Category Archives: Words Of Wisdom

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.

Fed Folly

Lacy Hunt from Hoisington Management.

Jimmy

JIM ROGERS: The worst crash in our lifetime is coming

Amen.

The End Of Volatility?

This morning, the VIX has a 9 handle. The stock market has gone 8 days without a move of more than 0.2%. Buffett, Grantham and others are arguing that this time really is different. In fact, they agree that the market has reached a permanently high plateau, although they do not dare us those words. Who are these people and what have they done with Warren Buffett and Jeremy Grantham?

Of course it is different. It is always different. History never repeats itself. In the first four months of 2017, according to Bank of America, central banks – mostly the ECB and BoJ – purchased more than $1 trillion in securities, a record rate. So of course that means blue skies forever.

And that blue sky is full of tree-tops. As the Chinese proverb goes, this too will pass. That massive liquidity pumping is not benign, it is a symptom of panic as economies refuse to respond to the therapy the bankers prescribe.

As John Hussman observes, these signs and portents are a call to lace up the gloves, not hang them up. Extended periods of low volatility and excessive bullishness are always followed by the converse. Commodities and trade are quietly collapsing, GDP barely has a heartbeat and subprime defaults are rising, especially in cards and autos, pension funds are struggling, valuations are beyond extreme.

Beware the gathering storm.

From A Friend

GREAT QUOTES

In my many years I have come to a conclusion that one useless man is a shame, two is a law firm and three or more is a congress. — John Adams

If you don’t read the newspaper you are uninformed, if you do read the newspaper you are misinformed. — Mark Twain

Suppose you were an idiot. And suppose you were a member of Congress. But then I repeat myself. — Mark Twain

I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle. — Winston Churchill

A government which robs Peter to pay Paul can always depend on the support of Paul. — George Bernard Shaw

A liberal is someone who feels a great debt to his fellow man, which debt he proposes to pay off with your money. — G. Gordon Liddy

Democracy must be something more than two wolves and a sheep voting on what to have for dinner. — James Bovard , Civil Libertarian (1994)

Foreign aid might be defined as a transfer of money from poor people in rich countries to rich people in poor countries. — Douglas Casey , Classmate of Bill Clinton at Georgetown University

Giving money and power to government is like giving whiskey and car keys to teenage boys. — P.J. O’Rourke , Civil Libertarian

Government is the great fiction, through which everybody endeavors to live at the expense of everybody else. — Frederic Bastiat , French economist(1801-1850)

Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it — Ronald Reagan (1986)

I don’t make jokes. I just watch the government and report the facts. — Will Rogers

If you think health care is expensive now, wait until you see what it costs when it’s free! — P.J. O’Rourke

In general, the art of government consists of taking as much money as possible from one party of the citizens to give to the other. — Voltaire (1764)

Just because you do not take an interest in politics doesn’t mean politics won’t take an interest in you! — Pericles (430 B.C.)

No man’s life, liberty, or property is safe while the legislature is in session. — Mark Twain (1866)

Talk is cheap…except when Congress does it. — Anonymous

The government is like a baby’s alimentary canal, with a happy appetite at one end and no responsibility at the other. — Ronald Reagan

The inherent vice of capitalism is the unequal sharing of the blessings. The inherent blessing of socialism is the equal sharing of misery. — Winston Churchill

The only difference between a tax man and a taxidermist is that the taxidermist leaves the skin. — Mark Twain

The ultimate result of shielding men from the effects of folly is to fill the world with fools. — Herbert Spencer , English Philosopher (1820-1903)

There is no distinctly Native American criminal class…save Congress. — Mark Twain

What this country needs are more unemployed politicians. — Edward Langley , Artist (1928-1995)

A government big enough to give you everything you want, is strong enough to take everything you have. — Thomas Jefferson

We hang the petty thieves and appoint the great ones to public office. — Aesop

FIVE SENTENCES TO LIVE BY

You cannot legislate the poor into prosperity by legislating the wealthy out of prosperity.

What one person receives without working for… another person must work for without receiving.

The government cannot give to anybody anything that the government does not first take from somebody else.

You cannot multiply wealth by dividing it.

When half of the people get the idea that they do not have to work, because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that is the beginning of the end of any nation!

Take A Memo

John Hussman this morning tweeted “Just time-stamping this chart for future generations”
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Amen.

This one needs to be saved, as well.

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Ding!

Jeremy Grantham’s 2250 is here. Now an “official” bubble.

Guess What?

Productivity improvement is highly correlated with investment.
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From John Hussman via Twitter

Failure To Thrive

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This chart is all you need to see to understand why the economy isn’t growing. Thanks to John Hussman.

It Does Not Compute

Jeremy Grantham’s discussion of the economic issues behind the immigration crises facing the world stunned me. Somewhat hypnotized by the religious and cultural issues, I simply had not realized the magnitude of the problem. Over to Jeremy:

The truth about immigration to the EU, in my view, is bitter. As covered in earlier quarterlies, I believe Africa and parts of the Near East are beginning to fail as civilized states.

■ They are failing under the pressure of populations that have multiplied by 5 to 10 times since I was born; climate for growing food that is deteriorating at an accelerating rate; degraded soils; insufficient unpolluted water; bad governance; and lack of infrastructure. Country after country is tilting into rolling failure.

■ This is producing in these failing states increasing numbers of desperate people, mainly young men, willing to risk money and their lives to attempt an entry into the EU.

■ For the best example of the non-compute intractability of this problem, consider Nigeria. It had 21 million people when I was born and now has 187 million. In a recent poll, 40% of Nigerians (75 million) said they would like to emigrate, mostly to the UK (population 64 million). Difficult. But the official UN estimate for Nigeria’s population in 2100 is over 800 million! (They still have a fertility rate of six children per woman.) Without discussing the likelihood of ever reaching 800 million, I suspect you will understand the problem at hand. Impossible.

To which you have to add the countries whose economic viability is based entirely on the sale of their energy reserves.