Pension

BBC Radio interview on Japanese crime

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Please find the link to the radio interview with BBC World Service here. I’m wondering whether there is more merit nowadays to vlogging or audio given the small propensity to read. The hardest thing is to accept is the sound of one’s voice on tape! What I wasn’t aware of is another person interviewed was my former colleague I sat next to in Tokyo 18 years ago…small world.

Crime in Japan – BBC interview 7 July

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Tomorrow, BBC World Service’s Edwin Lane will release the pre-recorded interview he conducted with me several months ago on the back of a series I wrote on Crime in Japan – Part 1 – Geriatric Jailbirds, Part 2 – Breakdown of the nuclear family and Part 3 – Fraud, Drugs, Murder, Yakuza and the Police some 15 months ago. Since then the reports have been reported in 14 different languages and reached c.5 million page/podcast impressions as the BBC also conducted an interview on BBC Radio 5 “Up all night”

The reason I ended up writing the research paper came by chance. While trawling through the Japanese National Police Agency statistics looking for data to help a client on motorcycle license trends, I stumbled over the crime stats and couldn’t believe the wealth of information that showed the sharp jumps in crime levels. There is some suggestion that much under-reporting went on several decades ago but as you can see in the reports the charts speak for themselves.

On a global basis, Japanese crime is low on almost any measure but the Ministry of Justice (MoJ) has had to expand prison capacity 50% in the last decade, facilitated early release to prepare for a sharp rise in elderly inmates. The pension-age cohort in prison now represents the highest percentage of total inmates. With that the MoJ has had to apply for a supplemental budget to cover the extra cost of healthcare in prison as the average age rises.

 

The sorry state of public pensions that are about to explode

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Perhaps the most disturbing fact that so many are choosing to overlook is the level of pension underfunding. Promises upon promises have been made and the nest eggs so many were expecting to retire on are likely to disappear or in the best case scenario be a mere fraction of what was originally thought. What a nightmare to wake up to. Decades of hard work gone up in smoke due to pension administrators sticking to unrealistic returns. Last year I wrote, ” US Pension Tracker assumes that public pension funds have a market based unfunded pension deficit of $4.833 trillion. The actuarial base (using a discount rate of 7.5%) of the pension deficit is approximately $1.041 trillion. This assumes an unfunded portion of $3.8 trillion. Using the 2016 20-year US Treasury bond yield of 1.71% the market based pension deficit explodes to over $8.8 trillion or a $7.5 trillion unfunded portion equating to around $74,000 per American household. For California alone this would push the pension debt per person above $135,000.”

Zero Hedge provides an interesting update on the coming crisis:

“We’ve written quite a bit over the past couple of months about the pending financial crisis in Illinois which will inevitability result in the state’s debt being downgraded to “junk” at some point in the near future (here is our latest from just this morning: “From Horrific To Catastrophic”: Court Ruling Sends Illinois Into Financial Abyss).

Unfortunately, the state of Illinois doesn’t have a monopoly on ignorant politicians…they’re everywhere. And, since the end of World War II, those ignorant politicians have been promising American Baby Boomers more and more entitlements while never collecting nearly enough money to cover them all…it’s all been a massive state-sponsored scam.

As we’ve noted frequently before, some of the largest of the many entitlement ‘scams’ in this country are America’s public pension funds. Up until now, these public pension have been covered by stealing money set aside for future generations to cover current claims…it’s a ponzi scheme of epic proportions…$5-$8 trillion to be exact.

Of course, the problem with ponzi schemes is that eventually you get to the point where the ponzi is so large that you can’t possibly steal enough money from new entrants to cover redemptions from those trying to exit…and, with a tidal wave of baby boomers about to pass into their retirement years, we suspect that America’s epic ponzi is on the verge of being exposed for the world to see.

And when the ponzi dominoes start to fall, Bloomberg has provided this helpful map to illustrate who will succumb first…”

Yellen’s Fedtime stories

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US Fed Chair Janet Yellen uttered perhaps some of the most bizarre words to come out of a central banker. So much so that Alan Greenspan’s “I know you think you understand what you thought I said but I’m not sure you realize that what you heard is not what I meant.” seems almost comprehensible by comparison. Yellen told an audience that she believes we won’t see another severe financial crisis in our lifetimes. Either Ms Yellen is not long for the world or denial is running deep within her veins. One of her own FOMC board members (James Bullard) wrote a piece on why the Fed needs to trim its balance sheet from $4.47tn to around $2.5 trillion) so they can prepare for the next horror that awaits.  Even Minnesota Fed Reserve Bank President Neel Kashkari said the likelihood of another financial crisis is 2/3rds. We have a world with debt up to its eyeballs and global interest rate policies that have only led to the slowest post slowdown growth in history. The signs of a global slowdown are becoming ever more obvious even in the US. Slowing auto sales and rising delinquencies are but one signal. The imminent collapse of so many public pension funds another.

Had she not seen the European Commission’s decision to let Italy spend up to 17 billion euros to clean up the mess left by two failed banks? The news is not only another whack for Italian taxpayers but a setback for the euro zone’s banking union, and a backflip for the EU’s stance on non-standard bailouts. The Italian government wound down Banca Popolare di Vicenza and Veneto Banca, two regional lenders struggling under the weight of non-performing loans which averages 20% across the nation and up to 50% in the south. Intesa Sanpaolo bought the banks’ good assets for one euro, and was promised another 4.8 billion euros in state aid to deal with restructuring costs and bolster its capital ratio. Italy’s taxpayers get to keep the bad loans, which could end up costing them another 12 billion euros. Even the Single Resolution Board — whose purpose is to take the politically difficult decision of whether to close a bank out of the hands of governments — chose not to intervene.

Last year four Italian banks were rescued and it seems that since Lehman collapsed in 2008 non performing loans (NPLs) have soared from 6% to almost 20%. Monte Dei Paschi De Siena, a bank steeped in 540 years of history has 31% NPLs and its shares are 99.9% below the peak in 2007. Even Portugal and Spain have lower levels of NPLs. The IMF suggested that in southern parts of Italy NPLs for corporates is closer to 50%!

Italy is the 3rd largest economy in Europe and 30% of corporate debt is held by SMEs who can’t even make enough money to repay the interest. The banks have been slow to write off loans on the basis it will eat up the banks’ dwindling capital. It feels so zombie lending a la Japan in the early 1990s but on an even worse scale.

Not to worry, the Italian Treasury tells us the ECB will buy this toxic stuff! But wait, the ECB is not allowed to buy ‘at risk’ stuff. So it will bundle all this near as makes no difference defaulted garbage (think CDO) in a bag and stamp it with a bogus credit rating such that the ECB can buy it. In full knowledge that most of the debt will never be repaid, the ECB still violates its own rules which state clearly that any debt they buy ‘cannot be in dispute’.

The Bank of Japan has no plans to cut back on the world’s largest central bank balance sheet. It continues to Hoover up 60% of new ETF issues at such an alarming pace it is the largest shareholder of over 100 corporates. Then there is the suggestion of buying all $10 trillion of outstanding JGBs and convert them into zero-rate (+miniscule annual service fee) perpetuals.

Australia’s banks are now the most loaded with mortgage debt globally at 60% of the total loan book.  Second is daylight and third Norway at 40%. Private sector debt to GDP is 185%. We have a government who can’t tighten its belt basing its budget on rosy scenarios that will be improbable. Aussie banks have been slapped with a new tax and with the backdrop of a rising US rate environment, the 40% wholesale funded Aussie banks will be forced to accept higher cost of funds. That will be passed straight onto consumers that are already being crushed under the weight of mortgages. One bank survey by ME Bank in Australia said that 1/3rd would struggle to pay a month’s mortgage if they lost their jobs.

Had Ms Yellen forgot to read the St Louis Fed’s survey which revealed that 45% of Americans can’t raise $400 in an emergency without selling something? USA Today reported that 7 out of 10 Americans have less than $1,000 in savings to their name.

“Last year, GoBankingRates surveyed more than 5,000 Americans only to uncover that 62% of them had less than $1,000 in savings. Last month GoBankingRates again posed the question to Americans of how much they had in their savings account, only this time it asked 7,052 people. The result? Nearly seven in 10 Americans (69%) had less than $1,000 in their savings account…Breaking the survey data down a bit further, we find that 34% of Americans don’t have a dime in their savings account, while another 35% have less than $1,000. Of the remaining survey-takers, 11% have between $1,000 and $4,999, 4% have between $5,000 and $9,999, and 15% have more than $10,000.”

So Chair Yellen, we are not sure what dreamland you are living but to suggest that we won’t see another financial crisis in our lifetime almost guarantees it will happen. The Titanic was thought unsinkable until history proved otherwise. Money velocity is not rising and every dollar printed is having less and less impact. I thought it nigh on impossible to surpass the stupidity of Greenspan but alas you have managed it.

Illinois Police Pension can’t protect or serve – it is going bust

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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 year…Fund 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.”

The public pension black hole in America is an alarming issue.  In the piece, “The Public Pension Black Hole” it was plain to see the problems of unfunded state pensions is rife across America. Take California- “The US Federal Reserve (Fed) reported in 2013 that the State of California had an official unfunded pension liability status equivalent to 43% of state revenue. However, if marked-to- market with realistic discount rates we estimate that it is equivalent to 300% of state revenue or 7x greater. Going back to 2000, California had an unfunded liability less than 11% of tax collections. As a percent of GDP it has grown from 2% to 9.7% based on official figures. If our estimate is correct, the mark-to market reality is that California’s unfunded state pension (i.e. for public servants only) is around 18% of state GDP!”

The problem for Illinois is that a taxpayer funded bailout is all but impossible. The State of Illinois ranked worst in the Fed study on unfunded liabilities.  The unfunded pension liability is around 24% of state GDP. In 2000 the unfunded gap to state revenue was 30% and in 2013 was 124% in 2013. Chicago City Wire adds that the police fund isn’t the only one in trouble.

“Chicago’s Teachers Union Pension Fund is $10.1 billion in debt. Its two municipal worker funds owe $11.2 billion and its fire department fund owes $3.5 billion…All will require taxpayer bailouts if they are going to pay retirees going into the next decade…Put in perspective, the City of Chicago’s property tax levy was $1.36 billion in 2017…Paying for retirees “as we go,” which will prove the only option once funds run dry, will require almost quadrupling city property tax bills…Last year, it would have required more than $4 billion in revenue– including $1 billion for City of Chicago workers, $1.5 billion for teachers, and $1.5 billion for retired police officers and fire fighters.”

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.

In order for states and local municipalities to overcome such gaps, they must reorganise the terms. It could be a simple task of telling retiree John Smith that his $75,000 annuity promised decades ago is now $25,000 as the alternative could be even worse if the terms are not accepted. Think of all the consumption knock on effects of this. I doubt many Americans will accept that hands down, leading to class actions and even more turmoil.

 

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!