Public Service

Australian Constitutional scalps?

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Most Australians have no idea of the contents of our constitution. Dennis Denuto is probably one of the more versed. In America we know the 1st Ammendment is all about freedom of speech, the 2nd about the right to bear arms and we know what pleading the 5th is about. This is a list of Australian politicians who were born in countries other than Australia. Section 44 (i) of the Australian Constitution states, “Any person who is under any acknowledgement of allegiance, obedience, or adherence to a foreign power, or is a subject or a citizen or entitled to the rights or privileges of a subject or citizen of a foreign power…shall be incapable of being chosen or of sitting as a senator or a member of the House of Representatives.”

Two Greens senators (Scott Ludlum & Larissa Waters) have recently resigned after being in breach of this. One has to question how anyone (much less politicians) are unaware that they are dual citizens. My kids are well aware of their dual nationality. Now we will see many of the above confirm their Australian citizenship.

Rules are rules. Regardless of whether these people have served their constituents in good faith, there is a requirement to change the constitution.

When one thought Australia had maxed out its ability to display a fractured political system, the constitution may well clean house.

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.

 

Mulligan democracy?

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One disturbing development in politics is the promotion of mulligans. The idea of ‘that is the shot I would have played if I had another chance’. Sadly some people think that is fair game and even worse, democratic. The lead up to the Brexit referendum almost a year ago saw “leave” and “remain” go at it. Months of campaigning, panel discussions and other forums were largely irrelevant. Both sides accused each other of lying and spreading falsehoods but ask yourself in the history of politics – if you believed everything that came out of a politician’s mouth you’d be lying to yourself. To host a second referendum would basically say ignore democracy until you get the result you want. Maybe like a modern day prep school sports event – everyone is a winner at St. Barnabus’.

People were well aware of the issues of Brexit going in. The idea of people being too gullible is frankly condescending in the extreme. Many long standing Labour voters went for “Leave”. They weren’t voting Tory by stealth. They took a view. It wasn’t just about immigration. They were feeling pain in real time, the valid threat of their future economic security. The higher unemployment rates and withering opportunities aren’t scare stories from politicians but here and now. For example the people of the Midlands didn’t need stats, Farage or Boris to sway them. Just like those that voted Trump – they were feeling the pressure of harsh economic realities that weren’t reflected in rosy government stats that were waved in their face as a testament to their superior leadership skills.

While Remainers can whine about ‘fake’ figures of how much the EU takes every week from the UK, immigration or the number of regulations that affected Brits, financial markets proved over the 12 months since the vote that the ‘Leave’ outcome didn’t crash the economy or skewer asset prices. In fact the idea of a potential Corbyn Prime Ministership sent the pound and markets into panic. If he was to get in then Macron will get his wish of a financial center in Paris. Investment money would vanish out of the UK. It isn’t an idle threat but a reality. Capital is global.

Some argue that had the people who thought ‘remain’ would be a foregone conclusion bothered to vote then the UK would have stayed in the EU. Maybe. They were given a democratic opportunity to exercise a choice and they didn’t. Many of the 1,000,000 new voters who signed up since Theresa May called the snap election who didn’t do so before the referendum had a choice a year ago. Do we give them a free hit? How do we truly instill the realities of a true democracy if we have to attach L-plates to beginners? It doesn’t matter one jot if there were enough dormant or eligible voters to defeat the referendum if they don’t show up on game day. Is the Premier League football FA Cup given to the team that won the most games til the final but doesn’t show up because of their for and against stats?

It is an important question because the lesson should always be that people must take their vote seriously every time. Even John Cleese is understanding this. If they can’t be bothered when they have a chance to vote then  that is self inflicted and we should have no sympathy.

Theresa May gave voters a democratic chance to give her a mandate and she got thumped. There were two parts to this. Some young voters were surely lured by the offer of free education and a chance to reject Brexit by the back door. Theresa May was too arrogant to think the population would roll over and give her carte blanche to carry out her plans along with a biting austerity budget for good measure. A refusal to do a debate vs Corbyn, a slapdash manifesto and dreadful performances when she appeared sealed her fate. Corbyn came across as the warmer candidate and simply campaigned better. Still an election and a referendum are two different beasts. Just because more voted for Labour than expected doesn’t mean they want an end to Brexit. They did it to send a message to May.

Still the idea we propose a second referendum is a bad idea for democracy. Unlike elections, referendums are yes or no.

Don’t buy the argument that people were sold a pup. That the elderly are bigots, racists and have no concern for their kids or the youth. That the youth should have twice the vote of the elderly because they’re on the planet for longer or the elderly should have their voting rights cut. Saying people are stupid is not a valid answer. Why not have an IQ test for voters to determine voting rights??  If lessons aren’t learnt through bitter experience then why bother holding elections or referendums at all. If anything this election showed through the higher turnout (68.7%) that the lesson is being learnt and the electorate has told politicians they won’t be taken for mugs.

The referendum was held, Article 50 was passed as an Act of Parliament and our Dear John letter was handed to President Tusk. The UK would be a total laughing stock to divorce and then ask to remarry again. Corbyn will undoubtedly have a much stronger say in negotiations and has a vested interest to ruin what little legitimacy May has left. She is left with a divided party created by her unwillingness to listen. The Tories are toast with her at the helm and the DUP alliance smacks of desperation. A Diet Coke Brexit is pointless. We’re in or we’re out.

The Conservatives won the popular vote despite the shambolic display although Labour took 60% of the votes from UKIP. What we can say is that politics is not like it used to be. The electorate is fickle. Loyalty is no longer a given and abandoning core party principles will see politicians punished at the polls. May must step down for the sake of the Tories. as the HMS Tory takes on water under Captain May, more will seek to abandon ship until she walks the plank.

This miscalculation by May will go down as one of history’s biggest political failures. Do not be surprised if we do get a second referendum but be very worried about the precedent it sets for the future. Democracy is at stake and even arguing that it is in the interest of the people to take a mulligan on this issue is effectively saying their votes don’t matter. That referendums have no meaning. Of course the Remainers will cite opinion polls that give them the answer they want to hear but as we all know polls are useless these days. May had the biggest lead and highest popularity in living memory yet got this result.

TM is no MT

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Theresa May (TM) is no Margaret Thatcher (MT). The fact their initials are the opposite of each other is almost as eerie. Some look at the second ever female UK PM as a sort of MT Mk.II. TM isn’t. In fact her total lack of judgement to host this election is made even worse by the fact she isn’t resigning her position. Is she was the CEO of a multinational and presented a strategy that caused such damage to the brand as this election has she’d resign. Period. TM channeled the wrong MT (Malcolm Turnbull) in the election campaign who also suffers from the same belief of thinking he is more popular than he really is.

TM sold this election as a victory for her party yesterday. Her lack of humility was telling. Apparently she will “provide certainty’. Losing 12 seats while her arch enemy won an extra 29 doesn’t ring “mandate” from the people. Enlisting Arlene Foster’s Democratic Unionist Party (DUP) to make up the numbers is patchwork and she knows it. This sign suggests that they can push hard on policy positions.

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The DUP want a soft border with the Republic of Ireland effectively diluting a hard Brexit, no change to same sex marriage or abortion laws, immunity for British soldiers in legacy cases, no border poll and a bump in its share of budget appropriations to offset a drop after Brexit. A mixed bag for May to negotiate.

While the election was interesting in the decimation of UKIP and the drubbing of the SNP under Nicola Sturgeon (who also sold it as a win), this was May’s Stalingrad. She thought she’d crush the Comrade Corbyn but didn’t bet on the resilience, resolve or resurgence in those who wanted to have a second shot at ‘Remain’. Now she leaves the Tories in a winter of discontent.

TM, you’ve lost your legitimacy – time to go.  MT would tell you the same.

Her Majesty knows best Mayor Khan

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Isn’t it funny how the Mayor of London Sadiq Khan has been gazumped by the Queen. Her Majesty has served her country for over 65 years and ruled over 14 Prime Ministers. Let’s just say her understanding of politics, geopolitics, terrorism and the importance of long term relationships has never got in the way of short term pettiness. The Queen values the American relationship knowing it was their partnership that helped Great Britain defeat the Axis powers in WW2. She never forgets the important times when the relationship has truly mattered. Her extension of an invite to President Trump to Buckingham Palace is all about preserving shared values. Khan wants to cancel Trump’s visit because he is offended by his tweets with regards to his softness on terrorism in his city. Is Trump wrong?

Instead of the Mayor facing Trump tete-a-tete and justifying his stance he seeks to do what many leaders in the West do – sulk and seek to alienate the relationship because of their weakness. What Trump has said about Khan has validity. The President isn’t conventional and he doesn’t necessarily deliver in the most courteous manner but where is the counter argument? Piers Morgan was spot on. Instead of Khan blaming Theresa May for Met Police funding cuts, he humiliated the Mayor querying isn’t his biggest responsibility to ensure the safety of Londoners by monitoring the 400 suspects living in his constituency?

Let’s be clear, if the UK was at war for whatever reason you can be guaranteed the majority of the British want America on their side. The Queen knows this and I’m sure Her Majesty can bring Trump to mutually beneficial discussions rather than exchange pleasantries over tea. All this nonsense about banning Trump and distancing the UK from the US shows the typical “conditional” attitudes our society seems increasingly willing to tolerate. Khan is in that camp.

Let’s be clear. Trump’s America first isn’t all about pure isolationism. A large part is about making sure other nations don’t ride their overwhelming generosity on things like NATO, UN or the Paris Climate Accord. Many presidents to date have happily allowed the country to be gouged on the international stage but now the budget and deficits don’t support endless freebies for other nation states.

Perhaps Mayor Khan should learn from the current monarch about true values rather than  grizzle about his hurt pride. She maybe in her 90s but she is still sharp as a tack.