Tag: finance

Authored by Chris Hamilton via Econimica blog,

For a dozen plus years, the Census has incorrectly believed and projected that total US births were on the cusp of an upturn.  The chart below shows actual total births and Census projections since ’00 through the most recent Census projection in 2017.  Each projection was lower than the last but still far too high.  Since 2007, there have been 5.5 million fewer births than the ’00 and ’08 Census projected.  And this delta in projected growth versus rapidly diving births and fertility rates is only continuing to widen, as detailed through Q1 of 2019 at CDC Fertility Data.

Social Security essentially gets its projections from the Census and makes forward based assumptions on the median Census projection.  In this case, the chart below shows actual US fertility rates since 1950 and Census projections (solid lines) versus UN projections (dashed lines).  According to Social Security projections (solid lines), fertility rates at present 1.72 (and still falling) are not possible and only higher fertility rates are to come.  Either fertility rates will rise to 2.2, 2, or 1.8…but the current reality and/or further decline is simply inconceivable.  Meanwhile, the situation isn’t so inconceivable for the UN Population Projections (dashed lines) which offer a wide range of possibility from a low of 1.3, to high of 2.3, with a long term base case of 1.8.

And here is the decade plus of discrepancy between actual 0 to 20 year-old US population.  Census (Social Security, solid lines) versus United Nations (UN) projections (dashed lines).  Again, the Census nor SS can conceive of what has been happening for the last decade nor can the Census and therefor Social Security project anything but growth.  In fact, the Social Security low growth projection is even slightly higher than the UN medium (baseline) projection?!?  And the UN baseline is too high…which means the reality for Social Security is significantly worse than their most “bearish” scenario.

But it isn’t just the absence of population growth, it is how this translates to the lack of fuel for further employment growth.  Rather than use the BLS unemployment data, I simply divide the populations that make up the work force by the quantity of those employed among each age group (chart below)…and this reveals we are at historical levels of full employment.  In fact, only once (briefly in 2000) has the largest and most important group (25-54 year-olds) ever had a higher portion employed.  The 55-64 year-olds have never had such a high portion employed…and even the 15-24 year-olds have recovered much of the losses they suffered in the ’09 great financial crisis (but even beyond X-Box, there are structural reasons this group is unlikely to see significantly higher employment %’s…detailed HERE).

Given we have full employment, the problem is we have precious little growth among the working age population over the next decades.  As the chart below details, the population growth over the next two decades shifts to the oldest among us with hardly any labor force participation among them.  The growth among 70-80 year-olds and 80+ year-olds will dominate.

And dividing the age groups by their participation rates gives us a clear idea of the potential fuel available for employment growth (aka, new home buyers, new car buyers, those likely to undertake loans, etc.).  For the coming two decades, I even likely over-estimate the 70-80 year-olds at 12% LFP and 5% LFP among 80+ year-olds versus a consistent 75% for 20-70 year-olds.  This means over the coming twenty years, the US is only capable of about 1/3rd the employment growth it was consistently capable of from 1960 through 2020.

Thanks to the 2019 OASDI Trustees Report, the Social Security situation is fairly plain.  The chart below shows the OASDI annual deficit plus low, medium, and high cost projections.  What I have detailed from this point forward is that given the unrealistic population growth projections and resultant unrealistic employment growth expectations, the worse case “high cost” estimate may be too optimistic. This will mean the Social Security so-called “trust fund” of $2.9 trillion will be burned through prior to 2035 and the politically charged issue of automatic “pay-as-you-go” 20% to 40% declines in benefits will be thrust upon the nation sooner rather than later.  For instance, of the 60+ million SS beneficiaries, the average beneficiary in 2019 pulls in $1461 monthly, and would be looking at an automatic $400 to $600 reduction in monthly benefits once the “trust fund” is depleted.  The worst-case OASDI cumulative scenario adds an additional $5 trillion in deficit spending through 2050 over the medium projection.

And just to round out the picture, the chart below details the combined OASDI and HI (Hospital Insurance) deficits.  Again, the redline worst case “high cost” projection is likely too optimistic.  Annual deficits absent population growth among the young and working and resultant minimal further employment growth…and the inevitable explosion of elderly…means a worse than “worse case” should be the base case.  And the combined worst case OASDI + HI cumulative projection adds another $12+ trillion to the projected debt pile above and beyond the medium projection.

Two final charts, below, detailing the annual change in the 20-40 year-old US childbearing population versus 70+ elderly and the movement of the Federal Funds Rate, plus the impact of the federal funds rate on incentivizing debt.

Below, annual population change (million persons) of the 20 to 40 year old US population versus annual change in 70+ year old US population, Federal Funds Rate (%), and public versus Intragovernmental debt outstanding (trillion $’s).

Below, annual population change (% of total population) of the childbearing versus elderly, Federal Funds Rate (%), and public versus Intragovernmental debt outstanding (trillion $’s).

Of course this doesn’t show unfunded liabilities, corporate debt, student debt, auto loans, credit card debt…but the Federal debt gives a nice example of the impact of ZIRP on the undertaking of new debt when the money is essentially “free” (particularly for the Federal Government and Corporations…and when served to our young adults as “student loans”).

Why is it important to break out the public vs. IG (Intragovernmental) debt?  IG trust fund surplus’ are mandated by law to buy US Treasury debt while Primary Dealers (a select # of the largest banks) are likewise mandated to bid on government debt which they then typically resell to the public and foreigners.  As you can see, IG purchasing is slowing while nearly all the debt is now being resold to the public / foreigners / and Federal Reserve.  This trend will accelerate rapidly over the coming decades.  The surge in 70+ year-olds collecting their Social Security benefits and the minimal growth among new taxpayers will result in public debt soaring while the theoretical IG trust fund is depleted.

Perhaps a “come to Jesus” moment is likely sooner than later.

Reuters reports that Russia’s Ministry of Foreign Affairs on Tuesday condemned the US move to reverse decades-long official policy which viewed Israeli settlements in the occupied West Bank as illegal. 

“The Trump administration is reversing the Obama administration’s approach towards Israeli settlements. U.S. public statements on settlement activities in the West Bank have been inconsistent over decades,” Secretary of State Mike Pompeo announced Monday, effectively overturning the State Department’s 41-year-old legal opinion that Israel’s West Bank settlements are illegal.

Russia condemned the drastic policy reversal as a severe blow to the peace process, saying “We consider this Washington’s decision as another step aimed at ruining an international legal basis of the Middle East settlement that will exacerbate tensions in Palestinian-Israeli relations,” according to the foreign ministry statement.

“We are urging all concerned parties to refrain from any steps that could provoke a new dangerous escalation in the region and impede the creation of conditions for resuming direct Palestinian-Israeli talks,” the statement emphasized.

Russia underscored it still sees as valid and binding the United Nations Security Council Resolution 2334 which states that “the establishment by Israel of settlements in the Palestinian territory occupied since 1967, including East Jerusalem, has no legal validity and constitutes a flagrant violation under international law and a major obstacle to the achievement of the two-State [Palestine-Israel] solution and a just, lasting and comprehensive peace.” 

Thus Moscow still views such settlements on Palestinian territory as illegal under international law, a Reuters summary of the Russian statement noted.

The historic policy shift of the Trump administration came after the State Department’s legal office was ordered to conduct a year-long review of the official US policy on the expanding settlements in the West Bank, according to The Jerusalem Post. 

Authored by Paul Joseph Watson via Summit News,

South Dakota’s Department of Social Services has spent nearly half a million dollars on an anti-meth ad campaign with the tagline “Meth. We’re On It.”

No, this is not The Onion.

“The campaign’s motto features the phrase, “Meth. We’re on it,” over an outline of South Dakota, and the ad and posters feature people of differing in ages and races saying, “I’m on meth,” reports the Argus Leader.

A video shows Governor Kristi Noem telling the camera, “I’m on meth,” before she explains that “on it” means “on the case of meth.”

If you’re having a rough day, just remember you’re not the governor of the state of South Dakota. The state launched a new campaign called “ONmeth” about battling meth addiction and apparently the tagline is “Meth. We’re on it.” pic.twitter.com/Gx72LSEIxa

— Mack (@_Kenziepuff) November 18, 2019

TV ads, posters, billboards and a website will feature the motto at a cost of $449,000 that was paid to Broadhead Co., a marketing and ad agency in Minneapolis.

The outlay compares with $1 million which has been set aside for meth treatment services and more than $730,000 for school-based meth prevention programming.

South Dakota taxpayers paid $450k for a new anti-meth PSA campaign. And here’s what the state came up with https://t.co/1MATJPBULv pic.twitter.com/bsZKkXCPNL

— Lachlan Markay (@lachlan) November 18, 2019

Social Services Secretary Laurie Gill called the campaign “inclusive and empowering,” but respondents on Twitter were not so enthusiastic.

“Apparently no one thought this through,” commented one.

“It’s so bad and I know it’s a serious issue but WHO APPROVED THIS?” asked another.

One respondent said they were aware that the tagline was meant to apply to meth addicts being refreshingly honest, “But having a clip of your governor saying I’m on meth is not exactly genius marketing.”

*  *  *

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Another overnight ramp evaporates…

As Home Depot weighs heavy on The Dow…

But the consumer is strong, right?

Treasury yields are tumbling too…

Source: Bloomberg

When we first learned about former WeWork CEO Adam Neumann’s practice of buying commercial properties (or shares in said properties), and then leasing them back to WeWork (often at an inflated rate), we knew that if Neumann had gotten away with such blatant self-dealing without a peep from the board, then WeWork’s governance problems were probably far more extensive than the public realized at the time (this is roughly one year before WeWork’s vision of a future powered by “We” came crashing down as the IPO was scrapped).

But here we are, more than a year later, and the proper authorities are finally getting involved. According to Reuters, New York State AG Letitia James is investigating the company and its former CEO. Specifically, investigators are looking into whether Neumann engaged in illegal self-dealing.

Did he? Well, Neumann had no qualms about enriching himself by using his company as a backstop for his personal investments, leveraging WeWork’s power as a lessor to worm his way into deals by touting his ability to bring on an anchor tenant willing to pay above-market rates. Neumann also personally bought the trademark to the word “We”, then charged his company $6 million to transfer the trademark (he later returned the money). When it came time to prepare the original WeWork pre-IPO prospectus, Neumann came up with an ownership structure that, as he put it, would leave his family in charge of WeWork for “the next 300 years” as he once reportedly bragged.

And when it all came crashing down, and WeWork’s valuation plunged to under $10 billion from north of $55 billion in the span of a few weeks, SoftBank, WeWork’s most fervent backer, was forced to either accept a massive loss, or put up more money for a turnaround.

When the buyout came, Neumann still walked away with a $1.7 billion payday. He’s off enjoying early retirement while a SoftBank-installed management team is desperately trying to figure out how to stave off bankruptcy at WeWork.

The company is now facing a radical restructuring: Some 4,000 employees, roughly one-third of WeWork’s global workforce, will likely be laid off before the end of the week. Employees who don’t support WeWork’s core mission will be let go, while the rest will learn on Friday what their new roles will be. Executive Chairman Marcelo Claure, a SoftBank exec, has been installed at the top to try and lead the WeWork turnaround.

Unfortunately for Neumann, federal authorities also seem to have taken an interest. The Reuters report followed a trial balloon published by Bloomberg claiming the SEC was looking into whether WeWork violated financial rules as it pursued its public listing.

Amid the furor, WeWork’s bonds have continued their slide to ever-lower lows.

After using his tremendous salesmanship abilities to sell WeWork as more than just a real-estate company, it looked like Neumann would get away with the outrageous swindle that was WeWork. But after taking SoftBank’s Masayoshi Son for another $2 billion, it looked like Neumann had pressed his luck: nobody can be that blatant and not trigger an investigation.

Meanwhile, WeWork’s social media accounts are laying it on thick:

Interior design inspiration out of New York City. #wework #weworknyc #nyc pic.twitter.com/nkVO6kRgIH

— WeWork (@WeWork) November 18, 2019

Submitted by Michael Every of Rabobank

There was more bad trade news for markets to focus on yesterday. NBC report Eunice Yoon tweeted: “Mood is Beijing about trade deal is pessimistic, government source tells me. China troubled after Trump said no tariff rollback. (China thought both had agreed in principle.) Strategy now to talk but wait due to impeachment, US election. Also prioritize China economic support.”

In other words, China appears set on trying to ‘wait Trump out’, which was a meme we heard earlier in the trade war, rather than pinning its hopes on a “phase one” deal – of which we have been highly sceptical from the get-go. It also suggests no trade deal at all due to red lines of intellectual property, subsidies, and enforcement mechanisms. Worse, if Trump gets wind of the fact that China is ignoring him, or even has the perception Beijing is working against him politically, it must surely raise the risk of higher US tariffs–at least on 15 December—rather than the risk-on imminent decrease so many have said so loudly for oh-so long.

More positively, the US has agreed to extend permission for its firms to export to China’s tech giant Huawei for another 90 days. However, even that comes ahead of a vote this week at the US FCC to decide if Huawei and ZTE should be officially designated as “national security risks”, which given the constant US effort to prevent its allies from adopting Huawei’s 5G, looks like a fairly predictable decision. Huawei is, of course, a red line for China in many respects.

Meanwhile, with the situation in Hong Kong still extremely tense, there has been another dramatic development. Yesterday saw the High Court rule that the Hong Kong government’s use of colonial-era emergency laws to ban the wearing of face masks was unconstitutional. In response, this morning China’s National People’s Congress has stated that “China’s constitution and the Basic Law jointly form the constitutional foundation of Hong Kong. Whether Hong Kong’s legislation is consistent with the Basic Law can only be judged and decided by the National People’s Congress standing committee. No other parties can judge or decide.” In other words, the High Court ruling is itself over-ruled by a legislative, not a legal, body . Let’s see if the mask ban now stays or goes, for example.

Beyond the response on the ground in already-troubled Hong Kong, this obviously opens up another potential market risk. Both the massive US-China economic security strategy Congressional advisory report last week and the soon-to-be-approved(?) US legislation to support Hong Kong protesters specifically speak of a threat to remove Hong Kong’s separate legal recognition should its autonomy be undermined. That is predicated on any violent intervention by the PLA or People’s Armed Police…but would that red line also extend to the constitutional legal arena? Let’s see what the global business community reaction is today.

Elsewhere, Iran’s closure of its internet continues in response to a major revolt after the removal of fuel subsidies that looks straight out of the Lebanon or Chile playbook. As a response, this apparently isn’t happening if one looks at the press, despite the fact that instability in Iran is of enormous significance geopolitically. Were we to see a repeat of the Green protests on 2009, I doubt the current White House would take as much of a hands-off attitude. That said, the same White House might be able to help reconcile the Iranian public and regime with its latest decision that Israeli settlements built across the 1967 ‘Green Line’ are no longer to be treated as illegal. How that will help sell The Middle-East Deal of the Century when it is released, I don’t know.

And in terms of markets, we saw Trump sit down with Fed Chair Powell. For once he didn’t cross any red lines, such as shouting “Where are my negative rates, you nincompoop!”. That usually arrives by tweet, of course. Trump has also alluded to the possibility of testifying in his impeachment trial, which would make for interesting viewing.

The RBA has also released its latest minutes, which state the Reserve Bank expects wage growth to stay around the recent rate going forwards – so disappointing. Very few firms surveyed expected higher wage growth, and new pay deals were generally delivering lower outcomes than the ones that they replaced. This is zero surprise to us, and a total shock to the RBA, of course, who are now to undertake a detailed review of how the economy has evolved relative to forecasts. Just don’t get your usual economists to do it, please. Indeed, there was a case to cut again in November, we now know, but instead the RBA opted to wait and see if things improved locally and globally before moving towards what was once their red line of basically zero rates.

Overall, there are once again more developments to suggest the risk on move is under greater threat, and this has seen some minor market moves: but like the RBA, the general view is still wait-and-see-and-project-for-the-best.

Two federal correctional officers who were on duty the night Jeffrey Epstein died were arrested early Tuesday on federal charges related to their failure to check on him the night he died in his cell, according to the New York Times, citing a person with knowledge of the matter.

The two federal Bureau of Prisons employees were expected to be charged later Tuesday morning and appear in United States District Court in Manhattan.

The charges would be the first to arise from a criminal inquiry into the death of Mr. Epstein, who hanged himself at the Metropolitan Correctional Center in Manhattan while awaiting trial on sex-trafficking charges. –NYT

The guards faced harsh scrutiny after Epstein was found unresponsive in his cell at the Metropolitan Correctional Center in New York City on August 10, after failing to check on him every 30 minutes as required. Instead, they fell asleep for hours and falsified records to cover up what they had done according to reports.

The official ruling on Epstein’s death was suicide, although skeptics have suggested that Epstein’s sudden death was all too convenient as it also buried the toxic secrets of countless implicated “luminaries” and Wall Street and Beltway VIPs across all sectors of US life.

At the end of October, prominent forensic expert Michael Baden refuted the official narrative, stating at the end of October that Epstein was “strangulated.”

Developing…

The impeachment circus is back on Tuesday as the public phase of the Dems’ investigation enters its second week with the public testimony of Lt. Col. Alexander Vindman, the top Ukraine specialist on the National Security Council who has objected to President Trump’s alleged decision to press Ukrainian Prime Minister Volodymyr Zelensky to investigate the Bidens.

Vindman isn’t the only one who will testify Tuesday: Kurt Volker, a former special envoy to Kyiv who reportedly told lawmakers in private that the White House decision to withhold military aid was “not significant” and Ukraine’s leaders “never communicated a belief that there was a quid pro quo”, will also appear before the Intelligence Committee.

Two other senior officials, Jennifer Williams, a national security veteran detailed to Vice President Mike Pence, and outgoing NSC staffer Tim Morrison, will also testify.

Dems have been working to impeach President Trump since a “whistleblower” believed to be a CIA analyst complained that Trump had risked undermining US foreign policy to pursue personal political ends. Keep in mind: A rough transcript of a call between Trump and his Ukrainian counterpart that took place on July 25 was released weeks ago, allowing members of the public to make their own decisions about what they think they heard.

Watch the hearing live below:

All four of these witnesses have already testified before lawmakers in private sessions.  Vindman, who has suspiciously advised the government of Ukraine in addition to working full time for the US, was on the July 25 call at the center of the impeachment probe. Volker wasn’t on the call, but he was a part of the shadow campaign led by Rudy Giuliani and the President to press the Ukrainians to investigate Hunter Biden over his links to a gas company suspected of paying bribes and other corrupt activities.

Morrison, meanwhile, has testified that Ukrainian ambassador Gordon Sondland in September told a top Ukrainian official that the release of US military aid to the war-torn country would hinge on whether Kyiv opened an investigation into the Bidens.

The witnesses will testify 2 at a time during Tuesday’s most packed hearing to date. Vindman and Williams will kick things off at 9 am, followed by Volker and Morrison around mid-afternoon.

Blain’s Morning Porridge, submitted by Bill Blain

“Damned if we do, damned if we don’t.. pass me a penny.. ” 

The global markets continues to wobble along. Trade deal or no deal..? Lots of talking heads saying it might happen, it might not, the potential credibility costs if its not.  Meanwhile, all eyes on Hong Kong to see how the current university standoff plays out. The Chinese upped the ante this morning:  – China attacks Hong Kong ruling to overturn Mask Ban. (Slightly concerned to read HSBC has apparently reacted to Chinese pressure and closed down accounts related to the protest movement.)

Fed Vs Trump

I would have loved to have been a fly on the wall at yesterday’s confrontation meeting at the White House between Donald Trump and Fed Head Jerome Powell.  They apparently had a convivial 30-minute chat where Trump lambasted, laid out his concerns the US is putting itself at a competitive disadvantage in terms of higher interest rates and a strong dollar. These factors have failed to fuel inflation and heightened trade tensions with EU and China. Trump protested his view US rates should be lower than competitors because, er, the US is the US. 

At my meeting with Jay Powell this morning, I protested fact that our Fed Rate is set too high relative to the interest rates of other competitor countries. In fact, our rates should be lower than all others (we are the U.S.). Too strong a Dollar hurting manufacturers & growth!

— Donald J. Trump (@realDonaldTrump) November 19, 2019

Its an interesting take on economics. Low rates typically mean a weak economy. But, you can see Trump’s perspective – if money to invest is cheap and abundantly available, then it stands to reason entrepreneurs should be borrowing loads to invest in new plant. But reason is precious and rare commodity. When working out the value of any investment, low rates and higher relative returns elsewhere mitigate against risky new ventures and towards available financial assets – for instance; stock markets. That’s the brutal reality of the last 10 years – all that lovely money central banks created through QE, that was supposed to fuel growth through economic multiplier effects, got sucked into the stock market swamp. 

You live and learn… It makes me wonder where all the current liquidity the Fed is pumping into the short-end – which definitely isn’t QE except that in just about every way it is – is going? Weaker dollar? Yeah, but, Europe and Japan are also pushing the Yen and Euro lower. 

Powell apparently stood his ground in front of Trump – making clear Fed policy will depend entirely on what the releases and data show in terms of the economic outlook.  According to the WSJ, Powell told Trump rate decision are: “based solely on careful, objective and non-political analysis.” How the Fed reacts to slowing growth, or the risks that tying themselves to low rates will leave the cupboard empty if a real crisis develops, are for the Fed to determine.

Based on Trump’s previous form I would predict we’ll be seeing the Trump-Fed twitter stream ramp up negativity on the Fed’s decision making in coming months, seeking to pin blame on the Fed for any downturn, and seeking to juice the economy ahead of the Nov 2020 election. Trump clearly perceives Powell as a disappointment – he appointed him to the post, and expects Powell to support him. How dare the fellow go against him… as he  said last year: “I’m not even a little bit happy with my selection of Jay.”

The issue of Fed vs President is not going away – while the market broadly believes Powell’s and the Fed’s independence is sacrosanct, and Trump can’t sack him, it damages the credibility of the Presidency that Trump still tries to bully the Fed. But – critically – it shouldn’t have that much effect on markets, because we all know that’s just the way it is… 

Meanwhile… back in Blighty

Joy oh Joy.. Tonight we get a televised debate between the two most unelectable men ever to contest the UK premiership.  I can’t wait… to catch up on something else instead on Netflix.  The big issue is where will Sterling go? Up on a clean Brexit! Down on further uncertainty! What are we likely to get?

The problem is… this election is turning into a chancy coin toss between government and ongoing chaos. It is not providing any positive signals for our future prosperity.

Current election odds say:

• 2/5 Conservative Majority
• 5/1 Labour Minority
• 8/1 Conservative Minority
• 18/1 Lib/Lab/SNP Pact
• 20/1 Lab/SNP Pact
• 25/1 Labour Majority

These are profoundly unsettling numbers. They basically say there is a 56% chance the UK is going to get another weak and divided government. What the UK needs most desperately is leadership – a government with a working majority. A Conservative minority will be unworkable. A Labour minority will be forced to concede too much to do much – and Brexzit will drag on and on and on and on and on… Coalitions are dangerous for the UK. The SNP will demand an independence referendum – and could even win it. The very worst result would be a second Brexzit referendum which looks to be about a 47% chance of happening according to these odds – it will just ensure the UK remains fraxious, rudderless and distracted for years to come.. 

And the issue is.. we still have 24 days of this hell to go through. Please make it stop! 

After last month’s surprising plunge in both Housing starts and permits, expectations are for a rebound (or slowdown in the collapse) and they did.

• Housing Starts disappointed, rising 3.8% MoM (+5.1% exp) against an upwardly revised 7.9% drop in September.

• Building Permits beat expectations of 0.5% decline, surging 5.0% MoM against an upwardly revised 2.4% drop in September.

Source: Bloomberg

On a YoY basis, both starts and permits surged to new multi-year high growth rates…

Source: Bloomberg

Permits jumped for both single-family (highest since Aug 2007) and rentals…

Oddly, Housing Starts continue to hold up despite a collapse in home-buying attitudes…

Source: Bloomberg

So, which is it? Delusional homebuilders in a ‘field of dreams’ world or debt-laden Americans unable to see the American Dream?