Month: October 2017

Having made no friends this week with his McCarthyite 'blacklist' of potential Russia-sympathizers, and facing bans and probes throughout eastern Europe (for his 'Open Society' actions), bilionaire investor George Soros has a new enemy – Isarel!

As Haaretz' Jonathan Lis reports, MK Miki Zohar (Likud) announced on Monday that he planned to submit a bill that would make it harder for leftist organizations to receive funding from organizations considered hostile to Israel.

He said the bill, named for mogul George Soros, won the approval of Prime Minister Benjamin Netanyahu (but, associates of Netanyahu couldn’t say on Monday whether the prime minister would support the proposed law in the Knesset).

 

Its exact wording has yet to be disclosed.

 

Zohar said the bill would prevent “donors who are anti-Semites, inciters or hostile to Israel” from donating to Israeli organizations.

 

Zohar said he was aiming at donors like Soros who donate to organizations like Adalah – the Legal Center for Arab Minority Rights in Israel, B’tselem, Breaking the Silence, Ir Amim, Machsom Watch, Yesh Din and the New Israel Fund, which he said were all anti-Zionist.

 

He said such donors should be considered anti-Semitic, inflammatory and hostile, and donations from them to non-profits or Israeli corporations should be forbidden.

 

According to the bill, the Strategic Affairs Ministry will compile and periodically update a list of bodies and organizations that are hostile to Israel or are defined as anti-Semitic.

The actions of Hungarian Prime Minister Orban and now the Israeli government appear to be escalating since Soros donated $18 billion his 'Open Society' Foundation.

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Authored by Cabot Philips via CampusReform.org,

This year at Campus Reform, we’ve reported extensively how college students around the country have increasingly taken offense to Halloween celebrations, often accusing various costumes of being offensive and declaring students who wear them guilty of “cultural appropriation.”

At campuses around America, students have been discouraged from wearing sombreros, ninja outfits, Native American headdresses, or any other costume which assumes a culture one does not represent.

One prominent example of this trend came last year at Yale University, where students famously protested a professor who simply advised students to wear whatever Halloween costume they deemed appropriate.

Students at Yale and elsewhere have made it clear: they want their schools to take preemptive measures to prevent the wearing of Halloween costumes which could offend.

But would they be willing to support a more extreme measure in the hopes of limiting hurt feelings this Halloween season?

Campus Reform visited Yale with a petition to outlaw Halloween on the New Haven, Connecticut campus.

Posing as a member of the fictitious “Yale Students for An Inclusive Fall Season,” I attempted to garner support for my cause.

I had no idea how easy it would be.

After explaining that my goal was to create a more inclusive campus and limit the number of students made uncomfortable by costumes each year, I received signature after signature.

What was their rationale for signing the outrageous petition? Watch the full video to find out.

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Earlier today, Milliman released their 2017 Public Pension Funding Study which explores the funded status of the 100 largest U.S. public pension plans.  Not surprisingly, this study only served to confirm many of the rather alarming trends surrounding public pension ponzi’s that we discuss on a regular basis.

Starting with a high-level status update, Milliman figures the largest 100 public pensions were roughly just as underfunded on June 30, 2017 as they were on June 30, 2016…not an encouraging development given that the S&P 500 surged 15% over that same period.

This 2017 report is based on information that was reported by the plan sponsors at their last fiscal year ends—June 30, 2016 is the measurement date for most of the plans in our 2017 study. At that time, plan assets were still feeling the effects of market downturns in 2014-2015 and 2015-2016. Total plan assets as of the last fiscal year ends stood at $3.19 trillion, down from $3.24 trillion as of the prior fiscal year ends (generally June 30, 2015). However, market performance since the last fiscal year ends has been strong, and we estimate that aggregate plan assets have jumped to $3.44 trillion as of June 30, 2017. We estimate that the plans experienced a median annualized return on assets of 11.49% in the period between their fiscal year ends and June 30, 2017.

 

The Total Pension Liability reported at the last fiscal year ends totaled $4.72 trillion, up from $4.43 trillion as of the prior fiscal year ends. We estimate that the Total Pension Liability has increased to $4.87 trillion as of June 30, 2017. The aggregate underfunding as of the last fiscal year ends stood at $1.53 trillion, but we estimate that the underfunding has narrowed to $1.43 trillion as of June 30, 2017.

Meanwhile, 32% of the top 100 plans were less than 60% funded.

Of course, the discussion gets far more interesting when Milliman analyzes the prevailing discount rates used by public pensions compared to independent analyses of where those discount rates should be set. 

As our readers are well aware, we’ve long argued that public pension funds essentially hide their true funding status by simply choosing artificially high discount rates for future liabilities thus making their present values appear lower than they actually are.  It’s a clever scam but one that can only persist until the ponzi runs out of cash.

As Milliman notes, the median expected return of the 100 largest public pension funds in the U.S. is somewhere around 5.9% based on the asset allocations of those funds.

That said, you can imagine our shock to learn that 83 of the top 100 funds used discount rates in excess of 7%.

So, what does that mean?  Well, Milliman figures that overstating a fund’s discount rate by just 1% artificially reduces it’s benefit liability by up to 15%.  Therefore, given that the aggregate liabilities of the top 100 funds are roughly $5 trillion, each 1% adds about $750 billion in liabilities.

A relatively small change in the discount rate can have a significant impact on the Total Pension Liability. How big that impact is depends on the makeup of the plan’s membership: a less “mature” plan with more active members than retirees typically has a higher sensitivity to interest rate changes than a more mature plan with a bigger retiree population. Other factors, such as automatic cost of living features, also come into play in determining a plan’s sensitivity. Using a discount rate that is loo basis points higher or lower than the independently determined investment return assumption moves the aggregate recalibrated Total Pension Liability by anywhere from 8% to 15% (see Figure 13).

Adding insult to injury, Milliman notes that the ratio of retired pensioners (those taking money out of the system) to active pensioners (those still funding the ponzi) has surged 16% over the past couple of years. 

Of course, this ratio is only going to get worse over the coming decade as a wave of Baby Boomers retire…unfortunately, that wave of retirements will result in many of them finally realizing they’ve been sold a retirement fantasy for their entire life.

Here is the full study from Milliman:

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Earlier, we reported on Under Armour’s epic stock collapse down over -75% from its September 2015 highs. This is one stock Central Bankers forgot to buy. Today’s stock crash -15% is being felt across Baltimore once again, city streets are eerily calm, as the latest round of millennials who ‘bought the dip’ called in sick this morning. Something tells us, the avocado and toast breakfast will be sadly missed by many….

Bloomberg sums up today’s terrible earnings report blamed on ‘shortfall on operational disruptions from a recent technology systems transition’, and also provides a dismal macro outlook for the company.

In terms of trades, Kevin Plank (CEO) appears to be a genius – selling stock at highs. Form 4s concludes, he’s sold over $145 million worth of paper even during the stock collapse.

Immediately, Kevin Plank – through his full-service real estate firm called Sagamore Development Company – embarked on the construction of his whiskey distillery nestled in Baltimore’s inner harbor.

At the point of construction in 2H15, the stock crashed -20% to -30%. Fast forward to April 2017, Plank in a need of a drink opened his whiskey distillery, as the stock crashed another -50%.

Plank, a smart guy, knew the only way to comfort shareholders was to offer them a bottle of good American whiskey to soothe the pain of Under Armour’s stock crash.

This is by far, a much better class act of distractions when compared to Elon Musk’s circus act

Simultaneously, Plank built an elitist only hotel in Baltimore’s Fells Point district called Sagamore Pendry.

The two year, $60 million dollar project was also constructed around the time of the whiskey distillery.

According to Kayak.com, the 128-room property sits on the historic recreation pier in Fells Point with rooms starting at +$335. Interesting to note, a majority of Americans don’t even have $500.00 in savings, so a one night stay at Plank’s hotel does not welcome middle America.

JPM’s Wealth Inequality desk outlines that nearly 1/3 of households of color have a net worth of zero in Baltimore. Considering total population is around 620k, that means over 100k African Americans in the city are flat broke. This gives you a perspective of Baltimore’s economic disparities as Plank builds fancy things.

Nevertheless, Plank’s Sagamore Farm, valued $18-$20 million just 25 minutes north of the city is another example of the lavish lifestyle Kevin Plank is manufacturing at the expense of Under Armour shareholders.

And one more thing, Plank’s $5.5 billion dollar ‘city with-in a city’ for elites was in danger of failing this year. Goldman Sachs came in with a hockey stick save for $233 million back in September to rescue the project when the stock was 20% higher. With the latest tumble in the stock along with re-imaging plans for the company through layoffs and cost cuts. The idea of such a project is farfetched.

Bottomline:

Kevin Plank’s actions over the past few years will certainly go down in the record books of what not to do in a stock market bubble. It’s only a matter of time when the overwhelmingly poor citizens of Baltimore wake up to the wide wealth inequalities produced by easy money policies of the Federal Reserve.

Nevertheless, the city is currently spiraling out of control with a homicide rate doubled of Chicago’s, along with an opioid crisis that is straining resources of the tax payers and city hall.

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Authored by Steve H. Hanke of the Johns Hopkins University. Follow him on Twitter @Steve_Hanke.

The Grim Reaper has taken his scythe to the Venezuelan bolivar. The death of the bolivar is depicted in the following chart. A bolivar is worthless, and with its collapse, Venezuela is witnessing the world’s worst inflation. 

As the bolivar collapsed and inflation accelerated, the Banco Central de Venezuela (BCV) became an unreliable source of inflation data. Indeed, from December 2014 until January 2016, the BCV did not report inflation statistics. Then, the BCV pulled a rabbit out of its hat in January 2016 and reported a phony annual inflation rate for the third quarter of 2015. So, the last official inflation data reported by the BCV is almost two years old. To remedy this problem, the Johns Hopkins – Cato Institute Troubled Currencies Project, which I direct, began to measure Venezuela’s inflation in 2013. 

The most important price in an economy is the exchange rate between the local currency and the world’s reserve currency — the U.S. dollar. As long as there is an active black market (read: free market) for currency and the black market data are available, changes in the black market exchange rate can be reliably transformed into accurate estimates of countrywide inflation rates. The economic principle of Purchasing Power Parity (PPP) allows for this transformation.

I compute the implied annual inflation rate on a daily basis by using PPP to translate changes in the VEF/USD exchange rate into an annual inflation rate. The chart below shows the course of that annual rate, which last peaked at 3473% (yr/yr) in late October 2017. At present, Venezuela’s annual inflation rate is 2875%, the highest in the world (see the chart below).

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In the latest sign that America’s looming pension crisis is inching closer to an all-our collapse that will inevitably end in a series of bailouts – or worse, the failure to pay out retiree’s coveted benefits – a handful of California cities are lashing out at CALPers after being forced to hike pension contributions to offset expectations for long-term returns that have been revised lower by the state pension system.

Ten of the largest local governments in the capital region can expect to pay a total of $216 million to CalPERS in fiscal 2018-19, an increase of $27 million over this year, according to the Sacramento Bee. And nearly half of that increase will be borne by one local government – the city of Sacramento.

The Sacramento region’s largest local governments will see pension costs go up by an estimated 14 percent next fiscal year, starting a series of annual increases that many city officials say are “unsustainable” and will force service cuts or tax hikes.

 

The increases come after CalPERS in December reduced the expected rate of return from investments, forcing local governments and other participants in the state’s retirement plan to pay more to cover the cost of pensions.

As one might expect, city officials are less than pleased. According to Leyne Milstein, the city of Sacramento’s finance director, said the city’s pension costs will double in seven years, and while city revenues have also increased in recent years, thanks in part to a strong real-estate market, the rise won’t be nearly enough to offset the increased cost.

“It’s not sustainable,” Milstein said. “These costs are going to make things incredibly challenging.”

In a report this month, Joe Nation, a researcher at the Stanford Institute for Economic Policy Research, wrote that “employer pension contributions are projected to roughly double between 2017 and 2030, resulting in the further crowd out of traditional government services.”

Nation said he supports tax increases to pay for pension obligations, although he adds that it would be extremely difficult to muster political support for such a tax.

In a futile exercise that resembles banging one’s head against a wall, local government officials from across the state, including West Sacramento, complained to CALPers board members, warning that they would need to cut services and raise taxes to put more money toward pensions.

“We don’t know how we’re going to operate,” said Oroville’s finance director, Ruth Wright, who suggested that a doubling of pension costs in five years could force the city into the nuclear option. “We’ve been saying the bankruptcy word.”

Of course, there’s little CALPers can do. If it doesn’t mandate the increases, it knows that will increase its culpability when the music stops and every asset has been liquidated.

To wit, Steve Maviglio of the labor-backed Californians for Retirement Security said officials have the means to address the increased costs. “If city officials are truly interested in meeting their obligations, they always have that opportunity at the bargaining table or providing more revenue thru measures on the ballot,” he said.

Of course, this exercise in cya isn’t nearly enough to stave off the inevitable collapse. Nation questions whether the new CalPERS return rate is too optimistic. In his report, he provides estimates for how much local governments can expect to pay if the fund’s investments don’t meet projections. In 12 years, the city of Sacramento would see pension costs go up $94 million a year under his alternative projection.

To afford these higher costs absent higher revenues, Sacramento would have to cut 25% of police and fire services after cutting other less essential services.

Milstein said she won’t estimate when or if the city will have to start cutting employees if the current financial forecast proves correct. In the city’s current budget, officials said, “Given the current revenue forecast, the city alone cannot absorb the increased costs of providing retirement benefits.”

Some groups, including the League of California Cities are lobbying CalPERS to consider funding options besides raising employer rates, including possibly suspending cost-of-living adjustments for pensioners and looking at working current workers into less generous plans.

As we’ve noted many times, defined benefit pension plans are, in many cases, a Ponzi scheme…

Current assets are used to pay current claims in full despite insufficient funding to pay future liabilities…but unlike Wall Street Ponzi schemers like Bernie Madoff, nobody goes to jail because everybody is complicit.

While California’s problem is certainly dire, pension costs directly triggered budget battles in state capitols across the US this year. Connecticut is still struggling to pass a budget that meaningfully reduces an expected $3.5 billion two-year deficit.

Indeed, as the chart below illustrates, underfunded pensions are an endemic problem.

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Authord by Daniel Nevins via FFWiley.com,

We’ve produced some research over the years that we’d love to see the powers-that-be react to, but none more so than our look at financial flows during the QE programs.

By netting all lending by banks and brokers-dealers and then comparing it to the Fed’s lending, we stumbled upon a chart that seemed to show exactly what QE does or doesn’t do. But “doesn’t,” not “does,” was the story, and it couldn’t have been clearer. Or shown a more stimulating pattern. To geeks like us, our Excel click on “Insert, Line” was like stepping from a shady trail to a sunny vista.

Here’s the updated chart, which we dubbed the “argyle effect” and looks even sharper than it did when we first produced it in 2014:

We like the chart because we’re just as confirmation-biased as the average human – anything that confirms our QE skepticism is cognitively satisfying. And the chart appears to show that QE was largely irrelevant. It merely replaced growth in privately financed credit with growth financed by the Fed. The Fed grabbed the credit-growth baton for QE laps and returned it to the private sector for QE pauses, and whoever didn’t have the baton more or less stood still.

As we concluded in 2014, QE is a substitution story, not an addition story.

Many pundits told the addition story as QE was underway. They expected banks to “multiply up” reserves by aggressively expanding their loan books. But reserves never significantly multiplied.

We think there are five reasons why the “money multiplier theory” failed:

1. High-quality borrowers don’t emerge mysteriously from cracks in the Eccles Building and parade zombie-like to bank loan desks. In other words, credit demand was probably about the same with or without QE.
2. QE’s effects on bank balance sheets aren’t quite as distorting as they’re often depicted. Consider that new reserves are typically matched by new deposits, because dealers offering bonds to the Fed get paid for those bonds through their accounts at commercial banks. In other words, QE adds a similar item to both sides of bank balance sheets, which you might not appreciate if your information comes from those who call for banks to “lend out” reserves. That’s impossible—reserves can’t be “lent out”—and it often leads to exaggerated statements about the implications of excess reserves.
3. To a significant degree, banks can neutralize excess reserves (and the corresponding “excess” deposits) with financial derivatives and other balance sheet adjustments. They can rearrange exposures to mimic a balance sheet of equal risk that’s not stuffed with reserves.
4. Just as importantly, excess reserves flow naturally from banks that don’t want them to banks that don’t mind them nearly as much. Consider that Fed data shows a disproportionate amount of QE’s extra reserves landing at U.S. branches of foreign banks. Those foreign banks might have sound reasons for holding excess reserves.
5. The money multiplier theory is inconsistent with real-world reserve management practices. The Bank of England has called it “reverse” to how bank lending and reserve management work in the real world. And the gap between theory and reality is so large that you don’t even need the four reasons above to reject the money multiplier—you just need a healthy skepticism about mainstream theory.

According to our chart, even QE’s wealth effects appear to be poorly understood. If credit growth is the same with or without QE, any effects on bond and stock prices might be more psychological than commonly believed.

Or, those effects might transmit mainly through financial derivatives (see #3 above). Or, I hear at least a few readers asking, “What wealth effects?” We’ll never know for certain if QE boosted asset prices at all. Maybe the bull market only needed low interest rates, a slowly growing economy, the knowledge that our policy honchos wanted asset prices higher, and a soothing narrative that they have the tools to make that happen?

Think of it this way: New borrowers know approximately how many calories they can consume, and after the Fed starts delivering three meals a day, private banks find that their contributions are no longer needed. By necessity, private banks shut down their kitchens, and almost nothing changes economically. We get substitution, not addition.

Getting to the Bottom of the Burberry Backlash

To be sure, the argyle effect might not be surprising to the Fed’s policy makers. They might have already looked at the data in the same way we did. They might also believe that QE increased the overall lending trend (referring to the entire period’s lending growth), irrespective of the pattern from one QE to the next. All that said, we’d like to know their reaction.

We’d like to know: Would the Fed’s heads explain the chart pattern differently to our interpretation above? If our interpretation is on the central-bank-printed money, how do they justify their policies? How do they expect the pattern to change as QE unwinds? Or, do they not know what to expect—are they as confused as anyone else about what QE really does? The last possibility matches public statements by both current and former FOMC members. (See, for example, Bill Dudley here, Kevin Warsh here, or just about anything from Richard Fisher.)

So, we’re asking Fed correspondents to lend a hand. Nearly nine years after QE began, you’re tired of having the same discussions, right? Here’s a chance to make the discussions more interesting—a chance to drop a Burberry bombshell on your most insightful Fed contact. Inquiring minds would like to see the bomb’s impact, or at least to know how policy makers would go about defusing it. More bluntly, inquiring minds deserve to know. It’s our economy, too, and public officials should be held accountable for the results of their actions.

And if the public interest isn’t enough to persuade Fed correspondents to investigate the argyle effect, we’ll offer other incentives. In return for a report that includes the insights of any FOMC member or senior Fed researcher, we’ll send a complimentary copy of Economics for Independent Thinkers, which is filled with similar research. Or, if our book isn’t mainstream enough for you, we’ll send a thank you with a big smiley face on it. Either way, we look forward to your report on our simple—yet oddly revealing—chart.

Author’s Note: We separated QE and non-QE periods according to the credit the Fed added to the financial system through all of its activities, not just open market operations. Because we included loans, repos, and various emergency facilities enacted during the financial crisis, our time periods are slightly different than the announced start and end dates for QE alone. (For more details, see this note from 2014, although replicators should be aware that the Fed recently replaced its “credit market instruments” category with a few subcategories.) In other words, the line showing the Fed’s net lending is jagged by design. By separating periods of high versus low Fed-sourced credit, we could test whether the private sector’s net lending would show a reverse correlation to the Fed’s activities. As you can see, it did.

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There will be "almost no prospective returns" from U.S. stocks over the next decade because the market is fully valued following years of gains, according to the global strategist at Allianz Global Investors, which manages $569 billion.

As Bloomberg reports, low interest rates and bond purchases by central banks have left cash and many other asset classes "significantly mispriced," Neil Dwane said Monday as part of a panel discussion on long-term investing at the Toronto Global Forum.

"The U.S. is fully valued," said Dwane, whose firm is owned by Munich-based insurance giant Allianz SE.

 

"There’s almost no prospective returns for the next 10 years from the U.S. equity market, and therefore investors have to look into Asia or Europe where valuations are significantly lower."

 

With interest rates close to zero around the world and bond markets "manipulated by central banks," it’s difficult to assess risk and return, he added.

 

Many investors have turned to high-yield bonds or emerging markets for income, which raises risks.

Dwane is not alone of course in this ominous view, as Bloomberg notes, Jim Keohane, chief executive officer of the Healthcare of Ontario Pension Plan, agreed that it’s not a good time to be buying assets of nearly any stripe.

"Right now assets are very expensive," said Keohane, whose firm manages more than C$70 billion ($54 billion).

 

"We need to be patient, to wait for better opportunities. Whenever the next crisis comes, assets are going to be on sale. You can buy them a lot cheaper than you can buy them today, but you have to have patience to be able to do that."

And finally, John Hussman, of Hussman Funds, warned that a century of reliable valuation evidence indicates that the S&P 500 is likely to experience an outright loss, including dividends, over the coming 10-12 year horizon, and we presently estimate likely interim losses on the order of -60% or more.

A rate of return of even 1% in cash is a much more desirable option than investors may imagine.

For a while, Bernie Madoff’s investors felt great about their impressive “returns.” For a while, investors in dot-com stocks felt the same. For a while, investors in mortgage bonds felt the same. But when investors focus on returns rather than the very long-term structure, stability, and even existence of the underlying cash flows, terrible things can happen.

All that’s required to get the snowball rolling is the creeping recognition that there’s no “there” there.

In response to the delusion that low interest rates “justify” virtually any level of market valuation, regardless of the growth rate of the underlying cash flows, the speculation of recent years has created a situation where there is effectively no way out for investors in aggregate. Every security that is issued must be held by someone until it is retired.

When one investor sells a share, it simply means that another investor buys it. The only question is who will hold the bag.

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