Financial topics

[Higgenbotham]

I can still remember the ads from when I was a kid that said, "Merrill Lynch is bullish on America." It seems like a lot of people equate buying stocks to being patriotic.

[John]

Dear Higgie,

> I can still remember the ads from when I was a kid that said,
> "Merrill Lynch is bullish on America." It seems like a lot of
> people equate buying stocks to being patriotic.

I have to agree with weak stream on this. I don't think patriotism
has anything to do with it any more.

The "bullish" concept is that if you invest in businesses, then
those businesses will grow. But I don't hear anybody talking about
that concept.

We're talking about a generation of analysts who think that the best
way to grow the economy is to execute a leveraged buyout. Their
clients are some of the stupidest morons you can imagine, since they
believe these analysts. But all the analysts want is to sell as much
crap to investors as possible, and take their fees and commissions off
the top.

There's been a lot of talk this morning on both CNBC and Bloomberg tv
about municipal debt, triggered by the Illinois tax hike.

Illinois is the worst off state in the country:

> Democrats are blaming these budget woes on the lousy economy. The
> real culprit for the budget imbalance is skyrocketing
> public-employee pension costs.

> Officially, Illinois is a state with an $80 billion unfunded
> pension system. Yet a study by Joshua Rauh, an associate professor
> of finance at Northwestern University's Kellogg School of
> Management, puts the funding shortfall at closer to $150 billion.

> The state still assumes that it is going to get a fat 8% rate of
> return on its pension investments. But over the past decade the
> returns were half that, which is why many actuaries believe that
> this return is pure fantasy. The pension payouts are gigantically
> lucrative, with many workers getting 80% of their final four-year
> pay. That includes a cost-of-living adjustment and can also
> include stacked-up overtime. The retirement age is 55 for many
> public employees.

> One study by the Illinois Policy Institute examined pension
> records and found that today there are 536 retirees collecting an
> annual pension of $100,000 or more. Some collect more than
> $200,000. The taxpayer tab for those 536 pensions alone is $68.2
> million a year. It costs the state about $4 billion annually to
> make the necessary pension contributions—and the system is still
> underfunded. Those annual pension costs are expected to rise to
> about $6 billion a year in the next few years.

> http://online.wsj.com/article/SB1000142 ... 94412.html

So Illinois has "solved" this problem by increasing income taxes by
67% in a stealth bill passed last night. It's possible that this will
raise no revenue at all, as businesses will move out of the state when
they can.

Meredith Whitney is predicting huge numbers of municipal bankruptcies
this year, though she says that she doesn't expect any state
bankruptcies.

Everyone agrees that investors are aware of the problems, but they're
expecting Washington to bail out the states and munipalities, either
through a fiscal bailout or through a Fed purchase of municipal bonds.

Exactly the same thing is happening in Europe. Greece and Ireland
have already been bailed out, and everyone expecting Portugal,
Belgium and Spain to be bailed out.

None of this is about patriotism. This is about the bankers who
engineered the global financial crisis by screwing everyone else now
turning their attention to other ways to screw everyone else.

John

[Higgenbotham]

John,

Going back to one of the other posts, I said I can understand why the herd followed the Hunt Brothers or Greenspan. That was before the Fourth Turning Crisis Era when unadulterated greed would be expected. But now that we are supposedly in a crisis era, why has the herd not turned against this and put it to a stop? If I understand correctly, it is because the current generations are partlcularly greedy relative to previous crisis era generations and the government is in more trouble (deeper in debt); hence, that combination of things makes this situation less apt to be immediately faced in this crisis era.

[John]

Dear Higgie,

Going back to one of the other posts, I said I can understand why
the herd followed the Hunt Brothers or Greenspan. That was before
the Fourth Turning Crisis Era when unadulterated greed would be
expected. But now that we are supposedly in a crisis era, why has
the herd not turned against this and put it to a stop? If I
understand correctly, it is because the current generations are
particularly greedy relative to previous crisis era generations
and the government is in more trouble (deeper in debt); hence,
that combination of things makes this situation less apt to be
immediately faced in this crisis era.

Because there hasn't been a real crisis yet. You've pointed this out
yourself.

It's true that we're in a Crisis era, but we're in the
"Post-Unraveling" portion, before the regeneracy events occur that
force civic unity to be regenerated.

That's why I'm always saying that a worst crisis MUST occur -- because
the behaviors that brought about the financial mini-crisis of the last
three years are unchanged. A real regeneracy event -- a real crisis
-- such as a 50% stock market crash -- will force generational changes
in behavior. Since behaviors haven't changed yet, it means that the
real crisis has not yet come.


John

[Higgenbotham]

John,

That makes sense. While there are a few people like Meredith Whitney and me who see the current era as a crisis era, most do not see it as such. Therefore, those few who do see it as a crisis era are confused by the behavior of those who don't. Until the herd reacts to events as if they really are crisis events, nothing will change. In fact, things will get worse. But the severity of events will probably need to increase until the crisis reaction is registered. And I think that goes back to what weak stream said. GenX should see these past events like the bankruptcy of Lehman or the BP oil spill as crisis events, but due to their extreme greed, they do not see it that way at all.

[John]

Dear Higgie,

> GenX should see these past events like the bankruptcy of Lehman or
> the BP oil spill as crisis events, but due to their extreme greed,
> they do not see it that way at all.

That's absolutely right. They see those events as proof of the
incompetence of Boomers, and as justification for nihilism and
destructiveness.

John

[weak stream]

As a Genx'er I know that nobody my age knows any real trouble. My friends think I'm a nut and an old fart like my grandparents. But my grandparents went through some very serious times, though. GenX has circled the wagons of denial and selfishness and will try to game the system for all it's worth and, I believe, will become quite a mean group when this ends. By contrast I think the boomers engage in fantasy and will be shocked and scared in the end.

[rolivier79]

Regarding the fear of municipal defaults, I'd like to point out that municipal bonds rarely ever get issued without bond insurance these days. Unfunded liabilities aside, that means that the federal government is not going to have to bail out the municipalities directly. The entities demanding the bailout will be large (to big to fail) insurance agencies and investment banks that issued the insurance to the munis. Also funding municipalities directly would be a political nightmare, a blank check (no matter how large) to the biggest financial institutions is more "palatable".

Therefore holders of municipal debt will start knocking on the doors of the insurance agencies. For now, that crisis is being avoided as long as the Fed and Bernanke keep firm in their statement that they might be open to all kinds of government debt purchases. This is exactly why efforts like QE2 have delayed the blowup in municipals, without the fed actually buying these debts. At one point though they will start buying municipals as wall street (like europe) will start noticing a hike in the credit default swap rates (= the cost of insurance) for these bonds. QE3 is the only way we can keep these rates from sky rocketing.

If not we will get a run on the insurance companies... Bam ... and it will be big.

The problem with all of this might be containable if the municipalities only held previously issued and already funded, already insured liabilities. In reality... the municipalities need more and more cash as these unfunded liabilities become due. At this point it could become expensive even prohibitive to find additional insurance for future debt. What do you do when this happens. Is the federal government start insuring the unfunded future liabilities of all municipalities, some municipalities, or none. Though choices, right?

[John]

Dear Robert,

> Regarding the fear of municipal defaults, I'd like to point out
> that municipal bonds rarely ever get issued without bond insurance
> these days.

As I recall, all those mortgage-backed collateralized debt obligations
(CDOs) were insured as well.

John

[weak stream]

That's why we bailed out AIG. With all the legal genius we apparently have in this country, why can't we grill the banks and anyone involved in this securitization (what amounts to) insurance fraud? When was the last time a big car insurance company blew up? Yeah, because that's what happens when responsible statisticians and risk people do what they're supposed to do....nothing. Until we muster the courage to break out the handcuffs, come what may, we won't see the end of this.