Drug addiction

Priorities, priorities…

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Maryland (MD) – 2018

  • High school graduation rate: 87.6% (12th highest)
  • Public school spending: $13,075 per pupil (19th highest)
  • 8th grade NAEP proficiency: 34.7% (math), 37.4% (reading) (11th highest).
  • Adults with at least a bachelor’s degree: 39.3% (3rd highest)
  • Adults 25-64 with incomes at or above national median: 61.6% (2nd highest)
  • Violent crime 4.72/1000 residents (national average 4.0/1000) (9th highest)
  • Crimes per square mile 57 (national average 31.9)
  • Baltimore, MD most dangerous city (out of biggest 50) in America.
  • Opioid death rate 29.7/100,000 (3rd highest) – national average 13.3/100,000

Good to see where things are ranked among the worst, Democrats wish to put the least focus and vice versa. Rather telling. Where is the focus on healthcare and climate change? Even more telling.

IOC, FIFA, Nobel Academy…#WETOO?

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The problem with private organizations such as the IOC, FIFA and Nobel is that they become so drugged by the power of the prestige they provide that they think rules don’t apply to them. FIFA’s Sepp Blatter and some other committee members were found guilty of money laundering and bribery. Blatter was given an 8 (later reduced to 6) year ban from FIFA after an independent ethic committee proposed it. In 2017 Blatter was accused of sexual harassing US soccer star, Hope Solo, at an awards ceremony in 2013. All class.

Now the Nobel Literature prize is being withheld over sexual harassment allegations made by 18 women against French photographer Jean-Claude Arnault who is married to a Nobel Academy member. He has also been accused of leaking the winners of the literature prize to the media.

One doesn’t have to dig too deep to find allegations made against the IOC ahead of Olympic bids. Imagine if audits were conducted by the cities that bid, breaking down specific payments to specific accounts.

Why are we surprised by these scandals? The opacity and often ‘untouchable nature’ only makes it easier to conduct nefarious activity. Perhaps governments should have whistleblower protection for people working in these committees bidding millions of taxpayer dollars for such events. Then again the governments are up to their own eyeballs in greed and prestige that turning a blind eye is easier.

Just how far behind the curve is the Fed?

As the Fed raised its Fed Funds Rate to 1.5~1.75% overnight, one has to question just how far behind is it? 3M Libor rates have surged from 0.5% in 2016, c.1% at the start of 2017 to 2.27% today, the highest levels since 2008.  Normally Libor minus Overnight Index Swap (OIS) rates don’t diverge so much without causing a credit issue. The gap is effectively the market price over and above the risk free rate. At the time of the GFC, the Libor-OIS spread hit 3.5%, with 1% being the detonator level. While it is currently at 0.54% spread, it has risen consecutively for the last 32 sessions.

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As Libor drives corporate credit recycling, with corporate debt piles approaching record highs and average credit ratings the worst they’ve been in over a decade (chart below depicts Top tier as AAA and bottom tier as BBB-) we could see the Libor-OIS spread keep expanding.

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What could be causing this? If we think logically the US Treasury has to refinance $1.5 trillion over the next 12 months and $8.4 trillion over the next 4 years. Add to that a Fed looking at quantative tapering and a less eager Japan and China as buyers of US$ federal debt then the corporate will undoubtedly get crowded out. The demands for refinancing are not being met with the supply of funds.

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Of note, the St Louis Fed reports the YoY increase in inflation reported by the CPI in the US in Feb 2018 was 2.3%. The 10yr breakeven inflation rate is around 2.08%. CPI ex food items is still at 1.9%. In any event the US remains in a negative real yield environment.

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The Fed can bang on all it wants about healthy growth, full employment but the depth of problems stored up is getting worse. $9 trillion in unfunded public pension liabilities, $67 trillion in combined public, private and corporate debt…

…many are recently talking of the huge pent-up profit boost to banks which have had such compressed spreads for so long. Indeed that all makes absolute sense from a theoretical (and to date practical) reasoning but banks like those in Australia up to their gills in mortgage debt, rising spreads have far nastier implications for blowing up balance sheets than boosting P&L accounts.

In a sense it is almost futile to call central banks as being behind the curve. The failure to take the harsh medicine of almost two decades ago is gathering momentum in so far as there is not much can left to kick down the road.

Domestic Violence & Child Abuse – a global issue

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Domestic violence and child abuse – inextricably linked to the breakdown of families. Two distasteful topics to be sure and the stats seem to be getting much worse. In 2015 authorities in the US recorded 3.4mn child abuse investigations from 3.1mn in 2011. For 2015, a nationally estimated 1,670 children died of abuse and neglect, mostly at the hands of their mothers. Alcohol, drug and other substance abuse has been a contributing factor. DV hotlines in America receive approximately 20,800 calls a day according to the National Coalition Against Domestic Violence. In 2016, 57,335 URLs contained child sexual abuse imagery and 2,416 domain names worldwide were linked to this content. This is a 21% increase from 1,991 in 2015. Until recently, most child sexual abuse images were found in the US(57%), but Europe now hosts 60% of all material. 21,000 of these sites are run out of The Netherlands. Internet Watch Foundation (IWF) notes a 258% increase in new website domains being bought specifically to show the abuse of children.

Even in peace loving Japan, domestic violence (DV) has seen a very sharp upturn according to the National Police Agency this week. DV reached almost 70,000 recorded cases in 2016. Between 2010 and 2016, victims of DV have doubled and over 4x since 2005.  The Ministry for Health, Labor & Welfare (MHLW) has 208 child consultation centres which fielded over 88,000 cases in 2014, a 20.5%YoY increase or 22x the level of 20 years ago. Child pornography cases continue to rise in Japan too from 1,342 in 2010 to over 1,800 in 2014 . While a law was passed in July 2014 banning possession of child pornography, sentences only carry a maximum 1 year jail sentence or ¥1mn fine. Sexually explicit manga, anime and computer graphics which display child pornography are exempt because lawmakers view these as outside the scope of real children.

In Australia some 264,000 DV incidents were recorded in 2015.  In 2016–17, about 72,000 women, 34,000 children and 9,000 men seeking homelessness services reported that family and domestic violence caused or contributed to their homelessness according to the Australian Institute of Health and Welfare.

The number of children receiving child protection services in Australia has risen by about 20% over the past 4 years—from 135,000 in 2012/13 to 162,000 in 2015/16. Nationally, emotional abuse was the most common primary type of abuse or neglect substantiated for children (45%), followed by neglect (25%), physical (18%) and sexual abuse (12%). Overall, just over half (51%) of children who were the subject of substantiations were girls (23,000 compared with 22,200 boys). Girls were almost twice as likely to have a substantiation recorded for sexual abuse than boys (16% compared with 8.5%). Boys had slightly higher rates of physical abuse, emotional abuse and neglect than girls (19% compared with 18%, 46% compared with 43%, and 26% compared with 23%, respectively.

According to the American Society of  Positive Care of Children (ASPCC), 14% of all men in prison and 36% of women in prison were abused as children, about twice the frequency seen among the general population.

The Department of Health & Human Services notes that child abuse reports in America involved 7.2 million children. More than one-half (54.1%) of perpetrators were women, 45% of perpetrators were men, and 0.9% were of unknown sex. The majority of victims consisted of three ethnicities—White (43.2%), Hispanic (23.6%), and African-American (21.4%).

According to the American Academy of Pediatrics, children born with fetal alcohol syndrome may develop learning and behavior problems including hyperactivity, poor concentration, and memory problems. The National Institute on Drug Abuse of the National Institutes of Health conducted a study on neonatal abstinence syndrome and determined babies suffering from opiate withdrawal were more likely to have low birth-weight and respiratory complications. 11,000 babies are born to crack dependent mothers each year and cost the state $750mn p.a. to treat. Victims reported with the alcohol abuse child risk factor during their first year, 87.9% of the victims were reported during their first month of life.

These trends are worrying. As an increasing number of countries make it easier to divorce by offering extra support to single parents, responsibility and accountability are being cast aside. The government essentially endorses families to split and get the single parent to marry the state. 40% of White and 70% of black households in America are now single parent. In Japan one quarter of families are now single parent. As we wrote last week, children that grow up in single parent households are far more likely to suffer emotional problems and issues with self-esteem.

Since 2007, the rate of suicide deaths among children between the ages of 10 and 14 in the US has doubled according to the Center for Disease Control Prevention(CDC). Most children under 13 who kill themselves are boys: 76% of those who died in 1999-2015 were male. Since 2014, suicide has become one of the leading causes of death in children aged 10-19 in Japan. 60% of the children and 46% of the young adolescents in the US who died from suicide had problems with friends or family members. School problems and recent crises were noted as common triggers.

Per our previous post, the police department that encouraged school kids to walk up to and communicate with outcast kids as opposed to walking out on school would have far more positive long term impacts. Yet authorities seem more keen on policing political correctness. Running school programs that reinforce ideals of celebrating identity politics that openly discourage traditional families.  Reading through the many years of warnings both school authorities and law enforcement/intelligence authorities had prior to the Parkland, Florida shooter, Nikolas Cruz, committing his schoolyard rampage the egg-shell culture of not tackling his issues head on led to a potentially avoidable tragedy. Yet in today’s culture shaming innocents, scapegoating unrelated organisations, vilifying corporations and pushing expedience after the fact take priority to taking responsibility and looking at ways of preventing the root cause rather than the method.

After reading through these depressing statistics, it is not too hard to envisage things going from bad to worse from here. It isn’t just an American issue but a global trend that only gets harder to treat the longer it festers.

Truly sickening US Public Pensions data

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Following on from the earlier post and our 2016 report on the black hole in US state public pension unfunded liabilities, we have updated the figures to 2016. It is hard to know where to start without chills. The current state of US public pension funds represents the love child of Kathy Bates in Misery and Freddie Krueger. Actuarial accounting allows for pension funds to appear far prettier than they are in reality. For instance the actuarial deficit in public pension funds is a ‘mere’ $1.47 trillion. However using realistic returns data (marking-to-market(M-2-M)) that explodes to $6.74 trillion, 4.6-fold higher.  This is a traffic accident waiting to happen. US Pension Tracker illustrates the changes in the charts presented.

Before we get stuck in, we note that the gross pension deficits do not arrive at once. Naturally it is a balance of contributions from existing employees and achieving long term growth rates that can fund retirees while sustaining future obligations. CM notes that the problems could well get worse with such huge unfunded liabilities coinciding with bubbles in most asset classes. Unlike private sector pension funds, the states have an unwritten obligation to step up and fill the gap. However as we will soon see, M-2-M unfunded liabilities outstrip state government expenditures by huge amounts.

From a layman’s perspective, either taxes go up, public services get culled or pensioners are asked politely to take a substantial haircut to their retirement. Apart from the drastic changes that would be required in lifestyles, the economic slowdown that would ensue would have knock on effects with state revenue collection further exacerbating a terrible situation.

CM will use California as the benchmark. Our studies compare 2016 with 2008.

The chart above shows the M-2-M 2016 unfunded liability per household. In California’s case, the 2016 figure is $122,121. In 2008 this figure was only $36,159. In 8 years the gap has ballooned 3.38x. Every single state in America with the exception of Arizona has seen a deterioration.

The following chart shows the growth rate in M-2-M pension liabilities to total state expenditure. In California’s case that equates to 3.2x in those 8 years.

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Sadly it gets worse when we look at the impact on current total state expenditures these deficits comprise. For California the gap is c.6x what the state spends on constituents.

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Then taking it further,  in the last 8 years California has seen a 2.62-fold jump in the gap between liabilities and state total expenditures.

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This is a ticking time bomb. Moreover it is only the pensions for the public sector. We have already seen raids on particular state pension funds with some looking to retire early merely to cash out before there is nothing left. Take this example in Illinois.

Sadly the Illinois Police Pension is rapidly approaching the point of being unable to service its pension members and a taxpayer bailout looks unlikely given the State of Illinois’ mulling bankruptcy. Local Government Information Services (LGIS) writes, At the end of 2020, LGIS estimates that the Policemen’s Annuity and Benefit Fund of Chicago will have less than $150 million in assets to pay $928 million promised to 14,133 retirees the following yearFund assets will fall from $3.2 billion at the end of 2015 to $1.4 billion at the end of 2018, $751 million at the end of 2019, and $143 million at the end of 2020, according to LGIS…LGIS analyzed 12 years of the fund’s mandated financial filings with the Illinois Department of Insurance (DOI), which regulates public pension funds. It found that– without taxpayer subsidies and the ability to use active employee contributions to pay current retirees, a practice that is illegal in the private sector– the fund would have already run completely dry, in 2015…The Chicago police pension fund held $3.2 billion in assets in 2003. It shelled out $3.8 billion more in benefits to retired police officers than it generated in investment returns between 2003 and 2015…Over that span, the fund paid out $6.9 billion and earned $3.0 billion, paying an additional $134 million in fees to investment managers.”

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To highlight the pressure such states/cities could face, this is a frightening example of how the tax base can evaporate before one’s eyes putting even more pressure on bail outs.

This problem is going to get catastrophically worse with the state of bloated asset markets with puny returns. Looking at how it has been handled in the past Detroit, Michigan gives some flavor. It declared bankruptcy around this time three years ago. Its pension and healthcare obligations total north of US$10bn or 4x its annual budget. Accumulated deficits are 7x larger than collections. Dr. Wayne Winegarden of George Mason University wrote that in 2011 half of those occupying the city’s 305,000 properties didn’t pay tax. Almost 80,000 were unoccupied meaning no revenue in the door. Over the three years post the GFC Detroit’s population plunged from 1.8mn to 700,000 putting even more pressure on the shrinking tax base.

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An end to sex segregation in sports?

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The ever impartial and balanced ABC posted an article talking about how it is time to eradicate sex segregation in sports by using formulas/classification systems to ‘even it out’. Were these social experiements warranted, how was it that Michele Mouton finished runner up in the 1982 World Rally Championship against an all male field with zero free kicks? She won four races in the season. Call it raw talent. She didn’t require complex formulas and spreadsheets to give her a handicap. She won on her own merits. No system required. Isn’t that the thrill of competition?

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In the Moto 3 motorcycle championship, Maria Herrera competes against an all male field. She is not a championship contender but she isn’t always last. Still she has no handicap. If she wants to race with the men then accept all the same rules of competition. You won’t find Maria moaning about being hard done by.

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Ana Carrasco, a 20-year-old from Spain, became the first woman to win a world championship motorcycle race last year. No sex segregation but grit, hunger and determination. No handicaps.

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Still, the driving factor (no pun intended) behind these three women has been the machines which level the playing field but the importance was they won on their own skill.

Sadly, it is an inescapable fact that men and women are different physiologically. Especially in sports which rely solely on the physicality of the athlete. Should Merlene Ottey have been pitted against Usain Bolt in the 100m? Give her a size, weight and twitch fibre handicap? However shouldn’t whites or Asians be equally justified to complain that black athletes tend to dominate track and field. Perhaps they should be given race based handicaps? Perhaps a flyweight female boxer be given a 20 point start against a flyweight male boxer? Whatever it takes. So much for betting agencies setting fair prices (although what a way to match fix by a subtle tweak to a handicap formula).

Then we switch into the transgender athletes e.g. males who identify as females. So let’s say a former 125kg All Black wants to play for a women’s rugby team. Apart from the health and safety aspects of such a move, there is no logic or fairness. Or perhaps to avoid health risks give Serena Williams a two set head start against Roger Federer? Make him play with a racket head half the size.

Since the first Olympics in Athens in 1896 the world has had over 100 years of sex segregated sports. No one has really complained. Drug cheating is a bigger issue to be fair. Having said that people want to see athletes break records unhindered by spreadsheet based technicalities. Usain Bolt trained for 16 years to remain at the top of his game. Would FloJo be satisfied to say she ran an adjusted 9.57s to be the world’s fastest sprinter when she only managed 10.49 in real money? Or is it worth setting her starting blocks to run 92m so as to even it out. Talk about hollow victories.

Seriously though, what is wrong with athletes training their hearts out to win glory? What is it with the left that insists on trying to even out absolutely everything. Why not allow women hammer throwers to do the men’s 100m? Surely they can derive a formula for that? Or perhaps the Jamaican 4x100m men’s relay team should complete against the Japanese women’s group synchronized swimming in their respective sports? Why not give the weight of a Djibouti gold medal 10x that of the US or China?

This thirst for loony social experiments is really going too far. The outward push for diversity continues unabated. Yet once again the hypocrisy of the left calls for ‘differences’ to be eradicated so everyone can be a winner. Equality without a level playing field. Now that is straight out of the socialist playbook.

Time to “put” some eggs in this basket!

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In the everything bubble it is hard to find exposure to ‘relatively’ cheap things. Just a quick glance at the S&P500 index derivatives market one can see that ‘Put’ options (i.e. buying a put option gives the owner the right to sell at a particular strike price) prices are scraping the bottom of the barrel. While the above 2450 strike price (expires on 19 Jan 2018) seems a stretch for an S&P 500 Index showing 2662 (8.7% higher than the above put option) listening to outgoing Fed Chair Janet Yellen in the December FOMC press conference tells us that group think is alive and kicking. At least she admitted that,

The stock market has gone up a great deal this year…asset valuations are elevated….We see ratios in the high end of historical ranges…but Economists are not great at knowing what the right valuations are…we don’t have a terrific track record

Whatever the ultimate timing is of the impending pullback in asset bubbles, the downside will be extra ugly, especially now with so much market behaviour driven by robots with algorithms that have not been thoroughly tested in bear markets.  Time to own some longer dated put options me thinks. #MPGA (Make puts great again)