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Mark's Market Blog

6-7-15: Pension funds imploding

By Mark Lawrence

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After making new highs last week, stocks started a slow downward trend. Bonds in Europe are collapsing, losses have been quite large, and this is starting to infect stock markets. I continue to believe we're rapidly nearing some sort of correction. Perhaps the first 10%+ correction in 3.5 years.

S&P 500 December 8 2014 to June 5 2015

Wage data came out and US wages are finally rising. Walmart announced raises for many workers, and no doubt they'll be followed quickly by other large companies. Wall Street hates this, as it means the Fed is very likely to raise rates soon. Free money for traders trumps the welfare of our working class every time.

The Yen broke long term support at 122 / $, and is now likely headed for the 140s. This will only increase the carry trade and tend to lead to higher stock prices in the US and Europe. It will also increase US and Chinese deflation, putting further pressure on China which cannot afford a devaluation race with Japan right now.

Pope Francis visited Sarajevo this week, and in a speech said he senses "an atmosphere of war" in the world. I agree.

In 1989 we all heard completely ridiculous things about Japan - the land around the royal palace in Kyoto was worth more than all of California, all the land, all the businesses, everything. The land in Tokyo was worth all the companies in the US. I immediately predicted a massive Japan crash, and within a year it happened. And they've never really recovered, the intervening 25 years have been "lost decades." It's happening again. The profits made this year in the Shanghai and Shenzen stock markets could buy all the property in London - twice. Just the profits, not the actual stock values. This is insane, of course. London, a financial center and home to 8,000,000 people is worth half as much as the stock market gains in five months. The reason for the run up is that Beijing is afraid of bad loans, so by causing the stock markets to rise they think they're making it so that companies can raise capitol with stock sales instead of loans. Of course this is all going to come apart. Soon - by the end of 2016 imo. I continue to believe 2015 will be a decent year, but it's looking more and more like 2016 is going to be very difficult.

China is believed to have massive bad loans all through their system. Cities have been encouraged to take out major loans to build big things just to get people employed. Now those loans are on the books and all too many of the underlying assets are non-performing. What's a good communist to do? So China is now starting their own QE program. Cities will be encouraged to issue bonds and use the money to pay off their bank loans, thus getting the questionable to bad loans off the banks books. The bonds will be sold to ignorant foreigners as much as possible, but the Chinese central bank will clearly emerge as the biggest buyer. Then when the bonds turn out to be bad, the bad news can be buried deep in the Chinese central bank vaults. So, perhaps a major Chinese banking crisis averted. They're still headed rapidly for an epic stock market crash. And a recession - container traffic out of China is timply collapsing. IMHO. But absent the banking crisis, perhaps the political fallout can be managed.

Although Super Mario was able to slow the european bond rout for a bit, it continued this week with interest rates multiplying and bond prices dropping. It's been calculated that investors lost $450 billion on european bonds in the last month. In the US 10 year government bonds are down 7.5% in the last two months - we're not immune. It seems to me this is largely about the uncertainty about Greece: what the Greek default will cost, who will pay, who's going to be without a chair when the music stops. Of course the bond rout will transfer to stocks soon enough. If this price action continues, expect a correction in stocks soon, like this month. Mr.Draghi promised that QE would keep bond and stock prices up and rekindle inflation. It's not at all obvious at this instant that he's going to be able to deliver on this. Meanwhile many have warned about decreased liquidity in the markets, so if bonds continue to fall and stocks follow course, we could quickly reach a point where there are sellers but no buyers. That makes for one of those Wile E.Coyote moments.

Although the IMF has indicated that Greece can lump their four required June payments into one large payment, Greece has not asked to do this. They did miss their June 5th payment, but the IMF volunteered that they have until the end of the month to make all four IMF june payments. We're apparently nearing the Greece end game. An official default this month looks pretty much inevitable to me; as I see it they're in default now. But then perhaps Europe will blink and there will be a last-second deal. In Europe they're talking about snap elections in Greece resulting in a change of government, apparently to something more pro-German. I don't see this at all, I think Syreza is quite popular in Greece and these EU guys are dreaming. On a related note, this week the IMF asked the Fed to keep rates low until 2016. Obviously they think they will have their hands full helping keep europe stable without more interest rate changes and more money leaving europe for the US.

We're coming up on the deadline for Obama's big nuclear deal. How's that going? The New York Times reports: "With only one month left before a deadline to complete a nuclear deal with Iran, international inspectors have reported that Tehran's stockpile of nuclear fuel increased about 20 percent over the last 18 months of negotiations, partially undercutting the Obama administration's contention that the Iranian program had been 'frozen' during that period." Iran's behavior confirms fears that it is using negotiations as a cover to continue its program, and worse, that this administration is providing it the latitude to do so. An official at a pro-Israel group said, "The revelation that the Iranians have blatantly violated the JPOA with their increased nuclear stockpile should be instructive about what lies ahead if a final deal is consummated. The Iranians will violate that agreement and the world will avert its gaze so as not to acknowledge failure. And why should the Iranians be concerned? After all, the President has evidently now taken the military option off the table."

Chinese hackers have gotten personnel records on federal employees dating back to 1985. These federal employees "are the people who hold US secrets," said national security expert Douglas Ollivant. "And now the hackers likely have access to blackmail-able levels of information, such as the employees' passports, Social Security numbers, history of drug use or psychological counseling, foreign contacts, etc. This is a really big deal. Some might consider it an act of war." How do they do this? Why don't we just cut off their access to the internet? That's 'cause there are 13 root servers that control the entire internet. Originally they were all made and maintained in the US. But Bill Clinton thought that was unfair, so he gave 12 of the root servers to various other countries. We haven't controlled the internet or access to US computers since.

Illinois is working on a bill to allow cities to declare bankruptcy. Boxed in by union pensions and their own state constitution which dictates salaries and benefits, Illinois finds there is no easy way out. One commission puts their pension deficit at $111 billion - just short of $10,000 per resident, or something like $30,000 per taxpayer. The Illinois legislature has 71 democrats and 47 republicans, so to get out of the mess that the democrats engineered for and with the unions the democrats will have to vote to screw the unions. Michigan allowed Detroit to declare bankruptcy and that is considered a major success. Of course the city hasn't recovered yet so perhaps "success" is a bit strong. Chicago has already been reduced to junk bond status. If the bill passes Chicago's bonds will almost certainly collapse raising Chicago's funding costs and making bankruptcy even more likely. Furthermore many, including your intrepid writer, think that the stock market is likely to have another collapse in the next year or two making pension funding even more critical. Adding to the general confusion is that the SEC has charged Illinois with securities fraud for misleading investors about pension funding and obligations. Will Chicago declare bankruptcy? Or will the threat of a federal judge making all the decisions bring the union back to the bargaining table? An Illinois professor suggests another solution: lay off all the Chicago employees and then either rehire them under new terms or contract out their jobs to private industry. Stay tuned for "As the democrats turn." This is just the second season of this new and exciting show; right behind season one's Michigan is Illinois, then in later seasons we'll be seeing New Jersey, Connecticut, Kentucky, Louisiana and Alaska. btw, a court recently ordered New Jersey to make their full $1.6b pension payment this month. There's no such money budgeted or available and it's very difficult to see how New Jersey will comply. Perhaps New Jersey will be locked up for contempt. New York Fed President Dudley has been warning that risks of municipal bankruptcies are "more widespread" than implied by bond ratings. Bondholders and public employees with pensions beware: The Fed is now doing workshops on municipal bankruptcies.

The Supreme Court has decided to hear Evenwel v. Abbott. This case is about voting districts. Currently districts are apportioned by population, but population includes illegals, non-citizens and non-voters. Urban districts are heavily democrat and much more populated with illegals and children of illegals. If the court finds that districts should be apportioned by voters instead of warm bodies it's estimated that republicans will pick up between five and ten house seats and two or three senate seats. Changes in state legislatures could be even larger as districts move out of cities and into suburban and rural areas where there are fewer children, fewer illegals, and more (conservative) voters. Reapportionment could happen soon enough to wreck Hillary's already thin chances. Although I must admit as little as I would approve of a Hillary presidency, my enthusiasm for a Bush or Huckabee presidency is not much higher.

There are 1800 mass transit systems in the US. 75 of them report income that's higher than their operating budgets; the remaining 1725 lose money. Here's the top ten:

Transit AuthorityLoss per Passenger
Niagara Frontier, NY$2.83
Maryland, MD$2.90
San Francisco Municipal Railway, CA$3.13
Greater Cleveland, OH$3.23
Central Puget Sound, WA$3.91
Dallas Area Rapid Transit, TX$4.43
NJ-Philadelphia, NJ & PA$4.47
Allegheny County, PA$5.20
Santa Clara Valley, CA$5.53
Hampton Roads Transit, VA $6.63

Virgin births - are they real? Surprisingly, yes. It's been known for some time that komodo dragons can reproduce asexually, as can some sharks, chickens, turkeys, pit vipers and boa constrictors. Now it's been seen in a saw fish in the wild. Saw fish, most frequently seen near Florida, are nearing extinction and under intense evolutionary pressure are producing virgin births in up to 3% of their offspring. We're pushing really hard on the planet. We should expect at some point it will push back.

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