vineri, 8 mai 2015

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

Illinois Supreme Court Rules 2013 Pension Reform Law Unconstitutional; Chicago Teachers "Insulted by 7% Pay Hike Offer"

Posted: 08 May 2015 12:18 PM PDT

Pension news out of Chicago keeps getting worse.

In 2013, the Illinois legislature took a feeble stab at fixing some small aspects of the Illinois pension problem.

The legislation, signed by then Governor Pat Quinn reduced the 3 percent compounded cost-of-living adjustment for retirees established in 1989, raised the retirement age for workers 45 and under, and imposed a limit on pensions for the highest-paid workers.

That was a step in the right direction, albeit a small one.

2013 Pension Reform Unconstitutional

Today we learn the Illinois Supreme Court Finds 2013 Pension Reform Law Unconstitutional.
In a unanimous decision, the seven justices declared the law passed 18 months ago violates the state constitution because it would leave pension promises "diminished or impaired."

"In enacting the provisions, the General Assembly overstepped the scope of its legislative power. This court is therefore obligated to declare those provisions invalid," Justice Lloyd Karmeier said in writing the court's opinion.
Analysis

State rep Rep. Elaine Nekritz, D-Northbrook hits the nail on the head with her analysis. "In its ruling today, the Supreme Court struck down not only the law but the core of that balance. Now our already dire pension problem will get that much worse and our options in striking that balance are limited. Our path forward from here is now much more difficult, and every direction will be more painful than the balance we struck in Senate Bill 1."

Underfunding Just Got Worse

On Tuesday, I noted the dire state of Illinois pensions on CNBC with Rick Santelli. (See Chicago Board of Education to Default on Bonds? Rick Santelli and Mish Discuss on CNBC).

Here's a video clip.




Illinois pension underfunding estimates range from $130 billion to $200 Billion. Those numbers assume two things.

  1. The 2013 Legislation was constitutional
  2. Pension plan assumptions of 7% or more will be met

Assumption number 1 just went out the window. It is my strong belief that assumption number 2 will soon follow.

Expect Negative Returns

I expect returns in stocks and bonds over the next seven years to be negative! For further discussion as to why, please see Valuations: Maybe I am Crazy.

Chicago Teachers 'Highly Insulted' Over Request for 7 Percent Pay Cut

On top of the already mounting fiscal issues, and in spite of the fact the Chicago Board of Education has a $1.5 billion hole, Chicago Teachers 'Highly Insulted' Over Request for 7 Percent Pay Cut.
The Chicago Board of Education wants teachers, social workers and other union members to take a 7 percent pay cut by paying their own pension contributions, according to the Chicago Teachers Union.

CTU President Karen Lewis, who led her members to strike in 2012 for the first time in 25 years, accused CPS of being "broke on purpose" and of retaliating against the union for opposing the mayor in his recent re-election campaign.

"Once again, the board has created a fiscal crisis in order to justify its continued attack on our classrooms and communities. By citing its so-called $1.5 billion deficit, the mayor is proposing a reduction in teaching staff which will result in larger class sizes and the loss of teaching positions," Lewis said in a press release.

"The CTU is highly insulted," said union spokeswoman Stephanie Gadlin, who planned a press conference on Wednesday.
Union Alternate Universe

In what alternate universe is Karen Lewis living to believe this is a manufactured fiscal crisis?

How is a state that has a $9 billion budget deficit hole going to bail out a single school district that is $1.5 billion in the hole?

Give Taxpayers a Chance

Today's ruling more than ever shows the need to pass a bankruptcy law. I have been pushing for that as has Governor Rauner.

A May 5 Chicago Tribune editorial viewpoint said the same thing: Pass a Bankruptcy Law, Give Taxpayers a Chance.
Many people view bankruptcy as a "nuclear option" for local governments in Illinois — a bad choice that will only bring disaster. Actually, if we do it the right way, it may be the best path for averting true financial devastation in communities statewide.

Under federal law, state governments can't file for bankruptcy. Local governments can do so if their states give them permission. A bill now before the Illinois legislature would extend that permission to Illinois municipalities, most of which now can't seek protection under bankruptcy law.

First, it would bring opposing sides to the table to have meaningful discussions about how to save the borrower, in this case the local government, from financial ruin.

Second, the government could ask the bankruptcy court to modify labor contracts and order the parties to renegotiate the terms of collective bargaining agreements. Only a constitutional amendment can get this done right now (unless the Illinois Supreme Court declares otherwise in a pending case). [We saw the answer today]

Finally, a law that puts bondholders first in line to get repaid would be a stroke of fairness that would help Illinois cities, school districts and other local governments avert a short-term solution like Detroit's.

The bottom line is this. Illinois taxpayers deserve a fighting chance. For years elected officials have been avoiding their fiscal responsibility by applying Band-Aids instead of structural solutions. As a consequence, local governments across the state are close to broke, owing billions of dollars in unpaid bills, pensions and retiree health care liabilities.
Per Household Liabilities

Census QuickFacts shows there are 4,772,723 Illinois Households as of 2013. To be generous, let's round that up to 5 million.

Let's also ignore my dire prediction of negative gains for seven years while placing the underfunding level at $200 billion.

To make the funds actuarial sound, Illinois households need to come up with $40,000 each. If instead of assuming 7% returns one assumed 2% returns (yield on the 10-year bond), the hole is closer to $500 billion.

And what if the stock market dives 30-40% over the next two years as I believe likely?

Promises, Promises



Image from Sun Times. Jan. 3, 2013 photo, a "Pension Promise" sign is seen as Illinois state union members and supporters rally in support for fair pension reform in the at the Illinois State Capitol in Springfield Ill. | AP file

Dishonest Promise

A promise is a promise, not an eternity. Marriage is a promise as well.

And this promise was not even an honest one.

Contracts made under coercion and threats are not even valid. But even valid contracts can be broken. That is precisely why we have bankruptcy law instead of debtor's prisons.

In this case, corrupt politicians made bargains with corrupt union leaders at taxpayer expense. Unions further contributed to the mess with coercion and threats. Any sensible person knew these promises could not be met.

Sue For Divorce

The result of the unholy alliance between corrupt union leaders and corrupt politicians was a shotgun marriage made in hell.

Taxpayers need to sue for divorce. The way to do that is bankruptcy court. I repeat Miracles Not Coming; Bankruptcy the Sensible Option.

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.

Clean Sweep by UK Conservatives Masks Huge Rifts

Posted: 08 May 2015 10:36 AM PDT

The UK results are in. The pollsters could not have been more wrong. The expected result was a close vote and a hung parliament. Instead, Labour and the Liberal Democrats got pounded. Here are the Final Tallies from the Guardian.



In a surge of nationalism that will likely lead to a call for another independence referendum, the Scotland National Party (SNP) won 56 seats of 59 seats.

Nigel Farage did not win his seat, but he will be around. So will UKIP. It appears UKIP did not take votes from the conservatives, but rather its anti-immigration platform took votes from Labour.

Major Outs

  • Ed Milliband - Labor Leader - Resigned
  • Nick Clegg - Liberal Democrat Party Leader and Deputy Prime Minister - Resigned
  • Ed Balls - Shadow Chancellor of the Exchequer, Labour - Not Reelected
  • Jim Murphy - Scottish Labour Leader - Not Reelected
  • Douglas Alexander - Labour Campaign Manager - Not Reelected 
  • Vince Cable, Liberal Democrat Business Secretary - Not Reelected
  • Danny Alexander, Liberal Democrat Treasury Chief Secretary - Not Reelected
  • Liberal Democrats - Lost 49 of their 57 Seats

Wow
How could the polls have been so wrong?

Clean Sweep Masks Huge Rifts

The Financial Times reports David Cameron Sweeps to Victory in UK Election.
David Cameron, UK prime minister, has swept back into Downing Street after a dramatic election victory, winning an outright majority for his centre-right Conservative party.

Britain faces an unprecedented strain after triumph for leftwing Scottish nationalists who won all but a handful of Scotland's seats, becoming the third-largest party in Westminster just eight months after losing an independence referendum.

The election result also sets the stage for a bruising fight over Britain's membership of the 28-member EU. Mr Cameron has promised to hold a referendum on continued EU membership and wants to win back more control over some issues from Brussels.

Meanwhile, Mr Miliband told supporters he was stepping down because the Labour party needed an "open and honest debate about the right way forward". The centre-left party won 232 seats in a crushing defeat for Mr Miliband, whose campaign to make Britain more equal failed to capture the nation's imagination.

Mr Clegg, who served as deputy prime minister in the coalition, stepped down as Lib Dem leader after his party suffered devastating losses across the country with the number of seats plunging from 57 to eight.

He said the results were "immeasurably more crushing and unkind than I can ever have feared".

Nigel Farage, the charismatic leader of the UK Independence party, quit after failing to win the South Thanet seat, despite the anti-EU party becoming the third-biggest in terms of national support. It won just one seat under Britain's first-past-the-post voting system.

The Scottish National party won 56 of Scotland's 59 seats, up from six in the last election in 2010, sweeping senior Labour figures from office in the party's traditional heartland and setting the stage for a deeply divided parliament.

"The Scottish lion has roared this morning across the country," said Alex Salmond, the party's former leader, who won the seat he was contesting and said it was "inconceivable" for any Westminster government to ignore the united voice of Scotland.

Despite losing the Scottish independence referendum by 55-45 per cent last year, the SNP surge at this election could lead to further demands for a more federal settlement in the UK and add to pressure for a second referendum.
Milliband Resigns

The Guardian reports Ed Miliband Resigns as Labour Leader
A devastated Ed Miliband has resigned as leader of the Labour party, saying he is truly sorry for the scale of the party's crushing defeat.

In an emotional speech, Miliband said it was time for someone else to take over as leader, but called on the party to keep fighting, rather than give in to despair.

"I take absolute and total responsibility for our defeat. I am so sorry for all of those colleagues who lost their seats," he said on Friday.

Ending on a defiant note, he said: "This party has come back before and will come back again."

Miliband's close staff are said to be deeply upset, struggling with the disappointment made deeper by opinion polls that led them to believe they had blocked Cameron from beating a clear path back to Downing Street. Miliband described the result as very difficult and disappointing, adding that the party in Scotland had been overwhelmed by a surge of nationalism.

Some union leaders will be questioning whether they should break from the party, or at least demand major changes on electoral reform, Europe and immigration. Labour will be concerned over signs that Ukip is establishing a secure foothold in the north of England and Wales.

In many respects Miliband had presented the agenda the unions wanted on issues such as workers' rights, tax and regulation of markets. But some union leaders will argue that the party's problems are deep-seated, dating back to the period of New Labour, when it lost touch with its working-class base, reflected in the surge of support for Ukip.

The former Labour cabinet minister John Reid said: "There is no point changing the captain on the bridge if the ship is heading in the wrong direction." He said elections were not won or lost in a short campaign, but over years, calling for the party to return to issues of wealth creation, as well as wealth distribution.
Goodbye Labour

Any party that campaigns for higher taxes and wealth redistribution deserves to get trounced. And Labour did get trounced. Liberal Democrats all but vanished as UKIP became the third largest party with more votes than SNP. Yet, SNP has 56 seats, Liberal Democrats 8, and UKIP one.

SNP still wants independence. And UKIP still wants out of the EU. The "clean sweep" by the Tories masks those problems. Meanwhile, pollsters have to be wondering "how the hell did we get this so wrong?"

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.

Establishment +233K Jobs; Household +192K Employment, Part-Time Employment +198K, Labor Force +166K

Posted: 08 May 2015 08:41 AM PDT

Initial Reaction

Today we see a snap back from last month's report on both establishment jobs and household survey employment. Last month the household survey came in at an anemic 34,000. This month it is 192,000.

Part-time employment went up by 198,000 meaning the entire increase in household survey employment was part-time.

Finally, March nonfarm payrolls were revised lower from 126,000 to 85,000.

This snap back is nowhere near as big as it appears at first glance. It will take at least another month to see if weakness in March was the start of something or an outlier.

Interesting Details

The Bloomberg Consensus jobs estimate was for 220,000 jobs, nearly right on target. The estimate range was a wide 180,000 to 335,000. There is lots of optimism from some economists.
Bloomberg: The April employment report is mixed and probably won't be pulling forward expectations for a Fed rate hike. Nonfarm payroll growth came in about as expected, at a soft 223,000. But there is a substantial downward revision to what was already an extremely weak March, from 126,000 to 85,000. The good news is another downtick in the unemployment rate, to 5.4 percent from 5.5 percent and reflecting a favorable mix led by a rise in those finding jobs.

Details of the payroll data show a very large 45,000 rise in what has been a depressed construction sector. This is one of the largest monthly gains of the recovery and may point to springtime acceleration for construction and new housing. Professional business services added a strong 62,000 jobs with temporary services up a solid 16,000 for its best gain of the year.
You cannot play (at least you should not play the gain in construction both ways). If the weakness was weather-related then a snap back in construction should have been expected. Some but not all of the recent weakness was weather related. Construction probably was more affected than services.

Let's take a look at all the key numbers.

BLS Jobs Statistics at a Glance

  • Nonfarm Payroll: +233,000 - Establishment Survey
  • Employment: +192,000 - Household Survey
  • Unemployment: -26,000 - Household Survey
  • Involuntary Part-Time Work: -125,000 - Household Survey
  • Voluntary Part-Time Work: +323,000 - Household Survey
  • Baseline Unemployment Rate: -0.1 at 5.4% - Household Survey
  • U-6 unemployment: -0.1 to 10.8% - Household Survey
  • Civilian Non-institutional Population: +186,000
  • Civilian Labor Force: +166,000 - Household Survey
  • Not in Labor Force: +19,000 - Household Survey
  • Participation Rate: +0.1 at 62.8 - Household Survey

March 2015 Employment Report

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

Total nonfarm payroll employment increased by 223,000 in April, and the unemployment rate was essentially unchanged at 5.4 percent. Job gains occurred in professional and business services, health care, and construction. Mining employment continued to decline.

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

Unemployment Rate - Seasonally Adjusted



Nonfarm Employment



Nonfarm Employment Change from Previous Month by Job Type



Hours and Wages

Average weekly hours of all private employees was flat at 34.5 hours. Average weekly hours of all private service-providing employees declined by 0.1 hour to 33.3 hours.

Average hourly earnings of production and non-supervisory private workers rose $0.02 at $20.90. Average hourly earnings of production and non-supervisory private service-providing employees rose $0.02 at $20.69.

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 5.4%. 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 10.8%. 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.
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