Mish's Global Economic Trend Analysis |
- Pension Tsunami Recognition Phase Arrives; Emails from Readers
- Consumer Spending Slumps Even With Back-to-School Underway; Cisco, IBM Sales Suggest Corporate Spending Slowdown
- Junk Bond Indigestion
- Are Corporations Sitting on Piles of Cash?
- Dollar Hits 15-Year Low vs. Yen; Trade Deficit Will Reduce GDP; BOE Trims Forecast; Greek Economy Sinks 1.5%; Australia Commercial Real Estate Bust
| Pension Tsunami Recognition Phase Arrives; Emails from Readers Posted: 12 Aug 2010 03:31 PM PDT Stories about public unions are now routinely making the front pages of national newspapers and magazines. Thus, the problem recognition phase is finally here. I discussed two such articles on Sunday and Monday
Here are some emails from readers in response to those articles. Private Sector Worker Chimes In Let's consider the point of view of someone who works in the private sector and is currently unemployed. Denise writes ... Hello MishSelf Employed Person Chimes In VegasBob, a self-employed reader of this blog chimes in with a real-life example of public pension math. VegasBob writes .... My Dad retired from Federal Civil Service in April 1977 after 30 years' service.Union Supporter Chimes In Bob Writes .... You are an idiot if you think teaching is a cherry job. Wonder why 80% of all new teachers are gone in 5 years.Well for starters I never said teaching was a "cherry job". It is amazing how people attempt to put words in my mouth that I never said. As for teaching being an honorable profession, I happen to agree. I recommend people take a career that they want to do. It is more important to be happy, than to work somewhere for expected benefits. If someone wants to teach, fine teach. But if someone cannot teach well, they should be fired. Unfortunately unions prevent that, even in cases of teachers making sexual advances towards kids. Unions are also again merit pay, charter schools, home schooling and damn near everything else that might benefit the kids. Unions do not give a rat's ass about what is good for the kids, they only care about what is good for the union. My beef is not with teachers per se, but with teachers' unions, more specifically public unions in general, as well as their absurd sense of entitlement. Note Bob's amazing sense of entitlement as to what a teacher is worth. By the way, to help explain Bob's statement "Teachers are the most precious Humans on the planet!" I need to point out Bob's "slight" bias. In one of several Emails from Bob, he indicated his wife is a teacher. Here is my reply to Bob ... Hello BobWhat's a Profession Football Player Worth? Somehow Bob thinks a teacher is worth as much as a professional football player. It's an absurd argument. Bob failed to consider sports math of what takes to be a professional athlete and how many fail after years of trying, how many wreck their bodies while playing. Here is the real issue, however: Who is Bob (or anyone else) to tell people how to spend their entertainment dollars? I will not pay what it takes to support those salaries, and apparently Bob will not either, but many will. What right does Bob have to decide what people are willing to pay to see a game. Tossing the nonsensical sports comparison aside, Bob thinks teachers deserve $900,000 annuities at retirement. Nowhere does Bob say where the money comes from. The only place it can come from is if everyone else is taxed to death to pay for it. Why? Because Bob thinks "Teachers are the most precious Humans on the planet!" Why? Because Bob's wife is a teacher. Bob seriously needs a math lesson. He also needs to consider who has to pay for his wife's pension, notably private sector workers who receive no such benefits. Professional Money Manager Chimes In Peter From California writes ... Mish,In a followup Email Peter Writes .... I live in California. There is a lot of talk, but no action. Even in Bell, the city manager resigns over the clamor but continues to collect pension. My local fire chief retiring at 55 with $233k annual pension. There hasn't been a fire in my town in the four years I have lived here.Thanks Peter. Unfortunately many don't see it that way. I received a lot of Emails from union supporters, most unprintable, some bordering on nonsensical. By the way, they are not all living like kings, but in comparison to Denise who has no pension or medical benefits they all certainly are. Public union pensioners have no sense of how well off they are compared to private sector employees. Concerned Retiree Chimes In Steve, a concerned retiree living in New Jersey writes ... Hello MishHello Steve Thanks for a rational email, unlike most I get from public union employees. However, I have some tough questions for you. 1. Pray tell exactly how much did you contribute to your pension plan and how much do you expect in return? 2. Who do you propose pay for your mistake (if it was a mistake) of working for the government? 3. Should those working at Walmart with no pension at all pay your pension? 24-year old kids out of college struggling to find a job? The 8 million unemployed? Who? 4. Please note that when a private corporation goes bankrupt, benefits are assigned to the PBGC and the beneficiaries take a huge haircut. Given that cities and states are effectively bankrupt, why shouldn't the same apply to you? 5. If you are not responsible for your career choice, who is? Retired NASA Engineer Chimes In Sometimes I am surprised by what people write. This is one of those times. Here is an email from Keith S. Brown, a retired NASA engineer. Keith writes ... Hello Mish,Director of Graduate/Undergraduate Programs Chimes In As much as the above Email surprised me, the next one from a Director of Graduate/Undergraduate Programs at a major university might surprise you. I have communicated with this person before, and although he did not ask, I will suppress the university he works for and his name. "University Director" writes ... Hi Mish,Attitudes Make A Difference It's not often someone tells me I do not go far enough in regards to public unions, especially someone on a public pension. Notice the wide variety of attitudes from Peter, Bob, Steve, Denise, VegasBob, Keith, and a university director. Yes indeed, attitudes make a difference, and one Email stands alone in a massive sense of entitlement. As far as who is responsible and who should pay, Bob in particular needs to do some soul searching and some math, especially regarding demographics. A massive wave of boomers is retiring and Bob wants $900,000 annuities for all of them. Bob needs to take a good hard look at the entitlement strife in Greece and explain why it would work differently here. He also needs to explain exactly who is supposed to pay for his wife's pension as well as why. Solutions I am frequently accused of offering no solutions. Even Bob accused me of that in our email exchanges. The irony is I fully 100% embrace Bob's idea of "closing down the department of education, throwing away the unions, and letting teachers bid on pay scale they will take." It is indeed the perfect solution otherwise known as the free market. We need to do exactly that, not just for teachers, but for all government employees. Benefits would plunge in the absence of union coercion, charter schools would spring up offering parents a real choice, and school boards unencumbered by union rules would quickly get rid of poor performing teachers. Thus the quality of teachers would rise and children would receive a better education. It is supposed to be about the kids isn't it? You would never know it from the way unions and people like Bob act. However, I commend Bob for recognizing the urgent need to get rid of public unions. That is indeed one of the necessary steps to fix the biggest problem facing cities and states: absurd public union salaries and pension benefits. Unfortunately, getting rid unions only fixes the problem of future retirees down the road. It does not address the problem at hand. The only solutions to the immediate problem are bankruptcy, default, or unions giving up pension benefits by negotiated deals, by increased taxes on pension benefits, or by court decree. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific. 
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| Posted: 12 Aug 2010 03:02 PM PDT A new Gallup Poll shows Spending Slumps Even With Back-to-School Underway Americans' self-reported spending in stores, restaurants, gas stations, and online averaged $62 per day during the week ending Aug. 8. Early August consumer spending trends trail 2009 and will need to surge to match last year's anemic back-to-school results.Corporate Spending Slowdown Bloomberg reports Cisco, IBM Sales May Signal Slowdown in U.S. Corporate Spending Weaker-than-forecast sales at Cisco Systems Inc. and International Business Machines Corp. may signal a slowdown in the corporate spending that has led the U.S. recovery.GDP is increasingly likely to be negative at least one quarter in the second half yet few economists even discuss the possibility. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific. 
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| Posted: 12 Aug 2010 11:25 AM PDT Bloomberg reports Junk Bonds' Record Sales Leading to Indigestion Junk bonds are losing momentum as the busiest week on record for sales of the debt and a warning from the Federal Reserve about the outlook for the economy drives up relative borrowing costs.JNK Lehman High Yield Bond Fund  click on chart for sharper image  click on chart for sharper image Note the correlation between junk bonds and the S&P 500. The magnitudes are not the same but the direction usually is. Every time it appears the junk bond market is ready to break down, it instead bounces, with the equity markets following along. How much longer the appetite for junk can remain strong is a mystery. However, somewhere along the line the corporate bond market is going to choke on all this issuance, and when it does, the result will not be pretty for equities. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Whether that time is now remains to be seen. Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific. 
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| Are Corporations Sitting on Piles of Cash? Posted: 12 Aug 2010 10:21 AM PDT The Wall Street Journal claims U.S. Firms Build Up Record Cash Piles U.S. companies are holding more cash in the bank than at any point on record, underscoring persistent worries about financial markets and about the sustainability of the economic recovery.Investors Punish Companies Spending Cash The "companies are going to spend cash" theory sounds nice except for two things. The cash is not there in the first place (it's really debt), and Investors Say No to 'Let's Expand' Companies Delta Air Lines executives spent much of an earnings conference call Monday parrying with analysts over the airline's plans to increase capacity by 1% to 3% in 2011, on top of this year's growth of 1% to 1.5%. Delta Chief Executive Richard Anderson said Delta is committed to "capacity restraint," but the stock fell 2.9% that day. The shares lost 2.3% for the week, compared with a 5.4% gain by the NYSE Arca Airline index.Sideline Cash = Corporate and Government Debt That corporations are sitting in piles might be dandy if it were true, but unfortunately it is not an accurate representation, at least in an aggregate sense. John Hussman mentioned the corporate cash situation in Cheering the Asset and Ignoring the Liability. Put simply, there is a lot of apparent "cash on the sidelines" because the government and many corporations have issued enormous quantities of new debt, often with short maturities, while other corporations have purchased it. It is an equilibrium. The assets that are held in the right hand represent debt that is owed by the left. You cannot call that pile of short-term marketable securities an asset without calling it a liability. The cash on the sidelines is evidence of debt incurred to fund economic activity that is already in the past. It will remain "on the sidelines" until the debt is retired. The government debt has been issued to finance deficit spending. At the same time, a great deal of corporate debt has been issued over the past year apparently as a pre-emptive measure against the possibility of the capital markets freezing up again.Corporate Cash Lie The article Hussman referred to is one I have been meaning to link to for several days. Please consider The biggest lie about U.S. companies You may have heard recently that U.S. companies have emerged from the financial crisis in robust health, that they've paid down their debts, rebuilt their balance sheets and are sitting on growing piles of cash they are ready to invest in the economy.So, in spite of what most are saying, corporations are not really holding tons of cash, ready at any moment to go on an investment or hiring spree. Instead, corporations burnt by inability to raise cash during the 2008 credit bust are simply taking advantage of market conditions to raise cash levels now, at attractive rates, while they can. Corporations raise cash in two instances 1. When they can 2. When they have to After the corporate bond blowup in 2008, companies are wisely focusing on #1, while they still can. How much longer the market is willing to allow debt financing at favorable rates remains to be seen. When it stops, equities are likely to get clobbered. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific. 
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| Posted: 12 Aug 2010 05:29 AM PDT It's time for an international roundup including Japan, Australia, Europe, England, and the United States. Let's kick things off with a look at the Yen. Japanese officials are busy yapping away, hoping to talk down the Yen, which as hit 15-year highs vs. the US dollar. Bloomberg reports Yen Trades Near 1995 High on Speculation Intervention Unlikely The yen traded near its strongest level against the dollar since July 1995 on speculation Japan is unlikely to try and lower the value of its currency. Japan hasn't intervened in the currency markets since March 16, 2004, when the yen was around 109 per dollar. The Bank of Japan sold 14.8 trillion yen ($173 billion) in the first three months of 2004, after record sales of 20.4 trillion yen in 2003.Intervention on the Way? Reuters reports Japan officials step up campaign against yen rise Japan policymakers fired off a volley of comments Thursday to curb yen strength and the central bank checked rates with banks as officials stepped up efforts to prevent the currency from harming a fragile economic recovery.Yen Summary Europe is happy about the rise of the Yen, but Japan is not. Indeed the value of the Yen is above where it needs to be for Japanese exporters to make a profit. Japan is worried that European exporters will capture market share but Europe of course is smiling about such prospects. Talk is cheap but intervention does not work so the global trade imbalances just simmer, with everyone expecting US consumers to lead the world recovery. Regardless of the increasing trade deficit, I highly doubt that is going to happen. European Industrial Production Unexpectedly Declines One of the reasons the Euro has plunged over the past two days is European Industrial Production Unexpectedly Declines European industrial production unexpectedly declined in June, led by a drop in durable consumer goods such as furniture and home appliances.This happy talk in Europe is rather amazing, and unwarranted in my opinion. Greek GDP Drops Another 1.5% The BBC reports Greek economy shrinks a further 1.5% The Greek economy shrank by a further 1.5% in the second quarter of the year, Greece's statistics agency has said. That adds to 0.8% decline in GDP recorded for the first three months of the year, suggesting that the decline in the economy is speeding up. Greece's GDP has fallen 3.5% since this time last year.BOE Cuts Economic Forecast The New York Times reports Blaming a Slow Recovery, the Bank of England Trims Its Economic Forecast The Bank of England cut its economic growth forecast Wednesday, in part blaming the uncertain pace of the recovery in the United States and the rest of Europe.Add the bank of England to those in the over-optimistic camp. And notice that absurd comment from HSBC. The private sector is still deleveraging and has a long, long way to go, yet economists think consumers are about to pile on more debt. There was never a "recovery" in the first place. Economists for some reason just do not understand this simple fact. They remain Fooled by Stimulus With Structural Problems Still Intact. Australian Malls Lose Their Shine Things are not well down under either. My friend "Brisbane Bear" comments "Retailer business models are broken yet most retailers are hoping things come back. They won't". Please consider The gleaming malls are losing their shine The disparity in Australia's two-speed economy, between a resource sector that is in overdrive and the hard scrabble of retailing, hit home to financial planner Kate Kimmorley when the Marina Mirage shopping centre slipped into receivership last month.Brisbane Bear writes ... The adjustment phase will render at least 50% of these retailers redundant. Australia Commercial Real Estate Bust Inquiring minds are reading Retail profits under attack for a decade, warns ex-Macquarie banker The aftermath of the global financial crisis and changes in consumer behaviour could hit retail profits for a decade. The warning has come from former Macquarie Group property investment banking head Bill Moss.US GDP Overstated Economists were surprised by the last downward revisions in GDP yet another downward revision is on the way thanks to a rising trade deficit. Bloomberg reports Wider Trade Gap Signals Weaker U.S. Second-Quarter Growth A swelling trade gap, less stockpiling and weaker construction indicate the U.S. economy slowed even more in the second quarter than the government estimated last month, economists said.That should put a nice international flavor to the "Non-Recovery". Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific. 
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