Cost of Insuring Illinois Debt from Default Hits All-Time High; Illinois Pension Fund Loses $Billions in OTC Derivatives Positions
by ilene - June 17th, 2010 5:26 pm
Cost of Insuring Illinois Debt from Default Hits All-Time High; Illinois Pension Fund Loses $Billions in OTC Derivatives Positions
Courtesy of Mish
Congratulations of sorts go to the State of Illinois for having the most hopelessly underfunded pension plans in the US and also one of the biggest per capita budget deficits.
Topping off the misery, the Illinois Teachers Retirement System is losing money in risky derivatives bets in what one analyst says amounts to “collecting nickels ahead of the bulldozer.”
Given that sorry state of affairs it should be no surprise to discover Illinois Debt Default Insurance Climbs to Record.
The cost of insuring Illinois bonds against default rose to a record as lawmakers sought to close a $13 billion deficit in the state’s proposed budget for the year starting July 1.
The cost of a five-year credit-default swap for the state rose 2 basis points today to 304.64 basis points, or $304,640 per $10 million of debt according to CMA DataVision.
Illinois Loses $Billions on OTC Derivatives
Inquiring minds are reading Illinois pension fund uses OTC derivatives to recoup returns, jeopardizes pensions
Dale Rosenthal, a former strategist for Long Term Capital Management, the hedge fund known for its epic collapse in 1998, and a proprietary trader for Morgan Stanley, has seen his share of financial complexities.
But when shown a seven-page list of derivatives positions held by the Illinois Teachers Retirement System as of March 31, obtained by Medill News Service through a Freedom of Information Act request, the University of Illinois-Chicago assistant professor of finance expressed disbelief.
“If you were to have faxed me this balance sheet and asked me to guess who it belonged to, I would have guessed, Citadel, Magnetar or even a proprietary trading desk at a bank,” Rosenthal said.
How bad is it? After losing $4.4 billion on investments in fiscal year 2009, and 5 percent on investments in fiscal 2008, the teachers’ pension is now underfunded by $44.5 billion, or 60.9 percent, according to the Commission on Government Forecasting and Accountability’s March 2010 report. By comparison, only 20.3 percent of the Chicago Teachers’ Pension Fund is unfunded.
For the quarter ended March 31, according to derivatives experts who studied TRS’ financial documents, the fund lost some $515 million on its derivatives portfolio. Since then, the fund’s derivatives positions have likely soured further, the experts
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DiggThere’s a Slow Train Coming
by ilene - June 5th, 2010 9:33 am
There’s a Slow Train Coming
Courtesy of John Mauldin, Thoughts from the Frontline Weekly Newsletter
There’s a Slow Train Coming
A Negative 2% GDP in the Third Quarter?
Small Business Still Has Issues
Italy, Paris, Vancouver, and San Francisco
And a Forbes Cruise to Mexico
Sometimes I feel so low-down and disgusted
Can’t help but wonder what’s happenin’ to my companions,
Are they lost or are they found, have they counted the cost it’ll take to bring down
All their earthly principles they’re gonna have to abandon?
There’s a slow, slow train comin’ up around the bend.- Bob Dylan
The question before the jury is a simple one, but the answer is complex. Is the US in a "V"-shaped recovery? Are we returning to the old normal? A great deal hinges on the answer, and this week we look at some of the evidence before us.
But first, a follow-up thought to last week’s letter. I wrote about why countries can reduce their private debt, reduce their public debt, or run a trade deficit, but not all three at the same time. If a country wants to see its government run a fiscal surplus (or small deficit) and at the same time its private citizens want to reduce their leverage (common desires throughout the developed world), it must run a trade surplus. That’s a simple accounting statement. If you did not read last week’s letter, you can get to it by going here.
That brings up the deepwater gusher in the Gulf. That it is an unmitigated disaster is an understatement. There is the possibility of the oil getting into the Gulf Stream and going around Florida and landing upon the Atlantic coast. We will be cleaning this up for years.
I am at the moment on a plane to Italy, but if memory serves me right, we run about a $300-billion-dollar trade deficit just in energy purchases. Our trade deficit has been coming down in most other categories but is fairly steady with respect to oil. And as noted above, if we want to get to a place where we are in control of our government deficit, we must reduce that trade deficit.
Bluntly, we cannot hope…
Six Impossible Things
by ilene - May 29th, 2010 2:18 pm
Six Impossible Things
Courtesy of John Mauldin
Six Impossible Things
Delta Force
Reduce your Deficits!
Pity the Greeks
Should the US Bail Out European Banks?
Italy at Last!
Alice laughed. "There’s no use trying," she said" One can’t believe impossible things."
"I daresay you haven’t had much practice," said the Queen. "When I was your age, I always did it for half-an-hour a day. Why, sometimes I’ve believed as many as six impossible things before breakfast."
- From Through the Looking Glass by Lewis Carroll
Economists and policy makers seem to want to believe impossible things in regards to the current debt crisis percolating throughout the world. And believing in them, they are adopting policies that will result in, well, tragedy. Today we address what passes for wisdom among the political crowd and see where we are headed, especially in Europe.
I am reminded of the great line from the movie, The Princess Bride. Vizzini is the short bad guy who is trying to get away from Westley and every thing he attempts does not work. Westley just keeps on coming. At each failed attempt, Vizzini mutters, "Inconceivable." Finally, Vizzini has just cut the rope and The Dread Pirate Roberts (Westley) is still climbing up the cliff.
Vizzini: HE DIDN’T FALL? INCONCEIVABLE.
Inigo Montoya: You keep using that word. I do not think it means what you think it means.
European leaders keep telling us that the break-up of the eurozone is inconceivable. I do not think they know what that word really means. Let’s see if I can explain the problem so that even a politician can understand.
But first, and quickly. We have transcribed the speeches from my recent 7th Annual Strategic Investment Conference I put on with my US partners Altegris Investments. To say they were awesome is somewhat of an understatement. If you have registered for my free accredited investment letter, you should already have gotten a link or will get one soon to the speeches. David Rosenberg, Dr. Lacy Hunt, Paul McCulley, Niall Ferguson, Jon Sundt, Jason Cummins, Gary Shilling and your humble analyst. That is a world class line-up.
If you are an accredited investor (basically $1.5 million net worth) and have not yet signed up for my letter, then go to www.accreditedinvestor.ws and do so now. One…
Munis About to Blow Up
by ilene - May 25th, 2010 1:44 am
Munis About to Blow Up
Courtesy of John Rubino at Dollar Collapse and TIME
So I’m sitting here trying to turn a pile of (mostly terrifying) data on muni bonds into a post that explains why this is the next domino to fall, and here comes Time Magazine with a feature on that subject:
Municipal Bonds: The Next Financial Land Mine?
As Wall Street nervously watches the sovereign debt crisis unfold in Greece, another potential landmine is looming closer to home, one that could bring U.S. cities and towns to their knees, force the federal government to cough up another bailout package, and potentially send the unemployment rate much higher. The danger this time? Municipal debt.
State and local governments are frantically scrambling to meet budget shortfalls as high unemployment and shaky consumer confidence mean less income tax and smaller sales tax revenue for government coffers. At the same time, falling home prices and rising foreclosures will start to hit municipalities hard this year as all those property reassessments done over the past 18 months kick in.
A couple of municipalities, such as Los Angeles and Detroit, have even whispered the “B” word. Former Los Angeles Mayor Richard Riordan argued in an editorial in the Wall Street Journal earlier this month that the city will likely have little choice but to declare bankruptcy between now and 2014. Also, several smaller markets, such as Harrisburg, Pa., and Jefferson County, Ala., have openly talked about filing for Chapter 9 bankruptcy — a reorganization available only to municipalities.
In general, municipalities try to avoid Chapter 9 filings. Although such filings make it easier for a city to break onerous labor contracts or make other politically tough cost cuts, they can have hidden costs, such as distracting politicians, alienating business and making it more difficult for a city to raise cash in the capital markets going forward. The city of Vallejo, Calif., for example, has been in Chapter 9 since spring 2008, and observers say the process has been costly and hurt the city’s ability to attract new business. “It’s been two years and the case is still going on and there’s still significant disputes with the unions,” says Eric Schaffer, a partner at Reed Smith LLP. “Ultimately you hope to bring everybody to the table and share the pain, but that can be a messy
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The mindset will not change; a depressionary relapse may be coming – European version
by ilene - May 17th, 2010 4:16 pm
The mindset will not change; a depressionary relapse may be coming – European version
Courtesy of Edward Harrison at Credit Writedowns
In March I wrote an American version of this post which pointed to the bailout culture in America as a major reason I fear a depressionary relapse. American policy makers have shifted private losses onto the government’s books while propping up bankrupt companies in the private sector in order to forestall yet greater economic pain.
The mindset is fixed on re-engineering some semblance of past economic growth. The result has been a return in the US to the status quo ante of low savings, excess consumption, indebted households, and leveraged financial institutions, but with policy options significantly diminished and greater levels of government debt to boot. Clearly, when stimulus is withdrawn, policy makers should expect more severe economic bloodletting.
In Europe, the same bailout mentality is at work. However, the results are likely to be even more disastrous because of the fundamental misunderstanding of economics and financial sector balances amongst the policy elite in Euroland. The public and private sector cannot simultaneously net save unless the Europeans engineer a competitive currency devaluation. Therefore, the Europeans’ newfound fiscal austerity is at odds with the need of the private sector to reduce debt and will likely lead to a collapse in consumer demand and depression or a trade war. What Europe needs is to allow over-indebted nations to default, reducing the political and economic pressure of austerity.
Intra-Eurozone Trade wars
Let me review how I come to that conclusion. This is a trade issue, first and foremost. The reason the Eurozone exists from an economic standpoint has to do with European interdependence from business trade. The eurozone functions as an internal market much the way the United States does, with the majority of trade occurring inside the region as opposed to externally with non-Eurozone countries.
When the Euro was formed, exchange rates were fixed and a common monetary policy came into being – much as we see for states in the US or provinces in Canada. Of course, monetary policy is not run for specific regions within the zone, but for the zone overall. And this invariably means that the European Central Bank’s monetary policy is geared more to the slow-growth core of Europe than the periphery.
During any business cycle then, current…
Schwarzenegger: “Terrible Cuts” Needed to Close Deficit
by ilene - May 13th, 2010 12:54 am
Schwarzenegger: "Terrible Cuts" Needed to Close Deficit; Prison System Insanity; Mish Proposals for California
Courtesy of Mish
Now that growth in California’s tax revenue is widely understood to be a mirage, with April wiping out all the gains in the previous 4 months, Schwarzenegger Preps ‘Terrible Cuts’ to Close Deficit.
California Governor Arnold Schwarzenegger will seek “terrible cuts” to eliminate an $18.6 billion budget deficit facing the most-populous U.S. state through June 2011, his spokesman said.
“We can’t get through this deficit without very terrible cuts,” Schwarzenegger spokesman Aaron McLear told reporters in Sacramento. “We don’t believe that raising taxes right now is the right thing to do.”
Schwarzenegger’s newest plan will revise the proposals introduced in January to account for the tax-collection shortages. In January, the governor said California may have to eliminate entire welfare programs, including the main one that provides cash and job assistance to families below the poverty line, without an influx of cash from the federal government.
Since then, the Democrat-controlled Legislature has made few strides toward closing the budget hole. Legislation adopted during the emergency session ordered by Schwarzenegger knocked about $1.4 billion from the deficit.
Democrats this week introduced a package of bills that would raise as much as $2.9 billion annually by imposing a 10 percent severance tax on oil production in the state, repealing corporate-tax breaks approved last year to spur job growth and assessing commercial property taxes differently.
By the beginning of 2010, Schwarzenegger and the lawmakers had closed a $60 billion deficit partly by slashing spending on schools, temporarily raising taxes and borrowing from local governments.
Prison System Insanity
I do not care for the Greece comparison, but some of the slides in 16 Reasons Why California Is The Next Greece are quite telling.
Slide #7: In 23 years, California erected 23 prisons and ONLY ONE university
"In a recent 23-year period, California erected 23 prisons — one a year, each costing roughly $100 million dollars annually to operate, with both Democratic and Republican governors occupying the statehouse — at the same time that it added just one campus to its vaunted university system, UC Merced."Slide #9: CA spends $859 million per year on imprisoned illegal immigrants
"There are roughly 19,000 illegal immigrants in state prisons, representing 11% of all inmates. That’s costing $970 million during
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EXCESS GLOBAL DEBT IS STILL THE PROBLEM
by ilene - May 8th, 2010 3:25 pm
EXCESS GLOBAL DEBT IS STILL THE PROBLEM
Courtesy of The Pragmatic Capitalist
The impact of the Greek debt crisis on the stock market does not come as a surprise to us. It is one part of the chain of reaction from the excess global debt problem and the related “cycle of deflation” that we have been warning about since the late 1990s. At that time we wrote about the large amount of debt being used to finance the dot-com boom that collapsed in the early 2000s. From 2003 to 2007 we continually pointed out that the housing boom and related debt buildup sparked by the Fed’s extended low-interest rate policy would inevitably have a bad ending.
Since that time we have been insistent that without the reduction of both global and domestic debt any economic recovery would not be sustainable. However, rather than reducing overall debt, most nations, including the U.S., have shifted debt from private to sovereign hands. These actions were virtually certain to result in sovereign debt problems, and these have now begun to show up in spades. As usual the weaker entities have been hit first (Dubai and Greece) and the debts are now in the process of being transferred to the stronger nations. The key problem is that the stronger nations have only limited capacity, at best, to take on a significant amount of additional debt, and they run the danger of being dragged down as well in a continuation of the chain reaction. Without a major deleveraging of debt the economy cannot return to its historical long-term growth rate. But the process of deleveraging will result in below-average growth with recurring recessions until the process of reducing debt to manageable levels is completed. The process of deleveraging almost always results in deflation, and a series of “beggar thy neighbor” policies, although inflation can eventually follow as nations attempt to print money in an effort to avert defaulting on their debt. (Please see Comstock’s cycle of deflation chart below)
The Greek debt problem, therefore, is not an isolated event, but part of a chain reaction in response to decades of debt expansion that must now be unwound. As soon as the Dubai crisis emerged late last year we have seen it as just the first in a series of sovereign debt crises that would emerge over time. Even if the EU and IMF…
The Center Cannot Hold
by ilene - May 8th, 2010 12:18 pm
The Center Cannot Hold
Courtesy of John Mauldin, Thoughts from the Frontline
The Risks from Fiscal Imbalances
The Challenge for Central Banks
Bang, Indeed!
The Center Cannot Hold
A Decent Employment Report
Montreal and New York and Italy
Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the center cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.
- William Butler Yeats
Last week we focused on the first half of a paper by the Bank of International Settlements, discussing what they characterized as the need for "Drastic measures … to check the rapid growth of current and future liabilities of governments and reduce their adverse consequences for long-term growth and monetary stability." As I noted, you don’t often see the term drastic measures in a staid economic paper from the BIS. This week we will look at the conclusion of that paper, and then turn our discussion to the fallout from the problems they discuss, initially in Europe but coming soon to a country near you.
But first, what a week in the markets! I’m sure more than a few investors felt like they had a severe case of whiplash. We will discuss the volatility a little more below.
First, a very quick three-paragraph commercial. In the current market environment, there are managers who have not done well and then there are money managers who have done very well. My partners around the world would be happy to show you some of the managers they have on their platforms that we think are appropriate for the current environment. If you are an accredited investor (basically a net worth over $1.5 million) and would like to look at hedge-fund and other alternative-fund managers (such as commodity traders) I suggest you go to www.accreditedinvestor.ws and sign up; and someone from Altegris Investments in La Jolla will call you if you are a US citizen. Or you’ll get a call from Absolute Return Partners in London if you are in Europe (they also work with non-accredited investors). If you are in South Africa, then someone from Plexus Asset Management will ring.…
States have $5.17 Trillion in Pension Obligations, Gap is $3.23 Trillion; State Debt as Share of GDP
by ilene - March 30th, 2010 11:23 pm
States have $5.17 Trillion in Pension Obligations, Gap is $3.23 Trillion; State Debt as Share of GDP
Courtesy of Mish
As the jobless yet supposedly nascent recovery plods on, states are finding it increasingly difficult to ignore their fiscal woes and pension deficits. The New York Times has some details in State Debt Woes Grow Too Big to Camouflage.
California, New York and other states are showing many of the same signs of debt overload that recently took Greece to the brink — budgets that will not balance, accounting that masks debt, the use of derivatives to plug holes, and armies of retired public workers who are counting on benefits that are proving harder and harder to pay.
California’s stated debt — the value of all its bonds outstanding — looks manageable, at just 8 percent of its total economy. But California has big unstated debts, too. If the fair value of the shortfall in California’s big pension fund is counted, for instance, the state’s debt burden more than quadruples, to 37 percent of its economic output, according to one calculation.
Unstated debts pose a bigger problem to states with smaller economies. If Rhode Island were a country, the fair value of its pension debt would push it outside the maximum permitted by the euro zone, which tries to limit government debt to 60 percent of gross domestic product, according to Andrew Biggs, an economist with the American Enterprise Institute who has been analyzing state debt. Alaska would not qualify either.
Professor Rogoff, who has spent most of his career studying global debt crises, has combed through several centuries’ worth of records with a fellow economist, Carmen M. Reinhart of the University of Maryland, looking for signs that a country was about to default.
“When an accident is waiting to happen, it eventually does,” the two economists wrote in their book, titled “This Time Is Different” — the words often on the lips of policy makers just before a debt bomb exploded. “But the exact timing can be very difficult to guess, and a crisis that seems imminent can sometimes take years to ignite.”
Some economists think the last straw for states and cities will be debt hidden in their pension obligations.
Joshua Rauh, an economist at Northwestern University, and Robert Novy-Marx of the University of Chicago, recently recalculated the value of the 50 states’ pension
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America’s Hidden Inflation and How You’re Getting Screwed
by ilene - March 24th, 2010 3:00 am
America’s Hidden Inflation and How You’re Getting Screwed
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Courtesy of Larry Doyle at Sense on Cents
Inflation is dead, right?
If we believe The Wall Street Journal, all we had to do was read yesterday’s edition to learn this fact. The WSJ wrote, Inflation is Dead? Long Live Long-Term Treasurys:
The Treasury Department is selling $118 billion in debt this week, just as Congress tackled a $940 billion health-care bill over the weekend, shining the spotlight on the U.S.’s hefty fiscal commitments.
Budget-deficit and debt levels are forecast to worsen: Total deficits including interest costs are set to remain above $1 trillion in the next decade, according to Barclays Capital. But longer-dated U.S. government debt is as popular as ever, even at the measly 3.689% and 4.580% yields that 10- and 30-year Treasurys are paying, respectively.
That popularity is supported by a single, compelling economic fact: Inflation is dead.
There you go. The WSJ said it, so it must be right. The policy wonks in Washington continually repeat it, so they must be right, too. Or are they?
I am a firm believer that there are strong deflationary forces and strong inflationary forces at work in our economy right now. In fact, I promoted this belief last fall in writing, “Can We Add Some Inflation to Some Deflation and Claim Overall Prices Are Stable”:
Inflation? Deflation? What is it going to be? As we continue to navigate the economic landscape, that question – perhaps more than any other – is of paramount concern. As I assess the economy and the markets, I envision the following:
- Ongoing deflationary pressures in real estate. Foreclosures hit a record level based on a report this morning.
- A likely increase in deflationary pressures from wages as unemployment continues to increase, hours worked do not pick up, and average hourly earnings are stagnant. How are corporations reporting earnings? Not from growth in top line revenue, but from cutting costs, including headcount.
I firmly believe these two overriding forces most concern the Fed and the threat that the deflationary forces could grow if not counteracted. How does the Fed counteract these pressures? Keep the liquidity pump running via a 0-.25% Fed Funds rate and now increased speculation of perhaps more quantitative easing in the form of purchasing more mortgage-backed securities.
What has been the result of all this liquidity running into the system? A significant decline
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