Central Perk

duminică, 27 decembrie 2015

Mish's Global Economic Trend Analysis

Death Watch Illinois: Despite Massive Stock Market Rally, Illinois Pension Liabilities Go Up, and Up, and Up

Posted: 27 Dec 2015 02:16 PM PST

Illinois Pension Problems Mount

Illinois' unfunded liabilities have risen ten out of the last eleven years. The only exception was 2011. This was despite massive rallies in financial markets every year since 2009.

One out of every five tax dollars goes to pensions, but that's nowhere close to enough to stem the tide.

Illinois has the worst funded pension plans in the nation. Those plans are a mere 42% funded in aggregate.

That bleak estimate understates the problem because it assumes 8% annualized returns going forward. Those returns are not going to happen.

I expect 0-2% returns at best, and most likely negative real returns for seven to ten years.

Still No Budget

In October, Moody's cut Illinois debt to one step above junk, specifically citing pensions as the "greatest challenge". Lower ratings have driven up borrowing costs. In turn, rising borrowing costs mean less money to spend elsewhere.

The new year is less than a week away, but Illinois still does not have a budget.

Bloomberg reports Illinois Record Budget Impasse Makes It Worse for the State's Pension Disaster.

As 2015 draws to a close, Illinois marks half a year without a budget. No spending plan has driven up borrowing costs, sunk its credit rating, and perhaps worst of all, exacerbated the state's biggest problem: its underfunded pensions.

Home to the least-funded state retirement system in the nation, Illinois has $111 billion of pension debt, which breaks down to more than $8,000 per resident. Partisan gridlock has produced the longest budget impasse in Illinois history. The stalemate has not only weakened state finances, it has kept lawmakers from finding a fix for those mounting liabilities.

It's been seven months since the Illinois Supreme Court rejected the state's solution. Justices threw out the 2013 restructuring that took six attempts over 16 months to pass, despite one-party rule at the time. The measure was projected to save $145 billion over 30 years by limiting cost-of-living adjustments and raising the retirement age.

Illinois enters 2016 snarled in partisan bickering as Governor Bruce Rauner, the state's first Republican chief executive in 12 years, and the Democrat-controlled legislature can't agree on annual appropriations, much less an overhaul of a retirement system that must withstand an inevitable legal challenge. The state constitution bans reducing worker retirement benefits.

In July, Rauner laid out a plan to create a tiered system to cut retirement liabilities. At the time, he said it would save taxpayers billions of dollars. The proposal, which included a measure to allow municipalities to file for bankruptcy protection, was never introduced, according to Catherine Kelly, his spokeswoman.

Illinois hasn't sold bonds since April 2014, a record borrowing drought. The spread on its existing debt has widened. Investors demand 1.8 percentage points of extra yield to own 30-year Illinois bonds, the most among the 20 states tracked by Bloomberg. When the spread climbs, that's reflecting that investors think the problem is getting worse, said Richard Ciccarone, Chicago-based chief executive officer of Merritt Research Services.

"What's the root cause of why we're in the problem we're in?" Ciccarone said. "It's down to the pensions."

Illinois is like a patient in the emergency room, said Paul Mansour at Conning, which oversees $11 billion of munis, including Illinois securities.

Death Watch Illinois

Illinois is terminal. Pension cancer is too deep and has spread too far to save the patient. The state is bankrupt morally, politically, and monetarily.

However, there is no provision for state bankruptcy (something US Congress needs to address). Regardless, what cannot be paid won't.

Illinois cancer is not just at the state level. The cancer permeates cities far and wide.

The Chicago Board of Education is already dead whether the coroner or Mayor Rahm Emmanuel makes the announcement or not.

Tax hikes won't help the dead or dying. Instead they will cause the healthy and able to flee.

Many Illinois cities lay in a bankruptcy coffin, but the current law will not let the coroner make that announcement.

The best way to ease municipality pain is to pass a law allowing municipal bankruptcies. Such a bill would let terminal cities and taxing bodies move to hospice to die in peace. That's something the Illinois legislature can and should address.

Illinois Republicans, I have a question: Where the heck is that bill?

Fresh Start

Corrupt politicians in bed with union officials have hollowed out the state beyond repair. Let's not pretend otherwise.

Illinois needs a fresh start:

Bankruptcies at the municipal level
A new constitution that allows pension cuts at the state level
Right to work laws
End of collective bargaining of government employees
End of prevailing wage laws
Tax reform, especially property tax reform
Workers' compensation reform
Unemployment insurance reform

Until we see those changes, the state will lay on the death-bed slowly bleeding workers and businesses in a fate worse than death by bankruptcy or default.

Sobering Pension Assessment

As noted above Illinois pension plans are 42% funded, and that's with projected returns of 8%. If returns average 2% or even 5%, liabilities and under-fundings will soar.

Unfortunately, history suggests 0% is more likely. Here's further discussion of what to expect and why.

Mike "Mish" Shedlock

Seth's Blog : One big idea

One big idea

Most breakthrough organizations aren't built on a bundle of wonderment, novelty and new ideas.

In fact, they usually involve just one big idea.

The rest is execution, patience, tactics and people. The ability to see what's happening and to act on it. The rest is doing the stuff we already know how to do, the stuff we've seen before, but doing it beautifully.

You probably don't need yet another new idea. Better to figure out what to do with the ones you've got.

{altMBA alum}

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sâmbătă, 26 decembrie 2015

Mish's Global Economic Trend Analysis

Economic Illusions vs. Reality; Helicopter Drop, What Else?

Posted: 26 Dec 2015 05:10 PM PST

Without providing a link, ZeroHedge posted some comments today regarding "Helicopter Drop Theory" by Willem Buiter, Citibank's Chief Economist.

Willem Buiter on Failure of Monetary Policy

We believe that a common factor in the relatively low response of real economic activity to changes in asset prices and yields is probably the fact that the euro area remains highly leveraged. The total debt of households, non-financial enterprises and the general government sector as a share of GDP is higher now than it was at the beginning of the GFC.

The wealth effect of higher stock prices appears to do little to boost private consumer expenditure.

To the extent that monetary policy has had an effect on real activity, and will have some incremental effect on activity, it may not be entirely sustainable. This is because part of the effect has been by bringing forward demand from the future, such as major purchases, including for cars or construction. That suggests that monetary policy, even if and when it has been effective in stimulating activity, will run into diminishing returns even in sustaining the levels of activity it helped to boost.

Economic Illusions vs. Reality

I wholeheartedly agree with every point made above by Buiter. Actually, things are far worse than he stated. The problem is not just in Europe, but everywhere.

With their deflation-fighting tactics, central banks have accomplished five things, none of them any good.

Brought demand forward at the expense of future GDP
Encouraged more leverage
Increased speculation in financial assets
Created bubbles in equities and bonds
Mistook economic activity for what much of it really is: malinvestment

The solution is not more craziness, but rather an admission that central banks are themselves the source of the problem.

Of course Keynesian fools would never admit such a thing. Instead they promote more and more of what common sense and history proves cannot work.

Willem Buiter Proposes Helicopter Drop

"Helicopter money drops (what else?)"

Our conclusion is that, in a financially-challenged economy like the Eurozone, with policy rates close to the ELB, and with excessive leverage in both the public and private sectors, balance sheet expansion by the central bank alone may not be sufficient to boost aggregate demand by enough to achieve the inflation target in a sustained manner.

This is more than an academic curiosity. Japan has failed to achieve a sustained positive rate of inflation since its great financial crash in 1990. The balance sheet expansion of the Bank of Japan since the crisis has been remarkable but ineffective as regards the achievement of sustained positive inflation and, since 2000, the inflation target. The balance sheet of the Swiss National Bank has expanded even more impressively, again with no discernable impact on the inflation rate.

The case for helicopter money is therefore partly to ensure the euro area (and some other advanced economies) reflate powerfully enough to escape the liquidity trap, rather than settle in a lasting rut of low-flation and low growth, with "emergency" levels of asset purchases and interest rates becoming the norm.

If, as seems possible, the ECB will increase, in H1 2016, the scale of its monthly asset purchases from €60bn to, say, €75bn, and if these additional purchases are concentrated on public debt, the euro area will benefit from a 'backdoor' helicopter money drop –something long overdue.

Myth of the Deflation Monster

Buiter wants to slay an imaginary monster, deflation.

He moans "Japan has failed to achieve a sustained positive rate of inflation since its great financial crash in 1990."

Other than the absolute mess Japan has gotten into as a direct result of decades of deflation fighting madness, what problem has a lack of sustained positive rate of inflation caused Japan?

The answer is: None.

The bank of Japan is now the entire market for Japanese debt. What positive result stems from that?

The answer once again is: None.

Nonetheless Buiter wants the ECB to pursue the same inane path.

There will be no benefit. Leverage will rise, not sink. And to top it off, debt purchases of the nature he wants are likely illegal under the Maastricht treaty.

Buiter has learned nothing from history. He ought to look in a mirror, admit he sees failure, and resign.

But economic illiterates don't resign, they just keep promoting policies that both common sense and history show can never work.

Challenge to Keynesians

The simple fact of the mater is "Inflation Benefits the Wealthy" (At the Expense of Everyone Else) .

If Buiter disagrees, he can respond to my Challenge to Keynesians "Prove Rising Prices Provide an Overall Economic Benefit"

Mike "Mish" Shedlock

Evolution of Shipping: Amazon Starts Own Air Cargo and Trucking Services

Posted: 26 Dec 2015 03:03 PM PST

Evolution of Shipping

After announcing Amazon Prime, free Two-Day Shipping for eligible purchases, Amazon followed up Air Prime, a future delivery system from Amazon designed to safely get packages to customers in 30 minutes or less using drones.

The next logical step is for Amazon to cut out as many air delivery middlemen as it possibly can.

Thus, it cannot be much of a surprise to learn Amazon Starting its Own Air Cargo Operation.

Cargo Facts reported today [December 18] that Amazon is building its own cargo operation and is in talks with Boeing to acquire up to 20 767-freighter jets to help deliver packages to customers around the U.S.

The Seattle Times also reported about Amazon's plans on Thursday, but noted that the company is looking to lease jets, not purchase them, because it does not have an Air Operator's Certificate, among other reasons.

When asked for comment, Amazon.com provided this statement to GeekWire: "We have a longstanding practice of not commenting on rumors and speculation."

An article last month ["A Mysterious Air Cargo Operation, Amazon.com?"] noted that a mysterious company, presumably Amazon, was flying four cargo flights per day out of Ohio's Wilmington Air Park, which previously served as a facility for DHL until 2008.

The mystery company used four contracted Boeing 767s that fly to and from four U.S. airports - Allentown, Ontario (CA), Tampa, Oakland - that all have nearby Amazon distribution centers.

Having more control of the entire end-to-end customer experience would also help Amazon avoid issues it has had with third-party delivery companies like UPS during its busy holiday season.

Amazon Branded Trucks

On December 4, Amazon announced Branded Truck Trailers for Inventory Management.

for Amazon, the initiative is the latest sign of the e-commerce giant's increasing interest in taking transportation of its merchandise into its own hands.

The company still relies on traditional mail to deliver most packages, but Amazon has been experimenting with its own methods, including bicycle couriers, Amazon Fresh delivery trucks, drones and an Uber-like crowdsourced delivery system.

The release notes the company has begun rolling out thousands of trailers to "increase capacity for package delivery from fulfillment centers to sort centers."

In other words, the trailers won't be delivering packages to customers' doors.

Amazon Planes

Amazon Trucks

Amazon Drones

Mike "Mish" Shedlock

Damn Cool Pics

The 12 Facts of Christmas – Things You Didn’t Know! [Infographic]

Posted: 26 Dec 2015 11:13 AM PST

Mulled wine, mince pies, chocolate and treats – these are all things that we associate with Christmas, but how many of them does poor old Santa consume on his way round the world? 150 billion calories is the answer! It would take him a whopping 166 million hours of running to burn it off, too. These facts, plus a tantalising 11 more of them, are waiting for you in this yuletide infographic from Up Up & Away.

Click on Image to Enlarge.

Via upupandaway.co.uk

Seth's Blog : Business ethics, ripples and the work that matters

Business ethics, ripples and the work that matters

The happy theory of business ethics is this: do the right thing and you will also maximize your long-term profit.

After all, the thinking goes, doing the right thing builds your brand, burnishes your reputation, helps you attract better staff and gives back to the community, the very community that will in turn buy from you. Do all of that and of course you'll make more money. Problem solved.

The unhappy theory of business ethics is this: you have a fiduciary responsibility to maximize profit. Period. To do anything other than that is to cheat your investors. And in a competitive world, you don't have much wiggle room here.

If you would like to believe in business ethics, the unhappy theory is a huge problem.

As the world gets more complex, as it's harder to see the long-term given the huge short-term bets that are made, as business gets less transparent ("which company made that, exactly?") and as the web of interactions makes it harder for any one person to stand up and take responsibility, the happy theory begins to fall apart. After all, if the long-term effects of a decision today can't possibly have any impact on the profit of this project (which will end in six weeks), then it's difficult to argue that maximizing profit and doing the right thing are aligned. The local store gets very little long-term profit for its good behavior if it goes out of business before the long-term arrives.

It comes down to this: only people can have ethics. Ethics, as in, doing the right thing for the community even though it might not benefit you or your company financially. Pointing to the numbers (or to the boss) is an easy refuge for someone who would like to duck the issue, but the fork in the road is really clear. You either do work you are proud of, or you work to make the maximum amount of money. (It would be nice if those overlapped every time, but they rarely do).

"I just work here" is the worst sort of ethical excuse. I'd rather work with a company filled with ethical people than try to find a company that's ethical. In fact, companies we think of as ethical got that way because ethical people made it so.

I worry that we absolve ourselves of responsibility when we talk about business ethics and corporate social responsibility. Corporations are collections of people, and we ought to insist that those people (that would be us) do the right thing. Business is too powerful for us to leave our humanity at the door of the office. It's not business, it's personal.

[I learned this lesson from my Dad. Every single day he led by example, building a career and a company based on taking personal responsibility, not on blaming the heartless, profit-focused system.]

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Seth's Blog : Very good results (and an alternative)

Very good results (and an alternative)

Hard work, diligence and focus often lead to very good results. These are the organizations and individuals that consistently show up and work toward their goals.

But exceptional results, hyper-growth and remarkable products and services rarely come from the path that leads to very good results. These are non-linear events, and they don't come from linear effort or linear skill.

It's tempting to adopt the grind-it-out mindset, because that's something we know how to do, it's a method that we can model, it's a sort of work ethic.

But by itself, the grind-it-out mindset isn't going to get us a leap. It's not going to lead to a line out the door or 15% monthly growth. That only comes from giving up.

We need to give up some of the truths that are the foundation of our work, or give up on some of the people we work with, or give up on the conventional wisdom. Mostly, we need to give up on getting approval from our peers.

Of course, we still have to keep showing up and grinding out. But we have to do it with a different rhythm, in service of a different outcome.

More hours in the practice room doesn't turn a pretty good musician into a jazz pioneer. More hours in front of the computer doesn't make your writing breathtaking.

Sure, the work might be just as hard, but it's work of a different sort.

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duminică, 27 decembrie 2015

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

Seth's Blog : One big idea

One big idea

More Recent Articles

sâmbătă, 26 decembrie 2015

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

Damn Cool Pics

Damn Cool Pics

Seth's Blog : Business ethics, ripples and the work that matters

Business ethics, ripples and the work that matters

More Recent Articles

Seth's Blog : Very good results (and an alternative)

Very good results (and an alternative)

More Recent Articles

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