Category Archives: Retirement

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.

Illinois And The Tsunami

Apparently the standoff between Governor Rauner and Speaker Madigan continues. As it should. Madigan’s willingness to dispense unfunded largesse to his supporters is largely responsible for the state’s financial woes. Today also the state was ordered by a Federal court to pay its backlog of Medicaid bills, which will be interesting as the state is already cash flow negative.

However the biggest issue is the unfunded state employee pension obligations. This article from Bloomberg contains a nice graphic ostensibly showing the funding levels of most states (no data for California? Really? just check this blog)

These reported funding levels are a cruel joke. These funds continue to assume 7-8% returns, despite the fact that they have not achieved them for years. Just look at the column showing the decline in funding ratio from 2014 to 2015. Not only are the assumptions high, but they are for long-term averages, so that they adjust future return estimates higher to compensate for below-average realized returns. John Hussman’s work shows more or less zero returns for the next 12 years, with the high likelihood that there will be a major drawdown in that period. Drawdowns are lethal to pension funds because the payment of benefits continues, sapping the capital base and making recovery to previous levels nearly impossible.

Pension funds used to invest in bonds. The trustees would meet once a quarter, review the actuarial forecast of liabilities and approve adjustment of the laddered bond portfolio’s maturities to exactly meet the liability schedule. Then there would be lunch and golf. The future returns would be locked in and the contributions needed to fund the bond portfolio would be obtained from the sponsor. Everyone got to sleep at night.

Then Wall Street decided that pension funds had a lot of money, and not enough was being siphoned off into Wall Street pockets. So the sales force went out, armed with charts showing that stocks had historically offered higher returns than bonds. Higher returns mean that less contributions would be needed, so fund sponsors bought the pitch. Yes, stocks have offered higher returns but for a reason – much higher risk. Well, we’ll just assume a long-term average return and surely it will average out. GLWT.

Hubris

Janet Yellen today:

“Will I say there will never, ever be another financial crisis? No, probably that would be going too far. But I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will.”

Seriously? If nothing else, the coming pension tsunami virtually guarantees it. It is truly scary that this powerful person seems to live in an alternate universe.

GLWT.

Alas, No DUSY

After the last bubble ate their 401(k)s, it seems that quite a few people deserted the stock market and started speculating in old cars. I say old cars instead of classic cars, because in the process of creating yet another bubble the definition of classic became, shall we say, broader. Pretty much any piece of junk that had wheels, or had wheels at some point in the past, became classic. But the buyers loved them – shiny, you know – and felt they understood the values much better than those of the pieces of companies whose names they barely knew.

In addition to the consequent elasticity of supply, old cars earn no income and their value is only what someone will pay for them. A pure speculation, like gold, of course, with the only real utility being conspicuous display. There are funds that speculate in cars, but so far I have not seen any ETFs.

Alas, this bubble is now popping. Entirely predictable, of course. I am a little disappointed that now the time has passed and the DUSY ETF may never appear. I confess I like old cars as much as the next guy, although I don’t own any nor plan to I do follow an auction site “Bring A Trailer.” It is amazing that the conviction remains that it is essential to buy cars “before the price moves out of sight,” even though the same cars frequently re-appear on the site at prices lower than their previous sales.

Pension Tsunami Sighted

NY Teamsters Pension Fund becomes first to run out of money.

Oh, and after the close the API announced that crude and product inventories continue to set new records. Not to worry, speculative buying continues. GLWT.