

  • On average, people answer fewer than three out of five basic financial literacy questions correctly, with lower scores among those who are less comfortable managing their retirement savings.

For example, one question – “Housing prices in the United States can never go down? (True or False),” was answered: Correct – 60%, Incorrect – 19%, Don’t know or no answer – 22%. After a devastating housing crisis, I was surprised by the survey respondents’ inability to answer or get this question incorrect.

Another – “Buying a single company’s stock usually provides a safer return than a stock mutual fund? (True or False).” Correct – 46%, Incorrect – 19%, Don’t know or no answer – a surprising 50%. In addition to being disheartened by the Fed to attach the words “safer return & stocks”, (stocks in any form are never safe regardless of time – not by a long shot), there exists a greater probability to lose capital with concentrated ownership of the stock of one company.

I’ve e-mailed feedback to the Consumer and Community Development Research team at the Fed suggesting a re-word of the query –“Buying a single company’s stock may be riskier than a stock mutual fund?” is a truthful representation.

  • Approximately 1 in 10 adults receive some form of financial support from someone living outside of their home.Nearly one-quarter of young adults received such support during 2017. Among young adults with incomes under $40,000, over one third receive some support from outside their home. Conversely, older adults are more likely to provide financial support to individuals outside their home— peaking at 23 percent of adults in their 50s.

  • One-fifth of those with education debt were behind on their payments. Individuals who did not complete their degree or who attended a for-profit institution are more likely to struggle with repayment than those who took on large amounts of debt but completed a degree from a public or not-for-profit institution.

  • Women of all education levels and less-educated men are less comfortable managing their retirement investments.

So, what lessons should RIA readers take away from the highlights of the latest survey?

  1. The financial industry has done a horrible job at educating consumers about the true nature of stocks and personal finance in general. I mean, not even the Fed can’t get it right when it comes to understanding the long-term inherent risk of the stock market. Bless their hearts. The entire industry pushes the myth that stocks are safe in the long run and the Federal Reserve supports it.

Unlike the pervasive, cancerous dogma communicated by money managers like Ken Fisher who boldly states that in the long-run, stocks are safer than cash, stocks are not less risky the longer they’re held.

Unfortunately, academic research that contradicts the Wall Street machine rarely filters down to retail investors. One such analysis is entitled “On The Risk Of Stocks In The Long Run,” by prolific author Zvi Bodie, the Norman and Adele Barron Professor of Management at Boston University.

In the study, he busts the conventional wisdom that riskiness of stocks diminishes with the length of one’s time horizon. The basis of Wall Street’s counter-argument is the observation that the longer the time horizon, the smaller the probability of a shortfall. Therefore, stocks are less risky the longer they’re held. In Ken Fisher’s opinion, stocks are less risky than the risk-free rate of interest (or cash) in the long run. Well, then it should be plausible for the cost of insuring against earning less than the risk-free rate of interest to decline as the length of the investment horizon increases.

Dr. Bodie contends the probability of a shortfall is a flawed measure of risk because it completely ignores how large the potential shortfall might be. Sound familiar? It should. We write of this dilemma frequently here on the blog. Using the probability of a shortfall as the measure of risk, no distinction is made between a loss of 20% or a loss of 99%.

If it were true that stocks are less risky in the long run, it should portend to a lower cost to insure against that risk the longer the holding period. The opposite is true. Dr. Bodie uses modern option pricing methodology i.e., put options to validate the truth.

Using a simplified form of the Black-Scholes formula, he outlines how the cost of insurance rises with time. For a one-year horizon, the cost is 8% of the investment. For a 10-year horizon it is 25%, for a 50-year time frame, the cost is 52%.

As the length of horizon increases without limit, the cost of insuring against loss approaches 100% of the investment. The longer you hold stocks the greater a chance of encountering tail risk. That’s the bottom line (or your bottom is eventually on the line).

Not only that, from this survey readers understand consumers are generally poor at managing their retirement plans. However, nothing stops the undying love for defined contribution plans. Unfortunately, small businesses can’t afford to establish an administratively burdensome structure therefore many small business employees do without. According to Pew Research, thirty-five percent of private sector workers 22 and older do not work for an employer that offers a defined contribution plan or a traditional defined benefit plan.

Financial firms provide wholesale guidance like “max out your 401(k) before all else,” without understanding the impact of these actions to the distribution phase of retirement when a retiree has zero tax diversification and every distribution taken is taxed as ordinary income. Roth in most situations, is a smarter choice. A 2017 Harvard Business School Study for the Journal of Public Economics suggests that most investors will have more money or retirement consumption dollars if they use a Roth 401(k) instead of a traditional choice. Roth accounts do not require mandatory retirement distributions at 70 ½ and qualified distributions including earnings are tax free.

As Lance Roberts and I have lamented numerous times in print and on our podcast –

“The 401(k) is one of the worst financial creations that exists today.”

Read: 6 Reasons Why You Should Unfriend Your 401(k) Plan.

The loss of pensions has been a major if not the paramount reason behind why many Americans are failing to meet retirement goals.

The Department of Labor is in the process of proposing a rule that would allow small businesses to band together to offer 401(k) plans to employees. President Trump signed an executive order to reduce regulatory barriers that keep small businesses from providing access to retirement plans for their employees.

If defined contribution plans are all workers are going to have access to (bye-bye pensions), then at the least, the financial industry, hopefully fiduciary advisers at the forefront, should understand investor accumulation and distribution cycles to formulate tax-efficient retirement strategies for plan participants.

  1. Financial vulnerability remains a factor for many U.S. households. Our culture of spending is hazardous especially now as borrowing costs increase.

Most metrics of economic health are based on consumption; personal consumption comprises 70% of America’s Gross Domestic Product. Through the 60s and 70s, the U.S. personal saving rate rarely fell below 10%. Our ensemble culture or the culture overall has become obsessed with owning more, status through the acquisition of goods and services. In your household, it must be different. I have a feeling in most RIA reader households, it is (and that’s a very good thing).

The movement must be grassroots, the individual one by one, must take action to shore up their personal and family household balance sheets. Think GPP or “Gross Personal Product”, not GDP. Let’s face it: Nobody is going to bail you out when the economy cycles in reverse. As a matter of fact, when our economy falls into the abyss, it’s we as taxpayers who bear the brunt of the costly, ineffective patchwork that fiscally duct-tapes systems back together.

  1. Households must establish financial boundaries and learn how to say “no,” more often to family and friends who require financial support.

Clarity’s Financial Guardrail Rule #3 is: Never allow others to cross your personal financial boundaries.

It’s a tough lesson for some, but once learned, never forgotten. There’s nothing inappropriate about maintaining boundaries and saying “no” to obligations that may place your personal financial security in jeopardy.

For example, we witness parents who extend themselves to co-sign for children. We know of those who lend to friends and family members only to be disappointed when loan obligations are not met. It’s acceptable to establish in a household budget, charitable intentions and gifts; it’s honorable to help people you love who are in need.

However, it’s best to understand upfront what the financial impact to your personal situation is going to be. Know your boundaries and adhere to them. If you say ‘no’ enough, others will respect them, too.

The Fed Survey outlines strong improvement especially for higher-educated, high-income households.

Unfortunately, financial vulnerability still plagues a majority of middle-class households and financial literacy remains downright embarrassing. The growing dependency on opioids is a known issue that requires attention.

Overall, the Federal Reserve gets a bad rap. Nonetheless, factions of the institution conduct relevant consumer research. This report on economic well-being is one of my favorites.

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