Category Archives: John Hussman

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That Which Is Not Seen

Alhambra Partners

After tax, corporate profits are still slightly less in Q2 2017 than in Q4 2014, and barely more (+3.4%) than in Q1 2012 five years ago.

SocGen’s Albert Edwards:

Our Ice Age thesis has always called for US and European 10 year bond yields to converge with Japan. We still expect that to happen, with the downward crash in US yields likely to be particularly shocking. There is mounting evidence that underlying US CPI inflation has already slid into outright deflation in exactly the same way that Japan did seven years after its credit bubble burst. Hence we repeat our call for US 10y bond yields to ultimately converge with Japan and Germany at around minus 1%.

In short, stocks are grossly overvalued and Treasury bonds are similarly undervalued. Not news, of course, just some confirmation bias.

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.

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.

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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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.

Chicago and Illinois

Union-supported Democrats have ruled the roost in the city and state, Obama’s base, for many years. The cost of that union support is now coming due. 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 its annual report. The fund, one of Chicago’s four pensions, serves some 70,000 workers and retirees. The increase will add to what had been an unfunded liability estimated at $20 billion. These estimates are vastly optimistic because they continue to assume a level of portfolio return that simply isn’t going to happen, see John Hussman’s work. Obviously, there is no way the city can make up this shortfall, so unions are working to pass a bailout from Illinois state taxpayers through the legislature.

Illinois state workers are the highest paid in the nation, even ahead of California when adjusted for cost of living. Yet, despite the fact that Illinois is for all practical purposes insolvent, the AFSCME* union demands four-year raises ranging from 11.5 to 29 percent, overtime after 37.5 hours of work per week, five weeks of vacation and enhanced health care coverage.

AFSCME workers already get platinum healthcare benefits that would make nearly everyone in the country green with envy. Median AFSCME worker salaries increased more than 40 percent from 2005 to 2014, reaching more than $62,800. During that same period, median private-sector earnings in Illinois remained virtually flat. But they are still not satisfied. Now the union is working overtime to remove Gov. Bruce Rauner – who actually represents taxpayers’ interests – from labor contract negotiations. The union supports House Bill 580, which would strip the governor of his ability to negotiate. AFSCME wants the current contract dealings turned over to unelected arbitrators who are likelier to decide in the union’s favor.

See any problem here?

* AFSCME is the American Federation of State, County and Municipal Employees

Stick A Fork

John Hussman posted this on his Twitter account this morning:

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The State Of Nature

“In the state of nature profit is the measure of right.”

— Thomas Hobbes (1588-1679)

It has been a depressing day, so far. This morning I read “The Economist” as is my wont of a Sunday morning. A compendium of corruption, violence, ignorance and religious fanaticism, fraud, theft, megalomania… So I turned to the Internet. That didn’t work either, but I thought it worth recording some of the turds I tripped over.

From the Curmudgeon and John Hussman on the effects of corporate buybacks. Corporations are the dip buyers that are supporting the equity markets, while over-leveraging their balance sheets as we head into a vicious recession. Their history is buying high and selling low. This time will be no different.

Corporations have emerged as one of the biggest sources of fresh cash in the stock market, eclipsing even mutual funds with more than half a trillion dollars spent last year, according to data compiled by S&P Dow Jones Indices. They swooped in and bought again on Wednesday as the Standard & Poor’s 500 Index flirted with its largest two-day selloff since January.”

Though nominal economic growth has been tepid, revenue growth has turned negative, and profits as a share of GDP have been falling for more than a year, companies have scampered to boost their per-share earnings by taking out debt to repurchase and reduce the number of shares outstanding. This leveraging has been done at market valuations that are near the highest levels in history on historically reliable measures.

Lacy Hunt manages over $6 billion of Treasuries.

We’ve learned that contrary to Keynesian theory the government expenditure multiplier is zero, if not slightly negative. So there may be a transitory benefit to deficit spending but it is so quickly reversed that ultimately an expansion in government expenditure financed with debt will make economies weaker. So what you have to do is scale back government spending, particularly those types of spending that go to finance daily needs. But that’s politically impossible to do.

And at the same time you basically need to shift income based taxes to consumption based taxes, but you have to address the regressivity of the consumption based taxes. The multipliers of consumption based taxes are minus one, the multipliers on income based taxes are in the minus two to minus three.

These concepts are too difficult for the general public to understand. So they really can’t be explained to them. And furthermore you don’t have the strong political leadership and it has to be done in the context of shared sacrifice.

Charles Hugh Smith shares a story from a correspondent, which describes the impassable thicket of arbitrary regulations that caused him to abandon his plans to open a business and create jobs.

Guess what, our government: you forgot that ultimately you live off the private sector. Yes, let’s pile on another 500 pages of regulations–no problem–nothing could be easier for those in secure jobs funded by taxpayers. But if the private-sector jobs go away, who’s left to pay for state employees to shuffle thousands of pages of regulations and enforce countless “improvements”?

Zero Hedge’s “Tyler Durden” points out that the global debt crisis is spreading.

China, Australia, Brazil, Canada, Sweden – it is beyond us how anyone can declare the crisis isn’t spreading. Be prepared – there are going to be lots of opportunities to both make and lose money.

But first, you have to recognize what is happening.

In addition to the macro-economic woes, we must not forget the crooks that are front-running every trade in the financial markets. From Nanex, via Zero Hedge of course, a concise but complete “Treasure Map” that shows the time advantages that HFTs purchase so that every day is profitable.

What a steaming pile.