THE GREAT RECOVERY — Unambiguous Clarity Over the Horizon

Are you a grasshopper or a weed hopper? A subscriber recently chided me for succumbing to that which I deride the very most, the dreaded groupthink. So ubiquitous is the consensus on the economic outlook for 2018, I’d been swept away on a wave of conforming concordance. What followed was, “You surprise me weed hopper.”

In the spirit of discovery, I must admit to being a bit mystified. I was familiar with ancient Asian teachings that raise the grasshopper to esteemed status. To wit, grasshoppers “overcome obstacles, jump into successful ventures and are forward thinkers. A grasshopper’s nature is stable, vibrant, content, intuitive, patient, peaceful, creative, insightful, connected, courageous, resourceful, and much more.”

A weed hopper, on the other hand, references one who is new to the scene to the art of smoking weed or a small aircraft which uses tricycle landing gear and a tubular-frame fuselage. True confessions, the scent of marijuana is all that’s needed to induce a wave of nausea for this one. And I’m a bad flier.

But maybe that was the point. Perhaps I needed to be reminded of the importance of nuance. Had I just accepted “weed hopper” as a synonym for “grasshopper,” wouldn’t that have proven the point that I’d stopped discerning and begun to take others’ thoughts as my own?

And then there’s the very source of groupthink, the Federal Reserve, though we can hope the times, they are a changing. For the here and now, a veteran and voter on this year’s Federal Open Market Committee continues to voice concerns over worryingly low inflation. That’s what happens when you suffer from the worst form of myopia that keeps you focused on a failed inflation gauge. What this unnamed Fed official should have said was what a fellow grasshopper, Dr. Gates, pointed out in reaction to this inside-the-box thinking:   “What the Fed should be concerned about is tightening the economy into a recession because the cost to buy what we must (non-discretionary) is rising at an appreciably faster pace than the cost to splurge on what we covet (discretionary).”

Price pressures for necessities are running too hot, not too cold. That applies to companies and households alike, by the way. Pick your poison – a margin squeeze or further strain on household budgets.

In the meantime, rampant commodity inflation continues to pressure yields upwards. As if the bloodletting needed reinforcements, this week’s bond market rout has intensified care of the two largest foreign holders of Treasuries. The Bank of Japan appears to be, denials notwithstanding, tapering its quantitative easing (mechanics matter). And China is making rumblings about the reduced attractiveness of holding our sovereign bonds with the added punctuation point that the risk of a trade war gives them more license to pull back.

And so, the two-year/ten-year Treasury spread gaps out by 10 basis points and there’s Bill Gross and his bond market peers of the world who angst (talk their books) about the end to the glorious bond market mega-run that’s been around for most of our careers.

Are you surprised the stock market is taking all of this in stride? If you answered in the affirmative, all I can say is, “You surprise me weed hopper.” In the meantime, in the real economy, it’s full steam ahead, something the Fed will follow, come what may. For more on the economy’s prospects this year and beyond, please enjoy this week’s installment The Great Recovery: Unambiguous Clarity Over the Horizon.

With hopes you are a grasshopper, and wishing you well,

Danielle

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AGAINST ALL ODDS — An Open Letter to a Strong Leader

Dear friends,

Welcome to the year of the crosscurrent. Expect for the ride to start out and stay bumpy, especially after landing.

For the time being, happy days are still very much here. Average what the Atlanta Fed and New York Fed are forecasting for economic growth in the just-ended fourth quarter and we’re talking about full year growth of 2.7 percent. But it gets better. There’s an increasing chance we’ll have 12 months of GDP growth at a 3-percent rate by the time the books close on the first quarter. Any upside from here will make Republicans giddy with excitement.

Back on Wall Street, the markets have sniffed out the economy’s seeming resilience. Stocks continue to reach for records celebrating the manufacturing renaissance as much of the country continues to rebuild from the Year of the Natural Disaster and the dollar remains weak, a beautiful combination if there ever was one.

In the event the holidays distracted you, the Chicago Purchasing Manufacturing Index hit the highest level since March 2011. In fact, the whole of the Midwest factory sector was booming headed into the new year boding well for the economy as a whole…with one notable exception care of my compadre Dr. Gates. Manufacturing in the Hoosier State, it would seem, has fallen into negative territory. That bears watching as Indiana is a bell weather for the U.S. as a whole.

Speaking of signposts, households have grown increasingly comfortable with leverage to maintain their living standards, which of course economists cheer. That’s worked for 24 straight months as credit card spending growth has outrun that of income growth. But home prices continue to catapult upwards at more than twice the rate of income growth and rents refuse to provide the respite so many households desperately need.

Did someone mention cross currents?

Into this fray steps the Federal Reserve and a whole new cast of characters, most of whom are unknowns to us or should be (still maintaining that Powell is no Yellen clone). What will they ponder when they convene the last two days of this month? Perhaps they will angst over the smoking hot prices paid component in the just released ISM report. The 69-handle resulted from 17 out of 18 industries reporting higher prices. Couple that with a 69.4-read on new orders and you can bet your bottom line there are more supply chain disruptions to come.

Will PPI rather than CPI alone sway the new crew to err to the side of caution, committing to more rate hikes than the market has priced in? For those inclined to keep a running tally, it only takes two rate hikes to completely offset the tax law’s boost to 2018 GDP.

And then there’s the elephant in the room, the fact that 2018 is the year of tapered shrinkage. With a hat tip to Nicholas Glinsman who did some quick back-of-the-envelope math, from this day forth (actually yesterday forth), European Central Bank (ECB) purchases are hereby halved. Looking back to the last three months of 2017, combined ECB and Fed reinvestment summed to $60 billion. Starting in January, that rate collapses to $15 billion. By the end of the first quarter, we’re talking $5 billion, which is still positive.

But by September, the dueling duo central banks will be yanking $40 billion a quarter from a financial system we’ve been assured will nary blink an eye. 2017 = $2 trillion in global QE. 2018 = $1 trillion. No sweat?

In the meantime, the tax man commeth, and that’s a good thing for several states that could use a bit of good news on the revenue front. The question is, will a bold leader, one with foresight and vision, emerge with the wisdom to make use of the tax windfall no one is talking about? For more on this, please enjoy the new year’s first installment, AGAINST ALL ODDS: An Open Leader to a Strong Leader.

With hopes you steer clear of the storms and wishing you well,

Danielle

And in case you missed it, please enjoy the best in class —  2017’s Money Strong Top 10.

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THE JOB MOB The Societal Impact of the Next Downturn, Danielle DiMartino Booth

The Job Mob – The Societal Impact of the Next Downturn

Before there was the mob, there was the gabelloti. It would seem that these Sicilian estate managers, employed by the church or feudal lord, were not above corruption.

As the nobility’s penchant for the provocative Palermo night life circa 1700 grew and proper pied-a-terres secured, more responsibilities were handed over to the gabelloti, who were charged with the overseeing of the day-to-day operation of the fiefdoms. A primary task for the gabelloti was ensuring the necessary number of hired hands were satisfactorily shepherding, farming and foresting the lands with which they’d been entrusted.

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Danielle DiMartino Booth, Money Strong LLC, Bitcoin, Blockchain

CRYPTIC CURRENCY — From Blockchain to Daisy Chain and Beyond

W. A. Saltford was a dexterous dandy ahead of his time. In 1898, Vassar College commissioned the Poughkeepsie florist to carry out a cherished charge as the first designated outsider to weave and wield the seminal symbol of Commencement Day, the Daisy Chain.

For the procurement of requisite raw materials, Saltford relied on who else but the “Daisies,” those senior-class designated and specially selected sophomores who scoured Dutchess County for thousands of the long-stemmed flowers. In Vassar’s early days, every graduate merited her share, or to be precise, a 100-pound length of shoulder-draped Daisy Chain. As graduating classes grew, scarce daisy supplies and bench-pressing limitations required Saltford innovate. Regal laurel leaves, he discovered, lightened the load and filled the gaps nicely, much to the Daisies’ delight and relief. Today, the chain is fixed at 150 feet. The alternative, given society’s love affair with liberal arts would be a chain of over 600 feet and some very sore sophomores.

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ATLAS STUMBLES Inequality and Macroeconomics at a Crossroads, DiMartino Booth, Federal Reserve, Money Strong

Atlas Stumbles — Inequality and Macroeconomics at a Crossroads

“If you don’t know, the thing to do is not to get scared, but to learn.” 

“Man’s mind is his basic tool of survival. Life is given to him, survival is not.” 

“I like to deal with somebody who has no illusions about getting favors.”

Red-blooded Americans read these lines and, if in polite company, resist the urge to beat their chests. These mantras say all that need be said of the virtues of honesty, integrity, productivity, grit, independence, pride and liberty itself. Accurately attribute the quotes to Ayn Rand’s Atlas Shrugged, however, and some pause for a moment of reticence, gently reminded of the need to be politically correct.

The need to be ‘PC’ was not even in accepted vernacular back in 1957, when Rand’s book was being vilified by critics. The tome was labeled a testament to hatred and cruelty, a soulless slaying of the welfare state. As fate would have it, a rich rebuttal in the form of a letter to the editor of the New York Times would make history: “‘Atlas Shrugged is a celebration of life and happiness. Justice is unrelenting. Creative individuals and undeviating purpose and rationality achieve joy and fulfillment. Parasites who persistently avoid either purpose or reason perish as they should.”

That the vehement defense was penned by one Alan Greenspan might go down as one of the most malevolent mockeries writ from an era in central banking heralded by the Rand acolyte himself. It rings as impolite in its bluntness, but it was Greenspan who most bastardized Rand’s basic premise, that innovators and producers build model economies.

Every tragedy has a beginning. At the outset of this particular saga was the moral hazard born of Greenspan’s fascination with the stock market. He was literally in awe of those Rand would have characterized as perfect producers, Wall Street’s Masters of the Universe who consumed what they killed. It’s one thing to admire, but quite another to allow yourself to be intimidated when you are tasked with regulating the world in which the Masters reside.

And yet, in the weeks and months that followed the crash of 1987, the newly minted Federal Reserve Chairman directed the New York Fed to leak to bond trading desks the Fed’s plans to inject liquidity into the system. By sanctioning the front running of the Fed, Greenspan had effectively invited the Wall Street’s foxes into the hen house to feast on preordained profits.

Stop and think for a moment about the regime change this heralded, the alteration thrust upon the principle of risk-taking, of markets’ duty-bound and noble tradition of price discovery. Greenspan flipped the very law of nature on its head for those who had been schooled to live and die off the consequences of their trades, come what may. To be shielded from the ramifications of their actions denunciated everything Wall Street did and should represent.

And yet, here we are, 30 years later. Thanks to the bounteous harvest of moral hazard sown by Greenspan’s original sin, far too many of Wall Street’s innovative producers have devolved into the looters Rand so decried in her tribute to capitalism. Rather than create anything of lasting value, today’s Wall Street leeches what it can from the bottomless, fetid supply of the moral hazard manufactured by central bankers.

If only it just ended there it would be bad enough. But politicians long ago opted to tie their fates and fortunes to the same poisoned central bank dealer. As far as they’re concerned, the monies that keep them in office need be fungible and nothing else.

And so, the Stygian tale turns, sustained by trillions upon trillions of dollars of debilitating debt taken on along the way. The central banks print money. The investment banks pocket fees. The tab swells. Add it all up and global credit sums to $220 trillion today, up from $150 trillion at the onset of the financial crisis. Narrow your focus to the four largest developed markets, those most active on the money-printing stage, and you find that $34 trillion of debt has amassed since then. Call the chart below simple if you will, but sometimes one line says more than enough.

Sum of Central Bank Balance Sheets and
Cumulative Budget Deficits for the United States,
Eurozone, the United Kingdom and Japan ($Trillions)

CENTRAL BANK ASSETS

In the words of the Deutsche Bank analysts who created the graph: “Another way of looking at this is the extra amount of stimulus over and above living within our means (no money printed, no deficits) seen since the Great Financial Crisis. In the end, $34 trillion of stimulus and Quantitative Easing has delivered very low growth, subdued inflation and sky-high asset prices around the globe. This is unprecedented territory and how can anyone estimate what the fallout will be when we normalize again?”

In all actuality, the very same Deutsche analysts answered their own question in the same report that produced that daunting chart above, of debt built to nowhere, akin to that pork-financed bridge, also to nowhere, so pilloried in the media years ago. The fallout will be anger — unprecedented, immeasurable levels of unrequited anger among the masses that know all too well that the economy’s designated producers have become looters, robbing them of a passageway out of the hell on earth they’ve come to know as subsistence care of entrepreneurship and innovation succumbing to slow, sad deaths.

Populism itself is coming home to roost and it will present itself as the macroeconomic challenge of the ages.

No doubt, ‘populism’ is a subjective force, all but impossible to quantify. Thankfully, that didn’t stop the Deutsche analysts from giving it a go. To wit, they weighed populist votes and population size in seven large countries over the last century, specifically those of France, Italy, Spain, the United Kingdom, Japan, Germany and the presidential elections within the United States. Qualifiers included parties that espouse communism, nationalist policies tied to immigration and militarism and leaders with dominating, charismatic personalities rather than well-defined policy positions. In Europe, anti-NATO and Euro-skeptic tendencies were also captured while in the United States, anti-corporate progressives that defied the establishment made the cut.

It’s noteworthy that these general themes, in one form or another, have withstood the test of time, answering the question as to whether we can’t all just get along. (Apparently not.)

Discount what you will. Net out what you like. No matter how you slice it, prior to the last decade, populism is off the charts. No period in modern history compares to what we’re witnessing today save the epoch set off by the stock market crash of 1929 that culminated with World War II, with, by the way, the Great Depression sandwiched in between.

Populism Index Against the Backdrop of
Developed Market Financial Crises

Populism index

Hats off to the team at Deutsche for resisting hyperbole in the face of the immutable message delivered in the graph: “While the consequence of the recent rise in populism hasn’t yet destabilized financial markets, the level of uncertainty will surely remain high while such parties remain realistic power brokers in major national elections. (Populism’s) rise surely increases the risk to the current world order and could set off a financial crisis at some point soon.”

It’s that last point that finally brings this week’s subtitle into context. The gravity of populism’s root cause, inequality, is no longer purely political tinder. It’s all about the economy.

The good news is the beginnings of an epiphany is dawning on the have’s. Mega hedge fund magnate Ray Dalio in particular, a man whose net worth crests $17 billion, has voiced concern. In a recent interview, Dalio said that he thought inequality was the most daunting challenge on the horizon, one on par with the period from 1935-1940.

“If you carve out that lower 40 percent, not only has there been no income growth, but death rates are rising because of opiate use, suicide and because they’re losing jobs,” Dalio said. “This is the biggest issue of our time – the biggest economic issue, the biggest political issue and the biggest social issue.”

Dalio is right. And though he’s gone as far as saying the Fed is poised to commit a policy error akin to 1937, he’s not vociferous enough in his criticism of Fed policy for engineering the fine mess in which the country finds itself.

Thankfully, I’m not alone in my indictment of the Fed. In the words of an economist worthy of the deepest respect, Judy Shelton, Janet Yellen’s concern for the plight of the forgotten masses is, “rich.” I recently caught up with Shelton and she had this to say, in a clear rebuttal of the fawning accolades being showered on Yellen as her time at the Fed comes to a blessed end: “While it’s nice that Janet Yellen cares about the issue, I think she should have been more forthcoming in acknowledging the Fed’s own role.”

Shelton’s eloquence shines through in Beware a Magnanimous Fed, an opinion piece she wrote three years ago in reaction to the following naïve statement made by Yellen:  “Although we work through financial markets, our goal is to help Main Street, not Wall Street.” Shelton’s reply follows.

“The problem with Yellen’s public display of benevolent concern over income and wealth inequality is that it implies she means to do something about it. This is worrisome because she views the Fed as a force for good rather than as a distorting government interloper into private-sector credit markets whose clumsy efforts skew financial rewards to savvy corporate strategists and sophisticated investors.

If Yellen wants to restore the free-market values rooted in our nation’s history, she needs to pay heed to the telling correlation between wealth inequality — at its highest level in the past 100 years, higher than for much of American history before then — and the creation of the Federal Reserve in 1913. It’s unbecoming to preach the virtues of equality of opportunity when Americans see only too well who most benefits from monetary favoritism and who is most punished by the inequality of access to vital financial capital.”

It’s doubtful Ayn Rand herself could have said it better. Shelton’s refutation of Yellen’s premise is all the more prescient given the results of the presidential election. The masses may not be able to identify zero interest rate policy and quantitative easing as culprits by name. But their actions speak volumes to their shared revelation that the enemy has been identified and it is indeed within.

As for any aspirations to attain the American Dream, they’ve long since been crushed by repeated iterations of subprime debt illusions ending in tears. Call the two dichotomous headlines from the November 15th issue of the Wall Street Journal Exhibits A & B: Household Debt Hits a New High and More Americans Feel Like a Million Dollars.

If you haven’t yet got the picture, it might be time for a courtesy call to your friendly neighborhood ophthalmologist. As for what lies ahead, populism appears to be taking a nasty turn for the worse. And though the problem is clearly as close to home as it can be, our shared national dilemma is anything but local.

Look no further than my paternal family’s homeland. Radical no longer suffices for the long-repressed Italians seeking relief at the polls. The far right, it would appear, is now rearing its hateful, ugly head. Be on the lookout for more of these headlines as oppression spreads in the way only nasty infestations can.

On a more practical level, it strikes me as untoward to bandy about investment ideas while pondering such heavy prospects. If you’ll indulge me some grace, it’s safe to say defense contractors will have no challenge keeping the lights on in the years to come.

In the end, our collective deliverance can only come from strong leadership that refuses to balk at the grave challenges that lie ahead. To call one last time on Rand’s sagacity, “Evil is impotent and has no power but that which we let it extort from us.”

 

DANIELLE DiMartino Booth, Commercial Real Estate, Federal Reserve, Restaurants

Congestion Indigestion – The Future of the Restaurant Industry in America

Oh how Mrs. Howe’s heart burned. Literally.

And so, her dutiful hubby descended to his basement where he concocted a remedy of calcium carbonate and sugar for his bride, much to her relief. And much to Jim Howe’s financial delight, his made-at-home remedy caught on like wildfire, extinguishing heartburn, neutralizing acidity and digesting indigestion far and wide. Could it be that the excesses of the Gilded Era were just what the pharmacist ordered in 1928? Or perhaps it was the hangover that set in the following year?

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Destination Reformation — The Dawn of a New Era in Central Banking

Combine contraband coffee, paralytic guilt and a gift for translating Greek and you too can change the world. Such was the case with a young, deeply devout Catholic by the name of Martin Luther in the year 1516.

A decade after he traded academia for the priesthood, Luther found himself disturbed by the quid pro quo nature of Catholicism. Sin expunged via penance in increasingly pecuniary form struck Luther as graceless at best. A field trip to Rome only served to dial up his unease as the ornateness on vivid display communicated dishonesty and even vice. That this epiphany coincided with the first trickles of coffee into Germany was fitting given what was to come.

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Danielle DiMartino Booth, Money Strong, Credit Markets

The Credit Markets: Casting Angels from Crowded Celestials

Mammon, Moloch and Mulciber have never had it so good. If your Paradise Lost is lost on you, a quick refresher. All three are former angels who have fallen on hard times, in Hades, that is.

Mammon is known as the “least erected,” as his eyes are always on the ground, faithfully foraging for gold. A pragmatist and capitalist, Mammon would have exploited the wealth of Hell to turn the heat down rather than bother with all that warring with God.

On the opposite end of the homicidal scale, sits Moloch, an idolatrous deity worshipped by some ill-fated Israelites. His penchant for child sacrifice went hand in hand with his council vote, which was all out war with God. And then there was Mulciber, inspired by Hephaestus in Greek mythology. He must have been the right brain among the fallen given he was the chief appointed architect for Pandemonium.

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Economy, Pensions, DiMartino Booth, Danielle DiMartino Booth, Money Strong LLC, Fed Up: An Insider's Guide to why the Federal Reserve is Bad for America,

Retirement in America: The Rise of the Velvet Rope

Before there was the One Percent, there was the velvet rope at Studio 54.

Gaining entry to the divine disco, with its adherence to a strict formula, was just as exclusionary. This from Mark Fleischman, the Manhattan haunt’s second owner in a memoir released to mark the 40th anniversary of the club’s opening:  “A movie star could bring unlimited guests, a prince or princess could invite five or six guests, counts and countesses four, most other VIPs three, and so on.”

Andy Warhol called it the, “dictatorship at the door.” Brigid Berlin, one of Warhol’s Factory workers and guests, once described to Vanity Fair how she, “loved getting out of a cab and seeing those long lines of people who couldn’t get in.” If beauty alone could sway the dandy doorman, famed for flaunting his fur, a different kind of cordon awaited you once you set foot inside the cavernous strobe-lit mecca, that is a screen hung across the dance floor to separate the chosen from the common. The scrim summarily dropped at midnight, but not a minute before, affording elites ample opportunity to make their escape to the VIP floors above.

The annals of the truly desperate include one reckless raver who rappelled into Studio 54’s courtyard, breaking his neck in the process. But at least he eventually walked away. A less fortunate celebrity seeker perished in one of the club’s air vents. Upon discovering his body, there was no surprise he was in black tie. Studio 54’s velvet rope has long since fallen. Unfortunately, in its place, another has risen.

So inescapable are the headlines pronouncing inequality, we’ve all but grown impervious. But what of the stories of Tomorrowland? What will come to pass in the coming years as demographics and valuations collide?

Last month, Deutsche Bank broke Wall Street’s version of The Ten Commandments, all of them at once, in a comprehensive report titled “The Next Financial Crisis.” In case you’ve been on sabbatical or on the buy side so long you’ve forgotten, the First Commandment is, Markets Always Rise. The nine that follow are a variation on why and how to convey to your clients that the music is still playing, even if you’ve long since sat down.

Though there were many condemning graphs related to the increased frequency of booms and busts, government balance sheets and central bankers gone wild, it was the one you see here that was the most incriminatory in its simplicity.

The chart dates back to 1800 and depicts an equal weighted index of 15 developed markets’ government bond and equity markets. Nominal yields relative to history and share prices relative to nominal GDP are used to gauge historic deviations. The 100 percent reading you see means that in the aggregate, using an equally weighted bond/stock portfolio, bond yields have never been this low and equity prices this high.

You could quibble that stocks are not as richly valued as they were in 2000. But that argument runs counter to the fact that thanks to the bond-sale-proceed/share-buyback feedback mechanism, the symbiotic relationship between stocks and bonds has never been so tight. You could also venture that the central-bank, spoon-fed trend higher in earnings of the past decade will remain intact, that this represents, in the Deutsche analysts’ words, “a new paradigm.” But such declarations do tend to come back to haunt. So why go there?

Instead, marry the inescapable reality of the Deutsche graph to the other fact of life, the $400 trillion shortfall in retirement savings that will pile up over the next 30 years. Perhaps it’s easier to get your arms around the figure if you look at it as a multiple of the global economy. By that metric, underfunding will equate to more than five times global GDP.

The recent World Economic Forum (WEF) report attributed the disaster in the works to longer lifespans and disappointing investment returns. But it’s the what’s to come that is more telling. It’s no secret that employers have been shifting away from traditional pensions to 401(k)s, IRAs and the like over the past several generations. It was somewhat startling, though, to learn that these self-directed plans now comprise more than half of all global retirement assets.

Zeroing in on the United States, we are racking up an additional $3 trillion a year in aggregate retirement underfunding. By 2050, the nation’s retiree assets should be under water by $100 trillion.

It’s safe to say I’ve written reams on the societal ramifications of public pension underfunding in the United States. In far too many cases, it will be mathematically impossible for the funding gaps to be rectified before time closes in and cash flows run blood red. The judiciaries will go toe to toe with the governing authorities who will in turn battle the unions. Around and around the interested parties will go, appearing to man the front lines of the retirement crisis. As is so often the case with appearances, these too will deceive.

While the fiscal unraveling of states and municipalities promises to pack punchy headlines, the World Economic Forum report nevertheless shifts the discussion 180 degrees.

As of the middle of this year, total U.S. retirement assets totaled $26.6 trillion. That’s not all good and well, hence the shortfall cited above. Still, it’s the breakdown of those assets that’s critical. As of the end of June, IRAs held $8.4 trillion followed by $7.5 trillion in defined contribution plans, mostly 401(k)s. Public pensions came in at $5.7 trillion while their dying-breed private pension counterparts rounded out at $3.0 trillion. Annuities complete the picture at $2.1 trillion (who knew?)

Though naïve to do so, remove IRAs from the calculus for the moment given the voluntary nature of these accounts and what that implies, albeit superficially. For the sake of argument, focus solely on 401(k)s and public pensions. Now, envision a typical public pensioner and a typical 401(k)-plan worker. You won’t be alone if similar pictures of hard-working folks came to mind.

The question is, how do their fates differ in Tomorrowland, after markets have begun to revert to the mean? (A full reversion to the mean is more than most can stomach, hence the softer suggestion.)

The fact is 401(k) holders suffer double damages vs. public pensioners, at least initially. While both individual investors’ and pensions’ portfolios take a beating, the pensioner won’t feel it due to their income being guaranteed by law. Heck, the pension fund manager won’t lose too much sleep knowing where there’s a loss, there’s a way…to raise taxes, that is.

That’s where 401(k) investors’ second helping of lumps enters the picture in the form of higher state or municipal taxes. Some lucky residents might see everything save their federal taxes rise if they’re fortunate enough to live in windswept areas where spineless politicians were corrupted by even more corrupt interested parties who negotiated pensions that could never be repaid. If push comes to shove and the increased taxes still don’t cover the pension bill, public services can be slashed.

Of course, public pensioners will also feel the brunt of cost of living increases, if they’ve not relocated to a town with faster EMS response times and more frequent trash pickups. But then, in the public sector many are able to retire at young enough ages to secure second careers and with them, supplemental sources of income.

Recall, though, that the retirement assets of the protected pensioners ($5.7T) are a pittance of those of the unprotected, especially if you factor back in those IRA assets to say nothing of at-risk private pensioners, whose benefits are severely cut in the event of bankruptcy ($18.9T).

It’s hard to conceive a blanket acceptance of working men and women bailing out working men and women. But that’s what we’re supposed to believe to be the solution to what is and will continue to ail public pensions, from, by the way, a starting point of record highs in asset prices.

Now might be a good time to add another snippet from that Deutsche Bank report. “Prior to the last decade, the only comparable rise in populism started in the 1920s and culminated in World War II. So although populism has proved unpredictable in recent years, the rise surely increases the risks to the current world order and could set off a financial crisis at some point soon.”

Substitute out ‘populism’ for ‘anger factor’ as it better captures the sensation shared by so many today who believe they’ve been dealt an unfair hand by a dealer on the take. Most who remain among our middle-income earners understand the terms ‘elite’ and ‘establishment.’ As much pride as they still have, they will find a way to revolt at the first whiff of being asked to bank a bailout on their pittance of a living.

The majority of workers may not have the statistics at the ready – that their paltry and at-risk retirement assets are but a third of the country’s financial assets, that the balance sits in the hands of the wealthy. But they do know what it’s like to be frozen out on the other side of society’s velvet rope and they won’t sit back and take it.

In other words, there’s simply no denying that some pensions, especially those of some acutely fiscally enfeebled states, will require federal bailouts in the coming years. As for how that is funded? More taxes yet, of the federal sort, of course. That is the only fathomable answer, which adds a dollop of insult to injury for those whose other taxes had already been rising for years.

Stepping back, you may be asking, why sound the alarm if the worst of the underfunding won’t crest for another three decades? The shortest answer is the sooner pension underfunding is addressed, the lower the probability a financial matter morphs into one that engulfs our society and provides one more reason yet to add parental controls to the evening news.

In the event your capacity for combining nobility, vision and politics is limited, you might deduce that some can-kicking takes place long before any preemptive pension reform is conceived. If you’d like to capitalize on that assurance and at the same time profit from the few states that have put their finances in order, you might want to put in a call to your municipal bond manager (I have several suggestions if you’d prefer).

The directive is simple enough. First, identify the most vulnerable states with the least-funded pensions and the lowest per capita income. The bottom three are Kentucky, Kansas and Mississippi. Next, locate the mirror image, the states with the most funded pensions and the highest per capita income, as in South Dakota, Wisconsin and Washington State. Now, short the weakest and buy the strongest and then sit back and wait for politicians to do their jobs.

As for the here and now, you can toss out any superstitious notions about October being a spooky month for the markets. September is traditionally the nastiest of the year’s bunch and it was a flat-out party in the house. Market history suggests the year will end with a bang.

But it’s much more than pure pattern that should sustain your risk appetite. The past two years, Federal Reserve policymakers have committed to hike in September and delivered in December. What’s followed have been Happy New Years, one after the other. It’s a safe bet most investors will remain in textbook Pavlovian momentum mode and go long into the mid-December Fed meeting.

Besides, fourth-quarter, hurricane-influenced economic data promise to do one thing and only one thing — produce more noise than the punk backlash that followed disco fever. Fundamentals will thus be fuzzy at best.

And finally, corporate bond issuance in the year through September was yet another for the record books, which says something about lenders looking the other way, or better yet, tuning out altogether. Those sales proceeds do tend to find a home and it doesn’t tend to be a bear cave.

So do the hustle, and fight that rational urge to short these irrational markets. Keep on dancing, dancing, dancing in Wall Street circa 2017’s answer to Studio 54 lest you find yourself rejected and subjugated to boogying down at the Crisco Disco.

@dimartinobooth, Danielle DiMartino Booth, Fed Up: An Insider's Guide to why the Federal Reserve is Bad for America, Money Strong LLC, economy, federal reserve, William Safire

Channeling Safire: “If it’s broke, fix it.”

Bert Lance must have left office thinking his legacy was in the soup.

Instead, the wise words of one of the country’s shortest-serving Directors of the Office of Management and Budget would go on to first merit inclusion in Random House’s Dictionary of Popular Proverbs and Sayings and then today, Google status. The expression, “If it ain’t broke, don’t fix it,” achieved such acceptance, conservative legend William Safire would go on to crown Lance’s idiom, “a source of inspiration to all anti-activists.”

For Safire, a gifted word spinner if there ever was one, his acknowledgement of pith perfected in no way implied admiration of the source. Indeed, Safire’s crowning glory as a New Yok Times columnist arrived with his 1978 Pulitzer Prize for “Carter’s Broken Lance.” …

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