Mish's Global Economic Trend Analysis

Scranton Residents Plead for Bankruptcy vs. Higher Taxes; Different Than Detroit
Bubble Valuation Blues; GMO 7-Year Outlook for U.S. Stocks is Negative
Gallup Poll: #1 U.S. Problem is Government, the Economy is #2
Retirement Sunset Math: Number of Employed vs. Population Over Time

Scranton Residents Plead for Bankruptcy vs. Higher Taxes; Different Than Detroit

Posted: 15 Jan 2014 07:12 PM PST

City officials in Scranton Pennsylvania have ignored pleas from residents pleading for bankruptcy.

Instead, the city raised property taxes and trash fees nearly 60% and tripled rental registration fees. The city's school district, which faced a $4-million deficit, raised taxes 2.4%. The City Council, which in 2012 passed a 5% amusement tax on live entertainment, is now discussing a 10% drink tax.

As a result, taxpayer who can are fleeing the city.

The LA Times reports For Scranton residents, bankruptcy is an inviting option

When Detroit filed for bankruptcy, hundreds of residents took to the streets to protest what they saw as a drastic approach to fixing the city's budget problems.

But in this hilly town of 76,000 in northeastern Pennsylvania, residents have a different view of Chapter 9: They want the city to declare bankruptcy. And soon.

"The silent majority would like to see bankruptcy," said Bob "Ozzie" Quinn, president of the Scranton and Lackawanna County Taxpayers Assn. "Basically, it's down to a point where people cannot afford to pay the taxes and are moving out of town."

The City Council, which in 2012 passed a 5% amusement tax on live entertainment, is now discussing a 10% drink tax. The city's parking authority is in receivership, and it recently privatized its parking meters: The company in charge upped rates and extended meter hours to 6 p.m., which bar owner Mert Gavin says has motivated workers to skip happy hour and head home to the suburbs straight after work.

"I am one of the last two bars that's still downtown. Tink's is gone. Whistle's is gone, Banshee's is gone, Molly Brannigan's is gone," said Gavin, who runs Mert's. "Do they expect I'm going to bail the city of Scranton out myself?"

The taxes are especially egregious to some because so many of the city's residents are elderly and living on fixed incomes. The median household income in Scranton is $37,000, and nearly one-fifth of residents live below the poverty line.

The city's financial problems were accelerated by a 2011 Pennsylvania Supreme Court decision that found that the city owed its police and firefighters unions back pay — about $21 million. The settlement money became due in 2013, but the city bickered over how to come up with the funds for so long that Moody's warned in November that Scranton faced the threat of default.

"It's been nonstop. They raised the water fees, the electric, the gas," said Richard Laytos, a Scranton native who moved back to the city to retire in 1997 after 44 years in New Jersey.

Gary Lewis, who once ran a blog, scrantonisbroke, that urged city leaders to consider bankruptcy, took a drastic step when they failed to do so: He moved out of the city where he'd spent his whole life.

"I did the math — realized how much it was costing me to live in the city," said Lewis, who now lives in Indiana, where he says he makes $2,500 more a year because of lower taxes. "That's the story of my generation. There's a lot of kids like me, who grew up, went to college at Scranton, but they turn 22 and move out of the city, and they don't move back because it's not a financially attractive proposition."

bankruptcy won't solve the city's financial woes, said John Judge, president of the local firefighters union. "It's a horrible idea — you take local control out of the hands of policymakers, and put it in some judge's hand," he said.

Neither the city's new mayor nor his predecessor, Chris Doherty, returned calls for comment, but former City Council President Janet Evans said she and Doherty had been determined to avoid bankruptcy.

"We are in a different situation than Detroit," she said. "We were willing and able to do everything within the scope of our authority to continue the recovery of the city of Scranton until it sits once again on sound financial ground."

My Thoughts

Officials in city hall are either complete financial-morons, beholden to the unions, or beholden to their own pension plans that would take a hit if the city declared bankruptcy.

I suspect a combination.

Different Than Detroit

"We are in a different situation than Detroit," says former City Council President Janet Evans.

Indeed.

Detroit is better off.

In bankruptcy, Detroit has a chance to dump union contracts and onerous pension promises. Detroit may have hit bottom.

The economic-jackasses in Scranton are going to extract every ounce of blood they can from taxpayers, then eventually declare bankruptcy anyway.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Bubble Valuation Blues; GMO 7-Year Outlook for U.S. Stocks is Negative

Posted: 15 Jan 2014 12:29 PM PST

Value investor Grantham, Mayo, Van Otterloo (GMO) now estimates US stocks are poised for annualized losses for the next seven years.

*The chart represents real return forecasts for several asset classes and not for any GMO fund or strategy. These forecasts are forward-looking statements based upon the reasonable beliefs of GMO and are not a guarantee of future performance. Forward-looking statements speak only as of the date they are made, and GMO assumes no duty to and does not undertake to update forward-looking statements. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time. Actual results may differ materially from those anticipated in forward-looking statements. US inflation is assumed to mean revert to long-term inflation of 2.2% over 15 year.

A year ago the chart looked like this.

Charts from GMO Asset Class Forecasts.

Reflections on Extreme Valuations

Was GMO wrong last year? Of course not. Expected returns are just that. Extreme valuations can always become even more extreme (and they did).

My Thoughts:

During periods of market excess, avoiding bubbles and instead investing in out of favor but attractive assets can be quite painful to live through in the short-term. But those who remain disciplined and on the right side of the somber judgment eventually get rewarded with significant gains amid widespread losses for those favoring that which has been working well during the period of excess.

GMO 10-Year History

Let's step back a bit and look at GMO's 10-Year history from 1999-2009. Please consider a chart from What a Decade!

Highlighting in yellow is mine.

In December 1999, GMO thought the S&P 500 would deliver negative returns for a decade. In 2007 that prediction probably looked ridiculous. Yet, it happened.

When GMO predicts negative returns, it's smart to pay attention.

Here are GMO's "Lessons Learned in the Decade".

Lessons Learned

The Fed wields even more financial influence than we thought.
Low rates have a more powerful effect on driving financial assets than on driving the economy.
The Fed is capable of being extremely out of touch with the real world – "what housing bubble?" – plus more doctrinaire – "no, the low rates had no effect on housing" – than anyone could have imagined.
Congress is nearly dysfunctional, primarily controlled by large corporations, and hamstrung by the supermajority now routinely required in the Senate.
Government administrations can be incompetent for long periods.
Poor leadership can really damage a country's hard- won reputation in a mere 10 years.
Obama is not a miracle worker!
The two time-tested investment tools, value (P/E ratios and P/B ratios) and price momentum, are now much more heavily used and not so reliable as they once were, say from 1977 to 1997.
Asset classes really are more inefficiently priced than individual stocks on average, and therefore offer greater opportunities for adding value and reducing risk.
Developed countries, including the U.S., are past their prime compared with developing countries: it is indeed a new world order.
Education and training are the keys to increasing wealth on a sustainable basis and the U.S. is in danger of losing its once large edge here.
We all live on an island, which can be overexploited and turned into a barren Easter Island if we are not careful. Resources are finite and biodiversity is fragile, and both must be protected. Carbon emissions are the single greatest threat.
Being a global policeman is expensive, and somewhere between difficult and impossible.
The Fed learns no lessons!

Fed Uncertainty Principle Revisited

The only point I disagree with is number 12 "carbon emissions are the single greatest threat" to finite resources and biodiversity.

Arguably the most important points are 1-3 and 14 "The Fed learns no lessons".

Readers will recognize those points as part of my Fed Uncertainty Principle, written April 3, 2008, before the big collapse.

Fed Uncertainty Principle:
The fed, by its very existence, has completely distorted the market via self reinforcing observer/participant feedback loops. Thus, it is fatally flawed logic to suggest the Fed is simply following the market, therefore the market is to blame for the Fed's actions. There would not be a Fed in a free market, and by implication there would not be observer/participant feedback loops either.

Corollary Number One:
The Fed has no idea where interest rates should be. Only a free market does. The Fed will be disingenuous about what it knows (nothing of use) and doesn't know (much more than it wants to admit), particularly in times of economic stress.

Corollary Number Two: The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.

Corollary Number Three:
Don't expect the Fed to learn from past mistakes. Instead, expect the Fed to repeat them with bigger and bigger doses of exactly what created the initial problem.

Corollary Number Four:
The Fed simply does not care whether its actions are illegal or not. The Fed is operating under the principle that it's easier to get forgiveness than permission. And forgiveness is just another means to the desired power grab it is seeking.

Bubble Valuation Blues

It's not just GMO singing the bubble valuation blues. John Hussman has independently concluded the same thing.

On November 11, 2013 in Textbook Pre-Crash Bubble Hussman commented "The problem with bubbles is that they force one to decide whether to look like an idiot before the peak, or an idiot after the peak. There's no calling the top, and most of the signals that have been most historically useful for that purpose have been blazing red since late-2011."

Such is the nature of the game. Everyone thinks they can get out at the top. Few ever do.

Hovering With an Anvil

Please consider this snip from Hussman's Hovering With an Anvil from January 13 (emphasis mine).

The ratio of nonfinancial equity market capitalization to GDP is about twice its pre-bubble norm, and is presently associated with an expectation of negative total returns for the S&P 500 over the coming decade. Measures based on properly normalized earnings are a little bit more favorable, with the overall outcome that we broadly expect nominal total returns for the S&P 500 of about 2.3% annually over the coming decade, with negative total returns on horizons of less than about 7 years.

Keep in mind that the 2000-2002 decline wiped out the entire total return of the S&P 500, in excess of Treasury bills, all the way back to May 1996. The 2007-2009 decline wiped out the entire total return of the S&P 500, in excess of Treasury bills, all the way back to June 1995. Our present expectations are rather conservative by comparison.

I side with GMO and Hussman.

Wine Country Conference II

I am pleased to again mention that John Hussman is a speaker and host of the second annual Wine Country Conference will be held May 1st & 2nd, 2014.

We have an exciting lineup of speakers for this year's conference.

John Hussman: Founder of Hussman Funds, Director of the John P. Hussman Foundation which is dedicated to providing life-changing assistance through medical research
Steen Jakobsen: Chief Economist of Saxo Bank
Stephanie Pomboy: Founder of MacroMavens macroeconomic research
David Stockman: Ronald Reagan's budget director, best-selling author, former Managing Director of The Blackstone Group
Mebane Faber: Co-founder and the Chief Investment Officer of Cambria Investment Management
Jim Bruce: Producer, Director, and Writer of Money For Nothing: Inside the Federal Reserve
Chris Martenson: Reknown speaker and founder of Peak Prosperity
Mike "Mish" Shedlock: Investment advisor for Sitka Pacific and Founder of Mish's Global Economic Trend Analysis

In addition, we expect confirmation from a number of other highly respected fund managers and speakers. This year's event is two days and will include additional "break-out" groups.

For speaker bios, please check out Wine Country Conference Speakers.

This Year's Cause: Autism

$100,000 of the money raised last year came from a generous matching grant from the John P. Hussman Foundation.

Some of us in the industry who have done well are making an effort to give something back. John Hussman is at the very top of that list.

One of John's kids has severe autism. This year, all net proceeds will go to support autism programs.

Conference Details

For further details about the 2014 conference, please see Wine Country Conference May 1st & 2nd, 2014

Nothing Like It!

This event is not just another "come and hear someone talk" kind of thing. Attendees and their significant others can expect an educational, fun, and relaxed time.

Last conference, we arranged wine tours. They were a big hit. We will do so again. One of the wine estates we visited had a Bocce Ball court. On a couple of miracle shots, I won both games I played.

Stay an extra day and golf or travel. I did. The conference hotel is a fun place in and of itself.

Unlike many other conferences, you will have easy access to speakers.

Want to chat with me, Steen, John, or anyone else at the conference? You will have an easy chance.

Not only do we have an excellent lineup of speakers, you will have an opportunity to meet with them, have intimate discussions on important investment topics, with a lot of fun on the side, including wine tours and great wine.

There's nothing like it in the investment business. And your money goes to a great cause! What can be better?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Gallup Poll: #1 U.S. Problem is Government, the Economy is #2

Posted: 15 Jan 2014 10:33 AM PST

An interesting Gallup poll shows Government Itself Still Cited as Top U.S. Problem

Mentions of the government as the top problem remain higher than they were prior to the partial government shutdown in October. During the shutdown, the percentage naming the government as the top problem doubled to 33% from 16% in September.

Compared with a year ago, mentions of government are up slightly. Mentions of healthcare, on the other hand, have quadrupled -- from 4% in January 2013 to 16% today, likely related to highly visible problems with the rollout of the 2010 healthcare law. At the same time, references to the federal deficit or debt have declined from 20% to 8%, while mentions of the economy in general have dipped from 21% to 18%, and mentions of unemployment/jobs are the same, at 16%.

Overall Results

By Political Party

Additional breakdowns in the report.

If one lumped the economy and unemployment together, the percentage would be 34% overall, 31% by Republicans, 37% by Independents, and 34% by Democrats.

Curiously, lack of money and rich-poor gap were low across the board despite all the protests for higher minimum wages and despite all the media and presidential touting of wage gaps.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Retirement Sunset Math: Number of Employed vs. Population Over Time

Posted: 14 Jan 2014 11:43 PM PST

As we face retirement sunset demographics, inquiring minds might be wondering how many people are left to foot the bill for retiree Medicare, health care, public union pensions, and Social Security promises vs. the number of people collecting benefits.

The following charts from reader Tim Wallace will help put things into perspective.

Employment vs. Population

click on any chart for sharper image

Federal Spending Per Worker

The above chart is just federal spending. It does not include state and local pension promises or healthcare costs

If you think promises made cannot possibly be kept, even with huge tax hikes, you are thinking correctly.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Mish's Global Economic Trend Analysis

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