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Another Way Of Looking At The Pension Crisis, As “A Stealth Mortgage on Your House”

Money manager Rob Arnott and finance professor Lisa Meulbroek have run the numbers on underfunded pension plans and come up with an interesting – and highly concerning – new angle: That they impose a “stealth mortgage” on homeowners. Here’s how the Wall Street Journal reported it today:

The Stealth Pension Mortgage on Your House

Most cities, counties and states have committed taxpayers to significant future unfunded spending. This mostly takes the form of pension and postretirement health-care obligations for public employees, a burden that averages $75,000 per household but exceeds $100,000 per household in some states. Many states protect public pensions in their constitutions, meaning they cannot be renegotiated. Future pension obligations simply must be paid, either through higher taxes or cuts to public services.

Is there a way out for taxpayers in states that are deep in the red? Milton Friedman famously observed that the only thing more mobile than the wealthy is their capital. Some residents may hope that they can avoid the pension crash by decamping to a more fiscally sound state.

But this escape may be illusory. State taxes are collected on four economic activities: consumption (sales tax), labor and investment (income tax) and real-estate ownership (property tax). The affluent can escape sales and income taxes by moving to a new state—but real estate stays behind. Property values must ultimately support the obligations that politicians have promised, even if those obligations aren’t properly funded, because real estate is the only source of state and local revenue that can’t pick up and move elsewhere. Whether or not unfunded obligations are paid with property taxes, it’s the property that backs the obligations in the end.

…click on the above link to read the rest of the article…

Spotlight Danville, Illinois, My Home Town: Bankrupt

Danville Illinois is bankrupt. That’s not an official announcement yet, but it will be. Pensions are at the heart of it.

I have talked about my relationship with Danvile before, but here is a brief recap.

I grew up in Danville, Illinois, the home of Chuckles (the candy), Hyster (lift forks), Lauhoff (the world’s largest grain elevator), Petersen Puritan (one of the world’s largest aerosol bottling plants, think deodorant sprays), a GM foundry in adjacent Tilton, and many other industries.

All of those industries but Hyster are gone or sold to other companies. Hyster remains but production of forklifts doesn’t. Lauhoff is now the Bunge corporation. Inquiring minds may be interested in the History of Chuckles, no longer made in Danville.

Dick Van Dyke, Jerry Van Dyke, Bobby Short, Gene Hackman, Irving Azoff, Hellen Morgan, are some of the celebrities that were born or raised in Danville.

The population of Danville was 44,000+ when I was in high school. It’s now 31,597 despite huge growth in area.

I graduated from Danville Schlarman, a Catholic high school, in 1971 and graduated from the University of Illinois in 1976. My goal was to escape the area, and I did.

Curiously, just today, I was labeled a “traitor” for this. I will return to that in a moments, but let’s get to the real story why towns like Danville are bankrupt.

Spotlight Pensions

Ask Danville, Illinois, Mayor Scott Eisenhauer if he has any control over his police and fire pension mess and you’ll quickly see frustration set in. “Springfield makes all the rules but localities have to pay for them.”

…click on the above link to read the rest of the article…

America The Insolvent

Satansgoalie

America The Insolvent

A reckoning is due. One the elites are already readying for.

Watching the world these days, I’m experiencing the same fury that rises up from my gut when the driver in the car ahead me is weaving drunkenly, endangering everyone on the road.

Fury is a normal and rational human response when threatened with unnecessary harm. Women who are groped (or worse) by a disgusting predator like Harvey Weinstein, pensioners whose funds are stolen by Wall Street shysters, everyone who is being fleeced by corporations in search of a few extra dollars this quarter —  all have the right to be infuriated.

It’s been especially hard of late for those of us who are “reality”-based; who value data, fundamentals and historical context.

I earn my living by reading, analyzing and making sense of the world, and then working to help orient people’s actions to align with both the current reality and future probabilities. But that’s become pretty damn difficult in a world where the financial markets are rigged and the main news outlets are unwilling (unable?) to cover the real issues, preferring instead to focus on distractions that mainly serve to keep us isolated and divided.

The trajectory our global society is on will not end well, and that infuraties me. And the fact that most of the coming suffering is unnecessary if only we’d make better choices — that really pisses me off.

Here’s just a small smattering of the threats we’ve created for ourselves:

  1. $247 trillion of global debt, growing exponentially
  2. Off-budget liabilities well over a quadrillion dollars globally ($220+ trillion in the US alone)
  3. Massively underfunded pensions mathematically unable to meet their future obligations
  4. A coming peak in world oil supply somewhere between 2020-2030 (and around 2022 for the US)
  5. A global economy that requires perpetual growth, but can’t grow for much longer due to planetary resource constraints

…click on the above link to read the rest of the article…

The latest casualty in the global pension catastrophe is…

The latest casualty in the global pension catastrophe is…

In the year 6 AD, the Roman emperor Augustus set up a special trust fund known as the aerarium militare, or military treasury, to fund retirement pensions for Rome’s legionnaires.

Now, these military pensions had already existed for several centuries in Rome. But the money to pay them had always been mixed together in the government’s general treasury.

So for hundreds of years, mischievous senators could easily grab money that was earmarked for military pensions and redirect it elsewhere.

Augustus wanted to end this practice by setting up a special fund specifically for military pensions.

And to make sure there would be no meddling from any government officials, Augustus established a Board of Trustees, consisting of former military commanders, to oversee the fund’s operations.

Augustus really wanted this pension fund to last for the ages. And to keep a steady inflow of revenue, he established a 5% inheritance tax in Rome that would go directly to the aerarium militare.

He even capitalized the fund with 170,000,000 sesterces of his own money, worth about half a billion dollars in today’s money.

But as you can probably already guess, the money didn’t last.

Few subsequent governments and emperors ever bothered themselves with balancing the fund’s long-term fiscal health. And several found creative ways to plunder it for their own purposes.

Within a few centuries, the fund was gone.

This is a common theme throughout history… and still today: pension funds are almost invariably mismanaged to the point of catastrophe.

We’ve written about this topic frequently in the past. It’s one of the biggest financial catastrophes of our time.

Congress has even formed a committee that’s preparing for massive pension failures.

And here’s another, very recent example: the city of Wilkes-Barre, Pennsylvania is deep in the red with its police pension fund.

…click on the above link to read the rest of the article…

The Pension Train Has No Seat Belts

The Pension Train Has No Seat Belts

In describing various economic train wrecks these last few weeks, I may have given the wrong impression about trains. I love riding the train on the East Coast or in Europe. They’re usually a safe and efficient way to travel. And I can sit and read and work, plus not deal with airport security. But in this series, I’m concerned about economic train wrecks, of which I foresee many coming before The Big One which I call The Great Reset, where all the debt, all over the world, will have to be “rationalized.” That probably won’t happen until the middle or end of the next decade. We have some time to plan, which is good because it’s all but inevitable now, without massive political will. And I don’t see that anywhere.

Unlike actual trains, we as individuals don’t have the option of choosing a different economy. We’re stuck with the one we have, and it’s barreling forward in a decidedly unsafe manner, on tracks designed and built a century ago. Today, we’ll review yet another way this train will probably veer off the tracks as we discuss the numerous public pension defaults I think are coming.

Last week, I described the massive global debt problem. As you read on, remember promises are a kind of debt, too. Public worker pension plans are massive promises. They don’t always show up on the state and local balance sheets correctly (or directly!), but they have a similar effect. Governments worldwide promised to pay certain workers certain benefits at certain times. That is debt, for all practical purposes.

If it’s debt, who are the lenders? The workers. They extended “credit” with their labor. The agreed-upon pension benefits are the interest they rightly expect to receive for lending years of their lives.

…click on the above link to read the rest of the article…

The Pension Crisis Will Break Up the EU

The German public broadcast agency ARD is proposing structural changes. Due to the low-interest rates, the ECB has placed the agency in hard times with its pensions. Karola Wille, the director, has called for structural reform to reduce costs. The proposal centers on technological change to increase efficiency in the performance of its mandate. They are also looking at developing cross-media applications to modernize the agency.  The ARD is non-profit so the German government has to fund it. As the low-interest rates have undermined pensions throughout Europe, the governments will have to step up and bail them out. This is going to put tremendous pressure on the entire EU budget and austerity policy embedded within the single currency.

We are looking at the same story being painted throughout Europe. The low-interest rate policy for nearly 10 years has not merely destroyed the bond market in Europe, it has undermined the pension system both privately and publicly. Indeed, adding to this crisis is the mandate that all pension funds hold some or the majority of their investments into government debt. The combination of these policies clashes with the ECB and the nightmare on the horizon and why Draghi can’t leave fast enough to avoid personal blame.

This crisis all stems from the structural design of the EU. They tried to be half pregnant with only a single currency and dictatorial control over member state budgets. The refusal to consolidate the debt emphasized the problem of the great disparities in cultures and the prevailing prejudices that exist through Europe between member states as well as within member states such as Bavaria v northern Germany or Spain v Catalonia, Scotland v Britain, Italy v Sicily, etc.. This prevailing prejudice is also why the bail-in policy was adopted.

…click on the above link to read the rest of the article…

This is Italy. This is not Sparta.

Nikolay Dubovsky Became Silent 1890

“European Stocks Surge Celebrating New Spanish, Italian Governments”, says a Zero Hedge headline. “Markets Breathe Easier As Italy Government Sworn In”, proclaims Reuters. And I’m thinking: these markets are crazy, and none of this will last more than a few days. Or hours. The new Italian government is not the end of a problem, it’s the beginning of many of them.

And Italy is far from the only problem. The new Spanish government will be headed by Socialist leader Pedro Sanchez, who manoeuvred well to oust sitting PM Rajoy, but he also recently saw the worst election result in his party’s history. Not exactly solid ground. Moreover, he needed the support of Catalan factions, and will have to reverse much of Rajoy’s actions on the Catalunya issue, including probably the release from prison of those responsible for the independence referendum.

Nor is Spain exactly economically sound. Still, it’s not in as bad a shape as Turkey and Argentina. A JPMorgan graph published at Zero Hedge says a lot, along with the commentary on it:

The chart below, courtesy of Cembalest, shows each country’s current account (x-axis), the recent change in its external borrowing (y-axis) and the return on a blended portfolio of its equity and fixed income markets (the larger the red bubble, the worse the returns have been). This outcome looks sensible given weaker Argentine and Turkish fundamentals. And while Cembalest admits that the rising dollar and rising US rates will be a challenge for the broader EM space, most will probably not face balance of payments crises similar to what is taking place in Turkey and Argentina, of which the latter is already getting an IMF bailout and the former, well… it’s only a matter of time.

…click on the above link to read the rest of the article…

The Next Recession Will Be Devastatingly Non-Linear

The Next Recession Will Be Devastatingly Non-Linear

The acceleration of non-linear consequences will surprise the brainwashed, loving-their-servitude mainstream media.

Linear correlations are intuitive: if GDP declines 2% in the next recession, and employment declines 2%, we get it: the scale and size of the decline aligns. In a linear correlation, we’d expect sales to drop by about 2%, businesses closing their doors to increase by about 2%, profits to notch down by about 2%, lending contracts by around 2% and so on.

But the effects of the next recession won’t be linear–they will be non-linear, and far more devastating than whatever modest GDP decline is registered. To paraphrase William Gibson’s insightful observation that “The future is already here — it’s just not very evenly distributed”: the recession is already here, it’s just not evenly distributed– and its effects will be enormously asymmetric.

Non-linear effects can be extremely asymmetric. Thus an apparently mild decline of 2% in GDP might trigger a 50% rise in the number of small businesses closing, a 50% collapse in new mortgages issued and a 10% increase in unemployment.

Richard Bonugli of Financial Repression Authority alerted me to the non-linear dynamic of the coming slowdown. I recently recorded a podcast with Richard on one sector that will cascade in a series of non-linear avalanches once the current asset bubbles pop and the current central-bank-created “recovery” falters under its staggering weight of debt, malinvestment and speculative excess.

The Intensifying Pension Crisis (37-minute podcast)

The core dynamic of the next recession is the unwind of all the extremes:extremes in debt expansion, in leverage, in the explosion of debt taken on by marginal borrowers, in malinvestment, in debt-fueled speculation, in emerging market debt denominated in US dollars, in financial repression, in political corruption–the list of extremes that have stretched the system to the breaking point is almost endless.

…click on the above link to read the rest of the article…

Illinois to Impose 1% Property Tax on Top of Everything Annually for 30 Years

 

In Illinois is a State that should just commit suicide and be emerged into surrounding states. It is following the EXACT pattern as the fall of the city of Rome itself. Constantine the Great moved the Roman capital from Rome to Constantinople around 330AD. Rome lost its status as corruption and taxes rose. More and more people just walked away from their property for there was NO BID.

Property values are already collapsing in Illinois.  The Pension Crisis is worldwide, but Illinois is leading the charge. The words of Edward Gibbon from his Decline & Fall of the Roman Empire are very applicable to Chicago. This is how empires, nations, and city-states die. It is always the abuse of taxation that drives people from their homes. Illinois is the NUMBER ONE state that now has a NET loss of citizens and people are fleeing that state. Bureaucrats cannot see the trend any more than they can see their own nose. They only see raising taxes. To them there is just no other way. They come first. Gibbon wrote:

“Her primeval state, such as she -might–appear in a remote age, when Evander entertained the stranger of Troy, has been delineated by the fancy of Virgil. This Tarpeian rock was then a savage and solitary thicket; in the time of the poet, it was crowned with the golden roofs of a temple, the temple is overthrown, the gold has been pillaged, the wheel of Fortune has accomplished her revolution, and the sacred ground is again disfigured with thorns and brambles. The hill of the Capitol, on which we sit, was formerly the head of the Roman Empire, the citadel of the earth, the terror of kings; illustrated by the footsteps of so many triumphs, enriched with the spoils and tributes of so many nations. 

…click on the above link to read the rest of the article…

Global Pension Gap Expected to Hit $400 Trillion: US Leads the Way

The global pension gap of 8 nations is $70 trillion. The US alone is $38 trillion. By 2050 the total gap will hit $400T.

The Visual Capitalist reports The Pension Time Bomb: $400 Trillion by 2050. The above image is a small section of a huge pension infographic.

  • According to an analysis by the World Economic Forum (WEF), there was a combined retirement savings gap in excess of $70 trillion in 2015, spread between eight major economies: Canada, Australia, Netherlands, Japan, India, China, the United Kingdom, and the United States.
  • The WEF says the deficit is growing by $28 billion every 24 hours – and if nothing is done to slow the growth rate, the deficit will reach $400 trillion by 2050, or about five times the size of the global economy today.
  • In the United States, it is expected that the Social Security trust fund will run out by 2034. At that point, there will only be enough revenue coming in to pay out approximately 77% of benefits.

Worse Than You Think

Lance Roberts at Real Investment Advice added to the report in his take The Pension Crisis Is Worse Than You Think.

What follows are excerpts of Roberts’ excellent presentation, withoutblockquotes. His name will mark the end of his report.

Problem 1: Demographics

With pension funds already wrestling with largely underfunded liabilities, the shifting demographics are further complicating funding problems. One of the primary problems continues to be the decline in the ratio of workers per retiree as retirees are living longer (increasing the relative number of retirees), and lower birth rates (decreasing the relative number of workers.) However, this “support ratio” is not only declining in the U.S. but also in much of the developed world. This is due to two demographic factors: increased life expectancy coupled with a fixed retirement age, and a decrease in the fertility rate.​

…click on the above link to read the rest of the article…

The Fed is Raising Rates Because of the Pension Crisis

QUESTION: The Fed says it will raise rates two or three times more this year. My question is this: If the stock market is crashing, why are they still raising rates?

HW

ANSWER: The Fed is raising rates because they must be NORMALIZED given the pension crisis. They are trying to get then back up and if they could, they would jack them up to 8%. If you can imagine, a pension fund under normal conditions needs 8% annual. Even CalPERS came in at 7% and they were insolvent. Rates are rising because of the pension crisis, not because the economy is really heating up or the stock market is booming. The technical resistance stands at the Downtrend Line at the 3% level. Rates will double to reach that area faster than people suspect.

We have a Directional Change due in May and look at the August/September period where we also have a Panic Cycle. Things are not going to be as smooth-sailing as many believe. We have a very RARE Double Monthly Bullish Reversal at 2.25%. A monthly closing above that level and 5% will be seen in a matter of months.

The Way to Survive Hyperinflation

COMMENT: Mr. Armstrong; I just wanted to comment that I am from Venezuela. My father came here to visit me in Florida where I live with a Green Card. Everything he saved in life for his retirement is now worthless and it does not even pay to travel back to collect his pension. The hyperinflation is a collapse in the confidence of government as you have explained. Those who saved for their retirement and had pensions, lose everything. They will be paid the amount that they were promised, but it will not even buy a single night’s dinner and soon a beer.

Thank you for your contribution to society. I wish more people would listen to you. Experience is the root of knowledge. Opinion is the root of bias. You have proven that

JE

REPLY: To survive hyperinflation requires the holding of tangible assets and never cash or pensions. The way pensions can be devalued is through inflation over the course of time and circumstance. What I paid into Social Security will never come back to me in terms of real purchasing power and that is without hyperinflation. I have stated before, I met with the Treasury back during the Reagan Administration and said these insane levels of interest rates will triple the national debt in less than 10 years. They simply responded; Yes but we will be paying back with cheaper dollars.

All promises of government are simply eroded with inflation. That is why Southern Europe fell into such chaos. The currency doubled instead of declining when they joined the Euro. That is why Europe has been a failure under this political-economic philosophy. The Euro first crashed, and then doubled in value. Southern Europe was used to inflation always reducing their debts. Suddenly, their debts doubled and deflation ruled. And people cannot figure out why the Euro is in such trouble?

I do like your saying though. It is spot on.

 

Is Volatility in Oil Price on the Way, Again ?

Is Volatility in Oil Price on the Way, Again ?


Experts say that you shouldn’t look at your pension investments too often as you might make unwise decisions. I don’t follow this advice. The reason that I’m drawn to tending my pension spreadsheet weekly, if not daily, is two-fold. First, I’m told by professionals who read the tea leaves on this sort of thing that I have Asperger’s syndrome. It turns out that pawing over columns of numbers in Excel is nirvana to certain of us oddball hues on the autism spectrum. Second, for ten years I have had a fascination, bordering on dread, for the incremental drama of two charts in my spreadsheet, both of which are shown below.

Stock market volatility follows clusters of spikes in oil price volatility

Figure 1 – Stock market volatility follows clusters of spikes in oil price volatility

Paradoxically, neither chart directly relates to my investments. However, they have guided the timing of when I move money around in my accounts – shifting between riskier stock indexes to safer bond funds. So far, my strategy has worked. For example, my pension fund suffered little during the 2008 financial crisis, and from lesser bouts of turbulence in 2011 and 2015.

So how does my investment approach work? It’s quite simple. The top graph in red shows a rolling 3-day standard deviation (SD) of daily oil price – specifically calculated from the Brent crude oil index. The chart below it in blue is a rolling 3-day SD calculated from the Dow Jones Industrial Average. Whenever, the red chart (i.e., that of oil) develops a cluster of large spikes that is sustained for a few months or more, I’ve noticed that a similar cluster turns up a few months later in the stock market. More importantly, I’ve learned that you don’t want your money in stocks when this is happening, so when the warning signs occur in oil, I march my money off to the relative safety of the bond market.

…click on the above link to read the rest of the article…

Find The Sentence That Dooms Pension Funds (Don’t Worry, It’s Highlighted)

Find The Sentence That Dooms Pension Funds (Don’t Worry, It’s Highlighted)

The “pension crisis” is one of those things — like electric cars and nuclear fusion — that’s definitely coming but never seems to actually arrive. However, for pension funds the reason a crisis hasn’t yet happened is also the reason that it will happen, and soon:

The Risk Pension Funds Can’t Escape

(Wall Street Journal) – Public pension funds that lost hundreds of billions during the last financial crisis still face significant risk from one basic investment: stocks.That vulnerability came into focus earlier this month as markets descended into correction territory for the first time since February 2016. The California Public Employees’ Retirement System, the largest public pension fund in the U.S., lost $18.5 billion in value over a 10-day trading period ended Feb. 9, according to figures provided by the system.

The sudden drop represented 5% of total assets held by the pension fund, which had roughly half of its portfolio in equities as of late 2017. It gained back $8.1 billion through last Friday as markets recovered.

“It looks like 2018 is likely to be more turbulent than what we have experienced the last couple of years,” the fund’s chief investment officer, Ted Eliopoulos, told his board last Monday at a public meeting.

Retirement systems that manage money for firefighters, police officers, teachers and other public workers are increasingly reliant on stocks for returns as the bull market nears its ninth year. By the end of 2017, equities had surged to an average 53.6% of public pension portfolios from 50.3% one year earlier, according to figures released earlier this month by the Wilshire Trust Universe Comparison Service.

Those average holdings were the highest on a percentage basis since 2010, according to the Wilshire Trust Universe Comparison Service data, and near the 54.6% average these funds held at the end of 2007.

…click on the above link to read the rest of the article…

This tiny corner of Rhode Island shows us the future of Social Security

This tiny corner of Rhode Island shows us the future of Social Security

The United States Court of Appeals for the First Circuit gave us an interesting glimpse of the future last week when it ruled on an obscure case involving government pension obligations.

Ever since the mid-1990s, police officers and fire fighters in the town of Cranston, Rhode Island had been promised state pension benefits upon retirement.

But, facing critical budget shortfalls over the last several years that the Rhode Island government called “fiscal peril,” the state legislature voted to unilaterally reduce public employees’ pension benefits.

Even more, these cuts were retroactive, i.e. they didn’t just apply to new employees.

The changes were applied across the board; workers who had spent their entire careers being promised certain retirement benefits ended up having their pensions cut as well.

Even the court acknowledged that these changes “substantially reduced the value of public employee pensions provided by the Rhode Island system.”

So, naturally, a number of municipal employee unions sued.

And the case of Cranston’s police and fire fighter unions made it all the way to federal court.

The unions’ argument was that the government of Rhode Island was contractually bound to pay benefits– these benefits had been enshrined in long-standing state legislation, and they should be enforced just like any other contract.

The state government disagreed.

In their view, the legislature should be able to change laws, even retroactively, whenever it suits them.

Last week the First Circuit Court issued a final ruling and sided with the state of Rhode Island: the government has no obligation to honor its promises.

News like this will never make major headlines.

But here at Sovereign Man our team pays very close attention to these obscure court cases because they often set very dangerous precedents.

…click on the above link to read the rest of the article…

 

Olduvai II: Exodus
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Olduvai II: Exodus
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Olduvai III: Cataclysm
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