Mish's Global Economic Trend Analysis

Calpers Wins Pension Lawsuit, Not Good News for Chicago (or Bondholders in General)
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Dismal Retail Sales Numbers Suggest Recession Likely Underway: Overall +0.0%, YoY +0.9%, Department Stores -2.2%

Calpers Wins Pension Lawsuit, Not Good News for Chicago (or Bondholders in General)

Posted: 13 May 2015 01:34 PM PDT

Judge Rejects Bondholders' Lawsuit Over Pension Debt

In bankruptcy, the federal courts have ruled that cities can reduce pension obligations. They can, but they don't have to. In Detroit, bondholders were sacrificed to maintain police and fire pensions with minimal haircuts.

On Monday, U.S. Bankruptcy Judge Meredith Jury ruled against bondholders in favor of Calpers in the San Bernardino bankruptcy. She acknowledged that her decision is likely to be seen as unfair to the municipal bond market and might even discourage investors from buying pension obligation bonds in the future.

Please consider Calpers' Pension Hammer Forces 'Unfair' Bond Ruling by Judge.

California's public retirement fund holds so much power over local officials that pension-bond investors can't expect equal treatment when a city goes bankrupt, a judge said in a ruling that she acknowledged seems "unfair."

"What I see as unfair, and might seem unfair to the outside world, does not matter under law," Jury said, referring in part to the powerful remedies Calpers can seek if the city doesn't honor its contract.

Monday's ruling sticks with a pattern seen in the bankruptcies of Stockton, California, and Detroit, said Marilyn Cohen, president of Envision Capital Management in El Segundo, California.

Up to Cities

Federal bankruptcy courts have many times ruled that cities can cut pension obligation, but nothing forces them to.

For example, in the Stockton California bankruptcy, a federal judge ruled that Stockton could have tried to reduce its obligation to Calpers. However, Stockton chose not to do so, arguing that fighting Calpers would take too long and could endanger employee pensions.

Conflict of Interest

I believe Stockton's rationale is nonsense. Instead, I propose Stockton city officials had a conflict of interest.

City officials wanted to preserve their own pensions.

Chicago Connection

So what does this have to do with Chicago and the state of Illinois in general?

Lots, so let's tie it all together.

As a result Tuesday's Illinois Supreme Court Ruling that the 2013 Pension Reform Law Is Unconstitutional Moody's cut Chicago's bond rating two notches to junk. Moody's specifically cited Chicago's pension crisis.

I discussed this yesterday in Chicago Bond Rating Cut to Junk; City Faces $2.2 Billion in Various Termination Fees; Irresponsible to Tell the Truth.

In light of the San Bernardino ruling today, cities that have huge pension issues will see bond yields soar.

The Chicago Board of education is already paying 285 basis points more than other cities because of pensions. If bondholders keep getting hammered, those yields will rise further.

Pass a Bankruptcy Law, Give Taxpayers a Chance

A Chicago Tribune editorial by Henry J. Feinberg, says Pass a Bankruptcy Law, Give Taxpayers a Chance.

Under federal law, state governments can't file for bankruptcy. Local governments can do so if their states give them permission. A bill now before the Illinois legislature would extend that permission to Illinois municipalities, most of which now can't seek protection under bankruptcy law.

The right way is to amend House Bill 298 so people who hold Illinois bonds have a "secured first lien," the fancy words needed in the law to make sure bondholders are first in line to get their money back. Passing this amended bill would do three things that the state's local governments have not been able to accomplish for decades.

Three Reasons to Amend Bill 298

Feinberg cites three reasons to amend the pending bankruptcy bill.

First, it would bring opposing sides to the table to have meaningful discussions about how to save the borrower, in this case the local government, from financial ruin.
Second, the government could ask the bankruptcy court to modify labor contracts and order the parties to renegotiate the terms of collective bargaining agreements.
Finally, a law that puts bondholders first in line to get repaid would be a stroke of fairness that would help Illinois cities, school districts and other local governments avert a short-term solution like Detroit's. There, some people who had lent money to the city by buying its bonds lost two-thirds of their investment. Meanwhile, members of the politically powerful police and firefighter unions took no cuts to their pensions (their cost-of-living adjustment was reduced). Other workers took a 4.5 percent base cut in pensions and the elimination of an annual cost-of-living increase, The Detroit News reported.

I agree with Feinberg on all three points. Bankruptcy is the only real solution for many of these plans and many cities as well.

Beware the Tax Man

Tax hikes cannot possibly address the shortfall. As discussed on May 4, in Beware, the Tax Man Has Eyes on You, the potential hike for Illinoisans is staggering.

Nuveen estimated 50% property tax hikes would be necessary. Those hikes were just for Chicago. They did not include money to bail out other Illinois pension plans. Nor did it address the $9 billion budget deficit for the state.

Finally, Nuveen's estimate assumed pension plans would make their plan assumption of 7% returns or higher.

Stock Market Bubble Will Hit Pensions

I believe another serious decline in the stock market is likely. So do some of the biggest fund managers in the world.

Please check out Seven Year Negative Returns in Stocks and Bonds; Fraudulent Promises.

Pension promises were not made in good faith.

Rather, pension promises were the direct result of coercion by public unions on legislators, mayors, and other officials willing to accept bribes because they shared in the ill-gotten gains of backroom deals at taxpayer expense.

Illinois taxpayers cannot be held accountable for coercion of public officials by public unions.

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

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Posted: 13 May 2015 10:52 AM PDT

I have posted on this before, but many people missed it.

JS-Kit/Echo went under. Along with that development, the comment system on this blog no longer works.

I am looking for a replacement but have not been able to get Disqus to work. I also need to strip out all of the Echo code, but have not done so because some of it I may need to handle peculiarities of this blog.

If someone is familiar with Disqus and blogger and is free to help, I would appreciate it.
Thanks.

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

Dismal Retail Sales Numbers Suggest Recession Likely Underway: Overall +0.0%, YoY +0.9%, Department Stores -2.2%

Posted: 13 May 2015 09:10 AM PDT

Economists were surprised by the dismal retail sales report this morning. That's not surprising because economists are nearly always surprised.

The Bloomberg Consensus retail sales estimate was a rise of 0.2%, but sales came in at 0.0% and the details were ugly, emphasis mine.

Consumer confidence may be strong but it still is not translating to strength for consumer spending. Retail sales were unchanged in April vs Econoday expectations for a 0.2 percent gain. Excluding autos, sales did rise but only barely at plus 0.1 and below expectations for 0.5 percent, while excluding both autos and gasoline, sales rose 0.2 percent vs expectations for a 0.4 percent gain.

The surprising part of the report isn't the weakness in motor vehicles, which was signaled by weak unit sales and which fell 0.4 percent in the month, but weakness in some of the core readings including department stores which fell a very steep 2.2 percent and electronics & appliances which fell 0.4 percent for a 7th straight decline. Both furniture and food & beverages also show declines.

Year-on-year rates show just how weak growth in the retail sector has been. Total retail sales are up only 0.9 percent year-on-year, down from 1.7 percent in March. This is the lowest rate since late 2009. Excluding motor vehicles, year-on-year sales are unchanged, again the lowest reading since late 2009. Ex-auto ex-gas, sales are up a respectable 3.4 percent but, compared to 3.9 percent in March, are going in the wrong direction.

Estimated Retail Sales

The Census Department offers this Table of Retail Sales.

click on chart for sharper image

Note the huge patch of negative numbers this month. At least people are still eating out and drinking more.

Also note the negative numbers in the November 2014 through January 2015 column.

Economists expected the decline in gasoline sales (down 7.2%) to translate into increased sales elsewhere. It didn't.

I am scratching my head over Bloomberg's statement "consumer confidence may be strong ...". What the heck is Bloomberg talking about?

Does Bloomberg even read its own numbers? Here is a snip from the Bloomberg Consumer Confidence Level Report for April 2015, released on 4/28/2015.

Consumer confidence has fallen back noticeably this month, down more than 6 points to a much lower-than-expected 95.2. This compares very poorly with the Econoday consensus for 103.0 and is even far below the Econoday low estimate of 100.5. The weakness, ominously, is the result of falling assessments of the jobs market, both the current jobs market and expectations for the future jobs market. The second quarter, which is expected to be much stronger than the weather-depressed first quarter, isn't likely to get off to a fast start, at least as far as this report goes.

The most striking weakness in April is the assessment of future conditions with the expectations component down 8.5 points to 87.5 for the weakest reading going all the way back to September. And the most striking weakness among the sub-components is employment, where fewer see more jobs opening up 6 months from now and more see fewer jobs available. This spills over into income where fewer see an increase ahead and more see a decrease.

But also weak is the present situation component which is down more than 2-1/2 points to 106.8 for its weakest reading since December.

The Fed is not looking at those numbers either. In the latest FOMC report the Fed specifically stated "consumer sentiment remains high".

I mocked the Fed on April 29 in Fed Cites Weather, "Transitory" Factors in FOMC Statement; What About Consumer Sentiment?

Autos Only Reason YoY Sales Are Positive

Autos are now the only thing keeping retail sales positive year-over-year. And auto sales are driven by subprime loans. How long is this party going to last?

Who wants a car, needs a car, can afford a car, and can get a car loan?

Retail Sales Flashbacks

January 14 - Economists Still Upbeat: Retail Sales Drop Seen as "Blip"
February 13 - Economists Blame Weather: Retail Sales "Unexpectedly" Decline; December Revised Lower, GDP Estimates Follow.
April 14 - Experts Confounded: Retail Sales Rise First Time in Four Months, But Weaker Than Expected.

Household Spending Growth Expectations Plunge; Recession Already Started?

Every month the Fed does a Survey of Consumer Expectations for inflation, earnings growth, income growth, and consumer spending growth.

Yesterday, I stuck my neck out regarding consumer spending projections: Household Spending Growth Expectations Plunge; Recession Already Started?

Downloading data from the Fed, I produced this chart.

click on chart for sharper image

This is what I said yesterday...

Spending Analysis

In spite of rising earnings and income estimates, "median household spending growth expectations retreated significantly from the last month" in the Fed's words.

Should these spending projections prove to be correct, a US recession that few if any economists see coming, has already started.

The Fed's own survey shows spending sentiment is weak. The data shows how weak. Amusingly, the Fed says "consumer sentiment remains high".

And Bloomberg does not believe its own sentiment numbers either.

Following today's report, I move my position from a recession may have started to a recession is now likely underway.

I suspect economists and the Fed will still believe it's "transitory". If so, look for the term "technical recession" because no one seems to believe it. Heck, they do not even believe their own data.

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

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Mish's Global Economic Trend Analysis

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