Whether or not you’ve had time yet to plow your way through David Collum’s excellent 2016 Year in Review, our annual podcast with Dave always brings additional color to light — and this year’s is no exception.
Any model based on an assumed 7.5% return is doomed. As you get low returns, our pensions get in trouble. And whenever the returns shoot above the norm they say “Well, this is excess.” And they scoop it up. So every time they are above water they scoop it up. How? They stop contributing. They start using the money for other stuff. Think of a sine wave oscillating about the mean — even if you guessed the mean correctly, if every time it is on the high side you skim it you’ll never get the mean; and that’s what the pension managers have done. And companies just stop contributing to pension plans and started calling the retained funds “profits”, which causes equities to go up and makes the thing get out of whack.
We’ve got a recession coming, one of the full-blown kind. And I don’t know what will happen. My prediction is that it is going to be a bad one. But what a lot of people don’t realize is that is when things start unwinding, counter party risk kicks in and faulty business models start showing up as bad and they start collapsing. All the accounting problems that built up behind the scenes so that the people cook the books to get their bonuses up and they made these crazy assumptions — under the protective cloak of a recession, CEOs can get away with announcing anything because they say Hey, don’t look at me. It’s a recession. So they write down huge blocks of cost. This actually exacerbates the downswing because people are dumping all their cooked books and getting all the fraud off their books so they don’t have to fess up to the fact that they cooked them. In actuality, they’re getting ready to then start building up their stock options again from some bottom somewhere.
This is going to unwind. It has to unwind. This is like a person who weighs 850 pounds — they’re not going to make it into their 90s, right?
Click the play button below to listen to Chris’ interview with David Collum (49m:26s).
Chris Martenson: Welcome to this Peak Prosperity podcast. I am your host, Chris Martenson. It is December 21, 2016, so happy Solstice everybody. It is perhaps fitting that we are recording this podcast on the shortest day of the year, because what things can only get brighter from here. At least physically brighter. Perhaps not financially or geopolitically, but that remains to be seen. Now, in order to assess where we are headed, what could be better than a gigantic romp to where we have just been? Continuing with our annual tradition we have got the best year in review in the business thanks to today’s guest, Dave Collum.
For those of you unfamiliar with Dave, he is professor of chemistry and chemical biology at Cornell University, where I got my MBA. And in addition to his academic interests, David authors an annual macroeconomic assessment titled the Year in Review. Great title and it is, hands down, listen it is the best synopsis of anything that mattered during the previous 12 months. I am super excited for today’s podcast. Dave’s latest year in review can once again be found in full and in all its glory on PeakProsperity.com. I’m excited to have him with us now, live in order to expand on his excellent insights. Dave, thank you for joining us again this year.
Dave Collum: Hey. I’m glad to be here. I actually was just editing the last of the galleys for this thing for Adam so it is kind of fresh on my mind. This time of year my mind is buzzing with this annual review thing. I almost can’t speak without citing it now.
Chris Martenson: It’s such a huge work and I have to thank you on behalf of everybody for taking the time to put pen to paper or finger to keyboard, as the case may be, and delivering this yearly review. This one- — I think there was so much material it is probably your longest ever.
Dave Collum: Actually presented a problem for me because when I started in January I knew that by – first of all, I knew the election would overwhelm the year. I had written these things through previous elections and never had that sense, but this year was pretty clear. And then I also knew that there was a dozen players, most of them Republican, but a dozen players who by November 9th would be irrelevant. They would be footnotes. So, I somehow had to keep track of all of these different players and what was happening, and then knowing that they would be relegated to footnotes by the end and that there would be one probably highly polarizing figure left standing and, as I refer to it, for us to be chalk outlines around this person. And as we now know, it is Donald Trump.
Chris Martenson: And that’s so amazing. You are writing this year about themes and this year’s theme that obviously deserves a lot of attention where you started is the presidential election. I want to start there; but listen, with failures and mendacity everywhere, let’s start with the easy prey. Just how badly did mainstream media screw this one up?
Dave Collum: Well, it depends on what their goals were. They screwed it up in unimaginable ways. At the beginning of my year in reviews, I always come out and support the notion of conspiracy theories.
Chris Martenson: That’s right, yea.
Dave Collum: And I denounce those that use conspiracy as a pejorative, because really, men and women of wealth and power conspire and, to anyone who doesn’t think that is true, is an idiot. And this year with the election, the Wikileaks, the curtain got pulled back so anyone who can somehow get through 2016 believing that conspiracies don’t exist is just a complete buffoon, right? So, I open up with that. The press’s role in the election this year was just staggering to me. It was obvious, because as Trump got more and more powerful, the press became more and more blatant in their attempt to engineer the outcome of the election. And then by the end we also, thanks to Wikileaks — we knew in advance of that, but we got confirmation that the press was completely in cahoots with the DNC.
Chris Martenson: Well, absolutely. They got a lot wrong, obviously. I want to get to how they missed the most obvious thing, which is what the appeal of Trump might have been. But first, I was just driving around today. I had NPR on for a second.