Pension

44% of Americans can’t raise $400 in an emergency. It is actually an improvement

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44%. This is actually an improvement on the 2015 survey that said 47% of Americans can’t raise $400 in an emergency without selling something. The consistency is the frightening part. The survey in 2013 showed 50% were under the $400 pressure line. Of the group that could not raise the cash, 45% said they would go further in debt and use a credit card to pay It off over time. while 25% would borrow from friends or family, 27% would forgo the emergency while the balance would turn to selling items or using a payday loan to get by. The report also noted just under a quarter of adults are not able to pay all of their current month’s bills in full while 25% reported skipping medical treatments due to the high cost in the prior year. Additionally, 28% of adults who haven’t retired yet reported to being largely unprepared, indicating no retirement savings or pension whatsoever. Welcome to a gigantic problem ahead. Not to mention the massive unfunded liabilities in the public pension system which in certain cases has seen staff retire early so they can get a lump sum before it folds.

Financial planning when you’re 100 years old

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Nomura Securities popped a leaflet in the post scouting for people to attend investment seminars.  What caught my interest was a seminar for those genki 100 year olds who need to plan for the future. While Japan has the highest longevity of anywhere I wonder if these centenarians have seen more cycles, crises and financial meltdowns than the 23yo freshman sales guy at Nomura combined!

14m Japanese pensioners behind the wheel. 1.6m over 80yo

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The Japanese National Police Agency (JNPA) has recorded 6 million extra pension aged drivers in Japan over the age of 65 in the last decade. The total is now 14.2mn. The number of 80yo+license holders has reached 1.6 million. Over the last decade the total number of licenses has not changed much but the age composition is definitely skewed to the elderly. I was waiting at the front door of the Roads & Traffic Authority the day I was able to apply for a license. It seems that Japanese kids are not as excited to get freedom on four wheels. There are 6.8mn fewer driver’s licence holders aged under 40 over the last decade.

The worry for the police is the growing incidence of traffic accidents involving elderly drivers.

The McTurnbull Burger – 2017 budget that says ‘waistline be damned!’

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Remember the Big Mac jingo? “Two all beef patties, special sauce, lettuce, cheese, pickles,  onions on a sesame seed bun?”  Well the 2017 budget From the Coalition might as well be called the super sized McTurnbull Burger. Two all thief parties, special porkies, levies, fees, spun on a $600bn dollar bomb. While the government needed to introduce a vegan budget of lentils, tofu and alfalfa to get the country’s nutrition properly sorted they’ve said waistline be damned. Morgan Spurlock couldn’t keep up with this super sized meal. As my wise sage Stu told me last week, “About as well-timed as Mining Super Profits tax – ding ding ding – top of the banking cycle just called by inept bureaucrats”

If people wanted a tax and spend party they’d have voted Labor. In a desperate attempt to supersize the meal they’ve made of the economy since Turnbull took office the debt ceiling will be raised. Wage growth has slowed for the past 5 years from 4% to under 2% according to the RBA. Throw higher Medicare on top why not?!. Cost of living is soaring. So let’s look at the extra calories they’ll inevitably load on the taxpayer.

1) Let’s tax the big 4 banks. That’ll work. What will they do as responsible shareholder owned organizations? Pass those costs straight on to the tapped out borrower where 1/3 mortgagees already under strain and 25% odd have less than a month of buffer savings. NAB already jacked interest only loans 50bps.

2) allowing retirees to park $300,000 tax free into super if they downsize their empty nest. Wow! So sell your $5mn waterfront property so you can park $300k tax free into superannuation. Can see those Mosmanites queue up to move to Punchbowl to retire. Hopefully the $1mn fibro former council shack the Punchbowl pensioner flips will mean they can move to a $500,000 demountable in Casula in order to free up the property market for the first home buyer who is getting stung with higher interest rates, .

3) Australia has a property bubble. The Reserve Bank has recently had an epiphany where they’re afraid to raise rates to crash the housing market and they can’t cut because they’ll fire it up more. Allowing creative superannuation deposit schemes (max $30,000 per person & $15k/year) to help with a deposit only doubles down on encouraging first home buyers to get levered up at the top of the market using a system designed to build a safety net for retirement. When governments start abusing sensible policies in ways it was never designed for then look out for trouble down the line. This doesn’t help first home buyers it just pushes up the hurdle to enter.

4) Australia’s credit rating is on the block. Australia’s main banks are 40% wholesale financed meaning they have to go out into the market unlike Japanese banks which are almost 100% funded by their depositors. Aussie banks could see a rise in their cost of funds which the RBA could do little to avoid. That will put a huge dent in the retail consumption figures.

5) speaking of credit cards. Have people noticed that average credit card limits have not budged in 7 years. If banks are confident in the ability of consumers to repay debt, they’d let out the limits to encourage them to splash out! Not so – see here for more details.

6) Infrastructure – I live in the land of big infrastructure. Jobs creation schemes which mostly never recover the costs – especially regional rail. The Sydney-Melbourne bullet train makes absolute sense. We only need look at the submarines to know that waste will be a reality.

7) small business – tax concessions of $20,000 not much to write home about. Small businesses thrive on a robust economy which is unlikely to occur given the backdrop. Once again this budget is based on rosy assumptions and you can bet your bottom dollar Australia won’t be back in surplus by 2021.

Some  media are talking of Turnbull & Morrison stealing the thunder of the Labor Party, providing a budget more akin to their platform. Sadly I disagree that this legitimizes Turnbull. It totally alienates his base, what is left of it. Tax the rich, give to the poor. Moreover voters see through the veneer. The stench of the Coalition is so on the nose that without ditching Turnbull they have no chance of keeping office. Labor is not much better and One Nation and other independents will hoover up disaffected voters by effectively letting the others dance around the petty identity political correctness nonsense.

In the end the McTurnbull Burger meal will look like the usual finished product which resembles nothing like the picture you see on the menu. A flattened combination of squished mush, soggy over-salted fries and a large Coke where the cup is 90% ice. Yep, the Coalition has spat between your buns too. This is a meal that won’t get voters queuing up for more. Well at least we know Turnbull remembers that smiles and selfies are free after all ‘he’s lovin’ it‘! After all virtue signaling is all that matters. All this to arrest some shoddy poll numbers which will unlikely last more than one week.

Pension Sinkhole

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The pension problem that many in the US face is no laughing matter. ‘Tis but a scratch is how many (especially state run) pension funds continue to view their predicament outwardly. Internally they must be panicking. Actuarial accounting is a wonderful thing. Tweak a few assumptions and immediately wash away a deep deficit. To put this in perspective the California Public Employee Retirement System (CalPERS) lost around 2% of its funds in 2015/16. The fund assumes an aggressive 7.5% return. Dr. Joe Nation of Stanford Institute for Economic Policy Research thinks unfunded liabilities have surged to $150bn from $93bn in the last two years. Furthermore suggesting the use of a more realistic 4% rate of return. CalPERS has an unfunded liability of $412bn (or the equivalent of 3 years’ worth of state revenue). California collects $138bn in taxes annually in a $2.3 trillion economy (around the size of Italy). With over-inflated asset markets and increasingly negative returns on highly rated paper, the growth in unfunded liabilities is even more concerning as any market correction (likely to be severe given such blatant manipulation to date). If the correction is huge it will push the unfunded portion to even more dizzying levels.

According to a Bureau of Labor Statistics report from 2015, the average household income of someone older than age 75 is $34,097 and their average expenses are around $34,382. Despite such austerity, a pension collapse would literally kill off the ability to live a bare bones existence.

Years of poor investments have stuffed South Carolina’s government pension plans with a massive funding gap. The plans serve about 550,000 (11%) of residents, and the shortfall of $24.1 billion is more than 3x Palmetto State’s annual budget.

Rewind to 2008. The municipality of Vallejo, California filed for bankruptcy. It wasn’t just the evil bankers that caused financial markets to collapse resulting in tax revenues shrivelling. Sadly, the city of Vallejo was living high on the hog. Bloated pensions and fat cat salaries for public servants ruled by stubborn unions created a scenario where it could not bail water fast enough when the crash hit.

The police captain was paid over US$300,000 while his lieutenants were on c.US$250,000. The average fire fighter took home US$170,000. The police and firefighters pay and conditions sucked up three-quarters of the budget much more than the 55-60% of most municipalities. That $80mn budget suddenly faced a $17mn black hole.

The city was forced to fire 40% of its 260 police officers and told its residents to be judicious with calling 911. Crime rates soared above the state average.

Vallejo did not sort its pension obligations to CalPERS during its bankruptcy negotiations which ended up becoming its largest budget hole by a considerable margin. Even in 2011 when the city came out of bankruptcy the pension time bomb ticked away. Moreover, the declaration of bankruptcy prevented access to bond financing making budget gap filling even more complicated.

Fast forward to 2016, the anaemic (and slowing) economic growth around the world is putting stress on pension funds ability to payout retirees and fund future pensions. Pension funds set “return targets” which actuaries calculate to ensure the fund stays solvent. However, pension funds need to be diversified with a mixture of cash, bonds and equities. With equities reaching more outlandish valuations and bonds moving further into negative yield territory (capital appreciating at least) pension fund returns are undershooting. When pension funds undershoot then the unfunded liabilities keep growing. As more baby boomers retire the more outflows are putting more pressure on the unfunded portions.

San Bernardino, California also filed for bankruptcy after GFC carrying $140mn in unfunded pension liabilities including $50mn in debt it had to raise to fill the pension hole. Yes! It was borrowing money to plug a pension hole. Sort of like buying groceries on the credit card you can’t pay off.

Take Detroit, Michigan. 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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Scroll forward to 2013 and this is how it looks. 2017 would look even more terrible.

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Do people then rely on Social Security? Well, according to the 2016 Social Security Trustees report it shows at the current rate the Social Security’s combined retirement and disability trust funds will be empty by 2034. The trustees estimate that the 75-year shortfall is $11.4 trillion in NPV terms. Good luck filling that.

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Your virtue signaling is writing cheques your pension can’t cash

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Isn’t it interesting that California lawmakers are trying to push through legislation that will ban its state pension funds already deep in crisis to virtue signal? Assembly Bill 946 from Assemblymen Phil Ting and Eduardo Garcia and Assemblywoman Lorena Gonzalez Fletcher would require the California Public Employee Retirement System (CalPERS) and the California State Teachers Retirement System (CalSTRS) to liquidate any investments in companies that helped build the US-Mexico wall. The latest Stanford University study reveals CalPERS unfunded liability is around $1 trillion. What we do know is that California collects around $138bn in tax revenue annually. While all that unfunded liability doesn’t need to be matched immediately it equates to over 7 years in dollar terms. One would expect companies that won contracts to build the wall would make sound investments (many cement stocks have reacted already) but for politicians it is better to put tokenism ahead of trying to build a reinforcement structure to stop the financial dam from bursting.

Toshiba, NEC, Panasonic & Sharp lost a combined ¥1.9tn over the last 25 years

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I am putting together a piece on corporate governance in Japan and stumbled over some interesting charts. The one above shows the aggregate net income of Intel and 20 of Japan’s tech juggernauts over 25 years. Sadly, Intel on its own made 41% more net income (currency adjusted) than all of the Japanese 20 combined. Toshiba, NEC, Panasonic & Sharp lost a combined ¥1.9tn ($18bn) over the last 25 years.

I’ve been speaking to the Financial Services Agency (FSA) about how to improve corporate governance as they look to tweak the code.

Is it any surprise that companies tend to perform better when board members (insiders) have a higher proportion of their remuneration linked to stock performance? Shareholders have traditionally been well down the list of priorities of Japanese companies, much to the chagrin of foreign investors. Stock incentives, especially in larger corporations, are often a minuscule part of total compensation for leaders. So much so that there is little incentive to focus on chasing real returns through more aggressive strategy. Many leaders in Japan would prefer to see out their tenure as CEO without blemish or scandal to avoid the risk of failure and the shame it would inevitably bring.

In hindsight looking at Sharp’s (6753) desperate long term need for crisis management could we have honestly expected any substantial restructuring when the CEO had $33,000 in stock despite being at the company 36 years? Had Sharp’s board held more skin in the game they might have defended shareholders much better against Terry Gou’s constant renegotiations. Perhaps if Sharp had learnt from Carlos Ghosn style performance based compensation structures, they might have been able to defend their turf from Gou. As it stands now Sharp were mere whipping boys of Hon Hai.

When I looked at insider (executive) ownership of Japanese corporations over 10yrs mapped against total returns, surprise surprise, there was strong correlation.

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More to follow but there is actually a lot of longer term hope here. Japan licks the world in most areas of technology. If they managed to connect those dots to shareholder returns then this market would re-rate substantially. Looks as though a growing number of corporations are working more performance linked pay.

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I think that the authorities should encourage corporates to adopt English language financial materials. By doing so would invite more eyes from investors in markets where shareholder returns are prioritised. This would create an environment that would encourage Japanese corporates to unlock more value.

The JPX would accrue large upside. Not only would it gain more status as a proper global exchange, it would invite higher activity which would improve liquidity which is a virtuous circle for a financial exchange.  This is the number of Japanese corporates where CEO/Chairman engagement with foreign shareholders -a little over  10% of listed entities.

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So some interesting trends and maybe something to look forward to if Japan accelerates the pace of corporate governance application. They can start by hiring fewer lawyers, accountants and academics as independent directors too!

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