ICYMI.ddb, In Case You Missed It — August 4, 2017

In Case You Missed It — June 23, 2017

Dear friends,

It may be summer, but things are hopping hot. Welcome but unexpected gifts have crossed my screen in recent days – Fed Up book reviews, feature interviews, speech recaps. Knowing you know that I’m judicious with the number of emails I send, I provide for you below links to what you might have missed knowing there’s a risk your inbox won’t be checked until Monday.

In that vein, why not unplug? I hear it’s the ultimate liberator. Why not dig your toes in the sand and forget life for a while? In the event you prefer a bit of light mental intake, please enjoy:

THE WRITTEN WORD:

The Fed Needs to Acknowledge Slowing Economy – Too much debt is putting a strain on car sales, retail and commercial real estate.
June 23, 2017 – Danielle DiMartino Booth via Bloomberg Prophets

FED UP… An Insider’s Take On Why The Federal  Reserve Is Bad For America 
June 22, 2017 – Richard Bowen  of RichardBowen.com

Danielle DiMartino Booth is Spreading Financial Literacy by Speaking the Truth Few on Wall Street Would Dare
June 14, 2017 –  Elaine Rau of Ladybossblogger.com 

Cassandra of the Crash: An Interview With Former Dallas Fed Researcher Danielle DiMartino Booth
July 2017 issue Digital Edition, Reason.com

11 Takeaways from Danielle Dimartino Booth 
June 09, 2017 – Cole Henson, Architect, GFF of TREC Wire via Recouncil.com

THE SMALL SCREEN:

What Would America Look Like if…The Glenn Beck Program 
June 21, 2017 –   Danielle DiMartino-Booth Joins  Glenn

Larry Berman: Why the Federal Reserve is bad for America
Jun 19, 2017 –  BNN.com

Fed Trying to Cripple Trump Economy  
June 21, 2017 – Greg Hunter’s USAWatchdog

Hoping you enjoy the beach for me, and wishing you well,

Danielle

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Danielle DiMartino Booth, Money Strong, Woman on Fire, Fed Up

Woman on Fire

There is a delicious liberation in having nothing to lose.

That profound realization quickly comes into focus for those who can bear the brutality that one man is capable of unleashing in Man on Fire.

Set in Mexico City, the casting and filming of the 2004 film are flawless. Though the supporting cast is critical to the film’s eventual success, its two main characters are key to the crossing of the film into the realm of sublime. Denzel Washington as “John Creasy,” a former CIA operative and Recon Marine officer turned mercenary, portrays to perfection a man whose heart had long since turned to stone. The on-air chemistry between Creasy and his nine-year old charge, “Lupita,” elevated the movie to greatness. A young Dakota Fanning nearly stole the show.

As shocked as he was to learn he still had the capacity to love, Creasy was all the more moved to hatred when told the girl, whose kidnappers had nearly killed him, had been murdered. With that his soul followed his heart into darkness.

Creasy avenged an evil as only a man with nothing to lose can. “Revenge is a meal best served cold,” he observed. And serve up vengeance Creasy did, to the powerfully protected “La Hermandad,” the corrupt brotherhood of police officers responsible for unspeakable crimes against the innocents.

Whether it was serendipity or fate that drew me to immerse myself in this film as I reflected upon the two years that have passed since I left the Federal Reserve will remain an unknown. Regardless, the resonance made its mark as I digest the latest headlines, warning that the new guard at the Federal Reserve will be much the same as the old, if not replicated down to the very same cast of characters.

Many readers who’ve journeyed with me these past two years have asked whether this spirit-sapping news will cause me to lay down my arms, to give the mission of reforming the Fed up to a higher being.

The answer is simple. Why come this far just to give up? I had no agenda, nothing to lose, the day I set foot inside the Fed. And I had nothing to lose the day I walked out its doors, determined to shine a light on an institution that is not so mysterious, as it is myopic, to the detriment of its own charges, We the People.

It is for the little guy that I will go on fighting the good fight. It is for the abandoned masses I will continue to make a stand against central banking’s answer to La Hermandad.

Did you miss the news, you might be asking? Have nominees to fill those three vacancies at the Federal Reserve Board been named? Has Janet Yellen been re-nominated to continue chairing the Fed? Well, no.

But Gary Cohn has told us we need not concern ourselves with change at the world’s most powerful central bank. As was reiterated in a deliberately timed and placed story in the Wall Street Journal last Wednesday, the very day the Fed met and raised interest rates,

“The Fed will do what they need to do, and we respect the powers of the Fed.”

Note two things: Cohn first spoke these words in an interview aired in March on Fox News. That his words were reprinted two months later under a front-page headline that read, “Search for Fed Chief Begins, Led by Goldman Veteran” was no coincidence. Consider the story’s emphasis on Cohn’s, “appreciation for the power of the Fed during his long career on Wall Street and for the institution’s relative freedom during his current stint in Washington,” to be the icing on the cake.

In the event you sense some sort of conspiracy at hand, stop it. It’s not sinister. It’s strategic. It’s how the establishment becomes entrenched. It’s how wrong becomes the accepted right.

Speaking of wrongs, a recent Economist story, cleverly titled, “How to be wrong,” offered a rude reminder to all of us who’d prefer to think we’re above fallibility. Two years on, and 127 missives later, I’d be remiss to park myself in the deity department. Rather, let me count the ways I have been wrong…

For starters, risky asset prices have gone from being rich to richer. As much as I’d like to brag on a different outcome, one that would have hit the reset button long ago, the stock market hasn’t fallen out of bed, bonds of all ilk remain buoyant and real estate roars on.

Rather than claim post-traumatic stress disorder resulting from too many years on the inside, take the words of Bernard Baruch, who once said, “The main purpose of the stock market is to make fools of as many men as possible.” Today, our upside-down existence dictates we flip his reasoning on its head. To that end, “The main purpose of a stock market in the modern age of central banking is to make fools of as many skeptics as possible.”

Did someone mention carnage in the junk bond market? Mea culpa again. Crude prices being closer to $30-something than $50-something looked to herald unprecedented losses in high yield bonds. What do we have instead, thanks to the bottomless pockets of those who ply in dry powder? That would be the leanest domestic energy industry on Planet Earth, which takes us one step closer to energy independence, an unequivocal best-case scenario result.

As for all those share buybacks I contended were the stock market’s sole prop, guess what? In the year through March 2017, the percentage of Standard & Poor’s 500 companies that have reduced their share count by four percent or more has halved to 14 percent from a high of 28 percent. Firms are being run as cost-effectively as ever and throwing off cash flow as never before.

Have faith the baring of these revelations that run contrary to my grave predictions has not been an enjoyable exercise. Nor was it supposed to be. But integrity demands it of the lowliest of us. Consider the alternative to fessing foibles, to acquiescing to necessary and yes, exhilarating, exercises in humility.

Perhaps you’ve noticed the belligerence of the bulls of late? How they all seemed to have lost any manners they should have gleaned from their upbringings in catty concert?

According to the Economist, “groupthink is highest when people within groups face a shared fate.” Well that explains a lot. “Even as the facts on a particular issue converge in one direction, parties can still become increasingly polarized around starkly different belief sets. That, in turn can make it harder still for a member of one party to derive any benefit from breaking ranks (emphasis mine).”

As little breaking bad as there is among the bullish herd, there’s even less among economists. For their sake, it’s a good thing Citigroup waves investors off viewing its proprietary Economic Surprise Index in isolation. The gauge, which tracks the pace at which economic indicators are beating estimates, has hit its lowest level in six years. You remember the summer of 2011, don’t you, when Uncle Sam was about to get slapped with a ratings downgrade? That said, once economists ratchet back their growth projections, this self-correcting index will pop back into positive territory.

As the New York Fed’s Bill Dudley himself has foreseen, it’s a matter of perspective and relativity. In his estimation, the overall outlook today is “pretty good.” As for what’s to come, forget the message in that old bond market. Things are apt to be smoking hot before we know it, hence the need to keep tightening.

“If we were not to withdraw accommodation,” Dudley said twisting his words as only economists can, “the risk would be that the economy would crash to a very, very low unemployment rate and generate inflation.” Follow? “Then the risk would be that we would have to slam on the brakes and the next stop would be recession.” Got it? The Fed is tightening so they don’t have to tighten. Right.

Dudley is right on one count. We could well see an overshoot on the unemployment rate. By the same token, the Fed wrote the rules on which economic indicators lead, and which lag. The caboose, if you will, is the unemployment rate.

What’s driving the train? What will lead the economy in its next direction? Hmmm. While earnings growth is all good and well, sales can’t seem to pick themselves off the floor and we’re talking the full spectrum, from the smallest to the biggest businesses. What else? There is that crude oil thing that’s looking less ‘transitory’ by the day and promises to bleed into inflation for months to com. As for the cars that have literally driven the current recovery? Maybe it’s best we not bring up the subject and leave it at that. You know how ugly it’s become in that space.

And finally, there’s this little thing called the commercial real estate market, which is taking daily body blows as valuations overheat in the face of a blindsiding barrage of supply emanating from retail, and soon to be restaurants.

Yep, that about sums it up if you’re into looking ahead as opposed to making monetary policy using only what you see in the rearview mirror to guide you.

To be fair, there are two voices of reason on the Fed. The Boston Fed’s Eric Rosengren has risen in stature as he refuses to back down on the potential for commercial real estate to spread to the macroeconomy.

And then there’s Vice Chair Stanley Fischer who just this week warned that house prices in a multitude of spots around the globe are a wee bit too high, “perhaps as a result of extended periods of low interest rates.” Imagine that. On the other hand, a $664,000 price tag for a parking spot in Hong Kong does seem a bit off (the Richter Scale).

If only, the lament goes, policymakers had a reliable inflation metric that correctly captured that darned asset price inflation! So we have whined for years and years…until now.

I wish I could take credit. Alas, the acclaim goes to a fishing buddy of mine who saw fit to put his mind to the grindstone for the cause of us wee souls who’ve been exhausted by “brilliant” central bankers who’ve yet to exemplify the capacity to come up with a new inflation mouse trap that incorporates real estate and asset price inflation. To think they defer to each other deferentially as “Doctor.”

For the time being, credit will have to sit with Brent Donnelly, or plain old Mister Donnelly if you insist on being formal, for taking a stab at reading reality.

Gourmand snobs in the audience will likely demand the details. To wit, Donnelly started with year-on-year figures for consumer prices (as per CPI), home prices and the Nasdaq. He then adjusted for volatility using the CPI as the baseline: he divided the CPI by itself; home prices by 1.64 and the Nasdaq by 11 (as it’s 11 times more volatile than the CPI). Is it me, or is it so far, so painfully intuitive?

The new and seriously improved metric goes by the ingenious acronym of the CAPI – the US Consumer and Asset Price Inflation. Maestro, can we please get a “Ta-Da?!” (Didn’t some central banker once go by that nickname? I digress…)

At the risk of Donnelly being drawn and quartered, I regret not being able to share the data and the glorious chart it produces that depicts this comprehensive metric all the way back to 1998, before the Original Sin of (inflation) omission was committed by Alan Greenspan.

Take my word for it, central bankers worth their weight in salt (gold is so passé!) would easily gather from a first blush glance that the line of demarcation between tamed inflation (the real and inclusive CAPI deal) and inflation run wild is seven percent…if they actually had to exist in a world that captured inflation in the aggregate.

In continuing on the theme of the data humbling any preconceived conclusions, in the here and now, the CAPI has just crossed up and over the seven-percent line. Inflation, measured wholly and holistically, is in true Goldilocks fashion, neither too hot nor too cold. The current equilibrium compares ever so favorably to early 2000, when the CAPI was double its current level, and 2007, when the index hit 10 percent.

Hate to break it to you, folks. Wherever “there” is, we haven’t arrived at “Destination No Looking Back.”

Bubbles, especially those that chip away at our intellect, wearing us down with their endless build-ups and messy aftermaths, are cruel, mean bitches that refuse to slink silently into any night. We may have a tornado in commercial real estate. We most certainly have a volcano building to eruption in the bond market. But we don’t have whatever it is that happens when a tornado meets a volcano in the risky asset marketplace that determines the fate of our financial livelihood.

And so, the Fed will once again appear to rise above the fray of so many naysayers, sloughing off worrywarts as Cassandras. The bulls will have their heroes and heroines to indemnify their vitriol. And the new administration will bask in the glory of being on the right side of the trade for the time being.

I refer back to the conclusion of the Economist’s lesson in fessing up to one’s ineptitudes to find a pathway to intellectual salvation, in the beauty of life’s eventually being allowed to be life: “It is rarely in the interests of those in the right to pretend they are never wrong.”

Should you choose to dwell in the land of central bank denialists, you too can dismiss the fifth largest state in our country being a stone’s throw from a junk bond rating. But first, ask yourself if an avalanche of states and municipalities will follow in Illinois’ wake when the markets correct despite the Fed’s delusions as to an otherwise out-worldly outcome?

Insist if you will that the Fed’s second mandate of maximum employment has not bastardized its originally intended role of safeguarding the value of the dollar in our wallets and stepping in as lender of last resort in times of extreme duress when the private sector is on its knees. Has the dual employment mandate not invited Mission Creep of the most nefarious sort?

Ignore if you must the flattest yield curve since the dark days of 2007 that preceded the financial crisis we crowned, “Great” for less than ignoble reasons; that flattening fast figment of our collective imagination is just that, a phantom in plain sight.

As for me, there’s a good chance I’m still Fed Up. There’s a high probability I’m more Fed Up than ever on behalf of you and you and you, that Twitter follower who recently remarked with deserved cynicism that “economic expansion” was defined as the rich getting more and the rest getting less.

More often than not, we forget the etymological wonders proffered by the Greeks. For shame. It is to those very ancient Greeks we are forever indebted for words such as “evangelize,” the literal translation of which is “to share the good news.”

There will indeed be good news to share and spread widely one day when the people take back what it rightfully theirs, their right to financial freedom. Until that splendid time arrives, have faith that I will carry the torch for one and all.

As for those who refuse to stop lying to us, the little people, the central bankers who continue to shush us, insisting they know better on all our behalf, be they ware, I remain steadfast to my committed cause. I still have no agenda, nothing to lose. I am now, more than ever, a Woman on Fire.

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DiMartino Booth, Housing in America: Movin’ on Up

Housing in America: Movin’ on Up

While exceptional exceptions exist, history’s shown superb sitcom sequels to be scant.

With any luck, you’ve long since forgotten the abysmal attempts of “AfterMASH,” “The Brady Brides,” “The Love Boat: The Next Wave,” and possibly the worst of the bunch, “Jonie Loves Chachi.” These small screen sideshows failed to give us Good Times, nor did they endear us to characters we still hold dear – Benson, Frasier, Laverne, Shirley, Maude, Mork and the lovely Mindy.

These disastrous debacles did anything but invite us to sing along to their opening songs. There was no, Movin’ on Up to the east side, to a deluxe apartment in the sky. Ah, The Jeffersons, which premiered in 1975 and ran for 11 seasons. Rolling Stone Magazine ranked it the fifth-best TV spin-off of all time. Think of it as the gift that All in the Family kept giving as only the brilliant creator of both George and Archie, Norman Lear, could deliver.

The beauty of The Jeffersons was the ease with which its characters elicited laughter. No longer was it 1971, when Archie Bunker’s angry sarcasm resonated so clearly with American viewers, whose own tempers were still flaring from the searing ‘60s. By 1975, we were all in the need of George Jefferson’s victory walk across the screen and the derision it elicited from Florence, the housekeeper who gave new meaning to cynically caustic comebacks.

It’s worth asking how valid the premise of The Jeffersons would be today. What are the odds a successful, entrepreneurial dry cleaner from Queens could pull up stakes and relocate to a luxury apartment at 185 East 85th Street in the Park Lane Towers? You tell me: units are available in the building with monthly rents starting at a cool $18,200.

Granted, this is an extreme example. According to Axiometrics, the national average annual rental rate is $1,304. While that figure is a record in dollar terms, there is much better news in the underlying trend of rental inflation. In May, effective annual rent growth rate was 2.2-percent, a level that’s held steady for the past six months. Critically, the rate has more than halved since its record pace of 5.2-percent was clocked in September 2015.

Chances are we will see a continued leveling off in rental inflation. Apartment construction is running at its highest level in at least 25 years. Nearly 600,000 units are currently under construction nationwide. Deliveries are forecast to be 102,000 in the third and fourth quarters, up appreciably from the average 82,000 per quarter in 2016 and early 2017. Looking out over the horizon, one million units will hit the market in the next three years.

This should be welcome news for renters. (Do you sense a however coming your way?) However, the vast majority of new construction in recent years has been in luxury units. That helps explain why half of would-be renters cannot afford to set out on their own – that $1,300-plus monthly pill is too big to swallow based on the affordability standard of 30 percent of income.

That’s assuming, mind you, you draw a decent salary. According to a recent report detailed in the Washington Post, no city in America has low enough rents on two-bedroom apartments for someone earning minimum wage to call home. All of 12 counties nationwide boast rents low enough for minimum-wage earners to let, that is if they can confine their belongings into a one-bedroom unit.

If you thought location mattered most when it came to buying, think again; it’s an even more critical determinant of rents. The minimum hourly wage you’d need to afford to rent in some counties in Georgia is $11.46. Meanwhile, across the country in the San Francisco Bay Area, you’d need to be raking in $58.04 an hour. Good luck with that commute teachers and nurses!

The report went on to say that things have only gotten worse since the Great Financial Crisis. In the eight years through 2015, average inflation-adjusted apartment rents rose by six percent while that of real wages fell by four percent. The upshot: some 11.2 million US households spend over half their income just to put a roof over their heads.

As big as that ‘however’ was, there’s an even bigger caveat that follows: Demographics suggest demand for apartments will only continue to increase in the coming years. Some 4.6 million MORE apartments will need to come online between now and 2030. That’s according to a fresh study jointly commissioned by the National Multifamily Housing Council and the National Apartment Association (Caution: Always consider potential bias of source).

It’s helpful to provide some context. The 4.6-million-unit figure is not altogether shocking against the backdrop of the million new renter households that have formed in every single one of the last five years, a record run rate as coming-of-age Millennials competed with downsizing Baby Boomers for apartments.

The question comes down to whether this momentum can be sustained. Will we really see annual construction of at least 325,000 new apartments for the next 12 years to satisfy this forecasted demand? It’s highly doubtful. It would require the massive imbalance that’s favored apartments over single-family construction to persist, which we know won’t be the case as the homeownership rate appears to have finally bottomed and begun to recover.

More to the point, Baby Boomers’ vacated homes don’t magically vanish into thin air keeping supply and demand in some beautiful balance only a realtor’s imagination could conjure. Every one of their homes sold adds to the supply that’s been ‘depleted’ in recent years by deep-pocketed private equity buyers who’ve swarmed markets from coast to coast to find a home for all that dry powder in their kegs.

Let’s be clear, Boomers have clearly indicated they’d prefer to sit tight, to age in their home sweet homes. Buy Home Depot stock and call it a day? That tall ‘buy’ order requires suspended animation, as in the presumption that recession will be held at bay indefinitely.

The reality of Boomer home sales won’t come into full view until we’re bearing the brunt of the next downturn. That cataclysmic catalyst will kill the optionality of aging in home. Millions of retirees on fixed incomes will buckle under the strain of their deflating retirement savings and skyrocketing property taxes, forced up to stem the bleed of underfunded pensions, which will also blow up at the intersection of Demographics and Recession Boulevards.

Wait. Go back to that part about private equity and their massive inventories of also-aging single-family rentals. Rest assured, these fly boys are not in it for the long haul despite what their propaganda purports. It’s just not in their DNA. Yes, the single-family-rental business is established. Heck, they’ve got bonds backed by these investment-cum-income properties that trade in the secondary market.

That’s all good and well until surging supply corrodes the collateral backing those securities. At that point, the big boys will do what they do best at the first whiff of a sell signal. They’ll hit the bid and hit it again to liquidate their portfolios ahead of the little guys who unwittingly followed them into the next-best-thing business.

So you’ve got supply conjuring more supply yet…which brings us back to apartment rents and some good news for that ‘lost’ generation, the Millennials. Believe it or not, these no-longer-youngsters will procreate. Furthermore, they will not cotton to raising their families in apartments, even of the George and “Weezie” Jefferson deluxe variety.

So there is good news in the making, if you can indulge one more ‘however’. At last check, student loans had not been forgiven in wholesale fashion. Top this with the fact that the average new home sales price hit $351,000 in 2015, a neat 40 percent rise from 2009. Holding hands with this dynamic household budget-buster duo is mortgage lending standards, which have been too tight for far too long. Taken together, Millennials could no sooner afford Boomers’ McMansions than a man in the moon.

That is, unless Millennials are in a position to leap frog prior generations and jump right in to move-up market. How so?  Despite what the realtors tell you, there will be ramifications that emanate from the largest age cohort in America failing to fulfill their designated role as first-time homebuyers in the current recovery. Millennials’ power-in-numbers will force the closure of the price gap between entry-level, move-up-to-after-second-child-born, and die-in homes.

You might be thinking the resurgence of affordability (Yes, Virginia, that is good news), and the home-price and rent declines it necessitates, will not be welcome news all around. Lower selling prices will obviously sting sellers.

The only advice on offer:  write in a complaint to your local Federal Reserve representative. It was failed Fed policy that created this fine mess in the first place.

Don’t see the connection?

Do any of us truly buy into the notion that private equity could have assumed the role of buyer of first resort had the Fed not lingered too long in its capacity of lender of last resort? Of course not! As for all of that luxury apartment construction, you try making the IRR work out for low-yielding properties in a zero-interest-rate environment.

The sad fact is buying and renting have never been so prohibitively, preciously priced. We can safely add that to the laundry list of obscene outgrowths of too-low-for-too-long monetary policy. You know, it sure would be nice if some Fed staffer could concoct a convincing model that shows how detrimental income inequality is to long-term macroeconomic growth prospects. Is it too intuitive for intellectuals to infer that housing is the biggest line item in an average household’s budget?

There is one last ‘however’ before we turn our attention to counting the words in today’s Fed statement.

As the headlines have heralded, one-percent down payments and subprime mortgage lending have finally staged a comeback. While such news is no doubt a relief to the politicians who are already agitating about the midterm elections (homeownership trumps baby-kissing every day of the week), easing lending standards should not be viewed as a palliative at this stage in the cycle, before prices come off their high boil.

We still have millions of conscientious subprime-mortgage homeowners who have never missed a payment in our midst, millions who are still underwater over a decade after home prices peaked the last time around, millions who remain imprisoned in homes they should have never qualified to buy. As they’ve learned the hard way, it’s impossible to Move on Up if you Dig in Too Deep.

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UK ELECTION, DiMartinoBooth

The U.K. Election: An Outsider Looking In

Talk about making hay if the sun shines through and through.

In 1696, William III introduced the ‘window tax.’ It was crystal clear that this dark tax was viewed with great disfavor being as it was based on the number of windows in a given home. Think of it as a first-generation progressive tax, which suited the extravagant era’s buildout of country estates. The more windows in a home, the wealthier the ostentatious occupants were, to say nothing of cheerier and healthier (did Vitamin D supplements exist back then?). So why not pony up more in taxes to help your sovereign offset the scourge of coin clipping?

Coin what?

Back in the day, coins were minted in pure precious metals. This prompted petty pilfers to shave, file and clip the edges off those coveted coins. Combine enduring effort with a red-hot melting pot and voila, fraudulent fortunes followed. The pinchers’ progeny were no doubt among the pioneers committing counterfeit currency capers.

These days we embrace the despicable denigration of our currencies. We go so far as to lavish the loftiest positions in the modern world on those whose most lauded accomplishments have been earned in laureates, not the legal authority to levy, well, anything.

‘Tis true, central bankers have assumed more power than our politicians. The question is where this will lead us all against the backdrop of a world where inequality has boiled over into illegality and depravity for our fellow man.

As all market watchers are aware, the British general elections are to be held Thursday. Intriguingly, some three million newly-registered voters will cast their calls for the first time. This should be a worrying factoid for Theresa May; the UK’s youngest voters were largely opposed to exiting the European Union last June.

The arguably inconsistent and unreliable polls will have certainly given Prime Minister Theresa May pause. One June 4th, May’s Conservative party looked to secure 354 seats, above and beyond the 326 needed for a Parliamentary majority. By Tuesday, other polls showed her party’s prospects had dwindled to 305 seats.

Intuition suggests Saturday night’s horrific terrorist attacks on London Bridge (pictured front and center in this week’s image) and a nearby neighborhood would have solidified Conservative’s lead. But the polls counterintuitively indicate a move in the opposite direction. Though impossible to predict, the least hyperbolic within the political analyst arena give the Conservatives better than even odds of winning a majority, or at the very least forming a coalition that accomplishes the next best thing.

It’s notable that May’s lead did not initially narrow based solely on events that were out of her control, as in three terrorist attacks in three months. Rather, it was her vow to make pensioners’ benefits progressive (just took a huge amount of license in simplifying her proposal) — as in those who have more can expect to collect less from the state – was met with about as much derision as William III’s window tax.

While it’s never wise to judge from the outside, some of the wisest and most patriotic suggestions floated in the United States have been from wealthy retirees who’ve suggested they need not collect Social Security to help balance the nation’s books. Moreover, May was magnanimous in her aim; she intends to use the saved state expenditures to funnel funds into raising productivity by closing the skills gap that has crippled the economy (sound familiar?)

Somehow the liberal media managed to paint May as a pariah (is it yours truly, or are the parallels multiplying?)

In one of May’s latest interviews, she reiterated her focus on what she hopes is to come: “It’s about young people’s future, it’s about ensuring we take the opportunities that will be opened up to us when we leave the EU to be a really global nation bringing more jobs, more investment into the UK. I want to see proper technical education for the first time for young people for whom that’s right.”

Connecting warm bodies with much-needed skills sets to UK’s corporate sector could well do the economy some good. Let’s hope she has wise economic counsel to help her execute her plan if the Conservatives prevail at the polls.

Luckily, one of Britain’s savviest economists is free to pursue his next career gig. Of course, the reference is to Andy Haldane, the Bank of England’s chief economist, whose term technically ended May 31st (he will remain at his post until his replacement is secured.)

How to sum up Haldane? A central banker who gets it right half the time is about as close to genius as you can ever hope for in the field given the de facto requirement that Keynesian Kool-Aid be drank before the threshold is crossed into the inner sanctum sanctorum. That applies whether you refer to the Bank of England, the Reserve Bank of Australia, the European Central Bank, the Bank of Japan or especially the Federal Reserve (though hawks may just get their chance to storm the temple – stay tuned on that count).

Of punk UK productivity, for one, Haldane has this to say in a recent speech: It wasn’t low interest rates that kept middling companies in business since the crisis hit, but rather delusions of operational grandeur. Haldane prodded the UK government to provide global benchmarks to UK firms so they could better appreciate their standing among their international peers.

“As Olympic athletes have shown, marginal improvements accumulated over time can deliver world-beating performance,” Haldane said. “Applying those marginal gains to the population of UK companies could significantly improve UK living standards.”

Sounds like May and Haldane are on the same page, though it goes without saying that low interest rates assisted in keeping ‘zombie’ companies alive in addition to an abject denial of mediocrity.

Most importantly for May, if she’s in the market for an economic advisor, Haldane is not beholden to the modern-day economics profession. Haldane likened economists’ failure to foresee the financial crisis to a, “Michael Fish moment.” Fish, for you non-Anglophiles, dismissed the chances that a massive hurricane would hit southern England in 1987. You know how this story ends. The Great Storm did indeed hit and how, wreaking mass destruction and casualties.

After describing his profession as being in, “some degree of crisis,” Haldane went on to suggest that his peers abandon their, “narrow and fragile” models in favor of a broader analysis that incorporated the perspectives of other disciplines. Hear, hear!

To be fair, Haldane went on to say that Brexit would crash the UK economy but with a lag, hence the above-referenced only ‘gets it right half the time’ bit.

If providence is propitious, May is also channeling the ghost of Margaret Thatcher, who made all manner of enemies going against the conventional wisdom of her day, especially as it pertained to the economy. No doubt it will take radical ideas to cure what ails the UK economy today.

In what can only be described as twisted irony, Mark Carney’s Bank of England (BoE) was recently taken to task for the pay raises recently ‘awarded’ to his employees which failed to keep pace with inflation. At around one percent, the most recent annual BoE employee pay raise is a pittance of the current 2.7 percent inflation rate. The average British worker bested that, with average wages increasing by 2.4 percent, which still fails to keep pace with the rising cost of living.

And yet, as is the case with his European and American counterparts, Carney is more likely to get caught out gnashing his teeth about inflation being too low, despite it clearly being too high for the average working man and woman.

The fact is Carney’s in a mighty tight corner with inflation running too hot, wages running too cold and a corporate sector petrified at the potentially poisonous ramifications of Brexit. For the moment, exports are a relative outperformer with a big boost from the weaker pound. It’s the ‘what’s next’ that matters most though — the impossible tradeoff between raising interest rates and the higher real wages that would follow, or lower for longer and the boost to short-term growth prospects too offset any Brexit fallout.

And that’s just for starters when it comes to threading needles on Threadneedle Street. As has been the case in Australia and Canada, residential real estate prices have run wild since quantitative easing unleashed animal spirits in the aftermath of the financial crisis. As a result, British households’ debt loads vis-à-vis the size of the economy have made a full round trip to record highs. But here’s the wrinkle:  mortgages in the UK tend to be of the variable rate variety, In other words, Carney has to tread more lightly than his counterpart Janet Yellen if he’s inclined to tighten.

And so they straddle the Atlantic, both weighed by impossible choices, rendered more intractable yet by their own misguided foregone follies that insisted more was more, lower was better. What good has that done? To add to their intellectual egos’ injuries, both Carney and Yellen have to contend with political leaders who’ve neither the appetite nor the intent to compromise, much less kowtow, to their theoretical end games.

Looking back, it’s hard to believe the window tax withstood its own political backlash for over 150 years. But believe you me, the tax was not abolished until 1851. By then, so despised was the levy, it had assumed a new name — Daylight Robbery. Is it so hard to see that the current crop of central bankers has also managed to destroy the vista, to suck the oxygen out of the world economy as closed up homes did back then, albeit with much more sophisticated means? We can only hope our elected leaders don’t have to wait another 150 years to see the light.

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The Demographic Divide: A Police State of Mind

The Demographic Divide: A Police State of Mind

Fake news is so old.

How else did, “I am prepared to veto any bill that has as its purpose a federal bailout of New York City to prevent a default,” become, “DROP DEAD” way back in October, 1975? Oh, those hellbent headline writers. Whatever will they think of next? Besides, the Daily News headline worked wonders, if infuriating die hard New Yorkers was the objective.

The insult so unhinged one William Martin Joel that he soon found himself saying goodbye to Hollywood and headed back to his native New York by way of a Greyhound bus on the Hudson River Line. Had the songwriter and singer we’ve all come to know and love as Billy Joel not been on that bus, he’d have never been inspired to pen the classic New York State of Mind, an anthem to the City only Sinatra himself can claim to have bested in his time.

So thank you, President Ford for refusing to treat the “insidious disease.” At least that’s how he characterized New York’s profligate spending ways. Without the media’s dramatization of Ford’s ire, the world would have been robbed of some of the most poetic lyrics ever written. And, by the way, a feasible blueprint for the years to come as some budget-strapped cities run their tills dry.

In the unique case of New York City in the late 1970s, federal assistance accompanied fiscal reforms. The details of the détente should thus be de rigueur study materials for the judicial and legislative arms of so many at-risk municipalities nationwide.

At the risk of feigning any pretense of legal expertise, municipal bankruptcies come down to the limitations of the federal government’s power to provide relief to ‘units of states,’ whether they be cities, counties, taxing authorities, municipal utilities or school districts.

Though a variety of other state-led interventions have been successfully deployed, many of us are most familiar with voluntary Chapter 9 bankruptcy filings, permitted by half the states and employing the powers of the judiciary in conjunction with creditor workouts. Jefferson County, Alabama and Stockton, California may ring mental bells. But it is 2013’s record $18 billion Detroit, Michigan Ch. 9 filing that reset precedent on how engaged the bankruptcy courts can be.

Suffice it to say, default via the court system is a lengthy process and most lucrative for the lawyers retained. In relative terms, New York City’s effective default occurred in a New York Minute. After the banks cut off New York City in the spring of 1975, the State created an emergency financial control board and a borrowing entity to provide immediate relief to the city. Rather than “default,” the city declared a “moratorium” on $1.6 billion in obligations, a hotly debated designation. A thorny rose it nevertheless was.

In December 1975, with the financial management wrested out of the city’s control, Congress passed and Ford signed into law legislation allowing the Treasury to extend loans to the city to keep it up and running. Future New York state and city revenues were promised to repay the loans and spending reforms that had been intractable were implemented by force.

Looking back at the 40th anniversary of the extraordinary federal-led intervention, American Enterprise Institute’s Alex Pollock applauded Ford’s staunch stance: “That’s what happens when you run out of money and the music stops. Intensely needed reforms of the city’s spending and financial controls actually did follow.”

Why raise the specter of federal assistance if it’s patently apparent other means can be deployed in today’s modern municipal era? The crush of retiring Baby Boomers will keep Uncle Sam up at night for years as he struggles to keep federal entitlements solvent. Why even consider federal involvement in municipal pensions that are at least backed by some semblance of assets? The answer comes down to demographics.

Forty years ago, Baby Boomer were entering their prime earning years. Opportunity in the land of America was expanding at a rapid clip. The level of education was rising among those entering the workforce vis-à-vis their older counterparts at the same time women were growing the overall workforce (just under half of women worked then; today it’s 70 percent). In the simplest terms, the size of the pie was growing.

Today, roughly 10,000 Boomers exit the workforce every day, which should present an opportunity in and of itself for Millennials to backfill the depleting workforce. Census data tell a different story. In 2016, median personal income for workers aged 24 to 34 was $35,000. In modern dollar terms, that same age cohort was earning $37,000 in 1975.

It’s difficult to square lower earnings with the educational makeup of the labor force. In 1975, 23 percent of young workers had earned a bachelor’s degree. Forty years on, 37 percent have achieved the same. Shouldn’t that improvement have lifted per capita earnings?

It comes down to comparative advantage. Back then, it was easy enough for a younger, better-educated worker to displace an older, less-educated and therefore less-qualified older worker. Today’s workforce is largely educated and intent on working longer; it’s stickier and less tractable. At the same time, the double governors of technological innovation and globalization have reduced the aggregate demand for warm bodies.

At the risk of getting buried in the weeds, there are more workers exiting the workforce than there are those joining it. Those making way for the exits are otherwise known as ‘retirees.’ It is at this critical juncture that municipal finance re-enters the picture.

As has been written on these pages, over the past few years, public pensions have been reducing the stated returns they anticipate their portfolios generating on investments. These reduced expectations necessarily trigger the need for higher contributions on the part of state and local governments.

That’s exactly what took place last year. The Census’ 2016 Annual Survey of Public Pensions found that state and local government contributions rose by 6.5 percent to $191.6 billion from 2015’s $179.7 billion. By contrast, earnings on investments, which include both realized and unrealized gains, tumbled 67.9 percent to $49.9 billion from $155.5 billion in 2015.

Meanwhile, the number of pensioners collecting checks marched upwards to 10.3 million people, up 3.3 percent over 2015. The benefits they received last year rose even more, by 5.4 percent to $282.9 billion from $268.5 billion in 2015. And finally, total pension assets fell 1.6 percent to $3.7 trillion from $3.8 trillion the prior year.

In the event you sense you’ve been felled by death by numbers, back out to the big picture. Paid benefits exceeded contributions to the tune of $40 billion in 2016 against the relentless backdrop of an increasing number of Boomers retiring (in 2014, there were 9.9 million receiving benefits).

Microcosm this demographic dynamic to the extreme example of Chicago. In 2015, the latest year for which we have full data, some $999 million was paid out to 29,296 recipients. That compares to the $90 million in investment income generated by the two employee pension funds that year. Back out the timeline a decade – in 2006, these two pensions held a combined $8.5 billion in assets. Since then the two funds have generated $3.1 billion in investment returns but paid out $8.511 billion to retirees.

Chicago Mayor Rahm Emanuel recently proposed raising new city employees’ contribution to help fill the gulf of underfunding but Illinois’ Governor quickly vetoed the measure declaring Emanuel was, “trying to fix a drought with a drop of rain.”

Projections suggest that one of the two funds will be cash flow negative by 2023; the other will run short by 2025. If all else remains the same, a big IF with risky asset prices trading at frothy high valuations, property taxes would need to be doubled to cover the coming shortfalls.

Many Cook County taxpayers are forsaking a wait-and-see approach. Chicago was the only large city in America to lose population last year, its resident count dropped at nearly double the rate of 2015.

As convenient as it might seem to excoriate the Windy City, there are plenty of other major cities deep in hock. According to a Moody’s report, though Chicago does indeed top the list, Dallas is the second-most underfunded city followed by Phoenix, two magnets for nomads in search of lower costs of living. Rounding out the top ten list are Houston, Los Angeles, Jacksonville, Detroit, Columbus, Austin and Philadelphia.

In other words, running and hiding in lower tax haven hamlets will be even more challenging in coming years. According to a Milliman report, 2015 marked the first time retirees outnumbered active employees in the nation’s 100 largest public pensions; there were 12.6 million retirees covered by the toils of 12.5 million workers.

Look back no further than 2012 to appreciate how the trend has accelerated; in that year retirees numbered 10.5 million vs. 12.3 million active employees. Absent a surge in state and local payrolls, further fiscal deterioration is poised to persist.

To take the case of the case of the country’s largest pension, the California Public Employees’ Retirement System, in 20 years’ time, retirees supported by the plan will be roughly double the number of active workers. CalPERS won’t be alone in this predicament.

Again, it comes down to the demographic divide that’s opened up since President Ford was in office. In the 1970s, the typical public pension’s active employees outnumbered retirees by a factor of four-to-five times; today that ratio is 1.5-to-1 and continues to fall as Boomers retire in droves and Millennials fail to fill the yawning gap.

After a grisly year that ended with a tally of 4,000 homicides, Chicago has begun to coordinate with federal authorities to control a crime wave driven by gangs’ unencumbered access to firearms. The last thing the city can withstand is further cuts to public service funding. By the same token, taxpayers have already begun to vote with their feet as rising taxes and foundering pensions promise to beget more tax hikes to come.

It’s plain that the last thing any of us want to see is a Police State of any kind. But the growing risk is that the next recession and deflating asset prices could well alter the rules of engagement between federal and state authorities on more levels than any of us care to envision.

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Danielle DiMartino Booth, Central Bankers, Money Strong LLC, Federal Reserve, Debt, Trojan Horse, Fed Up,

Beware of Central Bankers Bearing Gifts

Ulysses’s reputation preceded him.

   ‘O unhappy citizens, what madness?

Do you think the enemy’s sailed away? Or do you think

any Greek gift’s free of treachery? Is that Ulysses’s reputation?

Either there are Greeks in hiding, concealed by the wood,

or it’s been built as a machine to use against our walls,

or spy on our homes, or fall on the city from above,

or it hides some other trick: Trojans, don’t trust this horse.

Whatever it is, I’m afraid of Greeks even those bearing gifts.’

Virgil, The Aeneid Book II

So warned Laocoön to no avail, and that was with Cassandra’s corroboration. As reward for his prescient prudence, the Trojan priest and his twin sons were crushed to death by two sea serpents. It would seem the Greeks had no intention of relinquishing hold of ancient Anatolia, a critical continental crossroad where Europe and Asia’s borders meet, a natural target for conquering civilizations.

Thankfully, history has made history of menacing machinations crafted with the aim of undermining the opposition. If only… History is rife with exceptions starting with most politicians on Planet Earth and more recently, central bankers.

In what can only be characterized as Mission Creep raised to the power of infinity, the Federal Reserve’s last Federal Open Market Committee Minutes warned that “equity prices are quite high relative to standard valuation measures.”

Let’s see. Where does the stock market fit into Congress’ statutory requirements that the Fed’s objectives be: “maximum employment, stable prices and moderate long-term interest rates”? You neither, huh?

The Minutes also indicated that, “equity price indexes increased over the intermeeting period.” Is it the slightest bit alarming that monetary policymakers are nodding to a phenomena that’s been in place since March 2009 as having just occurred to them? Are we pondering pure coincidence or is this exactly what it appears to be — political pandering?

This from CNBC:  FOMC Minutes have unleashed the word “valuation’ as it pertains to equities six times since Alan Greenspan, a self-described obsessive observer of the stock market, first uttered the words, “irrational exuberance.” In every instance, stocks were hit over the next 12 months.

Could it be that Janet Yellen, who in 2008 said the Minutes should be used, “to provide quantitative information on our expectations” knew exactly what she was doing, that she planted the word ‘valuation’ to send the President a pointed message with nothing less than perfect precision?

You may be thinking our new leader has more than enough on his agenda to be worried about a threat to the stock market from the likes of academics he not so long ago publicly derided. If Trump cares about staying in the good graces of those who put him in office, he will fight the temptation to pivot on the Fed. He’s been in office long enough to have made a move to begin filling the three open seats on the Federal Reserve Board.

More to the point, in the event Trump hasn’t been apprised, the Fed has the economy by the short hairs. And, yes, it was, is, and will be about the economy, at least among those who voted him into office, many of whom remain angry and anxious, but not stupid.

They are still waiting for an advocate who sees through the average data right through to the galling truth that absent executive pay, incomes remain in decline. They pine for a leader who can like debt all he wants to get deals done, but doesn’t force it down the economy’s throat to generate economic growth of the most fleeting nature. They may not be able to identify the enemy within by name but they have every right to expect their President does, that he has the gumption to stand up to the Fed and deliver his People from the shackles of indentured servitude.

It might even be a good thing, for working Americans who’ve long sensed the economy has abandoned them, that Trump has a beef with the media and two savvy guys from Goldman Sachs helping steer the economy. Together they should be able to glean the facts from the data the Fed insists are so much “good news.”

Consider, if you will, a fresh report on the state of consumer finance released by the New York Fed. At $12.73 trillion, household debt sits at a record high. We’re told to look the other way, that it’s a nominal figure and more importantly that debt as a percentage of gross domestic product (GDP) is nowhere near where it was back in the bad old days of 2007.

‘Tis true that household debt is no longer 95 percent of GDP which was the case when it peaked in the fourth quarter of 2007. Before resuming its climb to its current 80-percent level, it got as low as 78 percent of GDP.  But let’s hold off on the austerity bubbly for the moment. Since record keeping began in 1952, when the record low of 23 percent was recorded, debt-to-GDP has averaged 56 percent.

As for the red herring that households have tightened their belts, while that is the case for a minority, the bulk of deleveraging that’s taken place has been the result of the past decade’s 10 million and counting foreclosures. (For those of you still keeping count, some 91,000 individuals had ‘foreclosure’ added to their credit reports in the first three months of this year, an uptick from 2016’s fourth quarter.)

The deleveraging, by the way, ended years ago. Aggregate household debt is 14 percent above the low it hit in the second quarter of 2013. And we’re not talking about mortgages here.

Drawing hard conclusions is a bit of a stretch as it really depends on your perspective. You make the call. How secured by anything of value is the type of debt households have taken on since mortgage lending standards tightened like a vise on would-be homebuyers? Credit card debt is an easy enough call. But what about that car loan? Checked your trade-in value lately? (Not recommended if you’ve had a bad day.) As for that festering $1.3 trillion mountain of student debt? Did someone say ‘perspective’?

The bottom line is we still have too much debt and precious little to show for it.

In return, we get this from the NY Fed’s President Bill Dudley: “Homeownership represents an important means of wealth accumulation, with housing equity being the principal form of wealth for most households.” (Isn’t that a good thing?)

He goes on to observe that, “Changes in the way we finance higher education, with an increased reliance on student debt, may have important implications for the housing market and the distribution of wealth.” (You think?)

And finally, out of the other side of his mouth, he has this gem of a recommendation to kick start the economy: “Whatever the timing, a return to a reasonable pattern of home equity extraction would be a positive development for retailers and would provide a boost to economic growth.” (Wait, wasn’t all that home equity borrowing what pushed debt up to its record highs and drove the economy into the Great Financial Crisis?)

It’s critical to note that Corporate America is also drowning in record levels of debt – nonfinancial corporate debt within a hair of $6 trillion. And though it was nary mentioned in the campaign by either party, at $20 trillion, Uncle Sam himself is up to his eyeballs in hock.

Hopefully you can see Trump’s once in a century chance to reshape the warped thinking inside the Fed. He has the tremendous power to redirect the meme by draining the debt swamp that makes our government beholden to foreign lenders, our corporations less competitive on the global stage and our households seething at their inhibited upward mobility. Talk about Making America Great Again, for ALL Americans.

Without a doubt, this will be one of Trump’s toughest tests, and yes, the Fed can easily take down the stock market in retaliation; they could even follow through on threats to shrink the balance sheet. It would be as if someone flipped a switch and we veered from Quantitative Pleasing to Quantitative Plaguing.

And what politician in their right mind wants plague visited upon their economy on their watch? Ask any of Trump’s predecessors and they’ll shoot you straight. Passing legislation with ultra-easy monetary policy and fluffy stock prices on your side sure as heck beats the alternative.

But in the end, it just buys time, not Greatness.

Artificially low interest rates might be as alluring as that Trojan Horse was to the people of Troy. But let’s put their experience to better use and not dismiss Laocoön’s words as the tragic Trojans did. Let us all Beware of Central Bankers Bearing Gifts.

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The Running of the Bulls’ Mouths

What has the power to turn a right of way into a rite of passage?

Might it be that the mighty hand of time plays a role? Any buffed historian worth their weight in tapas will tell you the most glorious bull run of all time is grounded not in pageantry, but rather pragmatism and perseverance. Nestled on northern Spain’s Basque seashore bordering France, the heat of summer brings with it the promise that Pamplona will once again host its famed San Fermin Festival, so named for its patron saint.

History has it that Middle Age cattle herders and butchers would venture out into the night to guide bulls from their barges to bovine barricades. And while legend suggests the tradition dates back to the 13th century, from whence the mid-night marches morphed into the festivities that today are called the Running of the Bulls, its true beginning remains an unknown. The locals claim October 1776 marked the transformation to today’s annual adrenaline-rushed race through the cobblestone streets. But who establishes anything in unpredictable October? And 1776? In any event, the festival has since been moved to reliable July and aside from a few deaths (15 in all since 1924, when record keeping began) the running continues to run smoothly.

The same can be said of the modern-day bull run the world both celebrates and derides, trading day in and trading day out – it runs like silk on steroids. But unlike the practical birth of its Pamplonan predecessor, there was an overabundance of pomp associated with the grave circumstances that marked the advent of the current stock market run born in March 2009 from the beneficence of commandeered central bankers.

Being as it is, the second-longest artificially-turbo-charged bull market in modern market history, the rally has garnered more than its fair share of detractors. These wall-of-worry scalers suffer from a post-traumatic-stress-disorder that only the twin architects Greenspan and Bernanke could conceive. They simply refuse to be thrice burned. And who with a straight face can blame them? And yet these stalwart prudes have nevertheless been engulfed in the flames of shame of the roaring rally that’s left them behind. In some cases, once again.

Have these unrequited bears lost money in the process? It is said, even insisted, that is the case. But all they’ve really done is lost face, not money. The bears have sat bitterly idle while their full-bull counterparts have racked up massive paper gains. As sure as salt finds an open wound, some of their professional peers will even be nimble enough to monetize their handsome profits and go off, as it were, into the wild blue yonder, or at least the Hamptons, which is a lot closer.

But history also dictates that most of today’s bulls will be fried to a crisp and lose it all. Such is the nature of the beast. Why else would he be called bestial?

In the meantime, the bulls have become belligerent, boastful and bloodthirsty. Naysayers in their pathway are as good as ripe for the picking to the bone as so many hyenas on the hunt would be innately inclined. If only there was some assurance that comeuppance was forthcoming!

Yes, stock market valuations are richer than at any other time since 2000 (in the case of you-name-the-bond and commercial real estate, well, no precedent exists). But let’s focus here. Yes, the yield curve is flattening. Yes, share buybacks have peaked and rolled over. Yes, unchecked leverage lurks in the shadows. Yes, the critically compromised Federal Reserve is threatening to unleash balance sheet Beelzebub. Yes, it is even the case that the real economy has peaked for the current cycle, in both the United States and China, for those inclined to see through bubblevision’s delusional depictions. No, as much as you’d like to believe, absent war, oil prices will not stage some robust rebound that rescues the junk market. And finally, yes, you are not imagining that the political and geopolitical backdrop have never been as tenuous as they are today, to be polite in shared company. At least in our lifetimes. And so justice commeth?

Afraid to be the bearer of good news, but NO, stocks are NOT poised to crash, at least not imminently.

The confluence of factors converging to bring stocks down are precisely what will keep them levitating for longer than any logical person could surmise. And God help the poor soul who endeavors to maintain a bet against stocks without withstanding magnificent losses. You may as well be shuffling razor blades blindfolded in the dark.

For all of you who’ve grown accustomed to analytics at this juncture, hit that ‘x’ at the top right of your screen. Stop reading now. This one comes from anecdotes, history’s brutal lessons and the gut.

Lesson number one is melt-ups have little to do with reason and everything to do with emotion. Where to start on measuring today’s mania?

If it was kosher to passively invest in a pre-Trumpian world, it’s downright patriotic to do so today. Bet against a future led by someone with no axes to grind, no special interests to whom to kowtow and a businessman at that? You call yourself an American? Buy the index! Long-term index                                                                                                                                                                                                                              investing always pays in the end.

As for the feckless Fed, futures are betting less than even odds of a rate hike after we see June 14th come and go. So rates are not at zero. But conditions are anything but tight and the market is telling us they’re as bad as they’ll get for the current cycle, within a quarter-of-a-percentage-point, that is.

Lest we forget the other inevitable that’s priced into the markets, DC is poised to stand and deliver. While that may or may not be the case, Congress-folks cannot recuse themselves from the lens of laudable lawmaking until a year from now when they hit the campaign trail for the midterm elections. And if nothing of note is passed? Oh you naïve nabobs, what’s at play is our playing along, nodding our heads in agreement that the smoke-in-mirrors routine amounts to anything more than a token tax repatriation that funds share buybacks (oh, the novelty of it all!)

But surely there’s that outlier of outliers to fall back on, that of the sadistic seed of demonic dictatorial despots? While abundant in their presence, you may note that absent the nefariousness of a nuclear nature, the markets could give a damn. Don’t expect that to change any time soon.

Not to get technical, but the technicals are poised to be the cherry on the bulls’ sundae. Bets are piling up that certain stocks are poised to fall. Those savvy souls placing their money where their mouth is include none other than the Big Short’s Steve Eisman, who almost lost it all, but lived to make it big betting against toxic subprime mortgages back in the day.

In the here and now, at least in his most recent CNBC interview, Eisman talked up his decidedly two-way book, one in which he’s long Amazon and short Simon Properties. Smart guy. Malls bad. E-commerce good. The only problem is, he won’t be alone in being long for long.

Crowded trades that are banking on a stock’s decline, especially when they begin to multiply as the macroeconomic backdrop deteriorates, oftentimes have a way of backfiring in splendid fashion. They’re called short covering rallies and can be a hairy to maneuver, to say nothing of escape, unscathed. As sound as the logic may be, extrapolating the idiosyncratic to the whole has made many an idiot investor.

How to put the mechanics succinctly? The slightest hint of not-awful news on a stock, or even the space it’s in, can trigger a mad dash to exit a negative bet. One investor covering their potential loss by buying a stock back necessarily propels that given stock upwards, which works in a vacuum. Except that shorting is akin to a plague in how quickly the contagion can spread. More often than not, others are forced to follow suit to contain their damage.

Recall that owning a stock, or being ‘long’ has finite downside. The flip side is that betting a stock will decline carries the potential for infinite theoretical losses, a truth to which many bloodied veterans who’ve lived to tell can attest.

More than any one factor, though, the one that is the least satisfying, the most vexing, for bears to bear, is that of gravity, or better said, the lack thereof. Though a challenge to quantify, upward trending markets are inclined to keep pushing into the stratosphere in search of weightlessness. Like a tantrum-pitching toddler whose headache has long since settled in, this tendency’s impetus to infuriate bears knows no bounds.

It will all come down to a race against time, a test of reality’s resolve to refute recession. But that’s the very nature of mindless melt-ups. They are what make bubbles unfathomable. The siren song of foregone fortunes is the very elixir that lures little investors into the lurch, lengthening the rally’s legs for one last leg-up.

If there is one saving grace, it is the gracelessness with which the bulls have begun to comport themselves, though comportment might be a bit generous in this application. Perhaps it’s better said that nasty is as nasty does. Reading the schadenfreude-fueled vicious barbs being spewed at the ‘loser-bears’ leaves one with some sense of the delayed justice to come.

To think these forked-tongue keyboard abusers embrace their mothers at holidays with the same claws that scratch out the multitude of inappropriate rants in public spaces. One is tempted to ask if someone can please get these bullish haters a puppy already. For the here and now, like it or not, the odds are the bullish cabal will keep running the Street, continuing to disappoint violently-disposed voyeurs by staying one step out of reach of those honed-sharp horns.

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ICYMI.ddb, In Case You Missed It — August 4, 2017

In Case You Missed It — May 12, 2017

Dear friends,

There are some predictions you just don’t want to come to fruition. As bad as things have been for retail, they just seem to be getting worse. It’s beginning to look as if the operating environment will assist in expediting the ripping-off-the-bandaid solution to what ails retail, that is resolving the overcapacity scourge that’s become the new retail reality, seemingly overnight.

If you’re into connecting the dots for fun during trading days that seem to stretch into an infinite sea of complacent calm, consider the value of the land under the malls that won’t be with us in the near future. These malls of our collective past may today be rendered irrelavent, labeled as they are ‘B’ and ‘C’ properties. But many are in pristine locations.

Viewed through this cold prism, you’ve got to give credit where it’s due.  Gleaning value via preemptive store closers salvages what little there is to be had from the wreckage. This will work for those nimble first movers.

In such fluid environments, though, wrinkles set in fast. Enter auto dealers, who are also waking to the reality of requiring smaller physical footprints to maximize profitability. (Yes, Virginia, you can shop for a car on the World Wide Web.) The question is, what happens when shrinking dealers’ real estate listings collide with the supply of primo real estate coming onto the market via mall razings?

The short answer is anyone who tells you they know the end result is lying. We are sailing into uncharted waters as Columbus did way back when. Oh, and by the way, concluding the exercise of connecting of dots requires you incorporate oncoming record supplies of multifamily and lodging properties. Starting to get the fuzzy picture?

For more on the potential for the retail meltdown to converge with peak autos, please enjoy my latest weekly Bloomberg Prophets column:  Car Sales Will Be Key to Job Creation — The renewal of the auto industry has been a major driver of economic growth in recent years.

If that’s not uplifting enough and you’re hankering to hear how I really feel about the latest economic developments and where my former employer, the Federal Reserve, fits into the equation, please listen to to a recent interview with Bloomberg’s Pimm Fox:

Signing off from Norfolk, VA where business has carried me and I’m happy to report, crabs are in season.

Danielle


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Pension Tension, Part 2: Don’t California My Texas!, Dimartino Booth, Money Strong, Fed Up: In Insider's Take on Why the Federal Reserve is Bad for America

Pension Tension, Part 2: Don’t California My Texas!

What’s the next best thing to heaven?

Ask any Texan. Or better yet, try Tanya Tucker, born in Seminole, Texas in October 1958. She might just answer you by belting out the first stanza of her smash 1978 hit, “Texas When I Die,” in that gravelly voice of hers:

“When I die, I may not go to heaven

I don’t know if they let cowboys in

If they don’t just let me go to Texas

Texas is as close as I’ve been”

 

The point of the song is to glorify the Lone Star State as no other. And make no mistake, true Texans of all ages know and love the song. An out-of-state foreigner might venture that Texas has an ego. Yes, the state, replete with its own rallying cries. Remember “Remember the Alamo!”? Or if you prefer, the modern-day version, “Don’t Mess with Texas!” That last one may or may not have started out as an anti-littering campaign. But Texans cannot be one-upped in the adaptation department.

More recently, a crop of bumper stickers has blanketed the state’s highways and byways. Though state shapes are employed for illustration purposes on said stickers, you see the translation in the title: “Don’t CA my TX!” Ask any Texan about optionality if our taxes (let’s leave it there) even flirt with California’s. They’ll share with you the latest word bandied about: “Texit!”

Let’s use Forbes as the arbiter to explain the corporate and middle class mass departure out of California and into Texas in recent years. In 2016, Texas ranked fourth in Business Costs; California 43rd. Though there are a myriad of contributing factors to the relative unattractiveness of the Golden State, deeply underfunded pensions sit high on the list.

According to one CA resident and close friend, who also happens to be a crack economist, the back-of-the-envelope math works out as such: Stanford figures the state’s liabilities are in the neighborhood of $1 trillion, or $78,000 per household. Narrow it down to her county level, the local liability if you will, and there’s another $2 billion to consider, or $10,000 per household. Now here’s the rub. Double that $88,000 to account for the fact that various groups estimate upwards of half of CA residents don’t pay taxes. For the record, my friend is grappling with moving to a low-tax cold or low-tax warm state. Answer seems obvious but go figure.

The irony is recent headlines might cause her to steer clear of Texas given that the nation’s building pension tension first broke in Texas’ two biggest cities. Legislation is making its way through the Texas State Legislature to overhaul Houston’s firefighter and municipal employee pension. The zinger: the fix involves a cool $1 billion pension obligation bond that would require voter approval. Not to be outdone, subsequently, the Texas House voted unanimously to approve a rescue of Dallas’ Police and Fire Pension, which will also put taxpayers on the hook for a $1 billion, give or take. News that there’s been a run on a pension apparently has a stimulative effect on politicians.

The question is, will Texas begin to lose some of its appeal as the low-cost alternative to just about any other state in the nation? More to the point, are there other states out there that also appear to be dirt cheap but have pricey pension promises that will present themselves the next time markets swoon?

So much for judging low-tax-rate states by their covers. The good news is there’s a somewhat neutral intermediary to help conduct your analysis. You know, the rating agencies. Before you reach through your screen and try to land a knuckle sandwich, consider first that Moody’s and Standard & Poor’s have long been in the business of rating plain vanilla municipal bonds. We’re not talking about securities comprised of toxic mass that’s sliced and diced into credit sainthood. Plus, recent revisions to accounting rules require the agencies to visibly incorporate pension underfunding when scoring credits.

According to a recent Wells Fargo report penned by Wells Fargo Senior Analyst Natalie Cohen, over the last twelve months, this shift in accounting rules has triggered state-level downgrades of Alaska, Connecticut, Illinois, Kansas, Kentucky, New Jersey and West Virginia.

One caveat, especially at the local level, involves termination costs that can be triggered by a downgrade and accelerate payments. Detroit is a classic case in which ‘swap terminations’ tipped the city into bankruptcy. Moody’s, in particular, has devised a methodology to appraise stress using a uniform corporate bond rate; it’s called the “adjusted net pension liability (ANPL)” calculation. Included among those that lost their top credit rating because they had prohibitively high ANPLs are Evanston, IL, Minneapolis and Santa Fe along with a handful of highly-rated Ohio school districts.

It shouldn’t shock that many of the shakiest local credits reside within the weakest states. On a list Wells comprised using Merritt Research Services data, weak pensions contributed to 11 local government downgrades in Illinois, 10 in New Jersey and six in Connecticut. In what can only be described as fiscal hot potato, some states are also increasing the funds school districts are required to contribute to state retirement funds. One case in point:  Local districts in Michigan previously contributed 16.5 percent of payrolls to the Michigan Public School Employee Retirement System; that has since been upped to 27 percent. Cohen calls it the ‘State-Local Trickle Down’ effect.

They say that the best laid plans cannot account for random molecules bumping around the universe. The rub is there’s nothing random about the rot spreading across the municipal landscape. The buck will eventually stop somewhere, even as states and municipalities endeavor to shift their growing burdens from here to there to anywhere. If you just squirmed in your seat, you know where this is going.

The theory is taxpayers will take the tax hikes of the future required to rescue pensions lying down, forcing the actuarial armies’ math to finally work out in practice, not fairyland theory. Let’s just say the jury isn’t even hung on such an outrageously optimistic outcome. Targeted residents are much more apt to follow in Cook County’s fleeing population’s footsteps, that is, pull up stakes and move to lower tax states.

Carry this inevitable, albeit eventual, process to its logical end-point and it’s easy enough to envision the United States having a periphery of its own consisting of shallow-tax-base, budgetary-basket-case, junky high-yielding municipal borrowers. Preening at the opposite end of the spectrum are states that have prudently managed their affairs and prevented unions from ruling the pension roost – pristine and pure investment grade municipals.

An aside if you’ve got the ‘G’ in PIIGS on the mind (remember the acronym for the European periphery?), don’t sap your synapses. There will be no Prexit. The Constitution doesn’t allow for it.

As for tax reform, that’s another story. John Mousseau, Cumberland Advisors’ in house municipal maven, recently published a one-pager titled, “Quick Take on Munis and the Trump Plan.” In the report, Mousseau calculates the math behind the lower tax rate that stems from the elimination of the ObamaCare tax on investment income for families making over $200,000 combined with the nixing of the alternative minimum tax. The first blush take is that taxable equivalent yields of 5.30 percent for the today’s 39.6-percent top federal bracket taxpayers will fall to 4.61 percent as the top bracket declines to 35 percent. That slippage, however, is offset by the closure of the loopholes and deductions proposed.

But what about rendering nondeductible state and local income taxes? Mousseau uses the high-income-tax state of California, where the top state tax rate is currently 13.3 percent on income over $1 million, to illustrate the impact of the proposed changes to the tax laws. Under existing tax law, that rate effectively declines to 7.5 percent. Eliminate both the federal deduction for state income taxes and the Obamacare tax and you land right back at 13.3 percent.

The result would be twofold:  1) demand rises for in-state tax-exempt bonds in high-tax states (prices up, yields down), and 2) major resistance on the parts of state and local governments against tax increases and a push to roll back tax rates as state taxes will abruptly and significantly rise from their current levels.

Mousseau’s bottom line:

“From today’s vantage point, we feel that muni bonds, particularly in the intermediate and longer maturities, should face little adjustment under the proposed plan and that the demand for municipal bonds in high-tax states should advance smartly.”

While a wash for municipal bond holders in general, the implication is that high tax states, especially those with deeply underfunded pensions, will find politicians struggling in their efforts to insure escape eludes essential taxpayers.

The next recession will only serve to expedite the exoduses. That will put the onus on DC politicians to ponder the profound, as in how does the country meet the aggregate challenge pensions present? At some point, clinical calculations will clash with the still-angry citizenry. Making matters worse, both pensioners and punished taxpayers are within their rights in feeling as if they’ve been wronged.

Who will represent taxpaying Californians who prefer to grow old enjoying their perfect vistas of the Pacific? For that matter, who will stand up for Texans who darkly joke that the real wall that will be eventually erected will rise up along the state’s northern border?

The closest thing to winners in this war of states are Texas real estate agents who have never had it so good. Loaded with sales proceeds courtesy of ostentatiously overpriced homes, California transplants tend to buy two homes instead of one, so flashily flush are they when they cross over the Red River. While that extra spacious back yard (of course they raze one of the two!) is all good and well for the eager emigrant jet set, the traffic is worse than ever.

So, is there a Texit in the cards? The late Supreme Court Justice Antonin Scalia assured us the answer is no: “If there was any constitutional issue resolved by the Civil War, it is that there is no right to secede.”

Try telling that to a tenacious Texan. As worthy residents of the state, who find themselves belting out Tucker’s gravelly-voice timeless hit racing down a dusty country road with the windows open will tell you, it’s not bond math that defines the allure of life in the Lone Star State. To the many, the proud, such a futile approach is akin to trying to put into words what the wind feels like to someone who has never felt a warm breeze against their face. Why bother? To borrow from another legendary bumper sticker: “I may not have been born in Texas. But I got here as fast as I could.”

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Pension Tension: Uncle Sam Walking Tightrope into the Unknown, Danielle DiMartino Booth, Money Strong LLC

Pension Tension: Uncle Sam Walking Tightrope into the Unknown

“The headlines read, ‘These are the Worst of Times.’ I do believe that’s true.”

So lamented Styx lead vocalist Dennis DeYoung in a song he wrote and recorded in 1980. To listen to the lyrics, the ballad would seem inaptly titled “The Best of Times.” But then, love conquers all. That’s where the ‘best’ part comes in, as two star-crossed lovers find in each other their salvation from a world turned cruel.

The song was the first release from Styx’s 1981 triple-platinum album Paradise Theatre. That first release suggests the album could just as well have been named Paradise Lost. It’s impossible to say without asking DeYoung directly but perhaps his somber tone was simply a reflection of the times.

The oil crises of the 1970s had left the country mired in stagflation and veering headlong into a double recession. Inflation and unemployment were both high leaving many so miserable an index was conceived in their name. And crime, well, it was at least perceived to be rampant and televised for good measure.

Hence the chilling lyrics, “When people lock their doors and hide inside. Rumor has it it’s the end of Paradise.” That one line in particular stopped yours truly in her tracks upon recently hearing the song for the first time in ages. Those haunting words transported me back in time to a conversation I’d had with then-Dallas Federal Reserve President Richard Fisher, who I advised back then. News of riots in the streets of Athens were flooding the airwaves. As safely removed as we were from the anger, violence and flames, he said he worried we would witness the same in our own streets if things didn’t change.
Surely not. Not in our lifetimes.
Maybe it’s time to spend less time pondering public pensions, time to stop worrying. Life is short. But then, denying a dilemma because it’s ostensibly insurmountable is never wise. Ask any politician cum lobbyist.

The fact is public pensions are an intractable issue that is growing as a factor of time and worryingly, increasingly ignored. And these are the best of recent times for pensions, without question. This from Bloomberg:  U.S. state and city pensions posted median gains of 4.1 percent in the first three months of this year, the sixth consecutive quarter of positive returns, the longest winning streak since 2014.

While this moment in time will alleviate some of the $2 trillion in underfunding, it cannot be enough to make up for lost time given that the depth of the hole was less than $300 billion in 2007. As is plain, a whole heck of a lot of damage was exacted in the short space of a decade. Obviously, there was blood in the Street during the crisis years. But that dark chapter was followed by a magnificent rally in risky assets.

The means by which pensions find themselves bound by Gordian’s knot is simple:  time.

For today’s older folks, the miracle of compounding interest is a simple and beautiful phenomenon. In addition to the income you gather on the principal you’ve invested, time sweetens the pot if you leave your earnings be. Your interest also earns interest, more is more. The growth is a sight to behold. That is, if your age begins with the number ‘6.’

Central bankers, in their infinite wisdom, have consciously robbed generations plural of such an ideal. Zero on zero gets you zero. No beauty there.

Unluckily, pensions have been allowed to exist in a parallel universe where zero interest rates don’t exist. Why discount future liabilities by zero, or even insanely low rates, just because the powers that be slam rates to the floor? That level of realism invites nasty side effects, as in an immediate tripling of pensions’ underfunding. Could any state or municipality shoulder such a heavy burden? (Answer: few to none.)

Instead, pension fund managers have traveled from one parallel universe to the next, to that of amplified assumed rates of returns to compensate for what reality simply cannot provide.

Think of it as the opposite of compounding interest. The insidious interplay between fancifully assumed discount rates and the unicorn returns we pretend managers can conjure on pension assets is where the word ‘damage’ comes into play.

In the same way compounding interest escalates the growth of your original investment, double denial in pensions renders the damage inflicted permanent.

While that four percent racked up in the first quarter sounds great, ask yourself this: can it compensate for the average annual return of 1.5 percent chocked up in the fiscal year ended June 30, 2016? Well sure, except for one glaring detail – the rate of return assumed was north of seven percent, again, on average.

It is THAT gap, repeated year in and year out, that cannot and will not be made up as a factor of time. Returns have been too low for too long, as have interest rates, to rectify what ails pensions. To compensate, as has been more widely reported by the media, to its credit, pensions have been making investments in illiquid, expensive private equity funds. We’re talking $350 billion since 2007.

To be clear, a pension fund manager is fiduciarily responsible to ensure that adequate funds are on hand to meet the obligations promised to beneficiaries, that assets are on hand to satisfy future liabilities. Period.

Why on earth, mandated by that seemingly simple tenet, would any pension manager in their right mind, or with the best interests of their entrusted pensioners at heart, be investing in a distressed real estate or illiquid credit fund? And at this juncture in the cycle?

Before the arguments begin – that we’re at the precipice of some new paradigm, that tax cuts will reignite growth, that stocks are dirt cheap when adjusted for inflation, can we just agree on one thing? Can we answer one question please: Do recessions occur, eventually?

If you can acknowledge that there is cyclicality in the business cycle, there are deeper issues to discuss.

Consider that every (remaining) California household is on the hook for $93,000 to cover the state’s public pensions, at least as of the end of 2015 according to Stanford University. That gap will never be rectified, at least on planet earth, not without eviscerating what’s left of the state’s middle class. Sorry to rain on the Golden State, but good luck. Middle-income-earning, tax-paying Californians will continue to do what they’ve been doing, along with their cohorts in Cook County, Illinois. They will continue to vote with their feet and relocate to states with better tax climes. And why shouldn’t they?

Economists like to gloat about inflation and unemployment hovering near record lows. But the truth is, a vast majority of Americans today are subject to a different kind of misery index, one that could be a kissing cousin to that of the late 1970s. Call it the bondage index. Buying a new starter home and renting your first apartment are so prohibitively expensive the homeownership rate among Millennials is the lowest on record for their historic age group. And while the unemployment rate is near record lows, it’s nothing to write home about, at least for the millions upon millions who’ve been forced to work part-time or take on two jobs just to make ends meet.

In other words, the statistics may not lie but they sure as hell don’t tell the whole truth. As one astute Twitter follower commented following fresh data on rising car repossessions, “Between losing their transportation to their job and unaffordable housing, expect the bottom 20 percent who have lost out to get desperate.” Economic bondage will do that.

Maybe you can help connect the dots. We’re in the third longest economic expansion in postwar history. Stocks have enjoyed their second longest bull run ever. Public pensions are loaded up to their eyeballs in risky assets because there are no alternatives aside from the alternative investments they’ve piled into that will give them no cover in a downturn. How exactly does this story have a happy ending, for pensioners and 401k-holding taxpayers alike?

Some arbiter from some corner will have to rise up to resolve this dilemma. The judiciary will certainly play a lead role in setting precedents. Strong leaders will also have to make tough calls knowing full well that unions will stage a rebellion. It won’t be easy to convert future public employees to the same retirement reality the rest of us rely on.

But what other choice is there? Cutting public services to such an extent that taxpayers take to the streets? Or worse, that we lock our doors and hide inside?

Teddy Roosevelt once said that, “People don’t care what you know until they know that you care.” We must ask ourselves how the barely-contained anger manifests itself when the masses wake to the knowledge that the most knowledgeable cared the least.

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