Vancouver Homeowners Made More From Sitting On Their Assets Than The Entire City Did By Working

The most stunning statistic to come out of China’s offshore money-laundering mecca located in Vancouver, where over the past two years Chinese buyers have created the biggest developed world housing bubble in recent history as a result of unprecedented capital flight from China’s financial system, is that just by sitting on their assets local homeowners “made” more in 2015 than the entire city population earned by actually going to work.

According to SCMP, while top-paying jobs aren’t easy to come by in the City of Vancouver – which partly explains its spiralling unaffordability – at least 75,000 “tireless workers” in the British Columbia city made the incredible average rate of C$126 per hour. Sadly, the Hong Kong website notes, “these workers are not among the city’s human inhabitants. They are its single-family homes.” Putting this in numbers, the quiet “efforts” of Vancouver’s houses (or, more accurately, the dirt on which they sit) whose value exploded in the past year, were rewarded so handsomely last year that they made their owners about C$25 billion, or about 30% more than the C$19 billion the entire city population made in employment earnings the entire year.

That shocking calculation comes courtesy of mathematician Dr Jens von Bergmann, a former teacher at Notre Dame and the University of Calgary. As SCMP reports, Von Bergmann now runs MountainMath Software in Vancouver, but his side interest is combining and presenting data in ways that help us better understand the city. He is best known for his “census mapper” depictions of Vancouver, that vividly chart the distribution of everything from poverty and mortgages to Irish ancestry.

For Vancouver workers, the results are disheartening: von Bergmann’s calculations – which are the result of combining data from the Census and National Household Survey, the City of Vancouver, Metro Vancouver and BC Assessment – show just how much more lucrative it is to own a house in Vancouver compared to, say, slogging away in a cubicle or on the end of a shovel with the rest of the schmucks. Of course, to own a house in Vancouver one first has to work long hours for many years; however the baseline price has now risen so high it has become virtually impossible to be a local homeowner in Vancouver thanks to honest, hard work. Now crime and subsequent money-laundering by Chinese oligarchs on the back of the world’s biggest financial bubble with $35 trillion in bank assets which have to be parked offshore asap… that’s a different matter entirely.

Von Bergmann, who first posted his findings on the MountainMath site earlier this year, also raises an interesting point about the Vancouver affordability debate: while there is a hue and cry about the origins of buyers’ money as it floods into the market, there is a lot less about how to treat that money once it has arrived in the bank accounts of sellers. “[There is] a tendency to view the money that is buying Vancouver real estate very critically, whereas once locals pocket the land value rises that same money is suddenly welcome and well-deserved,” he said. “I find the vilification of the money pre-purchase in contrast to the silent acceptance of the money post-purchase problematic.”

Bingo, and that is precisely why the Vancouver housing bubble will continue because local politicians are mostly focused on the “post-purchase” aspect of the transaction. Of course, potential buyers could care less and are merely shocked by just how unaffordable the pre (or post)-purchase prices have become.  And as long as this selective focus remains unchanged, so will the general Vancouver situation as the bubble gets even bigger, despite the unexpected warning by none other than the OECD last week warned of a “disorderly housing market correction” In Canada. The OECD is of course correct becuase while many of those have an incentive to perpetuate the status quo, only the poor and powerless want change and they obviously don’t matter.

How does von Bergmann reach his conclusion that owners of single family houses earned more than all City of Vancouverites did by working? The latter part is pretty easy. The 2011 National Household Survey shows that the city’s average household income was C$80,460 (for the 2010 tax year). Multiply this by the 264,575 households in the city for total income of C$21.29billion. But of this total, only 78 per cent is attributable to employment or self-employment income (versus, say, investment income or welfare). So the total pre-tax amount that City of Vancouverites earned by actually working in 2010 was C$16.6billion.

Assuming that Vancouverites’ overall employment income rose at the rate Statscan suggests that median incomes did from 2010 to 2013, then did so again from 2013 to 2015, this results in total citywide pretax work income of about C$19.2 billion.

Von Bergmann offers a slight caveat here: “Average incomes have probably risen a tiny bit more than median incomes [because of] the nature of incomes at the top … generally growing faster. But [the] effect will be very small.”

On the other hand, calculating the amount “earned” by Vancouver’s single family homes is trickier. First, von Bergmann had to identify these homes, which he did by combining a City of Vancouver property outline dataset with Metro Vancouver land use data to calculate all single family and duplex properties, then subtracting stratified properties identified as having received multiple property tax bills.

In this way, he included houses with non-stratified basement suites or other dwellings, which are excluded from oft-cited census data that suggests about 47,000 single-family homes in Vancouver. Instead, von Bergmann concludes there are 78,740 single-family houses in Vancouver.

 

[It should be noted that the City of Vancouver has previously tallied about 76,000 single family houses; Von Bergmann said he could not explain that discrepancy. However, it’s not a big enough difference to alter his overall findings]

 

Von Bergmann then looked at the increase in value of these 78,740 properties, according to data from BC Assessment. Excluding building-value increases, the land-value-only increases averaged C$313,072, for a total land value rise of C$24.65 billion.

By simply dividing the average land-value rise by the average Vancouver household’s 62 person-weeks of work per year (and assuming a 40-hour work week), von Bergmann calculates that the owners of Vancouver houses earned about C$126 per hour for what he called “thumb-twiddling”. East of Main Street, the rate was C$92 per hour; west of Main, a whopping C$173 per hour.

“I am not entirely sure why anyone would want twiddling thumbs to stay so lucrative…or why earnings from thumb-twiddling should remain tax-free [as untaxed capital gains on a principal residence],” von Bergmann said on the MountainMath site.

Not everyone agrees with Von Bergmann’s general point, that the speed, scale and taxability of house equity increases demands scrutiny. It was in February’s throne speech, outlining her government’s agenda, that BC Premier Christy Clark made it clear she would “carefully protect the savings and equity that existing homeowners have painstakingly placed in their homes”.

“Painstaking” is not a word many would use to describe the process that last year saw the average price of a single family home in the Metro Vancouver rise by 40 per cent, hitting C$1.8million.

Of course, anyone concerned about Vancouver housing prices rising by 25% in one year and casting blame on homeowners who did nothing more than “twiddle their thumbs” will surely have nothing but praise whose destructive monetary policy may have crushed the American middle class and led to the widest chasm in income inequality on record (one which even the Fed admits is helped create) thanks to a market which has nearly tripled in the past 7 years purely as a function of a few money printers not twiddling their thumbs but instead repeatedly pushing the buttons CTRL and P.

One thing is certain: neither the US asset bubble, nor Vancouver’s housing bubble have a happy ending.

via http://ift.tt/1t94pUq Tyler Durden

Grasshopper Nation: Planning For Those Who Aren’t Prepared

Submitted by Adam Taggart via PeakProsperity.com,

Take a moment to reflect on all the people you care about who aren't reading this article. Or sites like this, which wrestle with the implications of limits to growth and the concerning unsustainability of the economic and natural systems our society depends upon.

How many of your family members, good friends, and neighbors simply choose to ignore the messages from those of us alarmists on the "doomer" side, and live life trusting that tomorrow will always look and feel pretty much like today? Most of them? All of them?

Look, it's understandable. Humans aren't wired well to respond to future risk that isn't visible as an immediate threat. And temperamentally, we prefer good news over bad, so we seek to overweight the former and discount the latter. Who wants to stress out about what "might" happen tomorrow, anyways — can't we just enjoy life today?

The rift between the preparedness-minded and those not is age-old, as fables like Aesop's The Ant & The Grasshopper date at least as far back as the 5th century BCE.

We spend our focus on this website engaging the "ants", the empirically-minded folks who look at the data and concur that there is sufficient possibility of one or several crises (economic, energy-related, environmental — or a combination of such) occurring in the next several years. And that taking advance action is prudent.

But the ants are the minority.

Forget about planning for the more esoteric risks posed by faulty monetary policy or energy economics — 72% of Americans don't even have a basic emergency response kit in place should an ordinary kind of disaster strike (power outage, hurricane, tornado, earthquake, etc).

The simple reality is that, if you're investing your energies towards building resilience against potential hardship, most of those around you likely aren't.

In the midst of your efforts, are you planning for their lack of preparedness?

Grasshopper Nation

The data shows us that the vast majority of Americans are not ready to deal with even minor setbacks.

In January of this year, Bankrate.com released survey findings that revealed that only 37% of Americans would be able to cover an unexpected expense (e.g., auto repair, medical bill) of $1,000 with savings. The remaining 67% would have to borrow from friends and family, cut spending elsewhere, or use credit cards to come up with the funds.

In March, the Economic Policy Institute published an excellent chartbook titled The State Of American Retirement (for those inclined to review the full set of charts on their website, it's well worth the time). The EPI's main conclusion from their analysis is that the switchover of the US workforce from defined-benefit pension plans to self-directed retirement savings vehicles like 401Ks and IRAs has resulted in a sizeable drop in retirement preparedness. Retirement wealth has not grown fast enough to keep pace with our aging population.

The stats illustrated by the EPI's charts are frightening on a mean, or average, level. For instance, for all workers 32-61, the average amount saved for retirement is less than $100,000. That's not much to live on in the last decades of your twilight years. And that average savings is actually lower than it was back in 2007, showing that households have still yet to fully recover the wealth lost during the Great Recession.

But mean numbers are skewed by the outliers. In this case, the multi-$million households are bringing up the average pretty dramatically, making things look better than they really are. It's when we look at the median figures that things get truly scary:

Nearly half of families have no retirement account savings at all. That makes median (50th percentile) values low for all age groups, ranging from $480 for families in their mid-30s to $17,000 for families approaching retirement in 2013. For most age groups, median account balances in 2013 were less than half their pre-recession peak and lower than at the start of the new millennium.

(Source)

The 50th percentile household aged 56-61 has only $17,000 to retire on. That's dangerously close to the Federal poverty level income for a family of two for just a single year.

Another survey breaking out retirement savings by generation shows that as unprepared as many Boomers are, their savings rates dwarf those of Gen X and Millennials. True, Boomers have had more decades to accrue money, but challenges to capital formation are also responsible in large part — e.g.  lower real household wages, higher cost of homes and other living expenses, and early-career portfolio losses from the 2008-2009 market crash:

(Source)

The result? 56% of all adult Americans have less than $10,000 saved for retirement.

When it comes to saving for the future, we are a nation of grasshoppers

But Wait, It Gets Worse

The statistics cited so far are depressing on their own. But what if American workers' ability to save gets further compromised from here?

There's a litany of reasons it very likely will. Here are just a few:

Declining Civilian Labor Force Participation Rate

Despite the manic (and wholly unbelievable) headline unemployment rate number released by the government, the real underlying story of US employment is one of a shrinking potential workforce.

We were treated to a most-egregious dose of BS from the BLS (Bureau of Labor Statistics) just this morning in the Non-Farm Payroll Report, which showed the unemployment rate falling to a shockingly fantastic 4.7%. Amazing, right? What a recovery our central planners have pulled off!

But when you look at the underlying data, it's not a growing amount of jobs that's the main driver of this low rate. Rather, it's the decline in the pool of bodies deemed as 'eligibile workers'.  You see, after folks have been out of work for a certain length of time, the government gives up on them, and re-classifies them as permanently unemployable. Some of this is understandable: the boomers (who can) are beginning to retire. But as friend-of-the-site Dan Amerman has calculated, 74% of the jobless who have been removed from unemployment calculations are in the 16-54 age bracket. So, we are looking at a situation in which the government is subjectively choosing whom to count and whom to not count.

The percentage of the US adult population counted as potentially employable has been declining since the start of the new millennia, and gathered steam after 2008. How many people is the US government now counting as "not employable"? 95 million — an all-time record:

(Source)

Think about that for a moment. Our government is telling us that 95 million adults — nearly 1/3 of all the people living in the United States — are such hopeless prospects that we should simply forget about them ever working again.

Of course, removing these people from the official record allows administrations to trumpet rosy statistics like the 4.7% unemployment rate we saw this morning. So if they can get away with it, you can bet they will.

Until we start pushing back on such devious manipulation of the facts, we're just fooling ourselves as a society. Any cheerleading of the current chicanery just takes our eye off of the really important, and massive, structural problem: we have a ridiculously high number of our adult citizens who can't find gainful employment.

Layoffs & Automation

I've written at length recently about two other factors that will make it hard for today's workers to build retirement capital: layoffs and automation.

So far 2016 is setting a 7-year high in terms of reported layoffs. My earlier article Mass Layoffs To Return With A Vengeance explains how that trend is likely to accelerate from here, and why having a Plan B in place before receiving a pink slip is a particularly sound strategy right now.

My more recent report Automating Ourselves To Unemployment examines the powerful incentives businesses both large and small have right now to replace human capital with technology. Yes, this has happened throughout history — but never at such scale and such speed. And it's important to remember that once industry invests in automation technology, the jobs displaced never come back. Displacing a large percentage of human labor without a plan in place to put that displaced labor to productive use is a sure-fire recipe for long-term crisis. Our current trajectory has us hollowing out our workforce at an alarming rate. Unskilled labor needs a place of entry in order to build skills and work experience. Yet we are closing that door.

Disruptions In Financial & Energy Markets

Websites like this one publish numerous articles each week detailing the extensive reasons why a 2008-style correction (or worse) in the financial markets is likely overdue. A world economy awash in too much debt. Asset prices bubbles blown by excessive central bank liquidity. A weakening global economy. Stumbling corporate earnings.

This week? We learned that the CAPE Ratio is back at its 2007 overvalued heights. So many bubbles. So many pins…

The EPI chart above showed us that US retirement savings have yet to recover from the losses experienced during the Great Recession. How long will it take them to recover from the next major market correction? An additional 'lost decade'? Longer?

And on the energy side, the US economy is still reeling from the collapse of the shale 'miracle'. Times get tough when prices collapse: companies bleed red, and layoffs ripple through the oil & gas industry and the many other industries that service it.

But times may well get even tougher in the next chapter of this story. Right now, infrastructure is being shut down and sold off (the US oil rig count dropped from 1,600 to 400 over 2015 according to Baker Hughes). But total world oil consumption is still growing. When the current excess of oil stores is used up, we are very likely to experience a petroleum shortage before incremental supply can be brought back online. Remember those days of $100+ per barrel oil? We may be back to them sooner than you think. And with that, all of the associated price inflation in the cost of living that a higher oil price brings with it.

How Will The Unprepared React?

So — lots of reasons to expect the vast majority of the population to be vulnerable to coming crises both large and small. When the next calamity strikes, how will these people likely react?

History gives us plenty of examples to answer this with confidence: Not well.

When resources per capita drop below a certain level on Maslow's Hierarchy Of Needs, civility is thrown aside. Desperate people act desperately.

We've heard examples of this from past podcast guests like Fernando "FerFAL" Aguille, who lived through several economic collapses in South America.

Closer to home, it took less than 24 hours for stores shelves to be emptied and fights to break out over water after a water main broke in Weston, MA, a suburb of Boston, in 2010.

But perhaps this classic episode from the Twilight Zone best captures the jettisoning of social mores in the face of unexpected crisis. 

Filmed during the Cold War, this short episode captivatingly dramatizes how quickly our social fabric can rip apart when unexpected threats arise. Specifically, it shows how the unprepared are likely to turn to — and then, on — those who did take precautions:

It's worth taking the time to watch this episode. It really hits home the importance of having extra supplies on hand for the inevitable 'unprepareds' banging on your door should a disaster arrive.

And it raises the critical questions:

  • Of the people in your life, which ones will you put aside reserve resources for?
  • How much are you willing to put aside for them?
  • And, what are your limits? At what point will you say "no"?

Preparing For The Unprepared

Our resources are finite. Most of us don't feel we have all that we require to meet our own needs and goals. And the best-laid preparations of the most planful of us can suddenly become woefully insufficient if too many unexpected family, friends and neighbors show up demanding our charity.

How do we prepare for the unprepared?

The short answer is we can't; not fully. But we can plan for how much to place in reserve for them.

Here at PeakProsperity.com, we firmly believe in helping others; even those who scoff today at our "doomer" approach of preparing for the worst. But we realize that the demand from the unprepared masses during a crisis will most likely always dwarf your resources. So you'll have to make tough calls. Our advice is to make them now. Whom will you help? What are you willing to provide them with?

Making those choices is heartbreaking. But making them now allows you — as well as your loved ones — to better prepare today by setting expectations and creating specific goals.

Here's our advice for those of you wrestling with this thorny task:

  • Put your oxygen mask on first — You can only be a help to others if you're first in a position to do so. It all starts with building resilience; reducing your vulnerability to the highest likelihood threats able to impact your lifestyle the most (job loss, market crash, sustained power outage, natural disaster, health issue, etc). Our book Prosper!: How to Prepare for the Future and Create a World Worth Inhering was created as a manual for doing exactly this. And its companion What Should I Do? Guide provides step-by-step guidance for a making your preparatons (be sure to start with Step 0)
  • Serve as a model — Let your actions be visible as an inspiration to others. Allow them to see that preparing for the unexpected isn't just for the "tin foil hat" crowd. Emergency preparedness investments like stored food and water don't need to break the bank, can be made over time, and can involve the entire community in activity that brings it closer together. Building Social Capital, improving your health and fitness, learning new skills, becoming more energy efficient, learning to strengthen your emotional health and those you care about — all of these are life-enhancing pursuits.
  • Keep your reserve assets confidential — Don't make ALL of your preparations known. As the above section shows, desperate people take desperate action. The best way to guard against folks coming to take your most precious assets is for no one to know they exist. Beyond that, it often helps to have protective measures in place. Our Personal Safety & Home Defense Guide is full of advice on how to reduce your exposure to the most prevalent forms of invasion and attack.
  • Build awareness among friends/family of the risks in play —  Forewarned is forearmed. Our video series The Crash Course was created to build awareness of the macro risks we face today, and to explain them in an intuitive, approachable way to people of all backgrounds. Sharing that series (or the more condensed 1-hour Accelerated Crash Course) is an excellent way to open eyes and minds to the need for prudent action today. Again, use our What Should I Do? Guide as a catalyst for helping those who 'get it' take their first steps.
  • Get folks engaged in the right actions for the wrong reasons —  So your buddy next door doesn't want to hear about your "doomer" predictions? Try a different tact. Maybe he likes the idea of a neighborhood fall cider pressing party, and joins you in planting a few apple trees in each of your backyards. Our Community Building guide is full of ideas for engaging your neighbors in action in ways that make your community more resilient, even if they don't realize it through the fun they're having.
  • Define your line — Let those whose welfare you're taking into consideration know of your intentions. Don't make it a guarantee; just let them know their security is important to you. But let them know now what the limits of your support will be — or even better, give them a more restricted version (which will leave you some buffer in case of the unexpected). Setting these expectations in advance is valuable, even if the folks you're talking to aren't really listening. At the very least, you can proceed knowing you've done your utmost to be up front about what they can and can't count on you for. Review our guide on Emotional Resilience; you will very well need it to prepare your heart in case you ever do have to put these tough calls into action.
  • Empower the latecomers — Invest in assets and agreements that enable late-arrivals to help themselves (tools, information/education, small jobs, etc). Helping people skill-up and provide for themselves both increases their ability to prosper and reduces the likelihood they drain your finite stores. And you'll be perceived as a benefactor within your community, which will be motivated to provide for and protect you (rather than abandon you) during times of adversity.

There's no doubt this is a thorny subject, with imperfect answers. But to fail to plan for the needs of the unprepared is, in itself, a plan to fail. After all: it's a grasshopper nation, and we ants are too few.

via http://ift.tt/1Pccc8c Tyler Durden

Trump Victory Would Mend US-Russian Relations: Top Moscow Senator

While the US political and financial establishment has been firmly opposed to a Trump presidency, an unexpected supporter for the presumptive GOP candidate has emerged in Russia, where the head of the Russian Upper House Committee for Foreign Relations, Konstantin Kosachev, said that a victory for Donald Trump in the US presidential elections would provide the “shake up” Washington needs and could be the catalyst to reverse the rapidly deteriorating trend in US-Russian relations. At the same time, even the Russians are convinced that there is no hope for the global geopolitcal stalemate and rising military tension and escalation to be resolved under Hillary as she would merely perpetuate the “democracy messianism” or, the reorganization of the whole world so that it could better serve the purposes of a select few individuals.


Chairman of the Upper House committee for foreign affairs, Konstantin Kosachev

Any continuation of the dialogue (which often looked more like a monologue performed by the US) using the same format that has been used over the past 25 years would automatically reproduce all conflicts and stalemates that we faced before – the NATO expansion, the creation of the global missile defense, the ’tug of war’ over the post-Soviet republics, and the attitude to the situation in the Middle East,” Konstantin Kosachev wrote on his Facebook page on Thursday.

Kosachev may be unduly optimistic: after all it is the US M.I.C. that pulls the strings on all US foreign geopolitical entanglements, and not even the US president is strong enough to withstand it; however he is correct that if the status quo in the White House persists, then the escalation between NATO and Russia which in recent weeks took on a far more ominous, nuclear twist with the launch of the US missile defense shield over Europe, may continue until there is a “mistake” and a mushroom cloud goes off somewhere.

Kosachev continued: “New chances may appear only as radically new tendencies in the White House, and we are talking not only about pro-Russian sentiments, we simply need some fresh air, some ‘wind of change’ in Washington. Then, we can reset certain things and agree on continuation of the dialogue.”

The senator went on to explain that it was practically impossible to deal with US officials obsessed with “democracy messianism” or, in other words, the reorganization of the whole world so that it could better serve their own purposes. “For them, any agreements and compromises are temporary and their own objectives never change,” he complained.

“In the context of these two factors [Donald] Trump looks slightly more promising… At least, he is capable of giving a shake to Washington. He is certainly a pragmatist and not a missionary like his main opponent [Hillary] Clinton,” Kosachev stated.

“Perhaps, the ideal choice would be between Trump and Sanders, because they both would mark a principally new page in American history and because of that – in the history of Russia-US relations. But it seems that such competition is already out of the question,” the Russian senator added.

At the same time, Kosachev acknowledged that under any administration the United States was bound to implement certain geopolitical projects, such as NATO expansion, missile defense or trans-ocean trade partnerships, but noted that new faces in US politics could still bring some pleasant surprises.

“We will wait for surprises because in the ordinary mode and under system-born presidents from traditional clans, like Bush or Clinton, we will definitely have no changes at all,” he concluded.

In late April this year, another top Russian politician – the head of the Lower House Committee for Foreign Relations, Aleksey Pushkov – said that Donald Trump’s pragmatic and business-like approach to politics made him a better candidate than the Democrats with their fixation on spreading liberal ideology and values.

“I would like to emphasize – today Trump looks a more pragmatic candidate who is ready to reach agreements. What will happen after the elections, if he wins, is another question,” the Russian lawmaker said. “In reality, the demand for cooperation with Russia exists in the United States, but this demand is being artificially contained and removed from the agenda by the current US administration.”

One can only hope that the Russians are right.

via http://ift.tt/1Pc9Oyo Tyler Durden

Caught On Tape: The Day The Teleprompter Died…

With the most ironically perfect timing this week, President Obama “umm’d”, “ahh’d”, and “if’d” in a stuttering mess during his veiled denunciation of Donald Trump stump speech for Hillary Clinton, when horror of all horrors – his teleprompter froze…

Enjoy what could be the strangest public appearance yet for President Obama…

via http://ift.tt/1U1tpWe Tyler Durden

Three Days In Chicago: 64 Shot, 3 Dead – Why It Keeps On Happening

We've covered the tragic events in Chicago quite extensively, most recently with the violence on Memorial Day weekend that helped lead to the deadliest May in 21 years for the city.

Now, the NYT gives us a glimpse of what takes place as residents just try to survive a weekend in the Windy City.

From the NYT

"The Newlywed Game" is on the television. Julia Rhoden, 53, is sitting on her bed, exhausted from another long day at the health care center where she works as a nurse's aide. There is a loud boom and then another and then another. She feels a sting as a bullet enters her back. "I been shot! I been shot!" she cries out to her children in the next room, as blood soaks through the summer dress she wears as a nightgown.

 

That same night, 15-year-old Veronica Lopez is hit as she rides in a Jeep that is speeding along a waterfront drive. "Babe, they shot me in the stomach," the girl tells a friend, who later says he covered her body with his own as the gunfire continued.

“Help, I’ve been shot!” another teenager screams as he limps down a darkened street, a bullet having torn through his leg.

 

It is Friday night in Chicago, and the Memorial Day weekend is just getting started. The Police Department plans to deploy more than a thousand extra officers to deal with the violence they fear will intensify with the unofficial start of summer.

 

There is no stopping the gunfire, which comes in bursts and waves, interrupting holiday barbecues, igniting gang rivalries, engulfing neighborhoods, blocks, families.

 

From Friday evening to the end of Monday, 64 people will have been shot in this city of 2.7 million, six of them fatally. In a population made up of nearly equal numbers of whites, blacks and Hispanics, 52 of the shooting victims are black, 11 Hispanic and one white. Eight are women, the rest men. Some 12 people are shot in cars, 11 along city sidewalks, and at least four on home porches.

 

It is a level of violence that has become the terrifying norm, particularly in predominantly black and Latino neighborhoods on the South and West Sides. With far fewer residents, Chicago has more homicides than Los Angeles or New York.

 

In an effort to capture what is happening on Chicago’s streets, and why, The New York Times dispatched a team of reporters, photographers and videographers to virtually all of the shooting scenes across the city. Working around the clock through the three-day weekend, The Times interviewed relatives, witnesses, police officers and others, and captured how much violence has become a part of the city’s fabric. The Times intends to follow the cases throughout the year.

 

This weekend, among the six killed are a father, Garvin Whitmore, who loved to travel but was scared of riding on roller coasters; and Mark Lindsey, whose outsize personality brought him his nickname, Lavish. The oldest person struck by a bullet is 57. The youngest person to die is Ms. Lopez, a high school student and former cheerleader.

 

And so the logic of one Chicago mother, who watches another mother weep over her dead son in their South Side neighborhood, is this: She is glad her own son is in jail, because the alternative is unbearable.

 

“He was bound to be shot this summer,” she says.

* * *

Friday, 3 P.M.

Rain is in the forecast, but Police Superintendent Eddie Johnson wants to make sure that his officers won’t let their guard down as they head into the holiday weekend.

 

“I think you all know how important this weekend is,” Mr. Johnson tells nearly 20 of Chicago’s highest-ranking police officials at Public Safety Headquarters. “Violence from the previous Memorial Day weekends hasn’t been good.”

 

The year, so far, has been steeped in blood. Shootings — 1,177 as of the Friday morning before Memorial Day — are up by 50 percent for the year. Two hundred and thirty-three people are dead.

 

Mayor Rahm Emanuel is also pushing for a quiet weekend. At a community event promoting nonviolence on the South Side, he greets men playing basketball, watches children draw, and compliments a mural underway, which reads: “Hearts Up. … Guns Down.”

 

A few hours later, the shooting starts.

Friday, 9:45 P.M.

Tim Miller and a group of friends are sitting on the steps in front of their apartment building drinking beer when they spot a teenager walking out of an alley between low-rise apartment buildings onto South Racine Avenue. He has been shot and cries out for help. Two of his friends coming down the street are also shouting for assistance.

 

The wounded teenager is bleeding heavily from his thigh. Mr. Miller and his friends, all in their 20s, put pressure on it, and then an ice pack. One goes inside to call 911. The police and an ambulance are on the way.

 

So is Pauley LaPointe. With the crackle of the police scanner, he steers his Ford Crown Victoria toward the scene and punches the gas. He makes his living by selling video to the city's television news stations, and is often the first to report at a shooting scene.

Friday, 10:55 P.M.

Mark Lindsey is outside his mother’s house after a visit. He has chopped off his signature dreadlocks, and a woman has sent him a compliment. He forwards her message to a cousin. It’s working already, he writes.

 

He is behind the wheel of his red Chevy Monte Carlo, a car he so prizes that neighbors see him wash it again and again. A man approaches on foot and opens fire, and Mr. Lindsey, 25, is hit. The car lurches forward and strikes a parked pickup truck.

 

His mother hears the gunfire, runs out and yanks on the locked car door. “Someone get him out of the car!” she shouts over and over.

 

The screams continue for long minutes. They are jarring here. This section of Ashburn, on the city’s Southwest Side, had seemed somewhat removed from the worst of the gun violence.

 

This block on West 75th Place is a cluster of small, neatly edged lawns rolling toward a quiet street where children play soccer. Late at night, television screens glow in living rooms.

 

“This stuff don’t happen here,” says Mr. Lindsey’s cousin Lorenzo Carter, 28. “We know everybody in this neighborhood.”

 

In only a matter of minutes the police and ambulance will arrive, but the mother is frantic. “What’s taking so long?” she shouts.

 

Witnesses see Mr. Lindsey in the driver’s seat, his head resting against the window. He is taken to Advocate Christ Medical Center and is pronounced dead at 11:34 p.m.

 

Mr. Lindsey worked at a railroad management company, friends say. “He was one of the success stories,” says Leroy Cook, 26.

 

The police have made no arrests in the case, and a motive is uncertain. Mr. Lindsey was arrested just a day before on a domestic battery charge. He was released on bond.

 

Neighbors say the shooting shows that the violence is trickling onto blocks that had long been considered safe.

 

“Shooting in Chicago is like a cancer,” says Charles Parker, 46, standing on the street with another neighbor. “It’s starting to spread out, and I just figured it was a matter of time.”

Saturday, 1:10 A.M.

Calvin Ward, 50, is smoking a cigarette on the front steps at his wife’s home on Paxton Avenue just after 1 a.m. when two young men come up the street and fire in his direction six times.

 

Four bullets pierce the screen on the front door. One round grazes Mr. Ward’s arm. Another tears into the house, flies through the living room and penetrates the bedroom wall before striking his wife, Julia Rhoden, sitting on her bed. She jumps up and runs out of the room, calling for help.

 

When he hears Ms. Rhoden’s screams, Mr. Ward scrambles to get a towel, and applies pressure to the wound as he waits for an ambulance

 

The violence in this city has long been concentrated along blocks like the one on Paxton, where sleep is often disturbed in the middle of the night by the sound of gunshots. It’s a world away from the glimmering downtown skyline and the mostly white, wealthier neighborhoods north of the tourist-clogged Loop.

 

“It starts to become normal,” says Darryl Edwards Sr., a neighbor who was awakened by the shots.

 

Three years ago, he and his wife consulted a Google map before moving here, trying to see if there were people hanging out on the corners. He’s happy with his choice – even though he estimates there have been gunshots on this block about 10 times.

 

“You get some gunshots every day in some neighborhoods — every day,” Mr. Edwards says. “So I say 10 in three years, that ain’t too bad.”

 

Mr. Ward is separated from Ms. Rhoden, but he is at her house visiting a 16-year-old daughter. He says he has no idea why the two men shot at him. “I ain’t no gangbanger or nothing,” he says.

 

Records show that Mr. Ward has been convicted several times of battery, and in 2012 was found guilty of aggravated unlawful use of a weapon.

 

“I hope they catch them,” Mr. Ward said of assailant, “but I doubt it.”

 

A day after Ms. Rhoden is sent home from the hospital, she is resting in bed, her feet swelling and the bullet still lodged in her back. It is too close to her spine to be removed, she says doctors told her.

 

Still, she is confident she will recover, physically. Her mental state is a different story.

 

“Emotionally, I’m not good — this put a fear in me,” Ms. Rhoden says.

Saturday, 1:27 A.M.

A group of friends are crammed into a blue Jeep Grand Cherokee, music blaring. One of them, Jose Alvarez, calls himself “Chi Rack Alvarez” on Facebook, a play on Chicago’s war-inspired nickname, Chiraq. He records a video of himself flashing signs disrespecting a gang, and posts it to Snapchat.

 

Mr. Alvarez, 28, is at the wheel as the Jeep heads north on Lake Shore Drive, speeding by the affluent neighborhoods of the North Side, when a dark vehicle pulls alongside and someone inside opens fire.

 

There are 15 shots in all, Mr. Alvarez estimates later from his hospital bed. He escapes with minor injuries: a bullet wound in the arm and a graze of his forehead.

 

Not his friend Veronica Lopez, 15.

 

“I turned around, put my whole body on her, and hold her wound while they are still shooting through the door,” Mr. Alvarez says. “I was trying to save her, and it didn’t work.”

 

Ms. Lopez, a high school freshman, becomes the youngest murder victim of the mayhem over Memorial Day weekend.

 

So much of Chicago’s street violence is documented electronically that detectives scour the internet for the gang ties and grudges that often spark the gunfire. The police describe Mr. Alvarez as a gang member and say he may have been the intended target of the shooting. Mr. Alvarez insists that the police are wrong in labeling him part of a gang.

 

After Ms. Lopez’s death, he changed his Facebook profile name to “Rip Princess Veronica.”

 

He says he expects the killers to boast about the shooting on social media.

Saturday, 5:15 A.M.

Damien Cionzynski, a 25-year-old forklift operator, is killed at a BP gas station just within the city limits. He is the third fatality of the weekend. The police, citing surveillance video and a witness, say they have identified two persons of interest in the killing and soon have one of them in custody. Mr. Cionzynski’s landlord, Sue Harle, says he came from Poland as a child and grew up in the area. He rented a basement room in her house just a few blocks from where he was killed. “He hasn’t lived half a life,” she says. “I hope they find these guys.” 

Saturday, 10 A.M.

The doors are open at the Universal Missionary Baptist Church in Austin, on the West Side, and a steady stream of people are dropping off rifles, revolvers, even replica guns — 61 weapons by the end of the day. Some are rusty. Some date to the 1920s. Most donors walk away with gift cards for $100, an incentive paid for by the city to get some firearms off the streets.

 

“That’s one gun gone,” says Cordelia Brooks, who turned in a weapon that had once belonged to her grandfather and had barely been touched in years.

 

Officer Bob Garcia strains to find the serial numbers etched on one revolver. It has a night sight guide and bullets that resemble shotgun shells. “A criminal would love to get his hands on this,” Officer Garcia says.

The Chicago Police have regularly seized more illegally possessed guns than New York or Los Angeles. People arrested here generally face a one-year minimum sentence for illegal possession. But efforts to make the laws more like New York’s, which mandate a three-and-a-half-year minimum sentence for an illegal, loaded weapon, have so far failed in the state legislature, and Chicago’s bans on handgun ownership and on gun sales have been struck down by the courts in recent years.

 

The Rev. Michael Pfleger, a South Side priest, says guns have become part of the “wardrobe” for some in the city. They would rather risk a short prison term than face the danger of walking the streets without a gun.

 

Sharod Roper, 24, who grew up in the Englewood neighborhood, says he had occasionally carried a gun to protect himself from being robbed, but never used it. “I have to have a gun to scare them off,” he says.

Saturday, 5:20 P.M.

“He’s gone!” Shorlanda Tutson cries. Her face is soaked with tears. Her hands stretch toward the sky.

 

The body of her son, Garvin Whitmore, 27, is in the car he borrowed from her, now covered with a white sheet.

 

Mr. Whitmore and his fiancée, Ashley Harrison, 26, had been sitting in the car outside a liquor store, in a South Side neighborhood accustomed to gunfire, when, in broad daylight, shooting started. Mr. Whitmore was fatally shot in the head. Ms. Harrison, the mother of his two children, grabbed a gun from the car, jumped out and fired into the air. She was later charged for discharging the weapon, and the police say they are following leads from video and forensic evidence in the case.

 

Standing off to the side is a woman, in tears. She does not know Mr. Whitmore's family, she says, but understands their pain.

 

The woman, Noel, says she does not want her last name used, for fear of bringing more troubles to her family. She says her nephew was killed a year ago as he left a party. Her 20-year-old son is a member of a gang. He has been shot each summer for the past three years. She is relieved that he is now in the Cook County jail.

 

She says she tried to raise him right, but the forces outside her door were stronger. “Somehow these streets suck my son in,” she says. “His friends, they’re dropping like flies. The boys, the girls, all of them. It’s a never-ending cycle.”

Saturday, 5:30 P.M.

In a police command center packed wall to wall with computer screens, Officer Richard Walton is tracking in real time the shooting that left Mr. Whitmore dead. Witnesses say the suspect fled in a white sport utility vehicle.

 

Officer Walton has views from all the city cameras mounted along nearby intersections, and there, on one monitor, comes a white S.U.V., making a sharp turn onto South Princeton Avenue.

 

“You can even see a figure in the driver’s seat, right there,” Officer Walton says, after alerting officers on the scene which way the suspect is headed and sending them images of the car.

 

From this nerve center, a dozen police officers monitor the city minute by minute. There is a map of the city overlaid with rectangles glowing red and orange to show current hot zones for gang disputes. A screen tracks the locations of the latest gunshots, capturing the sounds of shots and estimating their origin down to 15 feet. Facial recognition software helps narrow down suspects whose images are caught on security cameras.

 

Sometimes only minutes after the gunshots end, a computer system takes a victim’s name and displays any arrests and gang ties — as well as whether the victim has a rating on the department’s list of people most likely to shoot someone or be shot.

 

Police officials say most shootings involve a relatively small group of people with the worst ratings on the list. The police and social service workers have been going to some of their homes to warn that the authorities are watching them and offer job training and educational assistance as a way out of gangs.

 

Of the 64 people shot over the weekend, 50 of them, or 78 percent, are included on the department’s list. At least seven of the people shot over the weekend have been shot before.

 

For one man, only 23 years old, it is his third time being shot. 

Saturday, 9:20 P.M.

About a block away from the Lexington Street shooting, a fight breaks out. Now the anger is aimed at arriving police officers.

 

Distrust of the police flashes on the streets, again and again.

 

“Please sir, don’t beat me,” one man yells, mockingly, at the scene of early morning gunfire that has left three men shot — two in their legs and another in his back — along West Walnut Street on the West Side.

 

Four men in their 20s are watching as the police mark the scene. Shell casings speckle the street. The men, who say they have been drinking a concoction of Pineapple Crush, hard candy and cough syrup, call out tauntingly to the officers.

 

“Man, you remind me of Clint Eastwood,” one says.

 

The Chicago Police Department, the nation’s second-largest municipal force, with about 12,000 officers, has a deeply strained history with its residents, particularly African- Americans. The distrust makes solving so many shootings all the harder.

 

Anger boiled over last year when the city, under court order, released video of Laquan McDonald, a black teenager, crumpling on a Southwest Side street as a white police officer shot him 16 times. Only a third of Chicagoans say the police are doing a good job.

 

“The Police Department is only as strong as the faith that the community we serve have in it,” Mr. Johnson, the police superintendent, says in an interview over the weekend, as he patrols parts of the city wearing a body camera.

 

The distrust means hurdles for law enforcement. Witnesses say they cannot remember what happened. The wounded refuse to cooperate. Victims drive themselves to hospitals, rather than call the police. They give the same story, over and over again: I felt a sting and realized I had been shot; I didn’t see anything.

 

So crimes go unsolved. In 2015, the authorities made arrests in just over a quarter of that year’s approximately 470 homicides. That only frustrates residents and fuels resentment.

 

Just before 3 a.m. on Saturday, a young man, bleeding badly, cries out for help after being shot on North Kimball Avenue. But then he begs the neighbors not to call the authorities. “When I say, ‘I want to call 911,’ he’s running from my house,” Mauricio Sandoval, 37, says. “He don’t say nothing. I see the shot in the back. I’m scared too, you know.”

Saturday, 9:30 PM

Over four decades, Herb Harrington, 64, has seen generations pass through his barber shop in the Austin neighborhood, and cut the hair of many of the neighborhood children who have since become involved in gangs.

 

Mr. Harrington is trimming a customer’s hair in his shop when he hears a series of loud bangs. They come from the direction of the nearby Christ Outreach Deliverance Center on West Chicago Avenue, where a 23-year-old man is bleeding profusely from a gunshot wound to his leg.

 

“I heard five shots and I thought it was fireworks, but that was just wishful thinking,” Mr. Harrington says. “It was real close, and one of the customers went outside and saw a young man laying on the ground.”

 

Mr. Harrington says he feels the area has become more violent. “Every week it’s someone else,” he says. “It’s retaliation, this person for that person, and it doesn’t stop. Every time there’s a body down, there’s going to be another one and another one.”

 

“You’re talking about poverty and families broken up and people not having opportunity and losing their way,” he says. “Violence is what we talk about in these chairs. We talk about it. We analyze it. But we don’t have easy answers.”

Sunday, 2:00 A.M.

A 34-year-old woman watches as an ex-boyfriend, his arm wobbly from alcohol, holds a gun to her cousin’s head. Their dispute is over money.

 

The cousin, Dontae Brock, pushes the gun away. They think it is a joke. But the ex-boyfriend pulls the trigger, she tells the police, the shots striking Mr. Brock in the torso. The woman, at the wheel of her Ford Explorer, says she sees what looks like a flash of fire on the floor of her car as the blasts hit.

 

Moments later, she jerks the Explorer into reverse, then speeds to a nearby hospital, where Mr. Brock, who was shot in the passenger seat, is told he will survive. Returning to her mother’s rowhouse later, next to the scene of the shooting, the woman — a mother of four, her cousin’s blood streaked across the back of her white T-shirt — says she has made up her mind: “I got to leave this city.”

 

Her 56-year-old mother, wearing bright pink pants, plops down on her stoop, the John Hancock Center looming in the skyline about a mile away. For about six years, she has lived on this street of old sand-colored brick rowhouses that were part of Chicago’s infamous Cabrini-Green housing project just north of downtown. She was cleaning ribs in the kitchen when she heard the gunfire and dropped to the floor. Now she smokes a cigarette and sinks her head into her hands.

 

“I hate the person that invented guns,” she says.

 

Police scanners announce Chicago’s crime problem in staccato bursts, over and over, with the same words: “Shots fired.”

 

Many of the gunshots here hit no one, but they still leave a sense of worry and vulnerability. Since the start of the year, Chicagoans have called the police 28,000 times to report gunfire. Some are multiple calls about a single shooting and others turn out to be fireworks, but the possibility of being shot leaves its mark, even beyond those killed and wounded.

 

At his home on the South Side, Rod Reeves, 42, turns on the spigot and shows how his garden hose, punctured by bullets, now leaks. Mr. Reeves says he and his family ducked behind a brick wall in their home to avoid stray shots when gunfire broke out on his block.

 

“I guess it’s good to have a brick house,” Mr. Reeves says. 

Sunday, 5:14 A.M.

The police don’t know exactly what led to a shooting in Roseland, on the city’s far South Side. But the residents are fairly certain.

 

“There’s always retaliation,” says one resident near where a 17-year-old was shot in the arm, insisting that her name and photograph not be published. “I don’t want them to come back and kill me.”

 

Retaliation drives a good share of Chicago’s violence, scarring bystanders and relatives and, in a notorious case last year, killing a 9-year-old boy whose father was in a gang.

 

Residents say it has gotten worse in recent years as gang structure has shifted. Some are vast and highly organized, while others span only a few blocks. New gang names pile on top of old ones, and they can change rapidly. So can their boundaries. And while once the violence associated with gangs was largely related to drug disputes, lately it is driven more by basic rivalries over turf and dominance, the police say.

 

“Why did I gang bang?” asks Johnathan Hallman, 28, who lives on the South Side. “Just to be around something, like just to be a part of something, man. Because when you growing up, man, you see all these other people, older people that’s in the gang life or whatever. They making they little money and they doing they thing. You see the little ice, the car they driving. It’s just an inspiration, man.”

 

Mr. Hallman says he joined a gang at a young age, but eventually decided it was not all he thought it would be. He got out, he says. 

Sunday, 11 P.M.

There is a routine in place whenever violence breaks out around the all-night laundromat in North Lawndale, on the West Side, which it frequently does. The employee on duty calls a co-worker, Frederick Clark, and says “attack.” Mr. Clark, 54, then alerts the police and heads into work. He has fielded about 20 such calls in the last six months, he says.

 

“I myself have been attacked 13 times in eight years here,” Mr. Clark says. “Never with guns, but I’ve had to defend myself.”

 

So when two men are shot just outside the laundromat, on South Harding Avenue, around 11 p.m. on Sunday, the business barely skips a beat. It doesn’t close or even slow much.

 

For all the trauma, pain and anxiety that the illegal use of handguns has caused people in communities like North Lawndale, there is also a practical response: This is where people live and work. And so they do.

 

Milk to pick up? Work to get to? Laundry to do? When the police secure the area after the shootings, reporters stand outside the perimeter and watch. But one man lifts the police tape to get to the laundromat.

 

Another man grows angry when police officers stop him from doing the same.

 

“It’s yellow tape, not red,” he shouts at the officers, so familiar with the rules of crime scenes that he knows red tape signals crucial evidence.

Monday, 10 A.M.

More than 200 men and women are crammed into cells at the Cook County jail, awaiting their first appearance in court. Some sit with their eyes closed, trying to sleep. Others bounce their knees and stare anxiously from the cells.

 

The police are still in the early stages of their investigations into the weekend’s shootings, and not one of the people being held in the cells awaiting an appearance in Cook County bond court has been charged with shooting anyone over the weekend.

 

Analyses of crime data in Chicago suggest that while violence has gone up in recent months, arrests remain low. As of Friday, the police had issued warrants to arrest two people in one of the weekend's shootings, and one of them was in custody. They had a person of interest in another shooting and leads in others.

Monday, 10:54 A.M.

Peter McDaniel is cleaning up behind a three-story apartment building in the 11th Police District on the West Side, the hardest hit area of the city this weekend. Signs of distress are everywhere, with brick and stone homes in decay, their expansive porches crumbling and windows boarded up. Many people have reinforced their homes with chained and padlocked gates. Signs warn of mean dogs. Streets are pockmarked by vacant and overgrown lots.

 

Over the course of the weekend at least nine shootings took place in the 11th, one right near Mr. McDaniel.

 

He hit the ground and emerged unhurt. But two men had gunshot wounds and the assailants, driving a black car, escaped.

 

This year, at least 32 killings have occurred in this area of about six square miles.

 

Mr. McDaniel blames a bitter and violent rivalry between two gangs, including one he says he has left. “We can’t get along,” he says. “It’s just always been that way.”

Monday, 11 P.M.

The holiday is winding down. People toss out garbage from sidewalk parties. Coolers go back into car trunks for the rides home from the lakefront. The city gets ready to go back to work.

 

Then a flurry of chaos bursts over the police scanner: Two men have been shot, on opposite sides of town, and neither one will survive.

 

On the South Side, on a block of boarded businesses and apartments along Calumet Avenue, a woman wanders up to a police line. The body of James Taylor, 44, hit by multiple bullets, lies beside a car. The woman, a relative, asks if she can see the body, but an officer says no.

 

It’s not the way you want to see that person,” he tells her.

 

On the far North Side, in a neighborhood of sari shops and kebab houses, police officers scan flashlights through bushes and behind buildings along North Rockwell Street, looking for evidence and for an assailant who is still on the loose.

 

Johan Jean, 39, has been struck in the neck, and the police say a dispute earlier in the day in a Target store might have led to the shooting. In the alleyway where he has died, smoke still swirls from an outdoor grill.

* * *

May 27-30, 49 shootings and 64 victims

via http://ift.tt/1XskIZp Tyler Durden

We Have Reached Peak Employment Levels in this Business Cycle (Video)

By EconMatters


The anchor for raising interest rates has been set by unreasonable Financial Market expectations instead of the Federal Reserve which should be using historical economic metrics. The Fed needs to go ahead and raise rates in June when they have a quarterly press conference. This may be as good as it gets in this business cycle, and we may be headed down from here, and be at the beginning of the next business cycle downturn. The Fed needs to build some cushion, have some dry powder for the next time they need to loosen monetary policy in an outright recessionary environment.

 

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When Will The Recession Start: Deutsche Bank’s Disturbing Answer

Just yesterday, when looking at the latest sudden drop in the US employment, JPM warned that as a result of the dramatic downshifting in the US economy, the bank’s recession indicator had just hit a new cycle high of 36%.

This is what JPM said: “This morning’s employment report also raised the recession probabilities, although for counterintuitive reasons. We do not include the payrolls number in the recession model because it is subject to larger revisions than other labor market data. But the unemployment rate enters the model in two ways. As a near-term indicator, we watch for increases in the unemployment rate that occur near the beginning of recessions. So this morning’s move down in the unemployment rate lowered the recession probability in our near-term model. But we also find the level of the unemployment rate to be one of the most useful indicators ofmedium-term recession risk. So the move down in unemployment raises the model’s view of the risk of economic overheating in the medium run and raises the “background risk” of recession.”

So we have unemployment. However, a far bigger risk to the US economy is a topic we have flagged since last fall: peak, and now sliding, profits.

Because as DB’s Dominic Konstam notes something every high school econ student knows, companies cutting headcount in rising numbers, while beneficial for profits at least in the short run, has negative impacts for long-run aggregate demand, to wit:

If aggregate demand is steady, then slower employment growth could well stabilize or improve productivity. However, the rub as always is that workers are also consumers, so as fewer jobs are created (or jobs are cut), then aggregate demand tends to decline.

As such, declining profits and a slowing work force (as the exodus from the labor force returns) is the worst possible feedback loop for an economy; it is the one that the US finds itself in now, ironically just as the Fed hopes to telegraph the all clear by continuing to hike rates and in doing so confirming just how misplaced the Fed’s optimism has been all along.

So while the BLS was finally forced to admit the truth about the US labor market yesterday, here is a reminder from DB’s most unexpected “bear”, Joe Lavorna, that “profit margins have likely peaked”:

The broadest measure of operating profits is pre-tax corporate profits with inventory valuation (IVA) and capital consumption adjustments (CCAdj). As the first chart below indicates, this series shows substantial compression of corporate margins.

 

 

As illustrated in the above charts, profits per worker have generally trended higher over time. This is a function of productivity gains and inflation. Notice that our ratio is measured in nominal dollars. In the current business cycle, margins peaked at $18,403 per worker in Q3 2014. This compares to a current ratio of $15,615 per worker as of Q1 2016. Margins have fallen because corporate profit growth has declined while private sector job growth over the intervening period has been very steady, running at around a 2.3% annualized rate.

 

Within corporate profits, the majority of the decline has been in domestic rather than overseas profits. This means that recent margin compression has had less to do with the strengthening dollar, and perhaps more to do with weak domestic demand. From Q3 2014, when profit margins peaked, to Q1 2016, domestic profits have declined by a little over -$175 billion. As we can see in the charts below, this is nearly double the -$88 billion decline in profits from outside the US. Not surprisingly, the decline in profit growth has occurred alongside a deceleration in domestic demand. In fact, the year-over-year growth rate of real final sales to private domestic purchasers, our favorite indicator of underlying demand, peaked at 3.6% in Q4 2014 and has since slowed to 2.6% as of last quarter.

 

 

If it were only jobs and profits, maybe the Fed would have some degree of control, even if it is reflexive. Normally tightening happens after companies start competing for scarce labor resources, generating cost inflation at which point the Fed raises rates to ease inflation pressures and un-compress cost pressures; only this time the Fed is putting the cart in front of the horse and is hoping that by tightening it will somehow prompt wage inflation which has been the biggest variable missing from the US economy. By way of reference, the last time the unemployment rate was 4.7% in November 2007, average hourly earnings were growing 3.1% Y/Y without a raise in the minimum wage; now wages are rising at 2.5% mostly thanks to the boost for the lowest-paid workers.

However, what is very different this time, is that companies have taken on debt in the current business cycle. Make that lots of debt.  As DB calculates, nonfinancial corporate debt has increased by $2 trillion from its trough in Q4 2010 through Q4 2015. And here things get interesting because as shown in the chart below, the ratio of nonfinancial corporate debt to nominal GDP is at its highest level since Q2 2009, when the economy was still in recession and nominal output was substantially depressed. As LaVorgna puts it, “this is one reason why the Fed needs to be very cautious with respect to the pace of policy normalization.”

While unnecessary, the following observation is mostly for the benefit of the Fed which continues to shock analysts with its level of cluelessness:

An over-tightening of credit conditions would be problematic for a highly-levered corporate sector, especially if final demand were to remain weak. If capital costs were rising in an environment of declining margins, employers would at minimum slow the pace of hiring, and perhaps even cut labor outright. This may already be occurring, given the broad-based weakness of the May employment report.

Which brings us to the question at hand: when will the next recession strike (if it hasn’t done so already because according to most manufacturing indicators including factory orders, core capital goods orders, CapEx spending both macro and micro, manufacturing PMI and manufacturing employment, the US manufacturing sector has already been contracting for over a year).

Here is DB’s answer:

Profit margins always peak in advance of recession. Indeed, there has not been one business cycle in the post-WWII era where this  has not been the case. The reason margins are a leading indicator is simple:When corporate profitability declines, a pullback in spending and hiring eventually ensues. Normally, margins compress because of cost pressures— namely the labor share of income rises relative to the corporate share of income. Put another way, when companies compete for scarce labor resources, worker pay is bid up. In turn, inflation pressures often surface. This typically induces a monetary policy response—the Fed begins raising interest rates to dampen inflation.

As a reminder, profit margins peaked in Q3 2014. With that in mind, the historical data reveals that the average and median lead times between the peak in margins and the onset of recession are nine and eight quarters, respectively, which as DB concludees “would imply that the economy could enter recession as soon as the second half of this year.”

Oops.

To be sure, Deutsche Bank tries to mitigate its disturbing conclusion somewhat – after all the last thing Germany’s most “troubled” bank wants is to infurate the Fed even more:

“as we can see in the table on the following page, the time period between the peak in profit margins and the beginning of recession varies substantially across business cycles. Margins can sometimes peak well in advance of the onset of recession, as they did in the 1960s and 1990s business cycles. In the former period, the peak in margins occurred 16 quarters before recession. In the latter episode, the peak occurred 15 quarters ahead of the economy’s entering recession. Conceivably, such a scenario could unfold now.”

But… there is always a but… 

“However, the current business cycle is already the fourth longest in the post- WWII period, and the corporate debt-to-GDP ratio suggests that imbalances are building.”

So, Janet, about that July (or September, or December) rate hike.

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Guest Post: Which Is The Better Buy – Amazon Or WalMart?

Submitted by Thad Beversdorf via FirstRebuttal.com,

In January I began teaching Applied Financial Modeling at Marquette University.  Part of the curriculum was to discuss real time real world markets.  As such, we began each class with a review and discussion of market pro perspectives and discussed viewpoints from various financial media outlets.  I pressed the importance of collaboration, drawing ideas and concepts from others but to ensure the viewpoints and arguments we use to draw our own conclusions are balanced.  While the bullish case is the predominant case as it is the paid objective of mainstream economists and bank strategists, Zerohedge is a great balancer of mainstream perspective.

And so I introduced the students to Zerohedge as part of the curriculum.  At the beginning of the course I reached out to Zerohedge with an idea.  I had planned that the final exam would take the form of a take home project whereby each student would be tasked with some analytical problem.  My proposal to Zerohedge was to publish the best final report.  Zerohedge responded with an immediate “Absolutely”.

Now a little context of the course.  Typically this is a heavy text book laden DCF curriculum.  However, from my time in banking I found that college grads seriously lacked the ability to think critically and to problem solve, or in other words lacked an ability to analyze.  And so I didn’t use a textbook and this brought great apprehension to most of my students who have grown up through an educational system that is laser focused on scoring well on standardized testing as a means to secure school funding.  These students have been trained to disregard the concept of learning in lieu of scoring well on a test.  Memorization and regurgitation is what they know.

The first half of the semester was spent learning the basic concepts of growth, risk, time value and cash flows.  I drafted all lecture notes and distributed to the class.  The second half of the semester I stopped drafting notes and because there was no textbook this forced the students to focus on what was being discussed.  The second half of the course was spent applying the concepts of analysis to real world data.  In effect, the concept of applied financial modeling is not DCF or any other specific formulaic model but the application of data in a useful and meaningful way toward some objective.  This requires a deep understanding of the inter-relatedness of all stimuli within the context of risk, growth and cash flow.

While my students had some fairly grave concerns about the class structure they came around and in the end I believe (by way of their evaluations of the course) to really appreciate having developed the skill of analysis, critical thinking and problem solving rather than just plugging and chugging in some preformed DCF models.

The winning final report was done by Leo Martinic, a junior and not surprisingly Leo is a member of the AIM program, a student run investment group led by Business Faculty, David Krause.  This group manages about $2M of the school’s endowment fund.

The assignment was one question: Which is the better buy – Amazon or Walmart?

Below is the analysis presented by Leo Martinic.

FINA 4360                                                                                                                 Leo Martinic

Final Paper

Overview

Amazon.com, Inc. (AMZN) and Wal-Mart Store, Inc. (WMT) is the classic example of old versus new school. Both firms sell just about everything imaginable, but how they go about making those sales is completely different. Amazon offers retail products solely online along with a myriad of technological services such as movie streaming. Amazon prides itself on getting a customer’s product to them as fast as possible and offers “Amazon Prime”, the firm’s two-day shipping service for an annual fee of $99. Walmart is the typical “brick-and-mortar” retail store, featured in almost every small town to large city in the U.S., along with a presence internationally. Walmart does offer an online segment, but does not have the internet pedigree Amazon possesses. Walmart just came out with their own two-day shipping service to combat Amazon, called “ShippingPass” for an annual fee of $49. As Amazon has plowed massive amounts of capital back into the business to generate growth, Walmart has continued to open stores while adopting a consolidation approach by creating “Supercenters”, resulting in increased total square footage. With these drastically different strategies for retail in the 21st century, only one question remains: As an investor, is Amazon or Walmart the better buy?

A Look into Amazon

Amazon’s revenues have soared since its inception, generating YoY growth of 20.2%, 19.5%, and 21.9% for 2015, 2014, and 2013. Estimates for 2016 are even better, sitting at 24.7%. This staggering revenue growth is due to CEO Jeff Bezo’s dedication to massive capital expenditures and a current no dividend policy, averaging about $4.7 billion spent on capital expenditures per year over the past three fiscal years. The capital expenditures have increased operating margins 943% in 2015 and 761% over the LTM. Although the huge plowback of cash into the business has generated corresponding growth, it does not come without potential risk. It is no guarantee that the large capital expenditures heading into the future will yield Amazon’s historical growth rate. The ever-present risk with such large capital expenditures is the fact that if it does not pay off by generating top line results or cost efficiencies, then it is effectively flushing money down the drain that could have otherwise been paid back to investors. This is something Amazon and investors need to consider.

The organic growth is great, but operating expenses have grown 27.1%, 33.5%, and 35.8% for 2015, 2014, and 2013 along with similar, but not as severe, increases in COGS. The brunt of these hikes in cost are due to the increasing cost of shipping. In fact, the firm has been losing money on the shipping aspect of “Amazon Prime”. In 2015, Amazon charged $6.5 billion for shipping and ended up spending $11.5 billion, resulting in a shortfall of $5 billion. The shipping cost issue needs addressing if margins are going to improve. An issue with Amazon’s huge growth is that it has only yielded break-even bottom line results. It seems as if investors are infatuated with the staggering growth, but are not worried about current profit generation given Amazon is trading at a current P/E of 295.93 and the firm’s P/E has reached as high as 537 over the past year.

Management has continually stated their current focus is on free cash flow, which they expect to generate a significant bottom line result when the growth phase scales back. The belief is that the massive capital expenditures will have set a foundation for revenues to continue their climb while the focus shifts toward cost efficiency. The promise of cash flow finally came to fruition in 2015, as Amazon generated $7.33 billion in free cash flow yielding a 276% increase over the prior year. Analysts believe this is the turning point for Amazon and expect these staggering numbers to continue, starting with the top line and filtering to the bottom line.

One worrisome fact with Amazon is that total debt has also increased at a similar rate as just about every one of the firm’s glowing statistics, increasing at a 58.6% CAGR over the past five years. With Amazon we have massive revenue growth, high debt and expenses, slim to no margins (other than gross margin!), and no true profit (as of yet). As I was sifting through Amazon’s SEC filings, I found an 8-K worth noting from February. Amazon’s board of directors authorized a $5 billion share buyback plan, which I believe indicates that management is weary about earnings growth and will resort to considerable buybacks to inflate the stock price heading into the future. The buyback could be a signal that the growth story is nearing its end and this authorization could be a back-pocket option to hold up the stock price along with distributing cash with which the firm cannot find another productive use. The counter argument is that if substantial negative interest rates permeate over to the U.S., then Amazon would rather hold their own stock than lose money by sitting on idle cash.

A Look into Walmart

Walmart is a completely different story. Walmart’s revenue growth has slowly deteriorated from 11.8% in 2007 to -0.7% in 2016. This deterioration is signalling the world is moving away from the “brick-and-mortar” provided by Walmart and more towards the currently preferable online shopping. And perhaps more alarming the growth deterioration may be signalling that consumption could actually be in decline.. With the decrease in revenue growth, Walmart has seen its operating income, pretax income, and net income decrease 12.6%, 14.2%, and 10.2% respectively from 2015 to 2016. This is the first time Walmart has seen such a pullback in their historically superb results. Walmart’s workforce also received a substantial wage hike of around $1.5 billion, which is bound to increase notably in the future.

Walmart’s P/E sits at 14.71, not far off from its five-year average of 14.83. It is obvious that Amazon and its online-only platform has eaten into Walmart’s grip on the retail sector. With the fall in performance, Walmart continues to pay a 2.95% dividend yield amounting to a $6.3 billion payout for 2016. The firm only carries $8.7 billion in cash on its balance sheet, so as cash flows begin to descend Walmart’s ability to fund a high dividend payout will be questionable at best. Cash dividend coverage has decreased from 6.39 in 1999 to 2.33 today, including an alarming 10.3% drop from 2015 to 2016 alone. Walmart will continue to run into trouble generating the cash necessary to pay their high dividend and soon enough the firm will have to borrow in order to continue to satisfy shareholders.

With no growth, Walmart will have to adjust in order to combat Amazon for the crown of the retail sector. Walmart is the perfect case of how investors are looking for immediate gratification, whether through stock price appreciation or through dividends. Such a strategy ignores the fact that Walmart is being forced to cannibalize itself from the inside out by trading future growth to satisfy investor hunger today. In addition, Walmart has slowly bought back shares since the turn of the century. In 2000, Walmart had 4.4 billion shares outstanding in contrast to the 3.1 billion outstanding today. The firm has decreased its outstanding shares about 1-4% every year, while repurchasing 7.1% in 2011 alone. I view this as management’s attempt to artificially prop up the stock price along with maintaining ratios as results have plateaued and begin their inauspicious descent. It also takes significant cash to maintain these repurchases again a form of economic cannibalization..

Up to this point I seem to be forecasting a disastrous spiral into irrelevance for Walmart, but let me be clear that the firm is not going away any time soon. Walmart has about 4.8x the annual revenue of Amazon and the firm’s accessibility around the world is unmatched. Also of similar importance, Walmart is a good risk averse investment for those who depend on large dividends from blue chip companies as annual income. However it is my opinion that these very things that make Walmart a risk averse asset in the short term could spell trouble further out; decreasing cash flows, waning profitability, breached competitive advantage, a high dividend payout to appease shareholders, and the continuous eating of shares to prop up the stock price all portray Walmart’s imminent cash problem for the future.

Conclusion

Overall, I think the better buy is Amazon, but not for the reasons you might think. Personally, I do not believe Amazon’s future lies with their online retail, but rather the firm’s AWS (Amazon Web Services) subsidiary. With strong growth prospects for their AWS segment, my DCF came to a price target of $924.34 per share for Amazon. Amazon is an incredible growth story with endless potential in a world where people demand to get products quickly without any real effort, but the firm’s core online retail business has not made money.

The business idea is terrific, but in order for Amazon to make money they need to raise the annual “Amazon Prime” fee well above $99. The issue is that price increases will steer customers away, so Amazon needs to make a choice. Should they continue their low priced “Amazon Prime” to increase their customer base and revenues while making no profit? Or should they increase prices, which will drive away some customers but will result in profit generation?  The question is whether Bezos can slash costs, most notably shipping costs, while maintaining a high quality and expedited shipping process.

As of now, that seems more like a pipe dream than a reality.  However, this past week, Amazon entered into a partnership with Atlas Air in order to add twenty Boeing airplanes to its operations, so it is not for a lack of trying. Amazon’s core business reminds me of the tech bubble of 1999-2000. Amazon’s P/E of 295.93 is nothing short of crazy and already prices in projected best case success for the firm. The reality is that Amazon has been operating for 22 years and their core business still cannot generate a profit. The core business’ inability to generate a profit will catch up with the firm and its stock price unless they adapt. The laws of finance can be bent, but they will not break. Fortunately for Amazon I believe the fundamental growth prospects from high investment has and will continue to produce ground breaking innovation resulting in realized growth.

If Amazon is going to generate a substantial profit, it will be realized through their promising AWS subsidiary. This may sound contradictory, as I said Amazon reminds me of the tech bubble, but here I am championing their “tech” segment.

Techcrunch  Source: Techcrunch

However, the situation is quite different. Amazon’s AWS segment has posted increasing profits and is well ahead of the competition in the cloud computing industry. From Amazon’s website, “Amazon Web Services (AWS) is a secure cloud services platform, offering compute power, database storage, content delivery and other functionality to help businesses scale and grow”. The segment is posting a bigger operating income than Amazon’s core business.

Seekingalpha

Source: Seekingalpha.com

AWS accounts for about 8% of the firm’s revenue but over half of their profitability in the first quarter of 2016. Businesses are buying into AWS faster than any other cloud-computing firm in the industry. Netflix delivers its streaming capabilities through AWS; Healthcare.gov runs partly through the service, and music giant Spotify is built on the service as well, just to name a few. Amazon even engineered a custom cloud for the CIA and other intelligence agencies in order to share information. It is apparent that AWS has quietly become a vastly important service.

MKM

Source: MKM Partners

In this table we see that Amazon’s AWS is witnessing the best of both worlds that it cannot quite find within its core business, which is tremendous growth in revenues along with profit generation. The operating margin is in line with the industry while swiftly increasing market share at an unmatched pace. Overall, I believe AWS is the future for Amazon. All businesses need cloud computing to operate in the 21st century. Businesses contemplating making the switch seem to flock to AWS in droves. Deutsche Bank recently stated that if AWS were a standalone business, it could easily be valued at around $160 billion.

Walmart had its success in the past, but the decrease in revenues and overall financial performance in 2016 foreshadow what will be a slow descent from atop the retail pedestal. My DCF resulted in a price target of $65.03 for Walmart. With tremendous growth and profitability in AWS, Amazon essentially buys itself time to figure out how to iron out their core online retail business to generate profitability. If Amazon does continue its burst onto the retail scene and finally improve margins, Walmart will have to adjust its strategies or cash flows will erode while the firm continues to spend huge amounts of cash on dividends and share buybacks, effectively leading the firm into self-cannibalism. So if I had $700 sitting around, I would much rather have one share of Amazon than ten shares of Walmart.

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Visualizing America’s Dominance In Military Spending

It’s no secret that the United States Spends more on its military than any other country in the world by far. To help understand the context of just how massive the the US spending is, the following video from howmuch.net shows each country’s share of of total military spending for the last 25 years (1990-2015).

 

Citing Stockholm International Peace Research Institute data, howmuch was able to show the change in share of the world’s total for each country, and not surprisingly the United States has the largest share each and every year by a staggering amount. In dollar terms, based on 2014 constant USD, the US has gone from spending $555 billion in 1990 and having 37.1% of the share, to spending roughly $595 billion in 2015, which accounts for 34.4% of the global military spend. China, which comes in at a very distant second, spent an estimated $214 billion in 2015, which accounted for 12.4% of the global spend – but the important thing to note with China is that the $214 billion spent in 2015 represents an increase of 874% from 1990 when the country spent an estimated $22 billion on its military, which at that time was just 1.5% of the global total.

With everything going on in the South China Sea, imagine the Pentagon’s internal panic that China is putting an emphasis on military spending at time when the US is looking to reduce deficits (or so they say). How can the US possibly be in a position to take over whatever they feel like, defend themselves if it only outspends China by roughly $381 billion a year…

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h/t MarketWatch

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The Equal Sign Can Be A Real Bitch

Authored by StraightLineLogic's Robert Gore via The Burning Platform blog,

If one had to choose a single symbol to represent the apex of human thought and achievement, a strong candidate would be the equal sign: =. That sign says that the symbols and mathematical operations to the left of it are equal to the symbols and mathematical operations to the right. Furthermore, to retain equality, anything done to the left side of the equation must be done to the right side. The equation is the heart of elementary arithmetic, the most complex principals of mathematics and science and their real world applications, and everything in between. Only logical challenge can disprove an asserted equality, and no amount of wishing will turn an inequality into an equality. The equal sign represents humanity’s capacity for ruthlessly pristine logic.

Many people shun mathematics, science, and logic, seeking refuge in their antitheses. A good part of human intellectual history has been attempts to either ignore equalities or turn inequalities into equalities. Forgiving, sloppy, delusional illogic is usually collective. Every age has its particular refuges. Our age has rejected the mathematics of debt. What can logically not occur, a perpetual inequality—consumption greater than production— has become the foundation of the global economy. As the tagline for Zero Hedge notes: “On a long enough timeline the survival rate for everyone drops to zero.” In the same vein, on a long enough timeline, consumption equals production. Understand that equality, and the future comes into stark relief.

Housing was the focal point of the last debt crisis. Old age funding—pensions and medical care programs—may well play that role during the next one. The math is straightforward: over time contributions and investment returns (if any) must equal promised benefits. The current reality is also straightforward: aggregate contributions, even if augmented by sterling investment returns, will be nowhere near enough to fund promised benefits. Current government and central bank policies exacerbate the predicament, making the achievement of even minimal investment returns problematic. The pay-as-you-go structure of many old age funds, such as Social Security and Medicare, does not allow for any investment returns at all.

It is easy for politicians to promise benefits and assume high investment returns. It is much harder to make the required contributions, whose benefits are long term and promise no immediate political payoff, and to actually realize the assumed investment returns. Underfunding of an old age fund can persist for years, especially if the fund borrows money. At any positive interest rate, borrowing further unbalances the equation; debt service will always outweigh the funds received. Debt only delays the day when promises are broken and the benefits paid out are realigned with what the fund actually has. Greece, Detroit, and Puerto Rico are the first chapters of what promises to be a very thick book.

Many of the governments facing actuarial imbalance do their best to make it worse. Contributions to old age funds come from the real economy, which is also where investment returns are generated. If there is a government on the planet that has improved the functioning of its economy over the last few decades, we are unaware of it. Dwindling growth (charitably defined as that benchmarked by official government figures) in the US, Europe, Japan, and China confirms that assertion. The ever-expanding Federal Register is emblematic of regulators gone wild, not just in the US, but around the world, and debt is a “gift” that keeps on taking. Most of the world’s $225 trillion pile of debt has paid for consumption or zero sum speculation. By definition these activities do not generate a return in excess of debt service, consequently their associated debt acts as an economic drag.

Central banks pushing down interest rates, in many cases to negative territory, kills old age funds dependent on investment returns. Most such funds are still assuming they can generate an annual 6 or 7 percent return, but if interest rates on safe debt are in the 2, 1, or -1 percent range, they have to take more risk to hit their targets. Taking more risk means investing more in equities and long-dated bonds. By most measures stocks are at the high end of their valuation ranges, and investing in them is especially dicey with governments and mounting debt gumming up economies. Long-dated bonds are most subject to interest rate risk should central banks find themselves unable to continue suppressing rates.

Such suppression encourages debt and discourages saving. Debt only makes sense when it is used to generate a return greater than the costs of debt service. Saving that funds productive investment is the true foundation of long term progress and economic growth. Dwindling savings further erodes the ability of the real economy to fund the contributions necessary to maintain old age funds’ solvency. If having children is thought of as “saving” for old age security, and in less developed countries that is often the literal case, then contributions are also facing a demographic “savings” deficit. In virtually every developed country, including China, over the next few decades the percentage of elderly will dramatically increase relative to the younger population that will supposedly support them (see links here and here).

Promised old age benefits are for income and medical care, and the funding gap for the latter is even greater than the former. In the US, decades of government intervention in medicine have produced almost complete separation of those receiving care from those paying for it, competition-destroying, cost-increasing concentration in the medical, drug, and insurance industries, and now Obamacare, which has exacerbated existing problems and created new ones. It relies on the healthy subsidizing the unhealthy and the more affluent subsidizing the less. Not surprisingly, the healthy and affluent are either shunning or subverting the system and insurance companies are fleeing unprofitable markets. Those who remain are seeking hefty premium increases. So add costly, convoluted, and inefficient medical and health insurance systems to the factors contributing to the unsustainable old age funding inequality.

That inequality propels mounting global debt, which has papered over shortfalls. That works until it doesn’t. Crashing commodity prices, sputtering economies, the frantic, counterproductive exertions of governments and central banks, and rising dependency ratios (the ratio of the dependent to those who support them) mean the reckoning is at hand. Whether or not anybody wants it or plans for it, benefits are going to align with the actual resources available to pay them, just as house prices aligned with economic reality during the last crisis. Unfortunately, this alignment will be far more severe than that one.

That equal sign can be a real bitch.

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