vineri, 6 februarie 2015

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

America, Watch Closely! Wayne County Careens Towards Bankruptcy; Detroit Pensioners Claim "We Wuz Robbed"; This Too Will Spread

Posted: 06 Feb 2015 12:19 PM PST

Just as Detroit is coming out of bankruptcy, the entire county is about to go under.

This will be especially aggravating because Detroit pensioners are already extremely upset with the pension haircuts they received.

In the "too late to complain now" category, Wayne County now seeks to overturn the Detroit bankruptcy settlement. Lawyers will have a field day with this setup.

Cries of Betrayal

Crain's Detroit Business reports Pension Cuts, Interest Paybacks from Bankruptcy Prompt Cries of Betrayal.
Pension checks will shrink 6.7 percent for 12,000 Detroit retirees beginning in March. Making matters worse, many also must pay back thousands of dollars of excess interest they received.

It's a bitter outcome of Detroit's record $18 billion municipal bankruptcy for David Espie, 58, who will repay the city $75,000 in a lump sum while his $3,226 monthly pension is cut by $216.

As retirement costs swallow larger portions of U.S. city budgets, Detroit's bankruptcy plan resolved a pension crisis with creative strokes, though at a cost to retirees who thought their benefits were untouchable.

"I feel betrayed," said Espie, who may abandon plans to move to Alabama.

In addition to absorbing pension cuts, almost 11,000 retirees and current employees must repay an estimated $212 million in excess interest they accrued in a city-run savings plan, which is separate from the pension fund. The annuity plan guaranteed a 7.9 percent annual return even when the pension lost money, and employees also received bonus interest in some years.

They can either pay the money back in a lump sum or have it deducted gradually from their monthly pension check with 6.75 percent interest.

Henry Gaffney, 61, a retired bus driver, said he'll pay back $56,000 of the $300,000 he saved by deducting $428 from his monthly $3,100 pension check for 19 years. He said he pays $375 more for health insurance each month.

"I may have to find a part-time job," said Gaffney, former president of Detroit's bus-driver union. "I guess the city wants us to work until we're dead
Simple Math Lesson (Yet Again)

This just goes to show you: What cannot be paid, won't.

Hot Air Category

Here's one for the meaningless "hot air" category: Wayne County Threatens Detroit Bankruptcy Deal.
Wayne County is threatening to unravel a breakthrough deal that settled Detroit's bankruptcy case unless it receives land or more than $30 million — money the city needs to bankroll Detroit's revitalization.

The fight could undo a hard-fought bankruptcy settlement the city reached with its fiercest bankruptcy creditor, bond insurer Syncora Guarantee Inc.
Too Late

It's far too late to go whining about something approved months ago. Worse yet, Wayne County has far bigger problems.

Wayne County in Serious Financial Difficulty Over Pensions

On Thursday, Wayne County Executive Warren Evans went over the county's finances at a news conference.



His conclusion Wayne County Finances are in Trouble, Could Worsen.
Wayne County needs to close a $70 million budget deficit, shore up pension plans that are nearly $1 billion underfunded and keep its general fund from running out of money in 2016, county Executive Warren Evans said of a recent financial review.

Evans announced Thursday the county has averaged about a $50 million annual deficit over the past three years in its general fund budget, which had $49 million of pooled cash last September and could be in a liquidity crisis as early as August, before the fall property tax collection.

An independent financial outlook report prepared for the county by Ernst & Young LLP found that the nearly $500 million general fund is creating a $50 million to $70 million structural debt each year for the county, which already had $159 million accumulated budget deficit at the end of fiscal 2013.

But perhaps most critical is an $850 million unfunded liability in the defined benefit pension plans for the county, which had more than 2,000 full-time employees in 2014. Pension plan contributions, retiree health care costs and some debt service are expected to drain a combined $92 million from the general fund in fiscal 2015.

Evans said the county pension plans were 95 percent funded about 10 years ago, but were only about 45 percent funded in 2013 and are on pace to be 39 percent funded by around 2023 without corrective action.
Solvency Crisis

This is not a "Liquidity Crisis", it's a solvency crisis. Wayne County is bankrupt. The only solution is a bankruptcy filing followed by pension haircuts.

Pension Promises Not Sacrosanct

As I have stated many times, pension promises are not sacrosanct no matter how much unions pretend that they are.

Instead of fighting this, I suggest unions ought to figure out how to protect the pensions of the most people. Instead, they will likely engage in futile time-wasting fights only have a unilateral, across-the-board pension solution imposed by the courts.

My idea, which will be quickly discarded by the unions, is to quickly agree to a plan that caps benefits at some level so that haircuts do not fall most on those who get the least.

America Watch Closely!

America, please watch closely. What's happening in Michigan, won't stay in Michigan! 

In spite of this massive rally in both stocks and bonds, Wayne County pension assets have declined, and are on a pace for that decline to continue.

Any turndown in stocks and bonds will crush pension plans across the country. This will get very serious, very soon.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Diving Into the Payroll Report: Wages Rebound (But Don't Get Too Excited), Revisions, Huge Jump in Labor Force

Posted: 06 Feb 2015 10:21 AM PST

Initial Reaction

Wages rebounded from the dip last month (but don't get too excited as per details below). Also, there were big upward revisions to many prior numbers.

The unemployment rate rose this month because of a huge increase in the labor force. The civilian institutional population also leaped this month, and apparently these newly-found people are all looking for work.

In yet another anomaly, unemployment rose by 291,000, but that was tempered by a rise in employment of 759,000.

This was certainly a strange report. Revisions are at the heart of it.

This is just one month, and the household data has been exceptionally volatile lately.

Revisions

  • November nonfarm payroll employment was revised from +353,000 to +423,000
  • December nonfarm payroll employment was revised from +252,000 to +329,000
  • With these revisions, employment gains in November and December were 147,000 higher than previously reported. 
  • Monthly revisions result from additional reports received from businesses since the last published estimates and the monthly recalculation of seasonal factors. 
  • The annual benchmark process also contributed to these revisions.

BLS Jobs Statistics at a Glance

  • Nonfarm Payroll: +257,000 - Establishment Survey
  • Employment: +759,000 - Household Survey
  • Unemployment: +291,000 - Household Survey
  • Involuntary Part-Time Work: +20,000 - Household Survey
  • Voluntary Part-Time Work: +92,000 - Household Survey
  • Baseline Unemployment Rate: +0.1 at 5.7% - Household Survey
  • U-6 unemployment: +0.1 to 11.3% - Household Survey
  • Civilian Non-institutional Population: +705,000
  • Civilian Labor Force: +1,051,000 - Household Survey
  • Not in Labor Force: -354,000 - Household Survey
  • Participation Rate: +0.2 at 62.9 - Household Survey

January 2015 Employment Report

Please consider the Bureau of Labor Statistics (BLS) November 2014 Employment Report.

Total nonfarm payroll employment rose by 257,000 in January, and the unemployment rate was little changed at 5.7 percent. Job gains occurred in retail trade, construction, health care, financial activities, and manufacturing.

Click on Any Chart in this Report to See a Sharper Image

Unemployment Rate - Seasonally Adjusted



Nonfarm Employment January 2011 - January 2015



Nonfarm Employment Change from Previous Month by Job Type



Hours and Wages

Average weekly hours of all private employees was stationary at 34.6 hours. Average weekly hours of all private service-providing employees was flat at 33.4 hours.

Average hourly earnings of production and non-supervisory private workers rose $0.07 to $20.80. Average hourly earnings of production and non-supervisory private service-providing employees rose $0.08 to $20.61.

Last month we reported wages of both categories declined by $0.06. In effect, this month wiped out last month's losses and a bit more.

Let's look at this another way. Since November, Average hourly earnings of production and non-supervisory private workers rose $0.03, from $20.77 to $20.80 (a penny and a half a month).

Since November, average hourly earnings of production and non-supervisory private service-providing employees rose $0.04 from $20.57 to $20.61 (2 cents a month).

From this perspective, wages are rising about 1% a year.

For discussion of income distribution, please see What's "Really" Behind Gross Inequalities In Income Distribution?

Birth Death Model

Starting January 2014, I dropped the Birth/Death Model charts from this report. For those who follow the numbers, I retain this caution: Do not subtract the reported Birth-Death number from the reported headline number. That approach is statistically invalid. Should anything interesting arise in the Birth/Death numbers, I will add the charts back.

Table 15 BLS Alternate Measures of Unemployment



click on chart for sharper image

Table A-15 is where one can find a better approximation of what the unemployment rate really is.

Notice I said "better" approximation not to be confused with "good" approximation.

The official unemployment rate is 5.7%. However, if you start counting all the people who want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is in the last row labeled U-6.

U-6 is much higher at 11.3%. Both numbers would be way higher still, were it not for millions dropping out of the labor force over the past few years.

Some of those dropping out of the labor force retired because they wanted to retire. The rest is disability fraud, forced retirement, discouraged workers, and kids moving back home because they cannot find a job.

For further discussion of a more accurate measure of the unemployment rate, please see Gallup CEO Calls 5.6% Unemployment Rate "The Big Lie": What's a Realistic Unemployment Rate?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Sowing Inflation, Reaping Deflation

Posted: 06 Feb 2015 12:52 AM PST

I received several requests to comment on an article written by Antal E. Fekete entitled the Counter-Productive Monetary Policy of the Fed.

The subtitle of his article is "Sowing Inflation, Reaping Deflation". It's 16 pages long and not an easy read.

In general terms, I agree with Fekete. Without a doubt Fed policy is counter-productive, for many reasons, some of which Fekete does not even mention.

  • The Fed creates bubbles of increasing amplitude over time.
  • The Fed fosters speculation with moral-hazard bailout policies.
  • Fed policies benefit those with first access to money, namely the banks, government, and the already wealthy, at the expense of everyone else.
  • The Fed is largely responsible for rising income inequality that even the Fed complains about.

Here's a couple of paragraphs from Fekete's article that caught my eye.
My thesis that falling (as distinct from low but stable) interest rates destroy capital across the board is admittedly controversial. I would welcome its examination 'without fear and favor' by a competent and unbiased panel that could also examine the superiority of "self-liquidating credit" over credit based on government debt (that could be called, tongue-in-cheek, "self-perpetuating debt"). We shall look at three destructive effects of a rate cut: (a) the increase in the liquidation value of debt, (b) labor's deteriorating terms of trade, (c) the fading of depreciation quotas.

The proposition that the bond price varies inversely with the rate of interest is uncontroversial and universally accepted by friend and foe alike. It describes the effect from the point of view of the credit or. Curiously, people find it hard to comprehend the equivalent proposition describing the very same effect from the point of view of the debtor, namely, that the liquidation value of debt also varies inversely with the rate of interest.

In particular, a rate cut increases the cost of liquidating debt before maturity. Liquidation value is what the debt or must pay if he wants to retire his debt ahead of schedule. As this liquidation value is now higher, falling interest rates make the burden of debt increase. For example, if the rate of interest is cut in half, then according to the rule of thumb the liquidation value of long term debt is doubled (that is, to liquidate the debt will cost twice as much as it did before the cut).
"If the interest rate is cut in half, to liquidate the debt will cost twice as much."

Let's discuss that last sentence.

I asked my friend Keith Weiner if he could explain what Fekete was saying.

He replied ...
Compute the present value of a stream of payments. Suppose you must pay $100 a year for 10 years. The net present value is not simply $100 X 10 = $1,000. Each future payment must be discounted using the prevailing interest rate. If the rate is 10%, then we get the sum of the series: $90 + $81 + $72.90 ... = $586. If the interest rate is cut in half to 5%, then the sum of the series is $762.

"Ahah!" you say. "That's not double." No, a 10-year bond does not double with a halving of the rate. A perpetuity bond does.

Another point Fekete makes is that in irredeemable paper money, debt is never extinguished. The currency itself, the dollar, is just an IOU (it's a slice of the government's debt). When you paid in gold, the debt went out of existence. But when you pay in dollars, you only shift the debt around. All debt should therefore be treated as perpetual.

There is a practical side of this, where the rubber hits the road. Suppose you borrow $1M to build a restaurant, at 10% interest. Then the rate is lowered to 5%. A competitor can build the same level of store and have a lower payment. Or he can build a more opulent place and have the same payment.
Fed Poison

Keith discussed the above points in detail on a Forbes article he wrote The Fed Poisons The Stock Market.

The problem I have with Fekete's model is I'm a practical guy.

While I agree debt is a slice of a government IOU, and that every piece of paper is an IOU, debts between people and corporations can be extinguished. Keith understands this as well; we discussed it on the phone.

So let's return to the statement once more "If the interest rate is cut in half, to liquidate the debt will cost twice as much."

Start with an interest rate of say 1%. It will cost twice as much if the rate drops to 0.5%. Twice as much again to 0.25%. Twice as much again to 0.125%. etc. etc.

There is an infinite number of times one could halve the interest and never get to zero. In the process, the debt would supposedly cost infinitely more to pay off.

Instead of halving the rate, let's suppose the Fed just cut the rate to zero. Then what would happen if the Fed hiked?

A curious thing would happen in Fekete's model. It would not matter whether the Fed hiked the rate to .1%, 1%, or 100% because a zero-divide situation would occur and any move off zero would make it infinitely less costly to pay off.

Let's not confuse a percentage change in a theoretical perpetual bond, with real-world experiences in which one can pay back debt, one can refinance, and one cannot (yet anyway) get a perpetual bond.

In the real world, slashing interest rates in half from 8% to 4% is a big deal. Cutting interest rates from 0.2% to 0.1% is meaningless although both theoretically double the liquidation value.

There is a real world aspect worth mentioning that I believe both Fekete and Weiner would agree with: The lower the Fed pushes interest rates, the more debt ends up in the system. The aggregate debt does become harder and harder to pay off, and it makes it harder and harder for the Fed to hike.

We are rapidly approaching a point where central banks in general will find it impossible to hike, even if they wanted to. Japan is at that point already.

Acting Man Chimes In

I pinged my response to Pater Tenebrarum at the Acting Man blog. He chimed in with similar thoughts. To his reply I added a few of my thoughts, inline, in braces ...
Some bonds are 'callable', which means they can be redeemed at par prior to maturity. But whether bonds trade at a premium due to declining yields-to-maturity or a discount due to rising yields-to-maturity's is largely an accounting artifact from the point of view of a corporation. They will simply let the bond mature, and replace maturing debt with new debt at lower rates.

What I believe is more important and actually does actively destroy capital is the fact that central bank manipulated interest rates no longer properly reflect society-wide time preferences. Instead, they give a wrong signal to entrepreneurs [also households, and corporations] that there are more savings available than there really are.

Investment in long-term projects in the higher stages of the productive structure is encouraged - in spite of the fact that the amount of "free capital" (the economy's pool of real funding) is not sufficient to bring these projects to a successful conclusion. Fracking is a recent example. [The housing bust is a classic example in which, thanks to the Fed, speculation rose so much there appeared to many to be a shortage of housing!]

In essence, however, Fekete is actually saying the same thing, only in a more roundabout or different fashion.
Conclusion

I don't think it's valid to put mathematical formula to this mess as the math gets pretty screwy as one approaches zero.

And as a practical matter, perpetual bonds don't quite exist. Consumer and corporate debt can be extinguished even if the dollar itself is debt. Secondarily, as bubbles get bigger, I propose the damage caused by the Fed isn't even linear.

The important point is that the Fed's monetary policy is extremely counterproductive. Fekete, Weiner, Tenebrarum, and I are all in agreement on that key essential point.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.
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