Category Archives: Financial markets

A Sour Surprise for Public Pensions: Two Sets of Books, by Mary Williams Walsh

A tiny little pension fund in California illustrates a gigantic problem for public pensions. From Mary Williams Walsh at nytimes.com:

When one of the tiniest pension funds imaginable — for Citrus Pest Control District No. 2, serving just six people in California — decided last year to convert itself to a 401(k) plan, it seemed like a no-brainer.

After all, the little fund held far more money than it needed, according to its official numbers from California’s renowned public pension system, Calpers.

Except it really didn’t.

In fact, it was significantly underfunded. Suddenly Calpers began demanding a payment of more than half a million dollars.

“My board was somewhat shocked,” said Larry Houser, the general manager of the pest control district, whose workers tame the bugs and blights that threaten their corner of California citrus country. It is just a few miles down the road from Joshua Tree National Park.

It turns out that Calpers, which managed the little pension plan, keeps two sets of books: the officially stated numbers, and another set that reflects the “market value” of the pensions that people have earned. The second number is not publicly disclosed. And it typically paints a much more troubling picture, according to people who follow the money.

The crisis at Citrus Pest Control District No. 2 illuminates a profound debate now sweeping the American public pension system. It is pitting specialist against specialist — this year in the rarefied confines of the American Academy of Actuaries, not far from the White House, the elite professionals who crunch pension numbers for a living came close to blows over this very issue.

But more important, it raises serious concerns that governments nationwide do not know the true condition of the pension funds they are responsible for. That exposes millions of people, including retired public workers, local taxpayers and municipal bond buyers — who are often retirees themselves — to risks they have no way of knowing about.

To continue reading: A Sour Surprise for Public Pensions: Two Sets of Books

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Stock Markets Sit Blithely on a Powerful Time Bomb, by Wolf Richter

Speculators on margin add to stock market volatility, because their creditors can force them to either cut their positions or cough up more money when prices go against them. From Wolf Richter at wolfstreet.com:

No one knows the full magnitude, but it’s huge.

How big is margin debt really, and how much of a threat is it to the stock market and to “financial stability,” as central banks like to call their concerns about crashes? Turns out, no one really knows.

What we do know: Margin debt, as reported monthly by the New York Stock Exchange, spiked to another record high of $528 billion. But it’s only part of the total outstanding margin debt – which is when investors borrow money from their broker, pledging their portfolio as collateral.

An example of unreported margin debt: Robo-advisory Wealthfront, a so-called fintech startup overseeing nearly $6 billion, announced that it would offer its clients loans against their portfolios.

“The dream house. The dream wedding. The dream kitchen. The dream vacation.” That’s how it introduced it in a blog post this week. “We want you to have your cake and eat it too,” it said.

Instant debt “without the hassle of paperwork,” it said. “We want our clients to be able to borrow what they need, when they need it, directly from their smartphones.” Secured by “your own investments.”

It’s a great deal as long as stocks are soaring. Clients with at least $100,000 in their account can borrow up to 30% of the account value. It’s seductive: No required monthly payments and no payoff date, though interest accrues and is added to the monthly balance. The rate is as low as 3.25%. “How’s that for flexibility?” it says.

That’s how margin debt is being pushed at the end of the cycle.

This borrowed money can be drawn out of the account to fund vacations or a down-payment of a house. But when stocks spiral down, as they’re known to do in highly leveraged markets, and fall below the margin requirement, clients get a margin call. They either have to put cash into the account to make up for the losses or they have to start liquidating their portfolio at the worst possible time.

To continue reading: Stock Markets Sit Blithely on a Powerful Time Bomb

 

The Last Time This Happened Was in 2008, by Bill Bonner

One of the best contemporaneous economic indicators, one that can’t be fudged or faked, is tax collections. Right now, they’re falling. From Bill Bonner at bonnerandpartners.com:

The Dow fell about 100 points yesterday.

It’s not hard to see why…

Factory output dropped the most since last August, led by declining auto sales.

Meanwhile, housing starts are at a four-month low. Bank loans are slipping. Commercial property is “rolling over.” Consumers have tapped out. And the Fed’s GDP growth estimates are getting lower and lower.

But the biggest deal is that tax receipts are down, year over year, for the fourth month in a row. Taxes are real money. They’re not fake news like unemployment and inflation statistics.

When people earn less, they pass less in taxes. A decline in tax receipts means that something real is happening in the economy.

The last time tax receipts fell like this was in 2008. You know what happened next.

False Impression

Meanwhile, evidence mounts that – outside of dividends – investing in stocks is rarely profitable.

According to a paper by Hendrik Bessembinder at Arizona State University, even without accounting for fees and expenses, roughly 70% of stocks deliver lower returns than the Treasury bill (considered to be one of the safest assets).

It’s part of the reason why, according to research firm Dalbar, only roughly one-quarter of active fund managers beat their indexes.

Winning stocks are rare.

We have long suspected that fund managers avoid slipping behind the indexes – which they use as benchmarks for their performance – in the simplest possible way: They buy the index!

This – and the fact that the big stocks in the index are the ones covered by the fake-news media (that is… by the popular press) – tends to boost the few popular stocks over the many unknown ones.

This also gives investors a false impression. With the index rising, say, 10% a year, they say: “If I buy ‘stocks,’ they should give me a 10% return.”

But a 2015 paper – “Why Indexing Works” by J.B. Heaton, Nicholas Polson, and Jan Hendrik Witte – revealed that the typical investor does not begin at zero with a 50-50 chance of beating the indexes.

To continue reading: The Last Time This Happened Was in 2008

Creating Another “Crash of 1929” by Jeff Thomas

There are already similarities between the present day and 1929. Jeff Thomas opines there may be more. From Thomas at internationalman.com:

Regarding the Great Depression… we did it. We’re very sorry… We won’t do it again.

– Ben Bernanke

Waiting too long to begin moving toward the neutral rate could risk a nasty surprise down the road—either too much inflation, financial instability, or both.

– Janet Yellen

In his speech above, future Federal Reserve Chairman Ben Bernanke acknowledged that, by raising interest rates, the Fed triggered the stock market crash of 1929, which heralded in the Great Depression.

Yet, in her speech above, Fed Chair Janet Yellen announced that “it makes sense” for the Fed to raise interest rates “a few times a year.” This is a concern, as economic conditions are similar to those in 1929, and a rise in interest rates may have the same effect as it did then.

So let’s back up a bit and have a look at what happened in 1929. In the run-up to the 1929 crash, the Federal Reserve raised rates to 6%, ostensibly to “limit speculation in securities markets.” As history shows, this sent economic activity south rather quickly. Countless investors, large and small, who had bought stocks on margin, would be unable to pay increased interest rates and would be forced to default. (It’s important to understand that the actual default was not necessary to crash markets. The knowledge that investors would be in trouble was sufficient to send the markets into a tailspin.)

Mister Bernanke was quite clear in 2002 when he stated that the Fed would not make the same mistake again that it made in 1929, yet, then, as now, there’s been a surprise victory by a Republican candidate for president. Then, as now, a wealthy man who had never held elective office was unexpectedly in the catbird seat and had the potential to endanger the control of the political class, at a time when that political class had been complicit in damaging the system by creating massive debt.

To continue reading: Creating Another “Crash of 1929”

Buy the Dip? by James Howard Kunstler

James Howard Kunstler reminds us to keep our on the ball: the debt-laden economy and its financial dynamics. From Kunstler at kunstler.com:

The military frolics of spring have distracted the nation’s attention from the economic and financial dynamics that pose the ultimate mortal threat to business as usual. Note the distinction between economic and financial. The first represents real activity in this Land of the Deal: people doing and making. The second, finance, used to be a minor branch — only about five percent — of all the doing in the days of America’s putative bigliest greatitude. The task of finance then was limited and straightforward: to manage the allocation of capital for more doing and making. The profit in that enabled bankers to drive Cadillacs instead of Chevrolets, but not much more.

These days, finance is closer to 40 percent of all the doing in America, and it is not about making anything, but getting more than its share of “money” — whatever that is now — and what “money” mostly is is whatever the people engaged in finance say it is, for instance, Fannie Mae bonds representing millions of sketchy loans for houses of vinyl and strand-board built in places with no future… or stock issued by the Tesla corporation… or the sovereign IOUs of the US Treasury.

The list of things that pretend to be “money” these days would be long and shocking and the sheer churn of these instruments among the banks and markets “produces” the fabled “revenue streams” beloved of The Wall Street Journal. What happens when the world discovers that these instruments (securities and their derivatives) represent falsely? Why, bigly trouble.

To continue reading: Buy the Dip?

So Who Are the Debt Slaves in this Rich Nation? by Wolf Richter

There’s an old joke that if you put one foot in a bucket of ice and one in a bucket of boiling water, on average you’re comfortable. The use of economic averages masks an ugly reality: for every wealthy American there are many Americans with small incomes, a lot of debt, and negative net worths. From Wolf Richter at wolfstreet.com:

The American economy has split in two: how averages of wealth & debt paper over the profound risks.

We constantly hear the factoids about “American households” that paint a picture of immense wealth – and therefore a lack of risk for consumer lenders during the next downturn. We hear: “This – the thing that happened in 2008 and 2009 – won’t happen again.”

For example, total net worth (assets minus debt) of US households and non-profit organization (they’re lumped together) rose to an astronomical $92.8 trillion at the end of 2016, according to the Federal Reserve. This is up by nearly 70% in early 2009 when the Fed started its QE and zero-interest-rate programs.

Inflating household wealth was one of the big priorities of the Fed during the Financial Crisis. It would crank up the economy. In an editorial in 2010, Fed Chair Ben Bernanke himself called this the “wealth effect.” So with this colossal wealth of US households, what could go wrong during the next downturn?

Here’s what could go wrong:

About half of Americans do not have enough savings to pay for even a minor emergency expense. The Federal Reserve found that 46% of adults could not cover an emergency expense of $400, such as a broken windshield. They would either have to borrow the money or try to sell the couch or something. So nearly half of the adults in the US live from paycheck to paycheck.

About 15% of American households have either zero or negative net wealth, according to the New York Fed. Negative net worth means they have more debt than assets.

And nearly 47 million Americans, or nearly 15% of the population, live below the poverty line, according to the Census Bureau.

So who benefited from the “wealth effect”? Those who had the most assets. At the very tippy-top: Warren Buffet. At the other end of the spectrum, in 2016, only 52% of households owned stocks directly or indirectly. The phenomenal stock market boom left 48% – usually those below the poverty line, those who cannot cover emergency expenses, those with zero or negative net worth, etc. etc. – in the dust.

To continue reading: So Who Are the Debt Slaves in this Rich Nation?

Libor: Bank of England implicated in secret recording, by Andy Verity

There have been rumors and allegations of central bank machinations in and manipulations of various financial markets for years, but try getting the actual goods on the central banksters. Now, that may be the case, as reported by no less than the BBC. From Andy Verity at BBC.com:

A secret recording that implicates the Bank of England in Libor rigging has been uncovered by BBC Panorama.

The 2008 recording adds to evidence the central bank repeatedly pressured commercial banks during the financial crisis to push their Libor rates down.

Libor is the rate at which banks lend to each other, setting a benchmark for mortgages and loans for ordinary customers.

The Bank of England said Libor was not regulated in the UK at the time.

The recording calls into question evidence given in 2012 to the Treasury select committee by former Barclays boss Bob Diamond and Paul Tucker, the man who went on to become the deputy governor of the Bank of England.

http://www.bbc.com/news/business-39548313/embed

‘Serious pressure’

Libor, the London Interbank Offered Rate, tracks how much it costs banks to borrow money from each other. As such it is a big influence on the cost of mortgages and other loans.

Banks setting artificially low Libor rates is called lowballing.

In the recording, a senior Barclays manager, Mark Dearlove, instructs Libor submitter Peter Johnson, to lower his Libor rates.

He tells him: “The bottom line is you’re going to absolutely hate this… but we’ve had some very serious pressure from the UK government and the Bank of England about pushing our Libors lower.”

Mr Johnson objects, saying that this would mean breaking the rules for setting Libor, which required him to put in rates based only on the cost of borrowing cash.

Mr Johnson says: “So I’ll push them below a realistic level of where I think I can get money?”

His boss Mr Dearlove replies: “The fact of the matter is we’ve got the Bank of England, all sorts of people involved in the whole thing… I am as reluctant as you are… these guys have just turned around and said just do it.”

Mr Dearlove declined to answer questions from BBC Panorama.

To continue reading: Libor: Bank of England implicated in secret recording