"Welcome to Wall Street Executive Air flight 2009 with service to Economic Disaster." All you need to know about the endangered species of Wall Street Faticus Caticus, and why it is about to cannibalize itself into oblivion, in a simple cartoon even Saturday night drunks can comprehend.

h/t Nolsgrad

Submitted by David Galland and Kevin Brekke at Casey Research

The other day, I came across an article that said, while individuals may be moving their money out of equities, they have been moving into bond funds – and in a big way.

It’s called jumping from the frying fan into the fire.

Based on my experience as a co-founder of a mutual fund group, I can tell you that if there is one sure thing in this world, it’s that when investors rush en masse into an investment category, it is invariably at almost exactly the wrong time to do so. Is that the case with today’s rush into bonds?

To shed some light on that point, Casey Research Switzerland-based editor Kevin Brekke volunteered to look into the correlation between bond flows and performance. Here’s his report…

Thinking About Bonds

By Kevin Brekke

With the great bond stampede that began in 2009 continuing, giving rise to the very real possibility of a bond bubble, we decided to check the relationship between bond returns and bond fund inflows to see if there might be a correlation. Take a look at this chart:

(1) Measured as the year-over-year change in the Citigroup Broad Investment Grade Bond Index.


(2) Plotted as the three-month moving average of net new cash flow as a percentage of previous month-end assets. The data exclude flows to high-yield bond funds.

As suspected, the rise and fall in total return from bond funds is accompanied by an influx or exodus of bond investors. Data to construct the chart were taken from the Investment Company Institute’s (ICI) 2010 Fact Book where they state, 

In 2009, investors added a record $376 billion to their bond fund holdings, up substantially from the $28 billion pace of net investment in the previous year. Traditionally, cash flow into bond funds is highly correlated with the performance of bonds. The U.S. interest rate environment typically has played a prominent role in the demand for bond funds. Movements in short- and long-term interest rates can significantly impact the returns offered by these types of funds and, in turn, influence retail and institutional investor demand for bond funds.”

 ICI continues by noting that secular and demographic trends have tempered the appetite for equities. An aging population tends to become risk averse, and the Baby Boomers are entering retirement and seeking a safer alternative to the stock market. This occurrence is clearly shown on the right side of the chart. Following the stock market crash in 2008, investors exited stocks and bonds as general panic prevailed. As investor calm returned, a tidal wave of new money flowed into bond funds, turning 2009 into a record year.

And the popularity of bond funds continues. So far this year, investors have funneled $200 billion in new money into bond funds. 2009 was also a record year for total assets and net new capital in bond funds from retirement accounts.

That is the view through the macro lens. Switching to a wide-angle lens gives one pause.

We can’t help but draw similarities to the housing bubble that began inflating at the start of the new century. As home prices started escalating, they drew the attention of a growing pool of investors. And soon this becomes a self-reinforcing phenomenon; higher prices attract greater numbers of investors that drive prices higher. Likewise for bonds. Bond returns are rising because bond returns are rising. Got it?

We have entered the terminal phase of a bond bull market ushered in thirty years ago by Paul Volcker, who drove interest rates over 20%. With 30-year U.S. government paper now under 4%, the easy profits have been made and the low-hanging fruit consumed. Investors today are shimmying out on a very tall and thin branch in search of higher “total return.” The snapping of the branch – sending investors big losses – may not be imminent, but it is inevitable.

As we at Casey Research have discussed and warned about often, the fiscal misadventures of the U.S. government will have their consequences. And one of the first victims will be bond investors as interest rates are forced higher, much higher, to attract buyers, particularly foreign buyers. When this happens, the total return on bond funds will be smashed.

The sad and pathetic irony: to escape the beatings endured in the stock markets, millions have sought safety in bonds. The punishment is not over.

We are afraid an awful lot of investors will be left asking, “What was I thinking?”

Via Pension Pulse.

Below is a guest commentary by Martin van Dalen, a portfolio manager in the investment department of the Dutch Social Security Organization:

Recent problems in the Dutch pension sector

 

I’m very grateful to Leo Kolivakis’ invitation to write this guest post.

 

Over here, in the Netherlands, the pension sector has a bit of a problem.

 

First, the structure of the Dutch pension system. There’s a nationwide (compulsory) retirement system, paid on a pay-as-you-go basis (out of the first two income tax brackets), providing a pension at 65 at the same level as the national minimum wage (that is, for a married or non-married couple, single persons get about 70%), calculated over a period of 50 years. (For every year you haven’t been a resident, 2% is deducted.) The starting age of 65 is likely to be moved to 66 (from 2020) and 67 (from 2025), but those plans were temporarily shelved when the Dutch government collapsed. Whether the next government will manage to get this done is uncertain; we’re still trying to form a government.

 

The second pillar is quite large: about 600 pension funds, (theoretically) fully funded, providing pensions to probably over 90% of non-self-employed workers. Mostly defined benefit, although the share of defined contribution is rising. By now generally based on the average wage during the period of employment, hopefully indexed for inflation. Pension rights are accrued, and contributions paid, on the income over the income provided by the first pillar pension. If all goes well, and one doesn’t have too many breaks in one’s career, one might expect a total of 60% to 70% of one’s average income. Since the income tax rates for retired persons are much lower, the net income might be about 80% of one’s average income (again, hopefully indexed). The total assets of the second-pillar pension schemes at the end of 2009 were € 741 billion.

 

The third pillar (for self-employed persons and for others who have gaps in their pension career) is run by insurance companies.

 

The pension sector is regulated by De Nederlandsche Bank, the Dutch central bank. Further on, referred to as “DNB”.  

 

By international standards, the Dutch system is considered to be quite good. (See Ambachtsheer, K.P.,  Pension revolution: A Solution to the Pensions Crisis, 2007, and the Melbourne Mercer Global Pension Index, updated 14 October 2009, at

http://www.mercer.com/referencecontent.htm?idContent=1359260 .)

 

So everybody thought their pension was quite safe. One typically gets an annual statement from one’s pension fund (“Uniform Pensioenoverzicht”), consisting of several pages filled with numbers. I expect that most people didn’t spend more than five minutes in studying it. However, the next statement might be scrutinised more closely, as I will try to explain. 

 

Pension funds have to report on their coverage ratio on a quarterly basis. And this is where the problems start. As I need not explain to the reader, it’s basically a simple matter: you have the current value of the investments on the one hand, and the present value of the expected outflows, based on actuarial assumptions, on the other hand. Divide the first number by the second number.

 

The big question is of course which discount rate should be used. DNB has prescribed a yieldcurve, period. I understand it’s a zero-coupon curve derived from the Dutch government bond yieldcurve. But whatever it is, it’s the one that pension funds are required to use when reporting their coverage ratio. It’s published monthly on DNB’s website at http://www.statistics.dnb.nl/popup.cgi?/statistics/excel/t1.3nm.xls .

 

Their policy on the resulting coverage ratios is quite clear:

<!--[if !supportLists]-->·        <!--[endif]-->Less than 100%: you’ve got a problem, you have to submit a recovery plan outlining how you are going to get back to at least 100%.

<!--[if !supportLists]-->·        <!--[endif]-->100% - 105%: no indexation of pensions and accrued pension rights allowed.

<!--[if !supportLists]-->·        <!--[endif]-->105% - 125%: only partial indexation allowed.

<!--[if !supportLists]-->·        <!--[endif]-->125% - 145%: full indexation allowed.

<!--[if !supportLists]-->·        <!--[endif]-->Over 145%: compensation of previous missed indexation allowed.

 

(These percentages apply to the average pension fund, in term of asset mix and demographic composition.)

 

I need hardly point out to the reader that coverage ratios have fallen dramatically over the last few years. See http://commons.wikimedia.org/wiki/File:Coverage_ratio_Dutch_pension_funds.png for a graph, made from data found on the DNB website. (The data for 2010Q2 have not yet been released.)

 

Neither do I have to explain to the reader that this drop is to a large extent the result of the drop on yields on Dutch government bonds. (The other part is of course the not-too-spectacular yield on investments during the last years.) Of course, this is to a large extent the result of the crisis in Euroland public finance: yields of Greek, Portuguese and Spanish government bonds have risen dramatically, yields of Bunds have dropped to historically low levels. And the Netherlands are seen, by the international investor community, as a sort of province of Germany, economically speaking. To a fairly large extent, they have a point: Germany is our largest trading partner, for instance. Dutch government bonds move, well, not exactly in lockstep, but in a fairly narrow band: about 20 to 30 basis points above Bunds, give or take a few basis points.

 

For Dutch public finances, this is obviously a blessing: we’re not the safe haven that Bunds are perceived to be, but pretty nearly so. Dutch pension funds, however, are now faced with the opposite effect: these low yields work against them.

 

A week or two ago, DNB issued a statement to the effect that 12 to 14 pension funds had such a low coverage ratio that they should cut their current pensions and their accrued pension rights by, depending on the fund in question, 1% to as much as 14%, starting as soon as January 1, 2011. DNB was barred by law from saying which pension funds were involved, but since then, the names of all of them have surfaced. All in all, about 700.000 people would be facing cuts (total of current pension recipients, current contributors and past contributors), on a nationwide total of about 8 million people who are involved in a pension scheme (plus their dependants). (The number of 8 million people is a back-of-the-envelope calculation by a senior official of a large Dutch social security organisation who I asked for a guesstimate.)

 

Some of these funds are quite small (in some cases I don’t understand why they haven’t merged with a larger one), but one of them, PME, is a fairly large one. One of the largest, in fact, right behind the “big boys” ABP (public sector and education) and PZW (healthcare). 700.000 people out of 8 million means that nearly 10% of the Dutch should brace themselves for bad news. It’s understandable that this has caused a pretty big row.

 

Cutting nominal entitlements has never happened before, at least, not since World War II. (Not getting your pensions or future pensions indexed is, obviously, also a way of cutting them, but it attracts less attention that way.)

 

As was to be expected, the pension funds have shown little inclination to do as they have been told. Some of the things they have said, thus far:

 

<!--[if !supportLists]-->·        <!--[endif]-->DNB made this demand out of the blue, without first telling us that they would do so, and informed the press at the same time. They should have been more polite. We’re not going to accede to their demand until they repeat their request in a polite way. (The Dutch, whatever their social status or position, do not take kindly to being told what to do. Ask any Dutch police officer for examples.)

<!--[if !supportLists]-->·        <!--[endif]-->We have agreed with the trade unions and employers’ associations to wait until 2012 before taking any steps, so DNB has to accept this agreement. (The fact that DNB, or for that matter the Minister of Social Affairs, has legal powers of itself is not seen as being relevant in any way. This is entirely normal in the Netherlands. It is impossible to exercise authority without the consent of the governed, especially in matters pertaining to labour.)

<!--[if !supportLists]-->·        <!--[endif]-->This is the result of something beyond our control, i.e. the behaviour of international financial markets, so we cannot be held responsible in any way.

<!--[if !supportLists]-->·        <!--[endif]-->This is the result of DNB prescribing this yieldcurve, so it’s entirely DNB’s fault.

<!--[if !supportLists]-->·        <!--[endif]-->The mere fact that DNB has said this, means that a lot of people are very upset, for which DNB is wholly to blame. The only way to restore confidence in the Dutch pension system is for DNB to retract its statement immediately.

<!--[if !supportLists]-->·        <!--[endif]-->As this problem has been created by the government yield curve, it’s up to the government to solve it: please send us the required umpteen billion euro’s immediately.

<!--[if !supportLists]-->·        <!--[endif]-->The present yield curve is historically low, which means it will rise in the future. Using a historically low rate means being too pessimistic. It would be desirable to use an average over a number of years. (This position has been taken by ABP pension fund in articles in several Dutch newspapers.)

<!--[if !supportLists]-->·        <!--[endif]-->This is not simply a matter of cutting everybody’s claims by x%. We have to decide on whose claims to cut by which percentage, to spread the pain in a just manner. If we have to cut at all. This will take time.

<!--[if !supportLists]-->·        <!--[endif]-->This is a very complex problem, whichever way you look at it. Let’s not start cutting claims in undue haste, but let’s make an in-depth study of the entire matter.  

 

Please excuse the levity. I have allowed myself some leeway in paraphrasing the arguments put forward, as, I think, befits a blogger.;) I hasten to add that I am well aware that the boards of the pension funds concerned will be extremely uncomfortable. Their position is not to be envied…

 

In the meantime, the yields on Dutch government bonds are reaching new lows almost every day. This means that a favourite way of handling complex problems –hoping they will disappear in some mysterious way without any painful steps having been necessary- is unlikely to work.

 

The Dutch parliament is currently debating the matter, along the familiar lines of “how could this happen” and “who is to be blamed”.

 

My two cents:

 

On the one hand:  

 

There is something funny about the DNB yieldcurve. It currently tops at about 20 years at 3.60%, but is significantly lower for later years: 3.10% at the end of the curve. That’s counterintuitive, to say the least. Furthermore, I’ve told that the observations used in construing this curve stop at the end of the Dutch government yield curve, i.e., at this moment 32 years, the NETHER 3.75 01/14/42 being the longest Dutch government bond, not counting a number of completely illiquid perpetual loans. Anything beyond that, up to 2070, is done by just extending the last set of observations. Now, this means that any fluctuations or distortions at the end are compounded in the calculations. A difference few basis points might not seem much, but raised to the power of 60…

 

On the other hand:

 

The purpose of this present-value calculation is to arrive at an answer to the question “how much should we invest today in order to be able to pay this stream of outgoing cashflows?”. This means that realistic assumptions as to future yields on this investments should be used, or the whole exercise is pointless. (I have read that U.S. pension funds are allowed to use yields of 8% or more in their calculations. If this is correct, I think this is a disaster waiting to happen, but that is another matter.)

 

Assuming one wants pension funds to invest in a safe way, without too much downside risk, this means, in my humble opinion, that one should use a yield curve that contains a large component of government bond yields, so to speak. (DNB does not tell pension funds which asset-mix they should use, but does apply “buffer requirements” for assets other than government bonds. The 125% mentioned above applies to a “standard asset mix” containing, roughly, 60% bonds, 30% equities and 10% anything else. Or thereabouts.)

 

If this means that in the present situation one arrives at an uncomfortably high number (of the present value of the future claims), that’s only a reflection of the reality.

 

If this means that current pensions and current claims have to be cut, so be it. (And I am quite aware that cutting someone’s pension by, say, 20 to 50 euro’s per month will be quite painful in a large number of cases.)

 

But if we don’t do that now, we are in effect spending money we don’t have. Which means that future generations will have to foot the bill, one way or another.

 

(Would it have been possible to hedge this risk? Up to a point, Lord Copper. Let’s assume that the duration of the liabilities of a typical pension funds is 15 to 20 years. Of course this depends on the demographics of the participants, but this seems not too far off the mark. Theoretically, the ALM manager could tell the asset manager to invest in a first-rate bond portfolio with the same duration: 100% Dutch government bonds. You’d have a lovely hedge: both liabilities and assets would bob up and down on the waves of the Dutch yieldcurve. But at this moment that would entail accepting a hideously low YTM: less than 3% on average, across the entire length of the curve. The price such a pension fund would pay for (a lot of) certainty as to its coverage ratio, would be an annual contribution that neither the employed participants nor the sponsor would want to find out. On the other hand, a pension fund with such an investment portfolio would not be required to have the “buffer requirements” that DNB require of other funds. The 125% coverage ratio mentioned above would be set at a much lower level. I don’t know what level, probably as low as 105%. But it’s a purely theoretical question. There just isn’t enough very long-dated Dutch government debt around to satisfy the needs of even a minority of Dutch pension funds if they would choose to structure their assets this way.)

 

It’s quite impossible so say what will happen. Clearly, the Dutch trade unions have a large say in the matter, and their members are generally older. (The typical trade union member is over 40, I understand.) Dutch employers’ unions, I would expect, probably care less as long as their members, in their role of pension fund sponsors, aren’t going to have to fill the gap.

 

Whether DNB will be able to assert itself, and force the funds to cut the nominal pensions and accrued claims, is to bee seen. DNB has had some bad publicity recently, especially over the collapse of DSB Bank. (The committee that investigated the way DNB handled this reported that DSB Bank should not have been given a bank licence in the first place…) DNB has announced far-reaching changes, among them setting up an “intervention unit” that should be authorised to take steps before things go wrong. (In my capacity as a citizen and a taxpayer I was a bit surprised to read this… I would have thought that a regulator would be able to take steps before things go wrong.)

 

I think this would be an excellent time for DNB to show that they do mean business. Let me put it this way.;)

 

A few links (in Dutch, I’m afraid, but I trust Google Translate will be able to give the reader a rough idea of the contents):

 

<!--[if !supportLists]-->·        <!--[endif]-->DNB, FAQ about this issue: http://www.dnb.nl/nieuws-en-publicaties/feiten-en-visie/kroniek-van-de-kredietcrisis/dnb238207.jsp

<!--[if !supportLists]-->·        <!--[endif]-->Interview with Ms. Kellermann, DNB board member: http://www.fd.nl/artikel/20092068/dnb-kritisch-accountant-actuarissen

<!--[if !supportLists]-->·        <!--[endif]-->Statement of PME pension fund: http://www.metalektropensioen.nl/portal/page_pageid=3015,5824987&_dad=portal&_schema=PORTAL&p_item_id=6343632

<!--[if !supportLists]-->·        <!--[endif]-->A collection of articles on pensions in NRC Handelsblad newspaper: http://www.nrc.nl/nieuwsthema/pensioenen/ 

<!--[if !supportLists]-->·        <!--[endif]-->List of pension funds that are involved:  http://www.telegraaf.nl/overgeld/rubriek/pensioen/7489903/__Overzicht_14_zwakke_pensioenfondsen__.html

<!--[if !supportLists]-->·        <!--[endif]-->Joint statement of pension fund associations: http://www.nu.nl/files/Brief_TK_VB_UvB_OPF.pdf   

 

Martin van Dalen is a portfolio manager in the investments department of a Dutch social security organisation. The above has been written in a purely private capacity, and does not reflect in any way the position or opinions of either his employer or the board of the fund whose assets he helps to manage.  

I thank Martin for this insightful contribution on the current state of the Dutch pension system which has long been the envy of the world. But as we can see from reading this comment, even the Dutch pension system is going through its share of problems.

→ Washington’s Blog

As I have repeatedly pointed out, American taxpayers have been bailing out foreign banks for years.

For example, I noted in May:

As the Wall Street Journal points out, the Federal Reserve might open up its "swap lines" again to bail out the Europeans:

The Fed is considering whether to reopen a lending program put in place during the financial crisis in which it shipped dollars overseas through foreign central banks like the European Central Bank, Swiss National Bank and Bank of England.

***

At a crescendo in the crisis in December 2008, the Fed had shipped $583 billion overseas in the form of these swaps.

As the BBC's Robert Peston writes:

There is talk of the ECB providing some kind of one year repo facility (where government bonds are swapped for 12-month loans) in collaboration with the US Federal Reserve.

See this for more information on swap lines.

Indeed, the Federal Reserve has been helping to bail out foreign central banks and private banks for years.

For example, $40 billion in bailout money given to AIG went to foreign banks. Indeed, even AIG's former chief said that the government used AIG "to funnel money to other Institutions, including foreign banks".

As the Telegraph wrote in September 2008:

The Fed has also just offered another $125bn of liquidity to banks outside the US that are desperate for dollars and can't access America's frozen credit markets.

Congressman Grayson said that the Fed secretly "stuffed" half a trillion dollars in foreign pockets.

(Of course, the Fed won't tell Congress or the TARP overseer - let alone the American people - who got the cash).

And as I pointed out the same month:

A Fact Sheet from the U.S. Treasury says:

Participating financial institutions must have significant operations in the U.S., unless the Secretary makes a determination, in consultation with the Chairman of the Federal Reserve, that broader eligibility is necessary to effectively stabilize financial markets.

An article from today in Politico explains

"In a change from the original proposal sent to Capitol Hill, foreign-based banks with big U.S. operations could qualify for the Treasury Department’s mortgage bailout, according to the fine print of an administration statement Saturday night."

Of course, even much of the bailout money which went to American banks ended up being shuttled abroad. As I wrote in March 2009:

Moreover, bailout money that went to Citigroup was loaned to Dubai, bailout money that went to Bank of America China was invested in China, and bailout money given to JP Morgan was invested in India.

And the government is in the process of providing billions more - along with trillions more in guarantees of worthless assets - to sovereign wealth funds and hedge funds.

So not only are Americans bailing out our own too big to fail banks, but we're bailing out foreign mega-banks as well.

Even though bailing out Europe might make sense if America was flush with cash, things are different now. As Congressmen Kucinich and Filner wrote last June:

Our country and this body cannot afford to spend American tax payer dollars to bail out private European banks.

In addition, the U.S. is - of course - also contributing tens of billions of dollars towards the Greek bailout through its contributions to the International Monetary Fund. Some allege that the U.S. will secretly help bailout of all of Europe. See this and this.

As Tyler Durden pointed out last week, the IMF has now abandoned any cap on the bailouts it gives, and the U.S. is the largest funder of the IMF.

Now, the New York Times says that the U.S. is going to bail out Afghanistan's biggest bank:

Details of the deal, including how much each government would contribute, were still being worked out on Saturday between the Central Bank of Afghanistan and the United States Treasury Department, officials said...

Top officials at Kabul Bank and a senior leader at the Central Bank declined to comment publicly on the proposed bailout, which was still being negotiated. However a manager at the Central Bank and a senior American official confirmed what the American official called an "intervention."

Not surprisingly, there have been numerous allegations of corruption at the Kabul Bank.

Update: The New York Times has updated their story with comments from U.S. Treasury officials insisting that no American money will be used to recapitalize the Kabul Bank:

"No American taxpayer funds will be used to support Kabul Bank," said Jenni LeCompte, a Treasury Department spokeswoman.

Of course, the IMF, World Bank or a foreign country could funnel the bailout moneys and then the U.S. could print more money to "repay" them later. Accounting shenanigans and under-the-table deals can work wonders to hide the truth from angry American serfs taxpayers.

In his most recent Popular Delusions piece, SocGen's brilliant Dylan Grice once again rightfully demolishes the shamanic rituals of the "alternate universe" theory, better known as economics, ridicules economists for the hack priests of financial paganism they are, and concludes what may be the key principle of modern cynical thought: "Some have said that the key risk investors face today is of ‘policy error’. But isn’t that always the key risk? Financial history is one long series of ‘policy errors’ and while policy makers labour under the delusion that they know the unknowable it will remain so. All investors can do is try to see the funny side, and focus on things we can know." Incidentally, focusing on the funny side is precisely what Zero Hedge has been doing for just over a year and a half (much to the dismay of our ever growing detactors and critics). Add some intelligence to the discourse, and one gets in 18 months more actual policy changes (Fed Audit, the end of Goldman Prop (a topic we were digging into long before Volcker was resurrected from the dead), banning Flash trading, inquiry into High Frequency Trading and daily market manipulation), more than others who in lengthy, rambling, somnolent, rants and essays have achieved in decades. Since mixing humor and "focusing on what we know" is all we know, we will continue doing it, until we succeed in terminally discrediting the most worthless voodoo "science" ever conceived by man - economics, and overturning its one most destructive construct - the central bank and the implicit central planning that goes side by side. But in the meantime, here is Dylan's most recent fusion of humor and scathing condemnation of the idiots who will gladly destroy the US economy in their pursuit of a theory which is proven to be more and more flawed, fake and destructive with each passing day.

Dylan on the basis of the illusion of control:

The pedestrian ‘push’ buttons at New York’s intersections don’t actually work. They were deactivated in the 1970s when computer-controlled automatic traffic signals were installed but left in place because removing them is too costly. Apparently most ‘close door’ buttons in lifts don’t work either. But give us a button and we’ll press it, not because the button works but because the sense of being in control makes us feel good (when subjects are crammed into a lift for example, those closest to the controls show lower stress levels). Feeling in control doesn’t mean that we are in control, but who cares? As Slartibartfast said in Hitchiker’s Guide to the Galaxy, “I’d rather be happy than right!”

Slartibartfast would have been a splendid economist. Squabbling amongst themselves in the press - when fiscal retrenchment should proceed; where monetary policy should go from here; how to avoid deflation; etc – they use loaded words such as “optimal”, “equilibrium” and “calibration”, language which gives the impression of learned discussion between experts who understand their subject matter. In fact, the overwhelming evidence of regular financial calamity (which has unambiguously increased as central banks have gained influence, see chart below) clearly demonstrates that they do not. But that doesn’t deter our brightest economists from happily believing their own propaganda. They really think they’re in control!

Let them press their buttons. Let them believe they know the unknowable if, like Slartibartfast, it makes them happy. Frankly, there’s not much we can do, other than allow the occasional giggle and avoid making the same mistake of failing to accept that some things just can’t be known. Our effort and energy should focus on what can be.

On the creation of ad hoc theories to explain a constantly changing reality, on their endless inability to predict even one day into the future, and on covering up that economists are really just the most insecure, unintelligent, overrated hacks ever produced by Ivy League universities.

A famous MIT economist earnestly warns on a prominent website that “the US may be near a liquidity trap” where monetary policy may no longer be ‘effective’ (whatever that means: effective at what, inflating bubbles?) Fear not though, and let the trumpets sound out, for our macroeconomists are riding to the rescue “ … the ineffectiveness of monetary policy can be turned on its head by using money creation to finance fiscal policy stimulus – such as a large but temporary cut in sales taxes. To avoid future problems, the Treasury could commit to transfer resources back to the Fed when the economy is back to full employment.” This is a brilliant solution … it’s smart … it might even be sexy. But there’s one glitch - how do we know when we’re at full employment? Didn’t the Irish think they were at sustainable and full employment in 2007, only to discover that they had been dangerously overheating?

Not to worry, another report on my desk warns against premature austerity. To give its argument added weight it quotes Keynes: “The boom, not the slump is the right time for austerity.” The authors are concerned that mistimed government retrenchment might cause more unemployment than necessary. Who would argue with such sentiments? Who wants to see high unemployment? But how will they know when the economy is booming? Knowing when it collapses is easy enough: spikes in unemployment hurt; market panics hurt … but booms? Like full employment; how do we know when we’re there?

During the boom, Ben Bernanke didn’t know it was a boom and dismissed the very notion of a US housing bubble. During the boom, the clever economists at the helm, who today diagnose the economy’s ills and confidently suggest its remedies, said then that the cycle had been tamed, that leverage which was once dangerous was now prudent. During the boom, the UK’s Chancellor boasted that he’d “put an end to boom and bust.” During the boom, the few lone voices pointing out the dangers of the credit inflation were dismissed as “perma bears” During the boom, everyone thought the boom was normal, leading us to where we are today. There was certainly no talk of ‘austerity.’

...On what we don't know (or at least what we should admit to those reading us, we have no clue). And yes, this is directed solely at Paul Krugman, and all the other prize Keynesianites of the world.

Never mind. Keynesian poster boy and Nobel prize winner Paul Krugman gushes over Richard Koo’s conclusion that even though Japan’s level of nominal GDP today is lower than it was in 1992, the nearly two decades of fiscal stimulus was the most successful in history, for without it Japan would have experienced a much worse decline! Conclusion? We need more fiscal stimulus to get the economy back to ‘full employment’… forget for now that no one has, has ever had, or is ever likely to have any accurate idea of where ‘full employment’ is: macroeconomists are now basing policy recommendations on intrinsically speculative and unprovable counterfactuals! I understand the intuition, but he can’t know that Japan’s stimulus has improved the lot of its people, or indeed what the full consequences of the stimulus are.

I could go on … the FT reported on 1 September (see Greece debt default seen as ‘unlikley’ – FT.com) the IMF estimates of the UK and US’s “fiscal space” and the conclusion that they can increase their debt by another 50% of GDP without a crisis. I hope they’re right, but their guess is as good as my cat’s. There just is no “trigger” beyond which debt crises happen (chart above) and we have no idea how much “fiscal space” governments have until they have none ...

...On what we do know, or what we should do with the things we have some control over...and not just a Keynesian illusion thereof:

But what can we do? Chuckle, and focus on doing homework in areas where we at least have a chance of knowing. We know, for example, that scarcity is developing in certain commodity markets and that China’s age of self sufficiency in things like coal and grain is probably over. We know that historically when a large producer has turned to world markets those markets have become vulnerable to violent upward spikes. We also know that wars have frequently been fought over scarce resources and that China now has more fighter ships than the US.

We know that the developed economies’ demography is set to decline and that while we’re not sure what the effect will be, that Japan’s experience isn’t encouraging. We know that overstretched government balance sheets have historically posed an inflation risk but that bond yields are at levels rarely seen in the past few centuries, let alone decades. We know that entry valuations determine long-run returns and so bonds are likely to be an appalling investment here. We also know that while equities still aren’t cheap in an absolute sense they’re as cheap as they’ve been since the crash of 2008, so there are bound to be opportunities within these markets for providing decent long-run returns (see chart below). And we know that as we’re exploring the many (hopefully) profitable areas in the coming months, the Slartibartfasts will be in their fool’s paradise, pressing their buttons and in their own tragi-comic way, adding to the richness of the whole experience.

And people wonder why we don't offer wholsale policy suggestions - indeed, what is the point when the entire house of cards is doomed by daily gyrations as the entire market and all investors can't focus their attention on anything more than a few seconds into the future, even as the reality behind the flashing stock tickers is turning darker with each passing day... Just sit back, relax, and watch the show as it unfolds. It will be hilarious from start to (imminent) finish.

I have written often on the status of SS. I also have some understanding of illegal aliens working in the US. I have sponsored four over the course of many years. I don’t hire them. But I pay many companies that do. The employers know they are illegal, but the workers have SS cards (fake) and so long as the PR taxes are collected no one seems to care.

These two interests of mine dovetail. SS has been collecting money from illegal aliens for years. They will keep the money they have collected and they will not pay out any benefits (except fraud) in the future. So this money is “free”. I have often wondered how big the numbers on this are. Now we know. The numbers are enormous. Without the Free Money coming in from illegal aliens SS would look much different than we "think" it does.

The WaPo had an article on this today. They had hard numbers (sort of) in the article. I was absolutely stunned that the source of this information was Steve Goss, the chief actuary of the SSTF. Some thoughts/numbers:

-Steve Goss does not reveal information of this significance unless he has a political agenda of his own, or he was told to. I am of the opinion that it was the latter and the WaPo/Goss story was a way for the Administration to get the illegal alien issue spun in a different light. Because of high unemployment the illegal story is getting traction and anger is boiling. What is happening in Arizona is the tip of an anti-immigration movement that is brewing in America. This is not healthy for society. Police profiling is not the American way. Except in 2010.

-This information is an unmitigated disaster for SS. It comes a month after the release to Congress of their annual report that suggested that things had actually improved for SS over the past 12 months. The report did not highlight the fact that over $300b of assets held by the Fund were in fact contributions from illegal aliens. As much as 13% of the Funds holdings are tainted. Without this funny money the Fund would today be running substantial deficits. That red ink would force major changes in both payouts and taxes.

-Goss provided a range of the cumulative impact to SS of $120-240b (as of 2007). He said that the overstatement was $12b in 2007. Those numbers do no not add up in my opinion. We know that the illegal population exploded from 2000 on. If the excess payroll income was only $12b in 2007, then it had to be a much smaller number ten-years earlier. There is no way it could add up to Goss’s minimum number of $120b. I think that when Goss was suggesting that the cumulative impact was 120-240b he was implying that the range of impact for 2007 would have been $12-24 billion.

Goss said that as many as 67% of all illegals are working with either a phony SS card or one that was no longer valid. Take this information together with a Pew report that put the number of illegal workers today at 11.1mm. This implies that there are 7,400,000 illegal workers contributing to SS. Most of this income is regular weekly pay. The average number for this in the US is $30K. About $100 per day. That comes to a total payroll of $225 billion! The SS tax on this is 12.4%, or $27b in just 2010. This analysis is how Goss got to the $240b 2007 topside estimate. Add three years to that at $25b a year plus interest on the whole nut and you get ~$350b.

I won’t (now) go into the longer-term impacts to SS of having overstated its surplus by $350b. That number is 13.5% of the assets of the Fund. I will say that this is a sea change event for how we look at SS. All prior analysis and all future expectations must now be revisited. I assure you that the results after excluding the illegal taxes will be will prove to be a major blow to the solvency of the Fund. It will change the debate on SS. It is that significant. Mr. Goss on this:

"If for example we had not had other-than-legal immigrants in the country over the past, then these numbers suggest that we would have entered persistent shortfall of tax revenue to cover [payouts] starting [in] 2009, or six years earlier than estimated under the 2010 Trustees Report."

-We know that the actuaries at the Fund have been aware of the magnitude of this issue for a very long time. The question I have is, “What did they do about it?” We need to understand what this means in terms of anticipated future benefit payments. There are two possibilities:

(1) The Fund knew the money was from illegal workers but chose to close their eyes. For the purposes of calculating future liabilities they assumed that everyone, including the illegal workers, would someday get benefits. But they won’t. This would imply that the future liabilities of the Fund are much smaller than has been projected. This “good” news would have to be offset with the reality that the “true” assets of the fund are significantly overstated.

(2) The Fund knew all along that the benefits that are associated with these illegal receipts are never going to be paid and therefore it has reduced the liabilities associated with this to some degree. This would essentially make a fraud of all of the SS accounting. I doubt (hope) that this is not the case. To restate both assets and liabilities would create a very big credibility gap for SS.


I have said repeated that nothing happens in D.C. by chance. That every nuance must be looked at closely. They all have meaning. In my opinion the WaPo article shines a very bright light on SS. They have been knowingly overstating assets and financial conditions for years. What possible motive could be behind this Labor Day weekend bombshell? My guess:

The Administration will use the Goss revelation to prove to the American people that illegal workers have made a major contribution to the US economy via the taxes they paid to SS. This will be done to blunt the growing tide of ire among those who actually live here. There could be another chapter to this story. It could be the ticket whereby some illegals get legal. The cost for a Green Card would be that the applicant would have to (among other things) agree to give up their rights to any future SS benefits based on prior contributions made to SS. They would be entitled to benefits based solely on what they were taxed in future years. Any previous contributions (both employer and worker) would be given up as a penalty. This thinking would set up the possibility for two extraordinary outcomes.

(I) If SS eliminated the future liabilities associated with the estimated $320b of excess contributions and they were allowed to keep those tainted contributions SS would be transformed overnight to an overfunded position of significant proportions. It would be so significant that the Fund could reduce the current 12.4% PR tax by 20-30% for the next three to four years. That would have a meaningful impact on the economy.

(II) America would get paid $350b (P+I) for allowing a significant number of workers to become legal. Many would still gripe. But the tradeoff of a partial tax holiday for 150mm workers and their employers would shut down much of the opposition.

The Administration needs a win-win on the economy and immigration. Steve Goss at the Trust Fund may have given them the opportunity to do that. Stay tuned. It does not get much weirder than this.

Just a question. Has SS been aiding and abetting illegal workers? They have taken in over $300b. They understood what they were doing. Without the SS "wink and a nod" employers could not have hired them. Who’s abusing whom?

Reports of potentially corrupt loans from Afghanistan's largest bank to political insiders, undermining confidence in the banks strength, caused a bank run during the week.

Depositors withdrew $180 million on Wednesday and Thursday according to the Wall Street Journal, and even Saturday the run continued.

WSJ:

Afghans continued pulling money from their country's largest bank Saturday, despite assurances from top officials that the lender, which has deep ties to the administration of President Hamid Karzai, was financially secure. 

Hours after dozens of branches of Kabul Bank closed following the first business day since the Islamic weekend, there was no word from Afghanistan's central bank or the lender's management on how much money had been withdrawn Saturday.

...

It isn't clear if Kabul Bank's assets—mostly loans and property—are easily recoverable. If the pace of withdrawals hasn't slowed, the bank could run out of cash in the next few days, despite its relatively large cash reserves.

U.S. officials fear that even the hint of failure at Kabul Bank, the largest of Afghanistan's 10 private banks, could prove dangerously destabilizing. More than a quarter of a million soldiers, police and teachers are paid their salaries through the bank, and the Afghan government keeps many of its accounts there.

Read more here >

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CEOs who fire people tend to make more money. That's been the trend recently, according to 'CEO Pay and The Great Recession' from the Institute for Policy Studies.

IPS:

The 50 top CEO layoff leaders received $12 million on average in 2009, compared to the S&P 500 average of $8.5 million. Each of the corporations surveyed laid off at least 3,000 workers between November 2008 and April 2010. Seventy-two percent of the firms announced mass layoffs at a time of positive earnings reports.

...

At a time when we should be pulling together to strengthen our shared economic futures, CEOs should not be rewarded for slashing jobs," says IPS Senior Scholar Chuck Collins. "Realigning the interests of CEOs with their employees and the rest of our country would be good for the economy and national morale."

It's disturbing that down-sizing CEOs have earned more recently, but it would be extremely disturbing if the government could control companies behavior in this regard.

So while far from an optimal situation, we're not sure what could be done about it for private companies, without massively infringing on the rights of individuals (business owners). For example, some companies owners might want their paid managers (CEOs) to reduce staff. Still, it's horrible to be on the receiving end for sure. It's a tricky situation. You can see examples of the highest-paid 'Layoff Leaders' here.

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One of the most peculiar observations of this depression started in December 2007 is that while the total US population has increased by 6.8 million from 303.3 million to just over 310 million in July 2010, over the same 32 month period, the civilian labor force has declined from 153.9 million to 153.6 million. This makes zero sense, as all those aging into working age, or immigrating into the US need to find some job or some other paid activity (either legally or illegally). But let's assume that due to discouragement with economic conditions people simply refuse to look for jobs. The reality is that eventually all those people will come storming into the job market, once the economy recovers sufficiently. Which is why we make an estimate of what the "fair value" of the civilian labor pool is based on the historical average participation rate of 50.4% (as a percentage of total population). Backing into the cumulative population growth by this estimate, means that as of July 2010, the labor force has really grown by 3.4 million, once the one-time adjustment of a "recession" is eliminated (and after all that's what all modern economist claim right - that recessions are merely one-time blips on the road to perpetual Keynesian growth). In other words, the cumulative differential between the labor force as reported, and as calculated has hit an all time record of 3.7 million: this is a number that has to be added to the 7.6 million directly tabulated unemployed to get a sense of just how many jobs have been lost assuming a reversion to the mean for the US economy. In other words, after eliminating the statistical voodoo of the BEA and the Census Bureau, the US has lost just over 11.2 million jobs since the start of the recession.

Chart 1: we demonstrate the cumulative change in the population of the US, the cumulative change in the as reported and the as calculated labor force, and the difference between the two (thick black line).

Chart 2: Cumulative job losses since December 2007, based on Establishment Survey estimates and adjusted for Labor Force "Catch Up"

Submitted by JM

More on Center Bets:  Commodity ETFs as Diversification

Recently there has been a surge in cherry picked employment charts highlighting that the Obama administration has done a great job in rescuing the economy. The premise goes: after dropping to as much as 700K+ jobs lost per month, the administration has managed to pull off a miraculous recovery and now we are riding on a wave of 8 consecutive "private jobs" beats in a row. This argument is so shallow we won't even bother with it. Perhaps the "economists" who espouse this theory will be so kind in their next iteration of their charts to overlay the monthly US debt issuance side by side with the jobs number. Because you see if you drown the economy in unrepayable debt, while using transfer payments to fund the digging of trenches by every man, woman and child who makes up the labor pool, then yes - you may get 0%, or even negative, unemployment overnight. Will it bankrupt the country (even faster)? Why, of course. But whoever said those who discuss politics subjectively ever care about the long-term implications of reality. So in the vein of sharing pretty charts, here is one: we show job losses since the beginning of the Recession (excluding for the impact of census hiring), juxtaposed to the natural growth rate of the Labor Pool (and not the artificial one, which according to the BLS is the same now as it was a year ago). We discover that i) 7.6 Million absolute jobs have been lost since the beginning of the Recession; ii) that a record 10.5 Million jobs (and you won't find this statistic anywhere), have been lost when factoring in for the natural growth of the Labor Pool of 90-100K a month (we use the lower estimate, which also happens to be the CBO's estimate), and that iii) assuming we expect to return to the jobs baseline level as of December 2007 (or an unemployment rate of 5%) by the end of Obama's second term (and we make the big assumption there will be a second term), Obama needs to create 230,000 jobs each and every month consecutively from September through November 2016 in order for the total jobs lost to be put back into the labor force, and that iv) an optimistic (if more realistic) projection of jobs returning to the work force means the return the baseline will occur in 2019, some 7 years after the start of the last recession. The point of these observations is not to cast political blame on either party: we are in this predicament due to the combined stupidity, corruption and greed of both parties. The question is how do we get out of here. And unfortunately for all those hoping that a return to a normal, baseline past is possible, please forget it (i.e., the New Normal is really real), at least for the next 7 years. This also means that any charting, technical analysis and other "reversion to the mean" approaches of forecasting the future will all end up sorely lacking and misrepresenting the final outcome.

Chart 1: a simple baseline chart that shows where we were, where we are, and where we are going, with the assumption of recovering all labor force growth-adjusted jobs losses from December 2007 through the end of Obama's second term. The conclusion: the economy needs 229,300 jobs per mont (incidentally, for the simplistic read on the labor force which does not account for demographic changes, which economists tend to conveniently forget all too often, a 230K jobs pick up a month, means a recoupment of baseline jobs lost in June of 2013).

Chart 2: We demonstrate that the cumulative jobs lost since December 2007, are in fact materially greater when adjusting for a realistic change in the labor force, instead of that presented by the administration, which naively expect people to believe that the labor force in August 2010 (154,110) was lower than that in August 2009 (154,426). That in the meantime the US population grew by 2.5 million seems to make no difference to the administration. Which only means that sooner or later this labor force participation will catch up to the numbers. Either way, we factor for it, and assume that the labor force was growing by 90K every month since the start of the recession, and add the cumulative differential to the jobs lost. The result: in the 33 months through August, the US has lost not 7.6 million jobs, but 10.5 million: a stunning 38% delta.

Obviously, all these projections are unrealistic. So let's take them down to some version of reality... even if it is Bank of America's. We take the most optimistic Wall Street projetions we could find - traditionally those belong to Bank of America's Ethan Harris. In a note released to clients, Harris discusses his revised jobs forecast:

Under the weaker growth trajectory we are now penciling in:

• Private payrolls manage tepid monthly gains of just 25,000 through the end of 2010. As the growth recession fades in the second half of 2011, gains in private payroll employment should accelerate. We expect average monthly gains of 125,000 in the fourth quarter of 2011.
• Therefore, for most of 2010 and 2011, employment growth is not expected to keep up with the rise in the labor force, which means the unemployment rate heads north. We expect a steady increase to 10.1% by the second quarter with a slow fall slightly below 10.0% by the end of 2011.

So let's adjusted the chart using Bank of America's projections, which assumesa gradual increase in the unemployment rate to 10% by Q3 2010 and a decline since then. We chart these projections on the chart below. According to this adjusted case, the payroll number will never return to the December 2007 baseline for the duration of Obama's term, even if one assumes 200K job pick ups beginning in January 2012 and continuing every month thereafter (as we have done). In November 2016 we forecast an unemployment rate of 5.7% using these assumptions. They are presented visually below:

And just to demonstrate what the recession will look like assuming even this quite optimstic assumption, here is the famous post WW2 recession comparison chart adjusted for an expansion of the depression (let's not split hairs here) labor force, that started in December 2007: it is shaping up to be 7 years before the jobs lost finally are put back into the system. And that's for those optimistically inclined.

So before everyone gets all political on who has done a more bang up job of destroying the economy, perhaps both sides can explain how they each got the US to a point where even wildly optimstic projections assume that the length of the most recent economic slowdown will take 85 months to resolve (and, in all reality, far, far longer).

Well, it happened.

After an invigorating summer that recalled much younger days, our 15 year-old cat Tony suddenly stopped eating and started barfing.

The barfing was nothing new, but this time it wasn't accompanied by the usual hairball.

The barfing stopped after a day or two, but instead of perking up and going back to yowling constantly for a lap to sit on and laptop to obscure, Tony retreated to a chair and lay down, alone. 

She (yes, she--my wife hadn't quite determined her sex when she named her) didn't eat much for the next few days. She also didn't get any perkier.  So, on Friday, we packed her off to the vet to learn that she was wildly dehydrated and, worse, that she had "kidney failure."

Now, it turns out that, as in humans, kidney failure is not an instant death sentence. They don't do dialysis with cats, but they do hook them up to IVs and pump them full of "fluids," and the fluids perform a similar service as dialysis.

To perform cat dialysis, we soon learned, you get one of those big IV bags, hang it on a hook, and put a needle on it. Then you hold the cat on the floor, grab some of the fur on the scruff of the neck, and poke the needle in. Then you keep the cat immobilized for a few minutes until the designated amount of "fluids" have dripped in.

The fluids go in too fast to be immediately absorbed, so they drain to the bottom of the cat. So when we got home from the vet yesterday, Tony had odd-looking globules of unabsorbed fluids floating around on her belly. But, miracle of miracles, she looked fluffier than she had two hours earlier. And two hours later, the globules were gone, and she was purring and stretching again.

There is a chance, the vet tells us, that through daily IV-rehydration, we can shock Tony's kidneys back to health. So that's the plan for the next three days: Daily trips to the cat nursing home to get hooked up to the IV. Then they'll check her blood levels again. And then, most likely, it will be decision time.  And here's what that decision will boil down to:

We can "prolong her life," maybe for years, by giving her IV fluids every day.

We can accomplish this by carting her off to the vet every day, where, for a fee, they will perform the procedure described above ($15-$20 a day). Or, we can order those IV bags and needles from a medical supply company and do it ourselves (apparently you don't need a license to perform internal medical procedures on your cat).

Alternatively, of course, we could order up a crate of tuna-fish, catnip, and milk, throw Tony a Bacchanalian 15th-birthday bash, and then drive her off on one last one-way trip to the vet.

So, the question is... Should we kill our cat?

Or, more accurately, should we:

1) do nothing and let her die,

2) proactively kill her, or

3) "prolong her life" by stabbing her with needles and giving her kitty dialysis every day?

This decision, it seems, is a microcosm of what is going on in our healthcare system at large. It involves questions of money, time, effort, and length of life versus quality of life.  It also involves far more profound philosophical concerns, such as playing God and being and not being.

Where are we on this decision?

Well, we're not carting the cat off to the vet for dialysis every day.  That would cost $500 a month ($6,000 a year), in addition to 30-40 hours a month.  Call us monsters, but we're just not signing up for that.

We're also not eager to have the cat killed or just sit around waiting for her to die.

But home dialysis? A few dollars plus medical equipment plus time every day?

A week ago, my wife and I would have dismissed the idea. This is a 15 year-old cat we're talking about--an awesome cat, yes, but a 15-year-old cat--and 15 is like 90 in cat years. Everyone dies eventually. Including cats. And the "prolonging life" madness has to stop somewhere.

But now, with the cat's life in our hands, I've got to admit that we're thinking about it. 

And that's before we bring the kids into the discussion. 

And I have no doubt what their answer is going to be...

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See Also:

• Welcome To The Worst Labor Day In History
• Beware of These 10 Myths About Innovation
• Here's The Real Problem With Labor Unions

Goldman's David Kostin, as usual, provides this week all you can eat chart buffett. In this latest edition we also find out that Goldman is also very good at hedging for every possible outcome: while calling for 1,200 on the S&P by year end (and 1,160 in three months, meaning in December the market will have to rise by 40 points), Kostin also admits that recommended sectors have generated -42 bps of alpha YTD, the recently introduced low operating leverage trade was down 1.9% in the past week, the long dividend growth stocks strategy lost 0.7%, yet all this was hedged with a long BRIC sales trade (up 1.1%), and a long Sharpe ratio strat (up 0.8%). Of course, all those strategies will likely net out to zero on a weekly basis going forward, as Kostin now has all bases covered. Some observations: "The S&P 500 was up 4.2% this week. Materials was the best performing sector this week (+6.0%) while Consumer Staples was the worst performing sector (+2.4%)." This is only fitting as Materials was the sector most beaten down going into the last week of August, and there is nothing like a little short covering rally to pass for a new bull market. All this and more inside.

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This week, financial advisors have been informed of some new disclosure and reporting rules.  As expected, the impact of the Dodd/Frank Bill is already foreshadowing a ridiculous amount of additional paperwork - mostly silly work as one of my colleagues would call it.  Financial regulation is a double-edged sword and changes were necessary, no arguments there. However, it is questionable to what extent investors will be better off, safer, and whether the financial system will any more stable after implementing the new financial overhaul bill. 

I had a chance to glance at some aspects of the Dodd-Frank Wall Street Reform and Consumer Protection Act but as soon as I opened this document, I had to close it again; I simply couldn't find the courage to actually read through some 800 pages of legalese.  So here is my offer:  I will buy anyone dinner who can muster up the courage to read this and give me a concise 20 minute plain English summary...

Going back to regulatory reform, my views are sadly quite cynical which is evident in the many references you can find in previous articles:

So what's it going to be after the dust settles and this monstrosity of an overhaul will eventually be implemented?  My take is that investors and the general public will have to foot the bill in one form or another.  Clients will lose out in having to pay higher fees. Smaller firms, such as our tiny practice, will find it increasingly difficult to swallow the cost of dealing with regulators and may be forced to team up with a larger firm, losing some of their coveted independence. Already overregulated jurisdictions such as the US and the UK must carefully evaluate what's at stake.  In the UK, several banks have been warning that they might relocate to business-friendlier jurisdictions.  HSBC just announced its clearest warning over relocation, warning that it might relocate its headquarters to Hong Kong.

The choice for many of these institutions is clear as well; they will be following the money and economic growth which has been in emerging markets.  London hosts the investment banking headquarters of many international financial institutions including some high profile US and German banks.  If those divisions can operate from London, why can't they move their investment banking headquarters to Hong Kong, Singapore or other jurisdictions that would give incentives to operate at substantial cost savings? 

While US investors must wait until the Dodd/Frank Bill is implemented to find out whether salvation is nigh, capital won't.  As the markets and institutions assess the impacts of new reform, we are going to be faced with a very different financial landscape in the near future. Investors might then also need to assess whether it makes more sense to "follow the money".

This post originally appeared at FXIS Investment Strategies and is republished here with permission.

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As everyone should know by now, my main concern with unions is specifically with public unions. While I do not care for unions at all, and never have, at least with private unions, someone other than corrupt politicians buying votes is bargaining at the other end of the table.

In the case of public unions, if politicians strike a bad deal, taxpayers foot the bill. In the case of private corporations, if management strikes a bad deal, the company goes bankrupt, shareholders take a hit, or the jobs move elsewhere, as soon as the contract is up.

Except in few cases every now and again, private unions just cannot seem to understand this simple economic fact.

Machinists Union Pickets Cessna Aircraft

The Kansas Wichita Eagle highlights the typical union response, public or private, in Cessna's initial offer to Machinists includes wage cut

Machinist union members at Cessna Aircraft picketed near the company's plant in southwest Wichita on Thursday to protest jobs being sent outside the city.

Members fought strong, gusty afternoon winds and carried signs that read "Keep it Made in Wichita," "Outsourcing is Treason" and "We built the Air Capital," as they picketed at K-42 and Hoover roads. Some carried American flags.

Cessna and the Machinists union are in the midst of contract negotiations. The current contract expires Sept. 19. About 2,300 hourly workers at Cessna are covered by the agreement. Hawker Beechcraft also has reopened negotiations with the union as it considers sending work to Louisiana, Mississippi and outside the country.

Cessna's initial proposal is for a 10-year agreement that cuts wages 4.2 percent, weakens job security, replaces the pension plan with a 401(k) plan and increases the share of the cost of health insurance paid by the workers to 30 percent, said union spokesman Bob Wood.

"There's no job security in the current proposal," Wood said.

"Wichita is based on aircraft," said Cynthia Hise. "If you don't get a good contract...." Darren Hise finished her sentence. "It's going to hurt the whole economy in Wichita."

Reflections on Job Security

Here's the deal. The Hises and the union in general appear ready willing and able to "hurt the whole Wichita economy" if they do not get what they want.

I have to ask "How stupid is that?"

The answer is "tremendously stupid".

It is far better to have a good paying job and no job security than no job at all and no prospects of a job. That's what it boils down to, and like it or not, that is the economic reality.

I do not know what salaries are, but a 10 year contract with only a 4.2% pay cut does not strike me as a bad deal. Those who think otherwise need to compare it to the alternative: seeing all the jobs go to Louisiana, Mississippi, or outside the country.

By the way, wouldn't residents of Louisiana and Mississippi be very grateful for those job, regardless of what the salary was? I think so. So the bottom line is this mess, is the unions would be to blame and only the unions to blame if Cessna moves elsewhere. The union will also be responsible for wrecking the entire local economy if it happens.

Take the contract and run! It's for 10 years! Because .... You Don't Know What You've Lost Till Its Gone, Then It's Too Late. In this case, it will be gone forever.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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See Also:

• 7 Weak Spots In The Employment Report

David Rosenberg rains on the bull parade and explains why the employment report was more bearish than the market response:

But there were many other parts of the nonfarm report that left much to be desired.  Here’s an unlucky seven examples of softness beneath the surface:

1.  Aggregate hours worked were flat.

2.  All the employment gains were part-time — full-time employment, as per the Household Survey, plunged 254,000.

3.  Those working part-time for “economic reasons” surged 331,000 — the biggest increase in six months.

4. While private payrolls were better than expected, 10,000 of that +67,000 tally reflected returning construction workers who had been on strike.

5. Manufacturing employment was down 27,000 and total goods producing jobs were flat — hardly signs of a robust economic backdrop.

6.  The diffusion index for private payrolls actually fell to 53.0 from 56.7 in July — a seven-month low.  It was 68.0 at the April high, which is consistent with an economy slowing down to stall-speed.

7.  The labour market gap widened with the all-inclusive U6 unemployment rate rising to a four-month high of 16.7% from 16.5% in July.  This is why the odds are stacked against a sustained acceleration in wages.

Source: Gluskin Sheff

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