Mish's Global Economic Trend Analysis

Uneven Housing Recovery in Pictures: Florida, Arizona, Illinois the Worst Large-Population Performers
Union Group Mobilizes "Against" Pay Hike
Beggar Thy Taxpayer: Currency Wars, QE Strain Life Insurers and Pension Plans; Negative Returns With 4-7% Promises
Farmers Walk Away From Leases Due to Plunging Grain Prices

Uneven Housing Recovery in Pictures: Florida, Arizona, Illinois the Worst Large-Population Performers

Posted: 23 Feb 2015 05:12 PM PST

The latest Black Knight HPI Report shows what I call the "Uneven Housing Recovery".

Nationally, prices are up 4.5% from a year ago, and down 0.1% from last month. Variances are wide.

A few pictures will explain what I mean.

Biggest Movers This Month

Biggest Metro Movers This Month

Think Florida looks good?

Then let's take a look at the largest 20 states in alphabetical order.

Performance of Largest 20 States

click on any chart for sharper image

Percentages are relative changes of HPI from dates shown to December 2014. Numerical ranking by most recent month's percentage change follows state name.

I reformatted the top-20 Black Knight table double-wide to make it easier to read.

Home prices in Texas and Colorado exceed their 2005-2006 high! New York has nearly recovered to its previous high in 2007.

Worst Large-Population Performers

Florida -30.3% since April 2006
Arizona -29.5% since May 2006
Illinois -22.5% since July 2006
Connecticut -20.9% since July 2006
California -20.2% since May 2006
Michigan -20.1% since July 2005
Maryland -19.9% since June 2007
New Jersey -19.5% since June 2006

Performance Analysis

Florida, Arizona, and Illinois are the three worst of the largest 20 states in terms of recovery.

Recovery has to do with several factors including magnitude of previous bubble, jobs, and tax policy.

Illinois did not have the bubble of numerous cities in Florida, Arizona, or California. Nor has Illinois had to suffer through a Detroit-style bankruptcy ... yet.

Rather, Illinois lags in the recovery because of poor job prospects, poor tax policy, and what most would consider poor weather. There is little here to attract businesses or immigrants from other states.

In particular, the property tax situation in Illinois is unsustainable. A home that might sell for $300,000 could require as much as $7,000 a year in property taxes, or more.

Taxes varies depending on home rule rates and how aggressive someone is willing to fight tax hikes and property valuations. I have fought tax hikes twice in the last 10 years and won. Most don't. If everyone did, no one would get them.

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

Union Group Mobilizes "Against" Pay Hike

Posted: 23 Feb 2015 01:27 PM PST

In what may be a first (otherwise an extreme rarity), a substantial force within a union has mobilized against a pay hike to $9.00 per hour from essentially nothing.

"Nothing" you say? Yes, it happens in small non-profit theaters that pay aspiring actors $7 to $15 per performance. Rehearsal time does not count.

Curiously, but rightfully so, the aspiring actors realize there will be no work at all if they have to get paid $9.00 an hour for acting and rehearsals.

Reader Richard, who works in the film industry writes ...

Hi Mish

Actor Equity (the union of stage actors) wants to force small theaters in Los Angeles "to pay the legally mandated minimum wage." There is no doubt this move will decimate local theater and goes against the vast majority of their LA member's wishes.

We have a few theater districts in the city which have sprouted restaurants that depend on the theater traffic to survive. Whole areas such as North Hollywood have transformed themselves as the NoHo Arts District [a play off the SoHo Arts District in New York City] all because of the theaters in the area.

Many actors have vowed to withdraw from the union. I myself work almost exclusively in the film and television these days, but I started my career in theater and benefited from the contracts negotiated by Actors Equity.

But Los Angeles theater is a completely different animal from New York theater and includes many actor run companies with national and international reputations. The economics of LA theater just do not support the model Actors Equity wants to foist on the theater community and will result in the closing of dozens of very well regarded theaters.

Anyway I thought it was an interesting twist on unions. Actors Equity has a vote planned for March 25th but the result is only advisory and the union leadership will them do what they want.

Hope you are well. Keep up the good work.

Cheers,
Richard

Small Theater Community Speaks Out Against a Pay Hike

The LA Times reports, L.A. County's Small-Theater Community Speaks Out on Proposed Wage Hike.

An impassioned, two-hour, open-mike meeting about the future of Los Angeles County's small-theater community Saturday at the Renberg Theatre at the Los Angeles LGBT Center in Hollywood drew an overflow crowd of well over 200 theater folks.

With just one exception, the dozens of speakers, including a calmly emphatic Tim Robbins, were motivated by a deep fear of what a proposed higher wage might do to their artistic scene.

Actors' Equity, the national union for stage actors, is seriously considering imposing a $9 hourly minimum wage for its members when they perform or rehearse in L.A.'s small venues.

Robbins and the rest think $9 an hour is exorbitant and that actors should continue working on small stages for what they have been receiving for decades. The going rate is $7 to $15 per performance, depending on ticket prices and seating capacities. Rehearsals, which can consume scores of hours, pay nothing.

Most of the small theaters are nonprofit organizations that need donations to augment ticket sales in order to sustain what's typically a hand-to-mouth existence.

Robbins is the founder and artistic director of the Actors' Gang in Culver City, launched before his 1988 ascent to movie stardom in "Bull Durham."

He stepped to a microphone wearing a pale blue denim jacket and said it made no sense for union officers to expect small theaters to survive under the proposed new terms. Even with volunteer labor from actors, Robbins began, "I've lost hundreds and hundreds of thousands of dollars. I should rephrase that — invested [it]."

The Actors' Gang has often done shows with big casts, developing new plays from scratch in lengthy rehearsal processes. Some have toured nationally and overseas — where real wages kicked in.

"I've gotten so much out of it, and so have the actors," Robbins said. "Actors have launched careers." The Actors' Gang would have died in the cradle, he said, had there been a minimum wage rule when it began.

"I may be the only person in this room voting yes," said Ann Colby Stocking. She said that she and some actor friends had in fact approached union leaders asking their help because they need better pay.

She painted the scenario she has seen actors endure: "They've come [to rehearsals] from working an eight-hour job. They're crying from exhaustion, they're fainting. They can't take time off, because they can't afford it." With better pay, she suggested, the play could be the thing, the exhausting day job, less so.

Stocking was politely received, even applauded. But by the time the meeting broke up it looked as if a civil war were at hand and that, in an extreme rarity for the U.S. labor movement, a substantial force within a union was mobilizing against a pay hike.

I believe this is a first. Yes, we have seen non-union forces organize against a union drive and alleged higher wages, but I cannot recall ever seeing unions rally against pay hikes. And this membership is not only against a pay hike, but overwhelmingly against.

Hats off to the LA guild for recognizing the theater itself may go under if this hike is forced upon them. So why be in a union at all?

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

Beggar Thy Taxpayer: Currency Wars, QE Strain Life Insurers and Pension Plans; Negative Returns With 4-7% Promises

Posted: 23 Feb 2015 11:28 AM PST

I received an interesting email on Saturday from Bob Hoye at Institutional Advisors regarding "Currency Wars".

Bob writes ...

Currency wars are very much the talk of the times. This was also the case in the last postbubble contraction when many countries sought to enhance exports through depreciation. And "beggar thy neighbour" policy was a feature of the early 1930s as well.

This time around it is an intelligentsia stricken by the fear of deflation, trying to ramp up anything that trades. But commodity markets and producer prices have not been "accommodating" central bankers. Instead there has been rampant inflation in financial assets, which has reached excessive levels of speculation. Clearly, it is a "beggar thy taxpayer" policy.

Currency Wars and QE Strain Life Insurance Companies and Taxpayers

Bob gets credit for the phrase "beggar thy taxpayer" but I have been thinking along those lines for quite some time.

Pension plan assumptions are always on my mind and a Financial Times article earlier this month puts a spotlight on the problem. Please consider Draghi's QE Strains German life Assurers.

In a report published on Wednesday, Moody's said the "profitability and solvency" of the industry in Germany would come under further strain from the European Central Bank's bond buying.

German life companies, which have estimated liabilities of more than €700bn, sell policies that offer annual guaranteed returns to policyholders, who use the products to save for retirement.

Similar products are sold across Europe, but the guarantees have been particularly generous in Germany.

The ECB's plan to buy €60bn worth of bonds each month has further depressed yields, giving the industry greater concerns. The yield on Germany's benchmark 10-year bond has fallen to 0.35 per cent

To help cope with the pressure, insurers have been reducing the returns they pledge to policyholders. The maximum guarantee sanctioned by authorities in Germany is now 1.25 per cent. The industry has also sought to sell more products that have no guarantees — effectively placing the investment risks with policyholders instead of shareholders.

However, the insurers still need to meet commitments from policies sold in previous years, for which the guarantees have been as high as 4 per cent.

Negative Returns With 4% Promises

Insurers have made 4% promises but long-term bonds yield close to zero.

Benjamin Serra, senior credit officer at Moody's said "They are increasingly constrained by the high level of guarantees sold in the past." 2015 will be a "pivotal and challenging year" for Germany's life assurance industry. Moody's maintained a "negative outlook" for the sector.

As of Friday, 10-year German bonds yield 0.39%. Five-year German bonds yield -0.07%.

Recall that the ECB pledged on January 22 to buy 60 billion euros ($68 billion) of assets a month for at least 19 months in its inane pledge to avert deflation. Buy from where?

Hoarding Bonds

Reuters asked an interesting question last Friday: ECB's Draghi wants to buy bonds, but who will sell?

Weeks before the European Central Bank begins a program to buy about 1 trillion euros of euro zone government bonds, banks, pension funds and insurers across the continent are hoarding them for regulatory or accounting reasons.

"We prefer to hold on to them," said Antoine Lissowski, deputy CEO at French insurer CNP Assurances. "The ECB's policy ... is reaching its limits now."

Insurers and pension funds typically buy long-term debt. They could make hefty profits selling to the ECB. But the money would have to be re-invested in other bonds whose yields would be much lower than their long-term commitments to clients -- a regulatory no-no.

"If we were to sell bonds, we would make huge capital gains, but we will then have to reinvest that money at a yield of 0.5 percent, set against liabilities at 3.50-3.75 (percent)," said Bart de Smet, the CEO of Belgian insurer Ageas.

RBS strategists see a 40 percent chance that ECB purchases would help turn German 10-year Bund yields negative this year.

US Yield Curve

US Promises

In the US, pension funds have not made 1.25% promises or even 4% promises, but rather 7.0%+ promises with the 10-year bond yielding 2.13%.

Annuities promise 6% or so.

How you get 6% in a 2% world?

The correct answer is: you don't. But insurers and pension plans try, by taking risks. And the more risk they take, and the more margin they use, drives prices higher and higher into bubble territory.

Seven Year Negative Returns

As of January 31, 2015, Stock and bond prices are so stretched that GMO's 7-Year Asset Class Real Return Forecast shows negative real returns for seven years in US equities and bonds.

"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. U.S. inflation is assumed to mean revert to long‐term inflation of 2.2% over 15 years."

As of December 31, 2014 GMO managed $116 billion in assets.

Broken Model

In the US, pension plans have aggressively shifted from investing in AAA rated bonds to equities and junk bonds because yields in US treasuries and AAA rated corporates is not high enough.

Denial that this has happened is nearly everywhere one looks. Of course the Fed, and most others, cannot and will not see a bubble until it bursts wide open.

Even if the air is let out slowly (something that has never happened in practice), negative real returns, and perhaps zero nominal returns for seven years is the only other plausible outcome unless one expects an even bigger bubble coupled with even longer negative returns in the future.

I will do a follow-up on this broken model later this week with a look at US pension plans, especially State of Illinois promises that absolutely cannot be met.

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

Farmers Walk Away From Leases Due to Plunging Grain Prices

Posted: 23 Feb 2015 12:43 AM PST

Walking Away Farmer Style

The price of corn is at a price seen in late 2006, wheat late 2005, and soybeans 2004. Land prices, lease prices, equipment prices, and fertilizer are much higher.

This has put the squeeze on many farmers, especially those who lease land. The result is best described as "walking away farmer style".

Please consider Rent Walkouts Point to Strains in U.S. Farm Economy

Across the U.S. Midwest, the plunge in grain prices to near four-year lows is pitting landowners determined to sustain rental incomes against farmer tenants worried about making rent payments because their revenues are squeezed.

Some grain farmers already see the burden as too big. They are taking an extreme step, one not widely seen since the 1980s: breaching lease contracts, reducing how much land they will sow this spring and risking years-long legal battles with landlords.

The tensions add to other signs the agricultural boom that the U.S. grain farming sector has enjoyed for a decade is over. On Friday, tractor maker John Deere (DE.N) cut its profit forecast citing falling sales caused by lower farm income and grain prices.

Many rent payments – which vary from a few thousand dollars for a tiny farm to millions for a major operation – are due on March 1, just weeks after the U.S. Department of Agriculture (USDA) estimated net farm income, which peaked at $129 billion in 2013, could slide by almost a third this year to $74 billion.

The costs of inputs, such as fertilizer and seeds, are remaining stubbornly high, the strong dollar is souring exports and grain prices are expected to stay low.

How many people are walking away from leases they had committed to is not known. In Iowa, the nation's top corn and soybean producer, one real estate expert says that out of the estimated 100,000 farmland leases in the state, 1,000 or more could be breached by this spring.

The stakes are high because huge swaths of agricultural land are leased.

Landowners are reluctant to cut rents. Some are retirees who partly rely on the rental income from the land they once farmed, and the rising number of realty investors want to maintain returns.

One catch is that many landlords never thought to file the paperwork to put a lien on their tenants' assets. That means landowners "can't go grab anything off the farm if the tenant doesn't pay," McEowen said. "It also means that they're going to be behind the bank."

Corn Monthly