Category: zerohedge

Submitted by Adam Taggart via PeakProsperity.com,

Yesterday I made the 2-hour drive back to Silicon Valley, where I lived for 15 years before moving out to the country.

I rarely go back, as I miss very little about the hyper-elite scene there. When I do, though, I feel I have a useful 'insider-now-outsider' perspective that allows me to see things there more accurately than those who live in that fishbowl 24/7.

It's Still Fantasy-Land

What hit me most strongly upon arriving back in the Menlo Park/Palo Alto area, is how little of the craziness has changed since I left 4 years ago. I don't mean 'unchanged' though; rather that the same craziness is there, just more extreme than ever.

The streets still bustle with hipster techies, fashionista spouses, the shiny Stanford students and the less-shiny venture capitalists. Every time I visit, I'm amazed by the latest generation of specialized stores that have sprung up to attend to every want and whim of this trend-driven population.

Here's a not-uncommon way a lunch break is spent in Palo Alto. First, zip over to Town & Country and drop $65 for a 3-minute cryotheraphy session at The Performist. Then warm up with one of your 3-times-per-week visits to Drybar for a $45 "blowout"  — no hair cut or treatment, mind you; just the styling touch-up needed to maintain your 'fabulous' look for the next 48 hours. Next, grab yourself lunch at Sushiritto (you guessed it: burrito-styled sushi) – but get there early, as you'll be waiting in a long line as this ultra-hip restaurant is only open for a few hours each day. Then for dessert, nab an ice cream sandwich at CREAM (yes, an entire store dedicated to high-end ice cream sandwiches), but be prepared for an even longer line than Sushiritto's…

The belief in the area's bulletproof and never-ending prosperity is as alive and well as I've seen it.

And housing is still the most visible example of this. Prices were insane when I lived there, and they're substantially more insane-r now: 

(Source)

Looking at this chart, I'm reminded that I first arrived in Palo Alto in the fall of 1997 (for grad school). So the data series pretty much encompasses the span of my personal experience watching home prices shoot the moon here — and then set their sights on Mars. It's been nuts to watch. And even more nuts when noting how the pace of increase only accelerated in the years following the credit crisis — perfectly timed, I might add, with the onset of the quantitative easing programs of the Federal Reserve and the other major world central banks. Flood the world with trillions of newly-printed thin-air money and it has to go somewhere… 

In 1997, I remember clearly driving down University Avenue on my way to orientation for grad school and being shocked by a 'For Sale' sign listing a home for $500,000. Who in their right mind would pay half a million dollars for a house? I recall wondering. Well, not quite 2 decades later, that same house is worth 7x (!) more according to the chart above.

Yesterday, driving through the neighborhood I used to live in, it seems every 4th or 5th house has either been substantially renovated by a recent buyer, or completely razed and replaced with a multi-$million McMansion.

My main point here is that, despite recent headlines that the Silicon Valley housing bubble may have popped, there aren't visible signs of it yet.

Trust me, I wish there were. You'll have a hard time finding somebody who has hated the housing scene there more than I have (and still do). Remember, this is the guy who ranted how this $2mil piece of garbage in my old 'hood epitomizes everything wrong with Bay Area housing:

Add that anecdote to the hard data released this week about the skyrocketing cost of renting in the Bay Area:

How Much Should You Make to Afford Rent in San Francisco?

 

For the squeamish, it might be best to look away. For the those with stronger reserve, another data compilation was released today by SmartAsset with arguably bad news. You will need to make $216,219 annually to rent a two-bedroom in San Francisco.

 

This comes on the heels of news that college grads can expect to pay upward of 79 percent of their income to rent in Baghdad by the Bay.

 

This is a 7.4 percent bump up from 2015, which showed that one needed $201,171 annually for a fair market two-bedroom in San Francisco.

(Source)

That is a truly staggering and stupid requirement. And while rising rents are occurring across the country (again: Thank you, Federal Reserve!), the San Francisco Bay Area remains a far outlier when compared to the other major metros across the country:

(Source)

So, I'm sorry to report from the trenches that Silicon Valley's famous "reality-distortion field" is not flickering out.

At least, not yet.

Signs Of A Top

Now, while there aren't yet signs of a correction there, there are plenty of symptoms indicative of a top.

Housing and tech company performance are the ubiquitous topics of conversation in Silicon Valley. That's nothing new. But the tone in which those conversations are being had is.

Homeowners are not oblivious to the dizzying heights house prices have now reached. While they remain smug about the equity gains they're sitting on, they privately admit that the rocket ride can't last forever. Most now predict a period of 'cooling off' will need to happen at some point, though very few have the stomach to consider that prices might actually correct lower. The point is, the ingrained belief that "housing prices always go higher" — which, trust me, is a universal religion out here — is beginning to moderate. Which is sort of akin to the Pope wondering aloud "Maybe those atheists are on to something…"

Of similar momentousness, the all-encompassing faith in the Tech sector to churn out ever more millionaires and billionaires is similarly experiencing a challenge of confidence. It's getting harder for start ups to access investor capital:

Forbes: Tech CEO Shares Difficulties of Raising Seed Funding in Tight VC Market

 

According to a recently released report from PricewaterhouseCoopers and the National Venture Capital Association, funding in Silicon Valley startups fell 19.5% in the first quarter of 2016 compared to a year earlier, and is down 10% for seed stage companies in the first quarter 2016, amidst fears over the global economy and the run-up in startups’ valuations.

 

(Source)

For more established companies, they're having trouble cashing out. The IPO window for Tech stocks is abysmal this year:

Why 2016 has been a terrible year for tech IPOs

 

Only 11 U.S. companies have gone public in 2016, making it the worst start to a year for initial public offerings since 2009, when only four companies made it out of the gate by April 20.

 

At this time last year, 43 companies had gone public, according to Renaissance Capital, which runs IPO-focused exchange traded funds.

(Source)

And the largest perennial powerhouses — companies like Apple, Netflix, Yahoo!, Google, LinkedIn, Twitter — have seen their stock prices flatline or (gasp!) drop over the past year (Facebook is the only notable exception). In fact, many are announcing mass layoffs, both public and stealthy, as I've been chronicling closely since the start of the year.

The world is slowly beginning to wake up to the fact that the Tech industry's track record of birthing world-changing enhancements looks better in past decades than this one. As I've railed about loudly, Silicon Valley has become a too-cozy partner with Wall Street — a partnership that has resulted in a lot more huckersterism than actual value. 

Life in Silicon Valley has evolved around a dependence on the next wave of boom-time money flooding in from the NEXT BIG THING. But right now, the current "big thing" is losing momentum, and there's no obvious fleeter-footed successor poised to take the baton anytime soon.

What happens when a system designed to sell to the "greater fool" runs out of fools?

Theranos: Portend Of A Coming Fall From Grace?

This week, Tech darling and soon-to-be-slain unicorn Theranos announced that it was voiding all test results performed on its proprietary Edison machines over the past 2 years, effectively admitting there is no real value underlying its business. As a result, its private market valuation of $9 billion is now on an express-ride to somewhere much closer to $0.

Here again, I have a personal connection to the story from my time in Palo Alto. Theranos CEO Elizabeth Holmes went to Stanford: a family friend was a close advisor of hers, and a grad school classmate is one of the VC investors in the company. To be clear: I haven't talked with these folks much directly about their involvement with Theranos, but I have an understanding of some of the players involved.

To my eye, the fall of Theranos is a quintessentially Silicon Valley story. A big, brash idea that feeds into the valley's self-adulation as a place where miracles happen. Silicon Valley wants Cinderella-stories like this to succeed. In fact, to support the real estate and Tech funding industries there — it needs them to. Without the influx of new capital and new dream-chasing professionals, the party ends pretty quick — as nobody can afford to live or operate there for very long without a windfall.

Because of this strategy of hope, those involved with Theranos deluded themselves. They clearly didn't conduct their due diligence with sufficient rigor and — based on the folks I know personally (who possess much more brainpower than I, I'll readily admit) — didn't seem willing to admit to themselves how bad things might actually be, even as the evidence mounted month after month. There's nothing terribly unique in this; as Dan Ariely reminds us, we humans are champion rationalizers. Our monkey-brain often derails us with its preference for the soothing lie over the inconvenient truth.

And now, Theranos' dream is dead. Even if there's worthwhile IT to be salvaged, the company's brand (as well as its founder) is now toxic.

I see a lot of similarity in the demise of Theranos and the likely future trajectory for Silicon Valley at large. Loose money enabled valuations to balloon way out of proportion with fundamentals, massive self-delusion fanned by media adulation have kept the system from challenging itself, and yet the farce continued far longer than anyone imagined possible.

Theranos' day of reckoning has just arrived. By itself, it's a single added blemish to the Silicon Valley 'miracle'. But how few more can be sustained before the 'miracle' starts to look more like a 'debacle'?

Answer: fewer and fewer the higher home prices and rents rise, and the prospects of being on the receiving end of a Tech windfall diminish. At some level, there's just no more greater fools left willing to contribute their money or their time given the high cost and cooling upside.

And then like Theranos, Silicon Valley's impenetrable reality distortion field will fizzle, and possibly flicker out. When that happens, like Theranos, the downdraft will be sudden, shocking, and brutal.

via http://ift.tt/1Tk7JYj Tyler Durden

While over the past several months the US has had its share of bizarre stories over the latest liberal craze, namely providing transgender bathrooms at public schools or losing access to funds which promptly enraged conservatives across the nation, the most recent development may also be the most surprising one yet: it appears that as the public debate over the treatment of transgender has hit a fever pitch, Oklahoma republicans have had enough and are now looking to impeach Barach Obama. 

The Oklahoma State Capitol

As Reuters reports, Oklahoma’s Republican-dominated legislature has filed a measure calling for President Barack Obama’s impeachment over his administration’s recommendations on accommodating transgender students, saying he overstepped his constitutional authority. So all the other times Obama overstepped his “constitutional authority”, that one could ignore, but this time he really crossed the, er bathoom, line?

Lawmakers in the socially conservative state are also expected to take up a measure as early as Friday that would allow students to claim a religious right to have separate but equal bathrooms and changing facilities to segregate them from transgender students.

According to the impeachment resolution introduced on Thursday night, Oklahoma members of the U.S. House of Representatives will file articles of impeachment against Obama, the U.S. attorney general, the U.S. secretary of education and others over the letter.

The Obama administration told U.S. public schools last week that transgender students must be allowed to use the bathroom of their choice, upsetting Republicans and raising the likelihood of fights over federal funding and legal authority. That said, the impeachment call seems to be on shaky ground since the letter offered non-binding guidance and did not have the force of law, legal experts told local media.

State Representative John Bennett, a Republican, said in a statement the White House directive was “biblically wrong,” and a violation of state sovereignty.

Alongside the impeachment resolution, Oklahoma lawmakers introduced a bill that could force schools into costly construction, which would be difficult for them to complete after lawmakers significantly cut education funding to plug a $1.3 billion state budget shortfall.  The Oklahoma bill would allow for segregation at school restrooms, athletic changing facilities and showers if a request is made to accommodate religious beliefs. It also allows the attorney general to file lawsuits to implement the changes.

Fans of Obama’s transgender crusade were displeased: Troy Stevenson, executive director of Freedom Oklahoma, an LGBT advocacy group said the measure promoted fear-mongering and was out of place

“In a time when our state is facing an unprecedented economic crisis, our lawmakers should be focused on righting the ship rather than stigmatizing transgender youth,” he said in a statement.

That, or merely acting according to what they believe is right.

Meanwhile, Oklahoma seems intent on a collision course with the administration: the measure was introduced just hours after lawmakers in the budget-challenged state set itself up for a bruising legal fight after approving a bill that would make abortions a felony punishable by up to three years in prison for doctors who perform them.

Abortion rights groups have promised a court battle if Governor Mary Fallin, a anti-abortion Republican, approves the measure.

* * *

And that, in a nutshell, is where US society finds itself at this moment.

via http://ift.tt/1U5oO25 Tyler Durden

Having cashed out a few hundred million dollars worth of stock to some dliuted greater fools – with the help of Goldman Sachs – the ugly face of reality of descending on Elon Musk and his government-subsidized car maker. As Reuters reports, Tesla suppliers are loudly questioning Musk's production goals as he moved up the launch of high-volume production of its Model 3 to 2018, two years earlier than planned.

Rather shockingly, given the huge demand, automaking consultants and supply executives, who asked not to be identified, admitted that Tesla has still not finalized the Model 3 design and specifications, warning that Musk's goals were "implausible," in part because Tesla's battery factory in Reno, Nevada, was unfinished; and furthermore, aluminum, lithium and other materials – already in short supply – "could be another limiting factor."

Tesla Motors Inc has surprised parts makers with plans to move up the launch of high-volume production of its Model 3 to 2018, two years earlier than planned – an acceleration that supplier executives and industry consultants said would be difficult to achieve and potentially costly.

In the past three months, Tesla has told suppliers the company was doubling its original production projections to 100,000 Model 3s in 2017 and 400,000 in 2018, several supplier industry executives familiar with the plans told Reuters.

 

Tesla has taken 373,000 orders for the Model 3 – which has a starting price of $35,000, about half its Model S – and has said it would begin customer deliveries in late 2017. But it has made no promises, and, on earlier models, customers waited months for delivery.

 

Citing "tremendous demand," Chief Executive Elon Musk told analysts on an April call that the company planned to boost total production, including the existing Model S and Model X crossover, to 500,000 in 2018 – two years earlier than its original target and a 10-fold increase over the 50,000 vehicles it made in 2015.

 

Musk said the Model 3's simpler design, new production hires and enthusiastic suppliers would help the company make its goals. He said Tesla would drop suppliers that could not meet deadlines and would bring more parts production in-house than traditional automakers typically do. He did not specify how much or which parts.

Industry experts said Tesla's new goals were extraordinary and raised doubts it could meet them… "They're aiming to be up and running in 2018, so they have two years – and suppliers are wondering if they'll make that deadline."

One complication is that Tesla has not finalized the Model 3 design and specifications, said automaking consultants and supply executives who asked not to be identified because Tesla prohibits them from disclosing contract details.

Musk has said the Model 3 design and engineering would be complete in June, 13 months ahead of the planned production startup.

Under ideal conditions, automakers have launched new assembly lines in 18 months, but they typically take two to three years after the first tooling and supply contracts are signed, several manufacturing consultants said.

 

The handful of North American auto plants capable of building 500,000 vehicles a year are all run by automakers with decades of experience, they said. 

 

One complication is that Tesla has not finalized the Model 3 design and specifications, said automaking consultants and supply executives who asked not to be identified because Tesla prohibits them from disclosing contract details.

 

Musk has said the Model 3 design and engineering would be complete in June, 13 months ahead of the planned production startup.

 

Under ideal conditions, automakers have launched new assembly lines in 18 months, but they typically take two to three years after the first tooling and supply contracts are signed, several manufacturing consultants said.

 

Automaking consultant Ron Harbour of Oliver Wyman said increasing production at the Fremont plant to 500,000 vehicles in 2018 would require more stamping, welding and assembly machinery that "could take up to 18 months to order and install."

 

Jeff Schuster of industry forecaster LMC Automotive said the goals were "implausible," in part because Tesla's battery factory in Reno, Nevada, was unfinished.

 

Aluminum, lithium and other materials – already in short supply – "could be another limiting factor," said Sam Fiorani of AutoForecast Solutions.

We note that Tesla continues to have delivery delays for its Model X SUV. Its Model S also missed delivery targets when launched.

And, as Jalopnik details, build quality remains dismal…

Tesla, the little American car company every other automaker loves to hate, recently lent a Model X to Fortune for a review. The car was not what one might expect of a $150,000 luxury car, unless something like an old Jaguar has been in your ownership history.

 

Fortune adored the Model X for its speed, its infotainment system, and its semi-autonomous mode. Fortune was less enamored with the seat controls that conspired to squish a baby.

 

“The theory is,” veteran auto tester Sue Callaway says as she places an occupied baby seat in the middle row, “the seats move together so the baby doesn’t get squished.”

 

 

“Oh! Nope,” she says, watching the baby seat immediately get pressed up against the back of the fronts. “Baby’s getting squished. That’s not good. It’s not supposed to hit the back of the driver’s seat.”

 

Indeed it is not.

 

Quality issues extended past baby-squishing, with weatherstripping peeling off one of the falcon doors that Tesla itself admitted were more ambitious than advisable. The carpet, as well, was coming off in places.

 

If this was an isolated issue with the Model X, one might figure that this was just a rare preproduction glitch or two. But the Model X has repeatedly been in the news for quality issues. There have been complaints about the car’s windshield, with its doors, its rear seat latches, and assorted other fit and finish problems.

 

Again, these issues once were the norm (decades ago) for ultra-luxury cars as expensive and as exclusive as the top-of-the-line Model X and the Model S. But this doesn’t bode well for people buying low-cost Teslas, or for the people who are expecting a mass produced product from the upcoming Model 3.

 

Jalopnik has reached out to Tesla for comment but has not yet heard back.

Still, all the time that Goldman Sachs and the Wall Street cheermongers pump out self-serving shit to a gullible public looking for a lottery ticket, the likes of Tesla (and Theranos) will continue to defy gravity… until they are Valeant'd.

Goldman compares the potential growth rate for Tesla as comparable to that of auto industry monopolist Ford Model T:

 

 

via http://ift.tt/1YJep0a Tyler Durden

In November 2014, The Obama administration announced a proposal to try and grant a proactive three-year stay of deportation and legal work permits to as many as 5 million illegal immigrants. As a result, the state of Texas led a large group of states suing the government, arguing the proposal violated both federal law and overstepped the president's constitutional powers – in which Judge Andrew S. Hanen agreed with.

Judge Hanen halted the amnesty just days before it was to begin accepting applications in February 2015, however, as the Washington Times reports, the administration was approving amnesty applications during that time, which Justice Department lawyers hid from the court. To make matters worse, even after the court ordered a halt to the whole amnesty proposal, the Department of Homeland Security approved several thousand more applications, in direct defiance of the court's order, and something that was not admitted to the court until much later.

"The decision of the lawyers who apparently determined that these three-year renewals under the 2014 DHS Directive were not covered by the Plaintiff States' pleadings was clearly unreasonable. The conduct of the lawyers who then covered up this decision was even worse." Judge Hanen wrote.

In writing the ruling, Hanen quoted from the scene in "Miracle on 34th Street" when the boy is called to testify to Santa's existence and saying that everyone knows not to tell a lie to the court. Hanen went on to say that that the Justice Department lawyers have an even stricter duty: Tell the truth, don't mislead the court, and don't allow it to be mislead by others.

"The Government's lawyers failed on all three fronts. The actions of the DHS should have been brought as early as December 19, 2014. The failure of counsel to do that constituted more than mere inadvertent omissions – it was intentionally deceptive." Judge Hanen wrote in his ruling.

In court, the government lawyers admitted they'd left the judge with the wrong impression, and expressed regret and sorrow.

Judge Hanen thought about imposing financial penalty on the government, but since taxpayers would end up footing the bill it seemed pointless. Instead, in what may be the greatest court ordered ruling ever, Hanen ordered the the lawyers at the DOJ's headquarters in Washington who practice in any of the 26 states that sued over amnesty to take at least three hours of remedial ethics training a year.

And to top it off, Hanen ordered that the classes must be "taught by at least one recognized ethics expert who is unaffiliated with the Justice Department."

All we have to say about that is bravo Judge Hanen, well played. However, is there a way to somehow extend that order to all elected officials?

via http://ift.tt/1W6HlkR Tyler Durden

While it most likely is just the usual Friday (past) midnight trial balloon by the Nikkei, a media outlet that has promptly become the BOJ’s mouthpiece (recall a week ago the new owner of the FT reported that Abe would delay his 2017 sales tax increase, only to see the premier backpedal when the reaction in the USDJPY was not quite as desired), moments ago the Japanese publication reported that the Bank of Japan will “likely set aside funds for the first time to prepare for losses on its huge holdings of Japanese government bonds should the central bank end its monetary easing policy in the future.”

Nikkei reports that the BOJ has reserved 450 billion yen ($4.07 billion) for the year ended in March. The amount will become known when the BOJ releases financial statements as early as next week. The way the BOJ is preparing for losses is amusing: it is accruing the interest income from the bonds it owns so it can reserve for capital losses on those same bonds once rates spike, to wit:

The BOJ created a framework last fiscal year that permits it to set aside part of the interest income from its JGB holdings, which have ballooned through the bank’s massive monetary easing program. Interest income likely grew about 30% from the prior year to around 1.3 trillion yen in fiscal 2015.

 

Though BOJ Gov. Haruhiko Kuroda has indicated that the bank could expand easing if it faces difficulty achieving its inflation target, the creation of the reserves is a move to prepare for an exit from monetary easing.

 

The central bank’s JGB holdings totaled 349 trillion yen as of March 31, up about 180% in three years. Long-term interest rates, currently in negative territory, will rise and bond prices will fall should the BOJ end its monetary easing once it is sure that Japan is finally breaking free of deflation.

According to Nikkei, the bank estimates that a 1 percentage-point rise in long-term rates lowers the value of its JGB holdings by 21 trillion yen, or about $200 billion, which incidentally is about 50x more than the BOJ is said to be reserving, which implies that the BOJ is expect only a tiny increase in rates.

There will be a problem however if interest rates spike far more than just 1%.. or even 10%. After all, with the BOJ out of the picture, there will be no backstopped buyer of marginal issuance (and deficit funding), which means that the BOJ will almost certainly never be able to get out of the market at all.

Which however explains the trial balloon: the BOJ is merely curious to see how the market will react to the hint that BOJ buying may eventually end (even if it never will).

Meanwhile, just like in the case of the US, the BOJ pays most of its net income to the government, and this payment will decline if the bank sets aside reserves. Furthermore, the central bank’s profits have suffered from the lower value of foreign-currency assets due to a stronger yen. As a result, payments to the government are estimated at 400 billion yen for fiscal 2015, down sharply from 756.7 billion yen in the prior year.

Fiscal 2010 was the last time the BOJ paid less than 500 billion yen to the government. “The reserves are meant to even out swings in profit so payments to the government will not change over the long term,” a BOJ official said.

 

But from a short-term perspective, the lower payment to the government means that taxpayers will shoulder a heavier burden. So while the BOJ’s monetary easing may be propping up the economy and consumer prices, taxpayers essentially are picking up the tab.

If and when the BOJ does withdraw from the market, it will therefore face a double whammy of risks: the threat of soaring bond yields and a just as soaring Yen, in a global risk off move. At least initially: once the BOJ loses all credibility, the Yen will disintegrate as has been the long-running thesis of Kyle Bass and Dylan Grice, as Japan finally unleashes hyperinflation to deal with its massive debt overhang.

It’s a different matter entirely if the BOJ will ever actually follow up with “ending monetary easing policy.” If the past 8 years have demonstrated something very vividly, it is that central banks simply can not escape the vortex of QE, ZIRP and now NIRP. If anything, more easing will have to be added in the coming years as global rates turn ever more negative.

In fact, according to many observers, far from reducing QE, Japan’s next move will be one of terminal easing in the form of helicopter money.

For now, however, let the latest Nikkei trial balloon play out.

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For 20 of the last 21 weeks, US oil rig count has declined as it tracked the lagged oil price lower. That changed today as oil rigs were unchanged week-over-week perfectly syncing with the lagged lows in oil. Total rigs dropped 2 (thanks to gas rigs) to a new record low but even that pace has slowed dramatically. Oil prices are fading modestly on the news…

 

 

And oil prices are giving up earlier gains…

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Submitted by Michael Shedlock via MishTalk.com,

New accounting rules show Chicago has understated its pension liabilities by $11.5 billion.

At the end of 2015 the stated liability was $7.1 billion. Today it’s $18.6 billion. That’s a jump in net liabilities of 168%.

Mayor Rahm Emanuel has hopes pinned on union concessions and help from the state legislature. Neither is likely.

Out of Money in 10 Years

Bloomberg reports Chicago’s Pension-Fund Troubles Just Became $11.5 Billion Bigger.

Thanks to the defeat of the city’s retirement-fund overhaul by the Illinois Supreme Court and new accounting rules, Chicago’s so-called net pension liability to its Municipal Employees’ Annuity and Benefit Fund soared to $18.6 billion by the end of 2015 from $7.1 billion a year earlier, according to an annual report presented to the fund’s board on Thursday. The fund serves some 70,000 workers and retirees.

 

Decisions that are now adding hundreds of millions of dollars to its annual bills have left Chicago with a lower credit rating than any big U.S. city but once-bankrupt Detroit.

 

The latest estimate for the municipal fund, one of Chicago’s four pensions, will add to what had been an unfunded liability estimated at $20 billion.

 

A key driver was the court ruling striking down Mayor Rahm Emanuel’s plan that cut benefits and boosted city and employee contributions. Without it in place, the fund is now set to run out of money within 10 years.

 

That triggered another change. New accounting rules, adopted to keep governments from using overly optimistic investment-return forecasts to mask the scale of their liabilities, require them to use more modest assumptions once pension plans go broke. As a result, the reported liabilities jump.

 

Under the traditional way of estimating the municipal fund’s obligations, which is how annual contributions are set, the shortfall rose to $9.9 billion as of Dec. 31, based on market value of its assets, according to the actuaries report. That’s up from $7.1 billion a year earlier. The pension is only 32 percent funded — meaning it has 32 cents for every dollar it owes — compared to 42 percent last year, according to the actuaries.

“Very Good Discussions”

Emanuel claims to have “very good discussions” with the unions. That means one of two things.

1. Emanuel’s mind has gone to mush.
2. Emanuel is telling the unions he will hike taxes again, and again, and again.

In retrospect, those are the same thing.

Fluidity

Meanwhile, Jim Mohler, executive director of the fund, told board members on Thursday that it’s a “fluid situation.”

Mohler cited pending legislation in the Illinois legislature to bail out Chicago.

The only thing fluid is the exact timing of the bill followed by Governor Bruce Rauner’s immediate veto.

Super-Majority Theory and Practice

The Democrat controlled legislature has a super-majority that could in theory override Rauner’s veto. However, the legislature could have passed anything they wanted all year long. Yet, Illinois still does not have a budget.

In practice, there are a few “blue dog Democrats” that have a bit of fiscal sense.

And in this case, add in a bunch of downstate legislators who won’t relish hiking taxes to bail out bankrupt Chicago pensions.

Pension Shortages

Will downstate legislators and “blue dog” Democrats vote to bail out that mess?

It’s possible, but color me skeptical. Is Emanuel going to get union concession?

That idea sounds even sillier.

Stock Market Valuations and Assumptions

The Chicago pensions are 32% funded despite the biggest bull market in history. What happens if the market has negative returns for even a few years?

The answer is the pension plans will go bust before 10 years pass.

The sorry state of affairs is stock and bonds have such lofty valuations that negative returns are likely not for a few years, bit seven to ten years.

“One Big Worldwide Bubble”: Cusp of 30-Year Bear Market in Stocks and Bonds

I side with Milton Berg, founder and CEO of MB advisors says “One Big Worldwide Bubble”: Cusp of 30-Year Bear Market in Stocks and Bonds.

 

Please click on the above link for a fantastic interview with Berg.

Tax Hikes Not the Solution

The pension mess and the Chicago public school mess cannot be placed on the backs of Illinois taxpayer.

Mayor Emanuel already passed the biggest tax hike in history. Here are some links for discussion:

• Chicago Tax Collector Hath Arrived With Massive Tax Hike: Emanuel Says “No Stone Unturned … Not Done Yet”.
• Chicago’s Sheep Dogs Approve Mayor’s Tax on Sheep; Quote of the Day “It’s Not a Piece of Art”
• Chicago Public School System Threatens Massive Tax Hikes Via “Backdoor” Bond Guarantee

Solution is Bankruptcy

If Mayor Emanuel really wanted to do something for the city and city taxpayers, he would be begging House Speaker Michael Madigan for the one and only thing that can help the city: legislation that would allow Illinois municipal bankruptcies.

Let’s stop pretending there is another solution, because there isn’t.

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Refugees have little or no respite today in the world and that’s a telling tale of the type of world that we have created around us. There are growing numbers of those that are fleeing something in their home country ad all too often they flee to the nearest available space, which in an ever-spiraling knock-on effect ends up with displacing people yet again, forcing them to go somewhere else. The USA has a lot to answer for after having unsettled and destabilized the Middle East in its search for controlling oil and the seeking of material benefit and gain, under the auspices of a fight for some illusive democracy and the savior of those countries from the hands of dictators. That’s called interference or intervention, but the USA gave itself the God-given right to step into the affairs of others and decide what should happen there. Guns-a-blazing and rockets at the ready, parachuting into Iraq and Afghanistan and the list could go on. The USA rarely gets it right. They were the ones that bought Saddam Hussein back from exile, weren’t they? They were the ones that were arming Al-Qaeda against the Russians in their ideological warfare against the super powerful USSR that they were hell bent on destroying, weren’t they? The USA managed to destabilize the entire Middle East in its quest for power and fuel. The USA is the source of the past three decades of the Afghans being the number one country to produce the world’s refugees. Until this year, that is. The Afghans were the world’s top refugees in terms of numbers in the world and 25% of all refugees in the world were Afghans. That figure has been overtaken in the world today by Syrians.

There’s an unprecedented crisis of refugees in the world today and they have increased in numbers by 40% since 2011. 59.5 million people are currently displaced somewhere in the world because of trouble and conflict or persecution in their country of origin. Those displaced people do not all have refugee status since the process is long and arduous; almost as long as the journey to get to the country in which they will be able to apply for that protection. There are only 14 million refugees that possess the status officially in the world today out of the nearly 60 million that are currently living elsewhere. There are ten countries that have opened their borders to 60% of all those that are either officially or unofficially refugees today in the world. The top countries that have hosted them are Turkey, Pakistan and Lebanon.

The United Nations High Commissioner for Refugees is mandated to protect refugees throughout the world and has been since its creation in 1950. Its “mandate is to provide, on a non-political and humanitarian basis, international protection to refugees and to seek permanent solutions for them.”

A refugee is a person who is outside their country of citizenship because they believe that they have well-founded grounds for fear of persecution due to factors such as race, religion or nationality or even political opinion and social group. They are also unable to avail themselves of protection of their home country’s government (as this may also be the source of the persecution, or not). Legally the so-called present ‘migrant’ crisis that is taking place in the European Union is not technically a migrant crisis at all. They are refugees. But, why isn’t that world being used? Perhaps it’s because ultimately migrants are perceived as bad entities that want to take advantage of the society to which they are trying to gain access. They are spongers that will destroy the tissue of lies that is called a national identity, that myth that becomes so engrained in the collective storytelling of a nation that the citizens of that country believe that they have a common destiny together. The migrants of Europe are not migrants at all. They are refugees; or they perhaps may become them one day since they will have to go through the process of asylum seekers first of all before gaining access to that status of protection.  Refugee status could take up to five years at times. The UN believes that refugee status is even hereditary for two groups given their current world status: Palestinian refugees and Sahrawi refugees.

The UN Convention Relating to the Status of Refugees considers a refugee as a person who: “owing to well-founded fear of being persecuted for reasons of race, religion, nationality, membership of a particular social group or political opinion, is outside the country of his nationality and is unable or, owing to such fear, is unwilling to avail himself of the protection of that country; or who, not having a nationality and being outside the country of his former habitual residence as a result of such events, is unable or, owing to such fear, is unwilling to return to it.”

So who are the countries that have provided shelter in the world to the largest number of refugees? They are often countries that are in turmoil and suffering from instability themselves.

10. China

The majority of refugees come from Vietnam in this country and the total number of refugees stands at 301,052 for a total population of 1.36 billion people. Very few child refugees are in this country for some unknown reason (27%, whereas the international average is at 57%).

9. Uganda

There are 385,513 refugees in this country that has a total population of 36.8 million people, with the majority coming from South Sudan. In 2014, there was an increase in the number of refugees by 140,000 for this country. 60% of all refugees are children in this country also.

8. Chad

Refugees in this country that has a population total of 11 million stand at 452,897 people. The majority come from the Central African Republic (25% of the population has been displaced already) and the number of refugees has increased for the past 13 years. There are over 34 refugees per thousand of the population in this country and that is the 4^th highest figure in the world.

7. Kenya

There are 551,352 (3.8% of the world refugee population) refugees in this country that has a total population of 41.8 million. They too come from South Sudan in the main.

6. Jordan

The total refugee population stands at 654,141 people and the country has a total population of 6.5 million. The majority of refugees come from Syria today and there was an increase in applications to the tune of 119,000 in 2014. Just a few years ago (2013), there were fewer than 100,000 refugees in the country. There are 87.2 refugees per one thousand of the Jordanian population and that is the 2^nd highest ration in the world.

5. Ethiopia

There are 659,524 refugees in this country and the total Ethiopian population stands at 88.9 million people. The majority of refugees come from South Sudan. 58% of all refugees here are under 18 years of age.

4. Islamic Republic of Iran

This country of 77 million citizens hosts 982,027 refugees today and the majority is from Afghanistan. Iran currently hosts 6.8% of the world refugee population. Sanctions imposed on Iran have considerable and consistently made it difficult for the United Nations to provide aid to Iran to assist refugees, unfortunately.

3. Lebanon

There is a total population in this country of 4.5 million Lebanese and there is a total of 1,154,040 refugees in the country. The majority comes from Syria and there was an increase in the numbers in 2014 that worked out to over 400,000 applications. It currently has the highest ration of refugees in the world (232 per one thousand of the population).

2. Pakistan

There is a total population of 182.6 million people in Pakistan and they have a total number of refugees that stands at 1,505,525, with the majority coming from Afghanistan.

1. Turkey

Turkey has a total population of 76 million and there are 1,587,374 refugees in this country. 1.2 million were admitted in 2014 alone, with the vast majority coming from neighboring Syria. 11% of worldwide refugees come to Turkey.

The crisis that has been going on in Syria has been the source of the most refugees in the world for the last year now. Pakistan has been the top destination of most refugees for the last 22 years out of a total of 36 that have been monitored. Most of Pakistan’s refugees come from Afghanistan. It was due to the Taliban that they fled their country. But, why were the Taliban ever in power in Afghanistan? Return to the USA and their sole object of desire: destroy the influence of the USSR in the country and so arm the enemies of the Soviets for decades until they become so powerful that you can’t control them.

There’s that wonderful and yet at the same time disappointing joke that when you take the names of Osama Bin Laden and Saddam Hussein and you write down the letters that are in common in their two names, then you get to spell out ‘Made in the US’. Certainly a coincidence and nothing more. But, an interesting explanation to exactly what happened in the region. Yes, they were made in the USA and made by the USA in the American combat against the Soviets, regardless of the consequences.

Half of refugees in the world are children today (57%) and ultimately only 1% ever get to return to their home country because the conflict last for decades. Countries that do open their borders fid complicated ways of halting the tide of refugees that are applying in their countries for status. Pakistan refused in 2014 to renew the cards of nearly 150,000 refugees and so they are now living illegally in the country. Lebanon has made the process an administrative nightmare that is even more difficult than conflict itself in the country of origin.

In the USA, there is only 1 refugee per 1,000 Americans and that makes a total of 267,000. What will happen if countries close their borders that are fleeing persecution? They will probably end up (having lost everything that they could have lost already) resorting to anything in order to gain status or at least the ability to stay in the host country. They will resort to the even more dangerous options of fleeing their country that might be available to them. These are the people that have no home and no place to welcome them; the unwanted millions in the world.

What would you do with the refugees in the world? 

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Less than a month after a still unexplained suicide took place inside a conference room at Apple headquarters, there seems to be more trouble in Silicon Paradise. According to CBS, an incendiary device ignited a fire late Thursday night at the offices of digital giant Google, damaging a Google Earth demo car and leaving a large singe mark on one of the buildings, authorities said.

Mountain View firefighters were called to the massive complex on Salado Drive at about 10:52 p.m.

Arriving firefighters were met by Google security personnel and guided to an area where the car, used in Google’s Street view project, was parked and the grass and building were singed.

The blaze only caused minor damage to the car and building.

Mountain View Police PIO Katie Nelson told KPIX 5 that two incendiary devices were found at the scene and have been sent to a lab for testing.

The incident remains under investigation.

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Submitted by Daniel Fernandez Mendez via The Mises Institute,

The country of Venezuela is dangerously approaching hyperinflation. At 2015’s year-end, official figures had yearly inflation at or above 180 percent (some private sector sources estimated it at 330 percent). The technical definition of hyperinflation is when inflation is at 50 percent or more per month, meaning that Venezuela is not yet at this point, but does seem to be approaching at an accelerated pace. The South American country finds itself with inflation rates at their worst in its history (1996 saw 103 percent yearly inflation) and the highest in the world (Ukraine is second with 50 percent yearly inflation).

^{Source: NSI Bolivarian Republic of Venezuela}

The main effects of hyperinflation are beginning to be felt. In every case in history where there has been hyperinflation, the main cause has been fiscal imbalance, and the case in Venezuela is no different. When there is a surge in the deficit, the same applies for inflation (graph 2).

^{Source: Central Bank of Venezuela; International Monetary Fund}

Normally, moderate inflation follows the path of the deficit with a relatively large delay, because economic agents are unable to anticipate deficit values and monetization with precision. On the other hand, in times of hyperinflation, inflation anticipates the deficit (economic agents overestimate new monetization policies and there is a universal tendency to evade local currency). In Venezuela, we can see that since 2013 (graph 3) inflation has increased at a faster rate than the deficit, and for this reason we can consider the country in a state of hyperinflation as of that date.

^{Source: Self-prepared using data from: Venezuela Central Bank; International Monetary Fund}

This creates a big problem for the government of Venezuela due to the fact that real tax revenues decrease (just as in all cases of hyperinflation). During the time between receipt of tax revenues and actually putting these taxes to use, inflation eats up the real value providing the government with less real revenue.

An inverse relationship exists between inflation in Venezuela and crude oil prices (graph 4). This relationship is such that inflation increases rapidly when the main source of government revenue (revenue from oil) decreases due to the fact that the government does very little to reduce costs when decreases in revenues are experienced (thus deficits are monetized and amounts of currency rise at aggressive rates).

^{Source: NSI Bolivarian Republic of Venezuela; OPEC}

One of the most surprising and paradoxical aspects of hyperinflations is the shortage of money. When rises in prices grow out of control (which is starting to be the case in Venezuela), the amount of new money created is not enough to suffice for these increases in prices. In other words, the real money supply drops (nominal money supply / price levels).

The last phase in all cases of hyperinflation is currency stabilization. This phase is inevitable whether it be because of changes introduced by the government or due to complete rejection of local currency by the population. In order for such a monetary reform to be successful, it is essential that the government first eliminate the main cause of the inflation (the budget deficit). Unfortunately, it does not seem as though the Venezuelan government has any plans to decrease spending, nor does it appear that revenue from oil will be recovering any time soon, meaning that any attempts at currency stabilization will surely fail (just as it did the last time when the bolivar fuerte was introduced in 2008).

In light of this situation, it seems that Thiers’ Law is inevitable. Thiers’ Law is the reverse of Gresham’s Law. Good money eventually takes bad money out of circulation as the latter becomes abandoned. Currently, the US dollar serves as a store of value for Venezuelans, and to a lesser extent, the unit of account. The only function that the bolivar currently serves is as a medium of payments, which is only a matter of time before this function is abandoned, as well (in fact, alternatives to using local currency have begun to spring up in the form of bartering and trade). Seeing that the US dollar is already serving various functions that replace the Venezuelan currency, it is all too possible that it becomes the undesired successor to the bolivar.

Most certainly, Venezuela finds itself in hyperinflation for which there exist only two solutions; drastically reduce spending and the deficit and execute monetary reform or lose the bolivar and adopt the dollar. Both are equally unpopular for the government of Venezuela, but the difference is that if the first option (the deficit) goes unattended, the second (dollarization) is inevitable. Then, one of the most anti-US governments in the world will have to accept the US dollar as its only remedy against hyperinflation.

In Venezuela, despite enormous levels of money creation; money shortages are more and more common (graph 5). While the money supply has doubled since last year, real money supply has decreased 30 percent.

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