DiMartino Booth, Federal Reserve, Jay Powell

POWELL ON POWELL — A Deep Dive into 2012’s FOMC Transcripts

It’s official…for a second time around. At least that’s what the CNBC headline said: Fed Chair Nominee Jerome Powell Wins Approval (Again) of Senate Banking Committee. It would seem the esteemed Committee is challenged by expiration dates, which could give one pause as it pertains to dairy products and such. Though the members voted on December 5th to approve Powell’s nomination, it would seem the expiry date came and went on December 31st.

For the record, Senator Elizabeth Warren was the only committee member to vote against Powell’s nomination…again. The full Senate now has all of 16 days to confirm Powell before Janet Yellen’s term ends on February 3rd.

At the risk of stating the obvious, time could be of the essence. While it’s true that the ink has yet to dry on the acclamatory, congratulatory and laudatory approbations of the Yellen mini-era, we might not want to risk even one day without a warm body chairing the Federal Reserve Board.

According to one veteran hedge fund manager, today resembles neither 1987 or 1999. What does this say of what’s to come, of the markets’ fate? One thing is for certain. If Jay Powell is confirmed, he’s going to find out.

To say that a den of cynics lays in wait, hoping for Powell’s failure is kind. Consider the very first Twitter reply to the posting of a Business Insider article about the world’s nine wealthiest men having a combined net worth that exceeds that of the poorest four billion.

I tweeted out the following: “I’ll repeat this until I’m blue in the face. Inequality will morph from a socioeconomic to a macroeconomic issue and boomerang back with a vengeance. And I’m a proud card-carrying capitalist if there ever was one.”

The first reply: “End the Fed and all other Central Banks.”

The public, it would seem, is taking no prisoners. The gig is up that trillions upon trillions of dollars of quantitative easing have accomplished one thing – they’ve made the rich richer. Let’s be clear, that’s a gross oversimplification. But the Pavlovian and vitriolic reaction to any mention of inequality nevertheless induces howls from the masses who lay the blame for the yawning gap that’s opened up between the proverbial have’s and have not’s squarely at central bankers’ doorsteps.

Meanwhile, despite my own fears that the cryptocurrency craze could infect the FANG stocks if Bitcoin did something like halve, all seems to be fine in the major indices. In fact, as Bleakley Advisory Group’s Peter Boockvar points out, if we manage another three days without a 5% correction in the S&P 500, history will have been made, as in the longest winning streak of all time. Is it any wonder the Goldman Sachs Financial Conditions Index is at the lowest since 2000?

And yet, the long end of the yield curve seems incapable of responding with anything more than a Heisman to the insistent laundry list of reasons long-maturity Treasury yields should be rising – climbing deficits leading to greater supply, razor-thin risk premiums, producer prices bubbling over. At last check, the 10-year yield registered 2.56% to the 2-year’s 2.04%. Correct me if I’m wrong, but that 52-basis-point differential is within a hair of the flattest curve we’ve seen for the better part of a decade.

Add them up – a grassroots campaign calling for your failure, risky assets gone wild, a bond market that’s double-daring you to hike into building inflationary pressures, oh, and, just for good measure – no historic precedent. How would you like to be Jay Powell?

The good news is that Powell understands every single aspect of what’s to come. His CV suggested as much, but it wasn’t until I dove into the freshly-released 2012 FOMC transcripts that I was sure. Especially after reading his words, I reiterate my contention that Powell is no clone of any of his predecessors. With that, I invite you to enjoy the fruits of my painstaking parsing of the transcripts in this week’s newsletter, POWELL ON POWELL: A Deep Dive into 2012’s FOMC Transcripts.

A personal aside. I was able to catch up with my best friends from New York over the long weekend in beautiful La Jolla. It had been over three years. Let’s just say that was too long a stretch. Sometimes Facetime just doesn’t cut it. Do yourself a favor before the new year sweeps you away, and schedule a time to catch up face-to-face. You’ll thank me for it.

Hoping you too enjoyed your long weekend and wishing you well,




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Danielle DiMartino Booth, TOPTEN2017

Money Strong Top Ten 2017 — Make That Top 11 #NeverForget

Money Strong Top 10 — 2017

Make That Top 11 #NeverForget

Many of us have just sung the most popular song in the world, Happy Birthday, albeit it in varying forms, dialects and venues. Color me sentimental, but Stille Nacht, or Silent Night to you and me, stirs the spirit and celebrates Jesus’ birthday as no other. I even have a favorite line from the Austrian poem cum smash hit hymn Franz Xaver Gruber wrote in 1818 – “With Dawn of Redeeming Grace.” In a world tragically bereft of grace, regardless of your religion, what could possibly best rising with the sun to find grace itself redeemed?

With that happy and hopeful thought in mind, it is time we look forward by looking back, which we achieve by singing the world’s second most popular tune, Auld Lang Syne. In 1788, Robert Burns sent the song to the Scots Musical Museum with the disclaimer that he was merely recording what he knew to be an ancient song. In exchange for being the first to put pen to paper, Burns is often credited as its author. If nothing else, he deserves props for taking the initiative that resulted in the introduction of the song and its translation into countless languages worldwide.

Auld Lang Syne is tough to translate but the song’s essence defines simplicity – we must look back at the year’s events to honor all of those we hold dear. Readers of Money Strong certainly qualify. The inspiration, feedback – both kind and constructive, and encouragement give me the courage to write to my best ability week in and week out. As we ponder what 2018 holds, tradition dictates that I share with you the newsletters from the prior year that have resonated the most with none other than you.

With ado, I add that #11, Angels Manning Heaven’s Trading Floor, was for a third year running the most read weekly newsletter. I cannot express enough pride in sharing that with you. I am also linking my favorite version of Auld Lang Syne, sung in haunting beauty by Mairi Campbell and featured in this video clip from Sex and the City, a show that captures my years in New York, years on which I often look back with a smile on my face and a tear in my eye. With that, I give you 2017’s Money Strong Top 10 List.


1.  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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2.  The Labor Market: The End of the Innocence?

One of the first of life’s lessons we all learned is that we need not rush life; it will do that for us and in the end against our will. The inspiration for this wisdom could well have sprung from Ecclesiastes wherein we read these peaceful words: To every thing there is a season, and a time to every purpose under the heaven. Co-writers Don Henley and Bruce Hornsby embraced the spirit of this message as the 1980s were coming to a close. You must agree 1989’s The End of the Innocence, that haunting and mournful ballad, was just the coda needed to move on to the last decade of the last century.

“Let me take a long last look, before we say goodbye,” the song asks of the listener who can’t help themselves but to listen.

Many veteran investors, those who don’t need to be reminded about the Reagan era because they were there, may be feeling a bit more wistful as they peer over the horizon. They have lived through extraordinary economic times and maybe even recall the early 1970s, the last time initial jobless claims were at their current historically low levels. They know, in other words, this can’t go on forever, that we are nearing the end of our own innocence.

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ATLAS STUMBLES Inequality and Macroeconomics at a Crossroads, DiMartino Booth, Federal Reserve, Money Strong
3.  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.

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DiMartino Booth, Big Boys, CRE, Money Strong, Fed Up

4.  The Big Boys of Summer

Do you feel it in the air? Is summer out of reach? Many of us came of age, or thought we did, the first time we heard Don Henley’s mega-hit The Boys of Summer, released in October 1984. But can a song be reincarnated to mean even more? Can one brush with destiny change everything? This week more than any other, it’s right and true to look back and answer that question in the affirmative.

For those of us in New York 16 years ago, September 12th and 13th stretched on for many more than the 24 hours the clock conveyed. It wasn’t until the early morning hours of the 14th, when Dick Grasso announced the New York Stock Exchange would remain closed through the weekend, that many of us were released, on many levels. Walking the beach that weekend, looking for signs in the sand, Henley’s mournful song stopped me in my tracks. “Those days are gone forever” forever took on new meaning.

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The Smell of Dry Paint in the Morning, Danielle DiMartino Booth, Money Strong LLC

5.   The Smell of Dry Paint in the Morning

Irish Playwright Oscar Wilde defied Aristotle’s memorable mimesis: Art imitates Life. In his 1889 essay The Decay of Lying, Wilde opined that, “Life imitates Art far more than Art imitates Life.” Jackson Pollock, the American painter, aesthetically rejected both philosophies as facile. We are left to ponder the genius of his work, which in hindsight, leaves no doubt that Art intimidated Life.

Engulfed in the flames of depression and the demons it awakened, Pollock’s work is often assumed to have peaked in 1950. The multihued vibrancy of his earlier abstract masterpieces descends into black and white, symbolically heralding his violent death in 1956 at the tender age of 44. Or does it? Look closer the next time you visit The Art Institute of Chicago. Greyed Rainbow, his mammoth 1953 tour de force, will at once arrest and hypnotize you. As you struggle to tear your eyes from it, you’ll ask yourself what the critics could have been thinking, to have drawn such premature conclusions as to his peak. Such is the pained beauty of the work. Rather than feign containment, the paint looks as if it will burst the frames’ binding. And the color is there for the taking, if you have the patience to slow your minds’ eye and see what’s staring back at you.

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Investing Now & Then: A Panoply of Parallels, DiMartino Booth, Money Strong, Fed Up
6.  Investing Now & Then: A Panoply of Parallels

So much for “ghoulies, ghosties and long-leggedy beasties” having a monopoly on “things that go bump in the night.”  No longer is this classification reserved for things that taunt, tantalize and toy with our terrors as that traditional Scottish poem first invaded our minds. Earlier this summer, some avid astronomers, tasked as they are with mapping out the infinitely capacious celestials, literally stumbled upon a distinctly different sort of bump in the night. A mysterious ‘cold spot’ sighted telescopically might actually be a bruise of sorts, “the remnant of a collision between our universe and another ‘bubble’ universe during an earlier inflationary phase.”

Such a discovery would strip the ‘uni’ right out of universe landing us smack dab in a ‘multiverse’ in which all conceivable outcomes are playing out at once in a layered rather than singular reality. In the event this panoply of parallel possibilities has left your brain in a painful pretzel, ponder not another moment. The jury is in and the verdict is parallel universes in quantum mechanics and the cosmos alike are unanimously unproven.

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The Buford T. Justice Job Market, Danielle DiMartino Booth, Money Strong, Fed Up

7.  The Buford T. Justice Job Market

Never in the history of filmmaking has artistic license paid off so handsomely.Of course, comic legend Jackie Gleason was no schlep in the world of thespians. Odds were high he would deliver a handsome return on stuntman cum director Hal Needham’s investment. And while it’s no secret there would have been no directorial debut for Needham had his close friend Burt Reynolds not agreed to be in the film, it was Gleason’s improvisation that made the Smokey and the Bandit the stuff of legends.

Though Gleason’s character’s name screams ‘surreal,’ the stranger than fiction fact is that Reynolds’ father was the real life Chief of Police in Jupiter, Florida who just so happened to know a Florida patrolman by the name of Buford T. Justice. The treasure trove of quotes from the film’s tenacious Texas Sherriff Buford T. Justice, who so tirelessly pursues the Bandit in heedless abandon over state lines, elicited nothing short of laugh-out-loud elation from anyone and everyone who has ever feasted on the 1977 runaway hit (it was the year’s second-highest grossing film after Star Wars).

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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,

8.  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.

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The Art of Trade Warfare, Danielle DiMartino Booth, Money Strong LLC

9.  The Art of Trade Warfare

For a moral compass, many look to the Bible. For political directives, Machiavelli’s succinct and direct The Prince. But for matters of war, the Chinese have a lock; they’ve literally raised the wisdom guiding generals engaged in battle to an art form. Here is a but a sampling from the Top 500 List of quotes from Sun Tzu’s fifth century masterpiece, The Art of War:

“Appear weak when you are strong, and strong when you are weak.”

“Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat.”

“The best victory is when the opponent surrenders of its own accord before there are any actual hostilities… It is best to win without fighting.”

“The general who advances without coveting fame and retreats without fearing disgrace, whose only thought is to protect his country and do good service for his sovereign, is the jewel of the kingdom.”

“All warfare is based on deception.”

Speed is the essence of war. Take advantage of the enemy’s unpreparedness; travel by unexpected routes and strike him where he has taken no precautions.”

The essence of the last two quotes is what has many market watchers on tenterhooks as Inauguration Day and the Chinese yuan sporting a seven-handle fast approach. For those of you following the Vegas odds, January 20th is sure to mark both Trump’s taking office and the yuan falling to 7-something, as if they’re somehow in simpatico and synched at the hip.

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

10. 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.

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9/11, Danielle DiMartino Booth, Money Strong, Fed Up

11.  Angels Manning Heaven’s Trading Floors

He could have passed for Yul Brynner’s twin if it wasn’t for those eyes. He was 57 years old, 6’2” tall, tan and handsome with a shining bald head. But his eyes, those elfish eyes dared those around him to partake of anything but his infectious happiness. It was those eyes I will never forget.

It was Labor Day weekend, 2001. One of my best friend’s college buddies from UCLA was in town and his uncle had a boat. So we had the good fortune to be invited to take a cruise around Shelter Island on that long holiday weekend 16 years ago. I was 30 years old at the time and I can tell you there was no “boat” about this Yul Brynner look-a-like’s 130-foot yacht. The crystal champagne flutes, the hot tub on the deck, the full crew – none of these accoutrements faintly resembled the boats I’d been on as a middle class girl spending summers off Connecticut’s stretch of Long Island Sound. The thing is, our friend’s uncle was none other than Herman Sandler, the renowned investment banker and co-founder of Sandler O’Neill.

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FINDING NEOM, DiMartino booth

Finding Neom: The Future of Black Gold

Sometimes you have to lose nearly everything to focus your attention on what’s most important, even if you’re a clownfish.

But then it’s not every day a barracuda massacres your entire family, save one damaged egg. Lucky for all us moviegoers, it was Nemo who eagerly emerged from that egg, the big screen’s most beloved orange-striped fish, damaged right fin and all. Not surprisingly, such trauma drove Nemo’s father to helicopter parenting, to the extent such proclivities are possible…underwater…on the Great Barrier Reef. On the other hand, anything is conceivable in animated features. Such was the case nearly 15 years ago with Disney’s release of Finding Nemo.

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DiMartino Booth, China, Policy, Economy

Dim Sums: A Fork in the Silk Road

Two centuries before Christ and millennia before truck stops, there was Dim Sum along the Silk Road. What, after all, could possibly best tea houses with nibbles to break the monotony of a 4,000-mile journey from Xi’an to the Mediterranean and back?

The tradition of Dim Sum is rooted in the revelation that drinking tea helps the digestion process, which prompted the introduction of bite-sized dishes to stand as accompaniments. It’s easy enough to envision the warm feeling those beckoning tea house silhouettes over the horizon elicited, the same sensation stimulated by the Golden Arches today.


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THREEofTHREE, Danielle DiMartino booth, Money Strong

Pricing in Perfection: Three out of Three?

We know two out of three ain’t bad. Does that render three out of three perfection itself? The history of the number three certainly suggests that to be the case. Little did we know that three is the first number bequeathed ‘all-encompassing’ status.

True Triads come in many familiar forms including the Father, Son and Holy Spirit; the beginning, middle and the end; the heaven, earth and waters; the body, soul and spirit; and last but certainly not least — life, liberty and happiness.

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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.

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

In Case You Missed It — July 28, 2017

Dear friends,

Calling turning points can be a fool’s game. But there is something to be said for the deathly quiet we’ve seen in the jobs market. Jobless claims volatility is at a postwar low even as companies have begun to cite cost cutting as the major driver behind job cut announcements. Is that ‘something’ finally about to give in this recovery that has left so many behind?

I’d love your feedback on my latest Bloomberg Prophets column, linked here:

Bloomberg Prophets — Like Markets, Jobs Are Due for a Jolt
Volatility for labor has reached its lowest in postwar history. What’s next?

I was also in New York ever so briefly as it was the day Fed officials met. Janet Yellen et al took the opportunity of a lame duck meeting to toughen up their language on Quantitative Tightening despite there being np press conference to explain themselves.

Will the Fed begin to shrink its mammoth balance sheet as early as September? Will the opposite of Quantitative Easing have no effect at all on markets? We will all tune in to FedSpeak in the weeks and months to come. The debate will no doubt continue to rage on.

You may be asking why I included a Bill Gross segment. As I was informed shortly after I left the set, CNBC’s Brian Sullivan gave self-deprecation new meaning when he claimed he was not as smart as me. I can assure you after many interviews sitting to his left, Brian is one smart cookie and a might bit smarter than yours truly.

A Few TV Stops in New York on Fed Day

Expert: Fed Fires ‘Shot Across the Bow’ on Balance Sheet Reduction
CNBC The Fed — Danielle DiMartino Booth

No One Knows How the Markets Will React to the Federal Reserve’s ‘Quantitative Tightening’
The Street — Danielle DiMartino Booth

Fed is Shifting its Focus to Balance Sheet Reduction instead of Interest Rates
CNBC The Fed — Bill Gross

On a personal note, I am delighted so many of you have subscribed. Next Wednesday marks the onset of a new journey and I am gratified to have you along. Bottoms up, friends and new subscribers! I raise my glass to you!

If you have not yet subscribed, please email subscription@dimartinobooth.com and type ‘Subscribe’ in the title line.

This weekend and next, wishing you well,



DiMartino Booth, Fed Up, Will Corporate Bonds Cross Over?

Will Corporate Bonds Cross Over?

It started out kinda ‘Crazy,’ in 1961 to be exact. A 20-something-year-old bass player by the name of Willie Nelson had written a song which he generously offered up to country singer Billy Walker. Walker, however, perceived the lilting lyrics to be a bit too feminine, so he passed. The late Patsy Cline would be forever grateful to Willie for ‘Crazy,’ which she sultrily sang to stardom, and in doing so, founded a movement.

We’re familiar with what followed, from the hobo portrayed as ‘King of the Road’ to the petulant moment, ‘The day my momma socked it to the Harper Valley PTA.” Even the most vacuous pop music acolytes couldn’t help but to let Olivia Newton John know they loved her. Did they ever let her know! And who didn’t want to emulate Glenn Campbell? Even those 1975 disco divas velvet-roping at Studio 54 dreamed of landing the perfect Rhinestone Cowboy.

Year in and year out, Crossover Country hits made traitors of pop purists. Even Willie finally got his mainstream due, with 1982’s No. 5 pop chart hit, “Always on my Mind.” It wasn’t until 1983, when Dolly Parton & Kenny Rogers met on “Islands in the Stream,” taking the hit all the way to No. 1 on the charts, that crossover crossed back over to strictly Country terrain.

And now there is Sam Hunt. Never heard of him? Chances are you can recite a line or two from ‘Body Like a Back Road,’ Hunt’s Crossover Country megahit that recently landed at No. 6 on the Billboard 100. Even if you choose to be obtuse about what the song is about, you can’t help but roll the windows down and sing about “Doin’ 15 in a 30.”

That is, unless you’ve recently hit our country’s byways and all but screamed at that infuriating Sunday driver who only adheres to half the law, that is, doesn’t comprehend Slower Traffic Keep Right (!)

Unbeknownst to unassuming corporate bond holders, they too will soon be forced into the slow lane. For the moment, the vast majority fancy themselves that equally exasperating driver who won’t get out of the fast lane, determined to bully their way to their damned destination. As for the perils of tailgating, they’re for the other guy, the less agile driver with rubbery reflexes.

That’s all good and well and has been for many years. Bond market fender benders are nearly nonexistent. The question is: Will central bankers worldwide turn placid parkways into highways to hell as they ‘remove accommodation,’ to borrow from their gently genteel jargon? That’s certainly one way to interpret Federal Reserve Chair Janet Yellen’s latest promise to shrink the balance sheet ‘appreciably.’

Care for a translation? How easily does “Aggressive Quantitative Tightening” roll off the tongue? Perhaps you’ve just bitten yours instead.

Enter the International Monetary Fund (IMF), The Institute of International Finance (IIF), The Bank of International Settlements (BIS), and by the way, the Emerging Markets complex including and especially China.

As a former central banker, it is with embarrassing ease yours truly can bandy about fantastic figures. No surprise that nary an eyebrow was raised at the latest figures out of the IIF that aggregate global debt is closing in on $220 trillion, as touched on last week. Consider that to be the broad backdrop.

Now, narrow in on the IMF’s concerns that financial stability could be rocked by a rumble in US corporate debt markets. Using firms’ capacity to service their debts from current earnings as a simple and elegant yard stick, the report warned that one in ten firms are failing outright.

The last two years of levering up have exacted rapid damage: earnings have fallen to less than six times interest expense, this during an era of unprecedented low interest rates. And as record non-financial debt as a percentage of GDP quickly approaches 50 percent, the share of income required to service this mountain is at a seven-year high. Should financial conditions tighten (the report was published in April prior to the Fed’s June rate hike), one-in-five firms are likely to default, which rises to 22 percent if rates continue to rise.

A separate signal of distress flickers into focus when one considers the sectors most at risk. Add up energy, real estate and utilities and you get to about half of the at-risk debt. And we wonder why Boston Fed President Eric Rosengren is perturbed about commercial real estate (CRE) and the risks it poses to the banking system.

A few bullets on CRE:

  • Smaller banks with less than $50 billion in assets hold $1.2 trillion of the $3.8 trillion in outstanding CRE debt. Larger banks are relatively less exposed, with $767 billion. This begs the question why the Fed chose this year to not stress test the smaller banks?
  • Bank holdings of CRE have risen nine percent over the last year; multifamily is up 12 percent.
  • Despite skyrocketing rents, multifamily prices have risen so much faster that “cap” rates (net operating income divided by the property price) have sunk to a 16-year low.

Why deviate to a CRE chit-chat in the middle of a corporate bond discussion? In so many words, financing is financing. Whether it’s the capital markets the Fed has kept wide open or banks, companies need access to sources of leverage, especially in times of need and extra especially in times of illiquidity. Stressed smaller banks in particular will be inhibited in their ability to extend lifelines to smaller companies in the coming years.

Speaking of illiquidity but not of small banks, over the past seven years, assets on the biggest banks’ balance sheets have fallen from $5 trillion to $3 trillion. Zero in on corporate bond inventories and you find that dealer holdings have collapsed by 75 percent since the onset of the financial crisis.

Who’s taken up the slack? Whom, pray tell, do you, Joe Q Bond Fund Manager, ping when you need to offload a few billion in bonds? Let’s just say the nontraditional entrants who provide bond market liquidity during the next rout won’t be nearly as polite when it comes to maintaining market stability and pricing. They might even behave a bit like vultures. The more you need to sell, the lower the price.

For this neat noose secured round our necks, we have the regulators to thank. Will bond investors sing along to the greatest hit that has yet to be released by those Rocking Regulatory trio of Dodd, Frank & Basel? Tossing tomatoes onto the stage will more likely be the case.

In the event you’ve begun to sweat, you might want to reach for more than a Kleenex. In a normal world, the bulk of the risk inherent in owning bonds was credit-related. But years of distortive low-interest rate policy have flipped bonds’ risk/return dynamic on its head. Using Barclays US-dollar Aggregate Corporate Bond Index, ‘duration’ now accounts for 90 percent of the risk of holdings bonds, with the balance related to credit; that’s up from 37 percent in 2013. Think of duration as your bonds’ sensitivity to interest rate risk. Kind of gives a whole new meaning to no sudden moves.

Thank heavens for geographic diversification? Ah, you must refer to those essential emerging markets (EM) bond holdings, a must have for any discerning investor. No doubt, they’re the ‘it’ girl. Dollar-denominated EM debt sales were already up 160 percent through May over 2016 to $160 billion, marking the fastest annual start to the year since 1999.

Let’s just say the Bank of International Settlements (BIS) isn’t quite so enthusiastic. The BIS is often referred to as the central bank to central banks. In its estimation, there is a total of $3 trillion in dollar-denominated EM credit worldwide. The BIS’ chief economist Claudio Borio warned in the BIS’ recently released annual report that, “dollar funding remains a potential pressure point in the international monetary and financial system.”

The IMF concurred, warning that in a tightening environment, “the weak tail of emerging economy firms” would be highly vulnerable. The report added that, “A sustained reversal of capital inflows would put pressure on countries with high external financing and/or low reserve adequacy.”

At least China’s got that going for it, as in $3 trillion in foreign reserves. The problem is that only a trillion is considered to be truly liquid, while another trillion is earmarked to build that expanse of infrastructure connecting China to the western world once and for all. After all, you don’t become dominant by being isolationists. Oops, well you get the point.

The BIS estimates that Chinese corporate debt is 169 percent of its GDP. Would you believe that eye-watering and disconcerting figure is realistically on the light side? My good friend Leland Miller sagely suggests one apply the apropos grain of salt to what Chinese statisticians generously refer to as ‘GDP.’ So round down the denominator, way down. Add in the fact the corporations might not be fessing up to what their liabilities really are (who wants to be Debbie Downer?) and or never repay it so why report it? So round up the numerator, way up.

And, you guessed it, who in the world can say with any authority how buried in debt Chinese corporations are? So there’s that lovely black box to ponder.

The takeaway is that ‘bonds’ just ain’t what they used to be. Don’t be comforted by your broker telling you they help you diversify or that they carry bullet proof credit ratings. Sit him or her down instead and warn of the real risks of swollen durations, of bonds of all stripes slipping into rusty junkyards, of our portfolios’ safest holdings crossing over, and not in the good way those country hits do for us pop enthusiasts.

Do yourself a favor. Have a listen to Body like a Back Road. It’s easy enough to find in your car, on that mean machine at the gym, or wherever you prefer to slow down and have a listen. You’ll be grateful you did as summer drags on, closing your eyes and imagining the luxury of going 15 in a 30. It beats the heck out of what your bonds are apt to do when inclement weather hits, which will feel more like going 100 in a 50 on bald tires. And who wants to listen to that?

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.




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.