| Reader Question on the Inevitable Los Angeles Bankruptcy; What About Chicago? Posted: 11 Apr 2014 06:05 PM PDT In response to LA Commission Studies Pension Crisis, Recommends New Commission; Bankruptcy Inevitable reader Daniel writes ... Hello Mish,
Can you please explain why a home owner in a place like Los Angeles would be concerned with their city's future bankruptcy?
Will whatever happens not be short lived?
I understand that city workers will be affected and that unions and union workers will be affected as well, but how would your typical resident/homeowner be affected in such a situation?
Thanks for your wonderful blog!!
Daniel Tax Hikes ComingHello Daniel In a futile attempt to prevent the inevitable, the first thing LA politicians are likely to do is raise taxes, all kinds of taxes. They will probably invent new ones too. Please compare LA's setup to Chicago. Comparison to ChicagoVia email, Ted Dabrowski at the Illinois Policy Institutes writes ... Gov. Pat Quinn is in a bind.
He's being asked to sign a Chicago pension bill that he knows has no real reforms and no way to pay for itself. By signing the bill, Quinn will give Mayor Rahm Emanuel his blessing to raise Chicago property taxes by $750 million over five years.
But that's just the beginning.
If the Legislature uses the same blueprint to "fix" the city and Cook County's other pension funds, Quinn will be blessing billions more in tax hikes.
The problem for Quinn is that he promised property tax relief to all Illinoisans in his state budget address just two weeks ago. Here's what he said:
"My comprehensive tax reform plan starts with providing every homeowner in Illinois with a guaranteed $500 property tax refund every year.
In Illinois, more is collected in property taxes every year than in the state income tax and state sales tax combined. In fact, Illinois has one of the highest property tax burdens on homeowners in the nation – more than 20 percent above the national average. The property tax is not based on ability to pay. The property tax is a complicated, unfair tax, hitting middle-class families the hardest.
For too long, Illinois has … overburdened its property taxpayers."
By signing a pension bill that helps Emanuel raise property taxes, Quinn will break yet another promise. The governor has already asked the Legislature to make the 2011 tax hike permanent, even though he originally promised it would be temporary.
But Quinn has a way out of his predicament. Besides the obvious political reasons to oppose the bill, Quinn has three good policy reasons not to sign it:
1. Property tax hikes won't solve Chicago's pension problem. Emanuel needs more taxes because his plan doesn't reform the broken pension system. Instead, it just props up a failed system run by the same politicians who bankrupted it in the first place.
What Emanuel and supporters of his pension bill won't tell you is that they'll be back for even more tax hikes. Emanuel's current plan calls for additional city contributions (above what the city pays today) to the municipal pension fund totaling $4.1 billion through 2025. But his proposed property tax hikes will raise only an additional $2.25 billion during that time period.
What Emanuel and supporters of his pension bill won't tell you is that they'll be back for even more tax hikes. Emanuel's current plan calls for additional city contributions (above what the city pays today) to the municipal pension fund totaling $4.1 billion through 2025. But his proposed property tax hikes will raise only an additional $2.25 billion during that time period.
That means the mayor's tax hike will be $1.9 billion short of the extra contributions needed through 2025. Without real reforms, he'll be back for more.
2. People and businesses will flee. Avoiding real reforms and raising taxes is a failed strategy. People and businesses will flee Chicago, just as they've been doing for years. Taxpayers will leave because they'll be paying more money for fewer services.
Each Chicago household is already on the hook for more than $61,000 in future taxes to pay down the massive long-term debt – more than $63 billion in bonds and pension shortfalls – that their city and county governments have racked up.
Tax hikes mean fewer people will stick around to pay a growing bill.
3. There is a plan to fix Chicago without tax hikes. The Illinois Policy Institute offers a reform plan that avoids tax hikes and immediately cuts Chicago's pension shortfall in half. The core of its solution is a hybrid retirement plan for city workers that gives them a self-managed plan and fixed, monthly Social Security-like benefits at retirement.
The plan makes the tough choices necessary to bring about real retirement security for Chicago's city workers.
Quinn and Emanuel's goal must be to end Chicago's pension crisis and to preserve Chicago's status as a world-class city.
Massive property tax hikes will do just the opposite and push Chicago further in the direction of Detroit.
Ted Dabrowski
Vice President of Policy Everyone AffectedNo one should assume they are unaffected by the pension crisis, even if they do not live in troubled cities. For starters, more cities are affected than admitted. For discussion, please see 85% of Pension Funds to Fail in Three Decades. Secondly, and equally important, Democrat controlled states like California and Illinois are dominated by union sympathizers. Of course that is precisely why those states are in serious trouble. So even if you live in an unaffected city, states controlled by unions are also highly likely to raise all sorts of taxes to protect union interests. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
| JPMorgan Earnings Drop 18.5%; Slowdown in Housing the Real Killer; Start of Mean Reversion in Earnings? Posted: 11 Apr 2014 10:29 AM PDT Stocks have been soaring mostly on investor sentiment. That sentiment was partially based on the belief earnings would continue to rise quarter after quarter, year after year. Investors also believe the Fed has their back. But what if the earnings thesis is not true? The New York Times reports JPMorgan Earnings Fall 18.5% on Slowdown in Trading and Mortgage LendingJPMorgan Chase reported an 18.5 percent slump in first-quarter earnings on Friday, as the nation's largest bank grappled with dual challenges: sluggish revenue from trading and lackluster mortgage lending.
The bank's stock dropped when the market opened on Friday morning, falling more than 4 percent.
Part of the slowdown came from a slowdown in revenue from fixed-income trading, which fell roughly 26 percent to $3.76 billion from $4.75 billion a year earlier.
JPMorgan's earnings also contained a number of bright spots, including an increase in average loan balances within the commercial banking business, along with an uptick in auto loans. Auto loans grew by 3 percent, to $6.7 billion from $6.5 billion a year earlier. Private banking was another rosy area for the bank, with revenue rising to $1.5 billion, up 4 percent from the same period last year. Credit card sales volume also grew, up 10 percent to $104.5 billion from the same period last year.
Still, the strength of those businesses could not completely offset the continued decline in trading revenue and mortgage refinancing, which had once been a particularly robust source of profit for JPMorgan and its rivals.
Now, the heady days of refinancing seem distant. Rising interest rates, coupled with an increase in housing prices, have damped homeowners' appetite to refinance. Mortgage loan originations also dropped to $17 billion, down 68 percent from a year earlier, and 27 percent from the previous quarter. That helped push net income down by $559 million to $114 million for the first quarter.
Asked whether the fall in mortgage loan originations might prompt the bank to broaden its lending to a wider swath of people — even those with tarnished credit scores — Mr. Dimon said on Friday that "our credit standards are pretty consistent." He added, "We feel pretty good about the risk that we are taking."
The comment reflects a deep timidity among the banks, which have focused their lending almost exclusively on borrowers with good credit. In part, the banks are reluctant to take on risk and are skittish about exposing themselves to litigation related to any questionable mortgages. The Financial Times reports JPMorgan Misses Targets as Fixed Income HitJPMorgan Chase had its worst start to the year in fixed income trading since the depths of the financial crisis, causing the largest US bank to report a sharp decline in profits.
Revenues from trading bonds, currencies and commodities fell 21 per cent in the first quarter to $3.8bn, compared with the same period in 2013.
The first quarter is traditionally strong and the weak result – the worst since the start of 2008 – reverberated across Wall Street ahead of next week's results at Citigroup, Bank of America, Morgan Stanley and Goldman Sachs.
Earnings per share fell to $1.28 from $1.59 a year ago compared with analysts' forecasts of $1.38 a share.
JPMorgan had already warned in February that trading revenue was weak, but had then pointed to a 15 per cent decline. Other banks also issued gloomier updates from their trading floors. Overall markets revenue was down 17 per cent at $5.1bn with a smaller decline in equity trading. Missing Ratcheted Down ExpectationsIt's rare for companies to miss expectations because of all the revised forward guidance. Typically companies guide to estimates they can beat by a penny. That JPMorgan failed to do so, means that conditions deteriorated more than expected. In this case, slowdown in fixed income and mortgages were way off the revised mark, and even further off the original estimates. Bright Spots About to DimSupposedly autos are a bright spot. But are auto loans going to rise forever? I think not. Rather, I suggest the demand for autos will soon peak if it hasn't already. But it's that slowdown in housing that's going to be the real killer. A housing slowdown means a slowdown in other durable goods. Looking ahead, a slowdown in durable goods, especially cars portends a decline in manufacturing hours or employment. This is precisely what's wrong with taking a single indicator and projecting it forever into the future for "years to come" as economist Robert Shiller did recently with manufacturing hours. For discussion, please see Start of Mean Reversion in Earnings?Those projecting future earnings explosion also play with fire. And if earnings expectation don't pan out (I suggest they won't), stocks are priced not for perfection, but well beyond perfection. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
| 85% of Pension Funds to Fail in Three Decades Posted: 10 Apr 2014 11:49 PM PDT Bridgewater Associates did an analysis of pension funds recently and concluded 85% of them will fail if returns average 4%. Bridgewater notes that public pensions have just $3 trillion in assets to invest to cover future retirement payments of $10 trillion over the next many decades. It would take an investment return of roughly 9% a year to meet those obligations. With the 30-Year long bond yielding a mere 3.5% and with stock valuation through the roof, I expect negative returns for 7-10 years. Stretched out over 30 years, 4% seems about right. 9% is out of the question. CNBC has further analysis in Report: 85% of pensions could fail in 30 yearsInfluential and well-regarded hedge fund Bridgewater Associates Wednesday warns public pensions are likely to achieve 4% returns on their assets, or worse. If Bridgewater is right, that means 85% of public pension funds will be going bankrupt in three decades.
Bridgewater came to these conclusions by stress testing the nation's public pension plans, much the way banks need to be evaluated on what could happen given a wide range out outcomes.
Many pension observers make the claim pensions will achieve 7% to 8% returns. But even if that assumption is correct, which is unlikely, public pensions are looking at a 20% shortfall, Bridgewater says. A 4% return is much more likely, the firm says.
Bridgewater set up a sophisticated model to simulate many of the possible market environments to see how they would affect public pension's resources. In 20% of those scenarios, public pensions run out of money in 20 years. And in 80% of the scenarios, public pensions run out of money within 50 years, Bridgewater says. Massive Number of Municipal Bankruptcies on Horizon I wonder what Bridgewater's model would predict starting with losses for the next seven to ten years, because that is what I think is highly likely. Given the only way to shed pension obligations is bankruptcy, one hell of a lot of municipal bankruptcies are on the horizon unless some other legal maneuver is found. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
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