Trump

Did you put on your bulletproof vest sweetheart?

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Is this the next school uniform? As written yesterday, gun violence in US schools has been a problem for decades. Metal detectors have been installed at certain schools since the 1990s. Gun massacres have still occurred. The problem stems from a growing tide of broken homes and kids venting out. The Zero Hour documentary on the Columbine massacre reveals in chilling details how premeditated and well prepared (not to mention preventable) the attack was – propane bombs, pipe bombs, machine guns, pistols and even handgrenades. Perpetrator Eric Harris’s father called up the police on hearing of the shooting fearing his son maybe behind it. The police had received multiple enquiries from concerned parents over death threats Harris had made online to students yet chose to do nothing. Harris and Klebold openly documented their intent in videos and diaries. It is patently clear they wanted revenge for their subjective feelings of having had their esteem crushed by society, especially by more popular class mates. It is clear there were no role models trying to pull them back from the brink.

Still the ‘banning guns will solve it all’ solutions still avoid dealing with the real problem. The psychology of kids lost in a world where they feel outcasts. Feelings of rejection, loss and trodden on self esteem are shown to be time and time again to be a leading factor in kids picking up a weapon and seeking to right perceived wrongs. Many American high school kids drive to school. Can we envisage one deciding to drive a car on campus mowing down students at lunch time? Will banning cars be a solution?

What next? Will parents be decking out kids in bulletproof vests and hoping teachers who are incentived to arm themselves in the class room step up if all hell breaks loose? One wonders whether kids like Harris & Klebold would have been deterred by teachers packing heat. Even worse, SWAT snipers at a distance of 500 meters may not be able to determine at the time who are the ‘bad guys’. Even worse, how terrible it would be for a teacher to be tasked with ‘offing’ a student who he or she teaches in remedial maths class. One would hope the motivation of teachers is to want to educate students to get ahead rather than aim at their head. Or have things got so bad in some schools that such a remedy gets leant a sympathetic ear. Having armed security at schools is less and less a rare occurrence.

In 2015, about 3,000,000 teens ages 12 to 17 had had at least one major depressive episode over the year according to the Department of Health and Human Services. More than 2 million admitted they were experiencing depression in ways that impair daily function. The National Institute of Mental Health reported about 30% of girls and 20% of boys– some 6.3 million teens–have had an anxiety disorder.

A Seattle Children’s Hospital study tracked hashtags people use on Instagram to talk about self-harm. It noted a dramatic increase over the past two years. In 2014 researchers got 1.7 million search results for “#selfharmmm”. By 2015 that number had surged to over 2.4 million.

The American Psychological Association (APA) released a report several years ago during the school year saying that teens report their stress level is higher than levels reported by adults in the past month. Many teens admitted feeling overwhelmed (31%) and depressed or sad (30%) as a result of stress. More than one-third of teens report fatigue or feeling tired (36%).

Sales of antidepressant drugs is expected to be a $17bn industry in the US in 2020, up $3bn from 2015. The National Center of Health Statistics reports the prevalence of teenagers taking such drugs has grown to 13%, in 2015 up from 11% in 2008. 68% of people ages 12 and up said they had been taking their antidepressant for two years or more. A quarter who took antidepressants reported taking them for 10 years or more. Clinical depression affects about 16mn people in the U.S. and is estimated to cost the U.S. about $210 billion a year in productivity loss and health care.

Is this honestly seen as the best way to tackle a mental health crisis? Just dope up teenagers and hope they are comfortably numb so as to not want to do harm to themselves or others? It was shown that Harris had switched antidepressants which could have fueled not quelled his homicidal and suicidal tendencies. This isn’t about guns. It is about ignoring the elephant in the room – stressed out kids with no mentors or role models to coax them out of their problems.

In some respects, schools are only making it worse by pandering to safe spaces and enforcing trigger warnings. Instead of dealing with the psychological problems at source and proactively targeting attention starved kids growing up in broken homes by counselling them in ways to build self esteem and how to get on in the “real” world, the problem will only fester because irrational feelings of hopelessness will get reinforced by ignoring the real issue.

Tranquilizing people with mental issues by molly-coddling them is also the mantra in the world of identity politics. By muzzling people from speaking truths we only build barriers around effective solutions. That regulations around hurting people’s feelings are increasingly being enforced, is it any wonder we are growing a generation of victims who can pin the blame on irrelevant and unrelated things? Healing comes through listening and understanding by open and transparent dialogue. Not by banning it.

Will an hypothetical ban on guns prevent the growing trend of kids growing up in single-parent households (and all of the psychological data which shows clear evidence of a higher rate of delinquency in children) from committing  such terrible acts of violence because they have no access to firearms? Feelings of desperation will only lead them to find other ways of seeking their distorted view of attaining inner peace. More kids will die and at the end the exact same problems will manifest themselves again – what lead to the act? At least in this case, Parkland, Florida shooter Nikolas Cruz survived. Perhaps we will learn much more about the psychological timeline of him if the press can wake up for 5 minutes and stop trying to link the act purely to white supremacy because it fits a narrative.

Security measures in US schools – shocking stats

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Let’s get one thing clear. Whether victims of shootings are kindergarten kids, school students, work colleagues or old age pensioners, the sheer act of it points to an increasingly sick element of society. To take innocent lives because of one’s own sense of subjective injustice can’t be justified. That’s hardly an earth shattering revelation. However what is actually going on at schools when it comes to securing students safety? The stats are mind boggling.

A 2017 study by the National Center for Education Statistics (NCES) reported the following,

In the 2013–14 school year, 93 percent of public schools reported that they controlled access to school buildings by locking or monitoring doors during school hours. Other safety and security measures reported by public schools included the use of security cameras to monitor the school (75 percent), a requirement that faculty and staff wear badges or picture IDs (68 percent), and the enforcement of a strict dress code (58 percent). In addition, 24 percent of public schools reported the use of random dog sniffs to check for drugs, 20 percent required that students wear uniforms, 9 percent required students to wear badges or picture IDs, and 4 percent used random metal detector checks.

Breaking down some of the categories in the chart 5.5% of primary schools use sniffer dogs to check for drugs!! Over half of high schools have random drug searches. 9% of high schools have metal detectors. How did it get to this? Is taking such preventive action having an impact?

In 1994, the federal government began requiring schools to introduce safety programs in an attempt to crack down on violence on school grounds. Many schools introduced metal detectors to check for guns, knives and other weapons. The year after the measures were introduced, violent deaths on high school campuses across the United States halved.

Then in 1999, the Columbine High School shooting reset the bar on violence inside the schoolyard. Armed with shot guns, machine guns, pistols and pipe bombs two students, Eric Harris and Dylan Klebold, murdered 12 students and one teacher before committing suicide. Listening to interviews of those who survived, the answer was the same – the two were regarded as outcasts. It was later shown that they were on anti-depressant medication and had committed multiple felonies. An excellent documentary done by Zero Hour chronologically runs through their mindset

In May 2002, the Secret Service published a report that examined 37 U.S. school shootings showing strikingly similar signals. The findings were:

1) Incidents of targeted violence at school were rarely sudden, impulsive acts. Prior to most incidents, other people knew about the attacker’s idea and/or plan to attack.

2) Most attackers did not threaten their targets directly prior to advancing the attack.
There is no accurate or useful profile of students who engaged in targeted school violence.

3) Most attackers engaged in some behavior prior to the incident that caused others concern or indicated a need for help.

4) Most attackers had difficulty coping with significant losses or personal failures. Many had considered or attempted suicide.

5) Many attackers felt bullied, persecuted, or injured by others prior to the attack.

6) Most attackers had access to and had used weapons prior to the attack.

7) In many cases, other students were involved in some capacity.

8) Despite prompt law enforcement responses, most shooting incidents were stopped by means other than law enforcement intervention.

Trump’s suggestion of arming teachers seems ludicrous to outsiders. To have holstered teachers (boils down to a question of how many would want to ‘carry’ in the classroom) or armed sentries in front of schools hardly sends the right messages about teaching respect. Then again with the ever growing surge of kids growing up in single parent households (currently 40% of white households and 70% of black households) in the US the psychological studies point to an increase in dysfunctionality in kids because of a lack a stable guardian to keep them on the rails.

Banning guns or enforcing gun free zones won’t prevent future massacres. Will America need 100% of schools to have airport style security with pat downs, ion scanners and prison style walls to prevent would be perpetrators breaking in? Maybe they will if families keep breaking down and disgruntled delinquent teenagers feel they need to vent.

Yet come between some Americans and the 2nd Amendment and all manner of excuses to justify ownership surfaces. As an Australian, my country is often highlighted as a success story of mandatory gun confiscation after the Port Arthur massacre in 1996.

Yes Australia hasn’t seen a massacre since yet there was never a big problem in the first place. 661,000 firearms were removed from circulation. Or 1 gun for every 33 people. In the US it is c.1 gun for every person in circulation. Even if a third of households have them we are looking at 1 gun per 3 people in the US.

The Aussie government offered $500/gun average. If Trump ran the same programme (albeit 21 years later) and taking into account inflation then conservatively at $1,000 a gun he would be looking at a cost of $320bn. To put that in perspective the annual US military budget is around $680bn. So a combined spend of $1 trillion.

Yet as tragic as the Florida shooting is, mainstream and social media has turned this into a cesspit of vile abuse and misinformation.

Whether it be the conspiracy theories of high school student David Hogg being a CNN planted child actor, Trump’s hand written  notes or kids threatening to march on Washington the whole tragedy is turning into a debacle. While we should be mourning the deaths of 17 innocent students at the hands of a lunatic, the media seems more focused on Trump bashing and posting memes of Republicans in the pockets of the NRA.

If guns in schools have been an issue since the 1990s, we have had ample numbers of administrations who could have acted but didn’t. If the 14 gun massacres that occurred under the Obama Administration when the Democrats had control of the House and Senate  resulted in no action being taken why the song and dance by Democrats today? Sounds like political point scoring at its worst.

This isn’t or at least shouldn’t be a partisan issue. This is an issue of a breakdown in social values. By allowing single parent households to simply and easily marry the state through generous subsidies, parental responsibility is being thrown out the window. To be fair automatic weapons are hardly a requirement for a civilian population but let’s deal with the real issues behind why so many students are being massacred rather than just the method of how they commit the atrocities.

Banning guns seems so simple to cure the problem but as the stats above make clear, the solution is far more complex than armed teachers, rent-a-cops at school gates and metal detectors. Parents need to start taking far more responsibility and the media needs to start focusing on keeping it real.

It is disturbing to turn a tragedy into yet another excuse to crank up Trump Derangement Syndrome. He may have handled the messaging poorly (as he does with most issues) but let’s look at the history. Almost 20 years have gone by since Columbine High and despite countless repeat events, where has the same level of outrage been? Exactly. Nowhere. Tragedies should never be used for political gain. Where is the dignity for the dead? Perhaps we can just boil the whole behaviour surrounding the awful event as merely “moving with the times”. It is the term we seem to hear for every other excuse to shut down sensible debate.

Ultimately it is for Americans to decide to vote for parties that will change laws for the greater good. The rest of the world can shake their head and waggle the finger at America’s gun laws but perhaps they should focus on how good they’ve got it at home by comparison.

Should we trust ratings agencies on US state credit?

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The Financial Crisis Inquiry Commission concluded in 2011 that “the global financial crisis could not have happened without the ‘Big Three’ agencies – Moody’s, Standard & Poor’s and Fitch which allowed the ongoing trading of bad debt which they gave their highest ratings to despite over three trillion dollars of mortgage loans to homebuyers with bad credit and undocumented incomes.” The table above tabulates the deterioration in US corporate credit ratings since 2006. The ratings agencies have applied their trade far more diligently.

As written earlier in the week, US state public pensions are running into horrific headwinds. Unfunded pension liabilities are running at over double the level of 2008. With asset bubbles in stocks, bonds and property it is hard to see how plugging the gap (running at over 2x (California is 6x) the total tax take of individual states) in the event of a market correction is remotely realistic. However taking a look at the progression of US states’ credit ratings one would think that there is nothing to worry about. Even during GFC, very few states took a hit. See below.

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Looking at the trends of many states since 2000, many have run surpluses so the credit ratings do not appear extreme. It is interesting to flip through the charts of each state and see the trajectory of revenue collection. A mixed bag is putting it lightly. Whether the rebuild after Hurricane Katrina in 2005, since 2008 revenue collection in Louisiana has drifted.

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Looking through S&P’s own research at the end of last year it included an obvious reference.

U.S. state and local governments can use pension obligation bonds (POBs) to address the unfunded portion of their pension liabilities. In certain cases, POBs can be an affordable tool to lower unfunded pension liabilities. But along with the issuance of POBs comes risk. The circumstances that surround an issuance of POBs, as well as the new debt itself, could have implications for the issuer’s creditworthiness. S&P Global Ratings views POB issuance in environments of fiscal distress or as a mechanism for short-term budget relief as a negative credit factor.”

Perhaps the agencies have learnt a painful lesson and trying to stay as close to being behind the curve as possible. It doesn’t seem like public pensions are being factored at levels other than their actuarial values. Marked-to-market values would undoubtedly impact these credit ratings.

As mentioned in the previous piece on public pensions, a state like Alaska has public pension unfunded liabilities equal to $145,000 per household, treble the 2008 figure. It is 3.5x annual tax collections. The state’s per capita operating budget of $13,728 per person is way above the national average of $6,826 per person. Alaska relies on oil taxes to finance most of its operating budget, so a sudden drop in oil prices caused tax revenues to sharply decline. The EIA’s outlook doesn’t look promising in restoring those fortunes in any scenario. So S&P may have cut Alaska two places from AAA in 2015 to AA in 2017.

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While pension liabilities aren’t all due at once, the last 8 years have shown how quickly they can fester. It wasn’t so long ago that several Rhode Island public pension funds reluctantly agreed to a 40% haircut, later retirement ages and higher contributions with a larger component shifted from defined benefits to defined contributions raising the risk of market forces exerting negative outcomes on the pension fund.

In 2017, despite a ‘robust’ economy, 22 states faced revenue shortfalls. More states faced mid-year revenue shortfalls in the last fiscal year than in any year since 2010, according to the National Association of State Budget Officers.

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Pew Charitable Trust (PCT) notes in FY2015 federal dollars as a share of state revenue increased in a majority of states (29). Health care grants have been the main driver of this. FY2015 was the 3rd highest percentage of federal grants to states since 1961.

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By state we can see which states got the heftiest federal grants. Most states with higher federal shares expanded their Medicaid programs under Obamacare (ACA) and got their first full year of grants under the expanded program in FY2015.

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PCT also wrote “At the close of fiscal year 2017, total balances in states’ general fund budgets—including rainy day funds—could run government operations for a median of 29.3 days, still less than the median of 41.3 days in fiscal 2007…North Dakota recorded the largest drop in the number of days’ worth of expenses held in reserves after drawing down almost its entire savings to cover a budget gap caused by low oil prices. It held just 5.4 days’ worth of expenditures in its rainy day fund at the end of fiscal 2017 compared with 69.4 days in the preceding year… 11 states anticipate withdrawing from rainy day funds under budget plans enacted for fiscal 2018

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Looking at the revenue trends of certain states, the level of collection has been either flat or on the wane since 2010 for around 26 states. As an aside, 23 of them voted for Trump in the 2016 presidential election. The three that didn’t were Maine, NJ and Illinois.

Optically US states seem to be able to justify the credit ratings above. Debt levels aren’t high for most. Average state debt is around 4% of annual income. Deficits do not seem out of control. However marking-to-market the extent of public pension unfunded liabilities makes current debt levels look mere rounding errors.

Considering stock, bond and property bubbles are cruising at unsustainably high levels, any market routs will only make the current state of unfunded liabilities blow out to even worse levels. The knock on effects for pensioners such as those taking a 40% haircut in Rhode Island at this stage in the cycle can only feasibly brace themselves for further declines. This is a ticking time bomb. More states will need to address the public pension crisis.

A national government shelling out c.$500bn in interest payments on its own debt in a rising rate environment coupled with a central bank paring back its balance sheet limits the options on the table. Moral hazard is back on the table folks. Is it any wonder that Blackstone has increased its short positions to $22 billion?

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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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Apparently this is newsworthy

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Apparently the mainstream media think this is newsworthy. A 70yo man who happens to be president has bald patches. Who knew? Guess that means that one should take their other media commentary about affairs of the nation – foreign and domestic – far more seriously with Pulitzer Prize winning journalism like this. One would be forgiven for thinking America had never had a balding POTUS – Gerald Ford, LBJ, Richard Nixon to name three. Yawn. How insensitive and offensive such an article is to the hirsute!

Plunging credit quality more troubling than market rout

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The Dow plunged 1175 points (-4.6%) overnight. 4.6% is a lot and yes 4-digit drops optically look worse but off the higher base we get higher (record) point drops. One thing to contemplate in a rising bond yield market is corporate credit quality. Since 2006 the average credit ratings for US corporates issued by the big agencies have seen the number of top rated (to the left) fall while those with deteriorating grades (to the right) soar. That’s right, the 4 categories before “junk” have risen sharply. After many years of virtually free money many corporations have let the waistline grow. When refinancing comes around just how will credit ratings influence the new spreads of corporates who’ve shifted to the right?

The IMF highlighted in 2017  that US companies have added $7.8t in debt & other liabilities since 2010. The ability to cover interest payments is now at the weakest level since 2008 crisis.

This despite near full employment, record level equity markets and every other word of encouragement from our politicians.

However if this is the state of the corporate sector at arguably the sweet spot of the economic cycle CM shudders to think the state of potential bankruptcies that will come when the cycle truly takes a turn for the worse. This is a very bad sign.

Approval ratings of world leaders

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Macron, France, Nov., 2017: 46%
Merkel, Germany, Dec, 2017: 38%
Trudeau, Canada, Jan., 2018: 37%
Turnbull, Australia Feb 2018: 37%
May, UK, Jan., 2018: 29%
Pena Nieto, Mexico, Nov., 2017: 26%
Trump, USA, Feb., 2018: 49% (Rasmussen)

Looks like the mainstream media should be serving up the beatings for unpopularity to other world leaders.