In Hoc Signo Vinces

I’m seeing two things that could be the sign of the bubble – and when they are over, it is time for the bears to win. Like me.

The first is the Russell 2000. The RUT has no P/E, mostly on account of no E. But it has out-performed the monster Nasdaq 100 since the March lows. The other is, of course, Tesla.

The S&P 500 is down about 0.5% and the Nasdaq 100 futures are down nearly 2%,, the Dow futures are about flat. But the RUTs are up 1.5% and Tesla is up 2.1% while the other 9 top momentum stocks are all down around 2%.

So I’m thinking these two need to break to show the bubble is over. In his signis vincam. Jeremy Grantham says:

“But this bubble will burst in due time, no matter how hard the Fed tries to support it, with consequent damaging effects on the economy and on portfolios. Make no mistake – for the majority of investors today, this could very well be the most important event of your investing lives. Speaking as an old student and historian of markets, it is intellectually exciting and terrifying at the same time. It is a privilege to ride through a market like this one more time.”

Amen. This bubble will make the 2000 and 2008 declines look like mere hiccups.

The title refers to the vision of the Christian cross that led future emperor Constantine to victory over his rival Maxentius. Constantine then became the first emperor to tolerate, and on his deathbed convert to, Christianity.

Wile E Coyote Moment?

We all know what happens when Wile looks down. Here comes the New Year and the likelihood that the world will have to look down. The tsunami of deficit spending in the US and other countries has kept Wile in suspense, but back in the real world the downside will be coming into view. Specifically:

• The destruction of business capital and equity. Hardest hit have been small businesses, but no segment is truly exempt.
• The pending losses and evictions resulting from rents and debts currently in forbearance.
• The gutting of downtowns in major cities, resulting from surges in crime and violence, remote working and depopulation.
• Replacement of in-person shopping, working and even some socializing, leading to a glut of commercial real estate and supporting services, such as transit systems.
• Flight of corporations and individuals from high-tax and/or business-hostile states to friendlier states.
• The decreasing effectiveness of deficit spending in supporting the economy
• The declining purchasing power of the US dollar.
• Mean reversion of the overvaluation in debt, the stock market and real estate, with especially serious consequences for underfunded government pension funds that have piled on more and more risk in an effort to reach their targeted returns.
• The likelihood that further attempts to reflate the economy by deficit spending with monetization by the Fed will occur and overshoot their targets, resulting in hyperinflation.

RIP NYC

New York City faces a grim future. The emigration of the wealthy resulting from the Wuhan virus, remote working and unrestrained criminality is only the beginning. If Joe Biden’s tax plan comes into effect, the marginal tax rate for high earners living or working in New York City will rise to 62%. They will be gone. The businesses and cultural institutions that they support will go with them. NYC is already in financial difficulty and hoping for a bailout. It may come, but, if so, it will simply allow the vast bureaucracy to hang on for a few more months, it will not fix what ails the city.

Like the other union-run cities, NYC’s spending and unfunded liabilities are unsustainable.

On The Wrong Road

California has eye-wateringly high taxes. In particular, it has the highest tax rate amongst U.S. states on diesel fuel and the second highest rate on gasoline (after Pennsylvania). This money is supposed to go to support transportation. But it has the second worst roads in the U.S., beaten only by tiny Rhode Island. On the other hand, every CHP officer retires as, in effect, a multi-millionaire so there’s that.

Voting With Their Feet

In 2017, Illinois lost a net 33,703 residents, the largest numerical population decline of any state.

“We could handle the cold, avoid the crime and pay the tax. But the government turned on us (property, income, sales, parking, red-light/speed cameras, bags, soda). Never-ending. Tired of paying for everyone else’s retirement before mine,” said one respondent.

I guess he hadn’t run into the vehicle impound program yet.
Per WSJ:

In the years to come, millions of people, thousands of businesses, and tens of billions of dollars of net income will flee high-tax blue states for low-tax red states…..

For years blue states have exported a third or more of their tax burden to residents of other states. In places like California, where the top income-tax rate exceeds 13%, that tax could be deducted on a federal return. Now that deduction for state and local taxes will be capped at $10,000 per family.

Consider what this means if you’re a high-income earner in Silicon Valley or Hollywood. The top tax rate that you actually pay just jumped from about 8.5% to 13%.

Of course, as the pain of lavish pension plans really starts to kick in, the tax burden will become greater still.

Silver Tsunami

The title is the name that has been coined for the government pension crisis that is unfolding. I have discussed this at length for quite some time, so here is a collection of current articles.

San Francisco Chronicle

Investment Research Dynamics

New York Times

Wirepoints.com

 

The Peeps Ponzi

The PEEPS case is a tangle of litigation between the company (“Just Born Quality Confections”), its union and the multi-employer fund that currently manages pensions for the 250 or so union workers.

The core issue is that the company wants to phase out the defined-benefit pension plan by placing new employees in a 401(k) or defined-contribution type of plan, while current workers will keep their defined-benefit plan.

If you look through the smoke, it is clear that the issue is not the new employees. Union workers seldom give a damn about new employees, yet in this case they had gone out on strike in their support. Seemed unlikely, so I took a closer look. The key is the pension fund. The new employees, who are presumably young and not likely to claim pension for a long time, are needed to provide contributions, which will fund the pensions of the older workers. In other words, the pension fund has become a Ponzi (just like Social Security) where new money is required to fund withdrawals because investment income is insufficient. Of course, the young workers are unlikely to ever see a dime of the money they put in or the company puts in on their behalf.

So, if the company gets its way, this will set a precedent which others will likely follow, bringing down this and other multi-employers funds.

Calm Before The Storm

It is the last day of 2017. The blog has been quiet this year because nothing much has changed as the indexes were pumped higher and higher with repeated volatility slams. However, while you can move risk around you can’t reduce it. The Fed and the other CBs are simply pushing risk off into the future, where it is accumulating. The Greenspan and Bernanke bubbles burst, but were rapidly re-inflated by the succeeding Fed chairman. What will be the fate of the Yellen bubble?

Here is an excellent view of what the Fed has wrought, from Lacy Hunt.

Universal Basic Income

The left continues to be fascinated with the idea of re-distribution. It believes that the whole notion of some people being paid more than others is fundamentally unfair, that they must have had some advantage – skin color, parents, brains, whatever – which was just a matter of luck. “You didn’t build that,” as Obama famously said.

So the latest brainchild of this idea is the notion of a monthly check from the government that is sufficient to provide a comfortable lifestyle regardless of whether or not the recipient chooses to work.

A single program that replaced the myriad of transfer payment programs, from welfare through Social Security, would save an enormous amount of administration costs at all levels of government and help to pay for the program. The “poverty trap” would be eliminated as the payment could be “universal” that is, not means tested. Minimum wage laws would need to be abolished, of course, since the “living wage” would be redundant. Might not work, but there seems to be some potential anyway.

But that is not what is proposed. In general, it seems that this would be yet another program which would be funded by even more government borrowing. This, it is claimed, would “grow the economy by $2 trillion.” Please.

There are only two ways to grow the economy. One of these is to increase labor utilization, the number of hours worked in a given period. The other is to increase the productivity of that labor, that is the amount of output produced for each hour of labor. That’s it.

Existing programs already provide a major disincentive for work – the “poverty trap.” This would add another. Productivity is improved by investment – in technology, skills, infrastructure, etc. More spending on consumption would not help this, but would certainly provide more inflation, which would act to deter investment. If you want to see the outcome of this kinf of program, just check the news from Venezuela.

 

 

Extreme Crazy

I was going to say Peak Crazy, but we all know things can always get crazier. Some things that spring to mind.

Political craziness: Mob violence on left and right, blatant defiance of federal law by city politicians, attempts to rewrite or at least deny history, demonization of Trump, Putin and anybody associated with them, and so on. Immigration in Europe – it’s that 4.7 kids per woman in Africa that nobody dares to talk about. Not to mention the crazy fat kid.

Fiscal craziness: Federal funding of runaway price increases, notably in university tuition, prescription drugs but also many other subsidized goods and services. Gross under-funding of state and local pension schemes even under ludicrous assumptions about future returns.

Monetary craziness: Central banks threatening to tighten but pumping away, consumer credit at record highs in US and elsewhere (Canada, that’s you I’m talking about with highest household debt in the world), government deficits keep growing. Subprime crdiet still gowing while defaults rise. Most of all, ICOs. People pouring money into blockchain-based tokens. Really?

Market craziness: Housing bubbles in China, Canada, Australia, UK and some US cities. Massive (record) risky speculation in many markets – short vol, long crude for example. Setups (risk parity) similar to portfolio insurance (remember 1987?).

I could go on. But I won’t. I’m just grumbling while I wait.