The Economy Thread

[ChromeHearts]

This is a response to train insane's question. The differences would be deducted as expenses assuming it happens seldom would be expensed out as extraordinary expense or non-recurring expense depending on the circumstances in the income statements however the sales do not change.

[sargent]

The whole fiscal cliff issue is really a lose/lose situation for the US at this point. They either kick the can (most likely scenario), avert spending cuts and get downgraded by the ratings agency.

The ratings agencies have stated that they will downgrade the US again if they pull that stunt again. If they go off the cliff then the spending cuts will push the US into a recession. There's little doubt about that considering Government spending accounts for alot of GDP right now.

Even if they 'come to a deal' it will still be scrutinized by the ratings agency.

I mentioned this already before but I expect the US to get downgraded again in 2013. Fitch removed France's AAA credit rating today.

I'm visiting the US (hello from Southern Arizona) and every day the media is talking about the 'fiscal cliff.'

A new buzz word.

Interesting point that it's a 'lose-lose' situation.

Kick the can, get downgraded but avoid a certain recession. Implement the cliff and a recession and as you note gov spending is indeed a large portion of GDP.

Sorry, I just regurgitated your post - but why can't the mainstream media ever say what you say, so succinctly? B/c they suck.

They are making this out to be another football game that is close and they need to attract an audience.

[sargent]

One more quick question.

But kicking the can down the road do you mean:

1. raising the debt ceiling,

or,

2. making an agreement between both parties?

Or,

something else?

Thanks.

[ChromeHearts]

For the first question, the media and politicians have 'agendas'. Even the president. That is just the reality of life. I have spoken privately to politicians regarding these issues and they largely understand them (some don't).

At any rate they put their head in the sand bc they do not want to deal with painful issues. I know two separate employees who were fired from public pension funds (for public employees) because they raised issues for investment returns and current funding ratios.

For example Illinois is something like 38% funded. That means they have .38 cents for every $1.00 in pension benefits they promised. That's optimistic actually. A lot of these pension funds I have reviewed have very muddy accounting and inconsistencies. I even emailed several and said their are questionable issues with their accounting. Most ignored me and the ones that responded passed me off to someone else and it was a fucking circle jerk. The pension funds have heavy union influence. Employees do not want to see their benefits cut.

I actually considered running as a state representative and I have the cash to fund myself all I'd need is political party endorsement. I'm more of a libertarian at heart (Ron Paul) however I'd have to probably go under republicans.

I don't think I will pursue it because its a thankless job, I make more doing what I do, and I'm just one person among many. I could push for changes however even Republicans have an agenda and would likely not support an independent person that actually would try to change things.

So I'm just left with taking care of our clients..........

[ChromeHearts]

Second question:

Kicking the can this is what I expect:

I don't expect them to make any kind of deal at all before Dec 31. They will put in a stop gap or some shit like that where nothing happens for another 3-6 months then we are back here again.

Government can never get shit done efficiently. That's the difference between private industry and Government.

Private industry makes hard and painful choice at the drop of a bucket. They have to because if they don't they will go under and their competitors will push them into bankruptcy. There is an alignment of interest and that's not going bankrupt. Pretty motivating factor.

Government on the other hand gets tax revenue. And members of Congress get paid the same no matter what. If a Government is run like shit or efficiently it's all the same. They get tax money bc companies and people have to pay bc it is the law. If you knew you were going to get money no matter what kind of job you did why would you have any motivation to work hard ?

I tell any investor out there that you need to watch out for yourself and you are responsible for yourself. The SEC, CFTC and whatever Government regulators out there will not protect you. If you get scammed don't expect the Government to protect you.

[sargent]

....At any rate they put their head in the sand bc they do not want to deal with painful issues. I know two separate employees who were fired from public pension funds (for public employees) because they raised issues for investment returns and current funding ratios.

For example Illinois is something like 38% funded. That means they have .38 cents for every $1.00 in pension benefits they promised. That's optimistic actually. A lot of these pension funds I have reviewed have very muddy accounting and inconsistencies. I even emailed several and said their are questionable issues with their accounting. Most ignored me and the ones that responded passed me off to someone else and it was a fucking circle jerk. The pension funds have heavy union influence. Employees do not want to see their benefits cut.

Wow. I knew that the Illinois pension was way under the 80% funding line, but .38 cents on the dollar with things not improving in Illinois means a lot of people that thought their many years of work would pay off will likely get a lot less than expected. As noted, you rely on the gov or any organization to "be there" and you take that risk.

I've read about some of the small cities that have gone under and they just stopped sending the checks to retirees.

I save and invest what I can but I also live for today, meaning, I am doing what I want to do now in life. Doing things sooner than later.

I expect to work until I drop. It does make planning your life easier if you recognize this (I'm 42 now).

Good on your previous intentions to participate and do good in the process. New minds and blood are needed.

[sargent]

Government can never get shit done efficiently. That's the difference between private industry and Government.

Private industry makes hard and painful choice at the drop of a bucket. They have to because if they don't they will go under and their competitors will push them into bankruptcy. There is an alignment of interest and that's not going bankrupt. Pretty motivating factor.

Government on the other hand gets tax revenue. And members of Congress get paid the same no matter what. If a Government is run like shit or efficiently it's all the same. They get tax money bc companies and people have to pay bc it is the law. If you knew you were going to get money no matter what kind of job you did why would you have any motivation to work hard ?

I tell any investor out there that you need to watch out for yourself and you are responsible for yourself. The SEC, CFTC and whatever Government regulators out there will not protect you. If you get scammed don't expect the Government to protect you.

I completely agree with you 100%.

So damn, true.

[ChromeHearts]

The problem is that a lot of the pension funds use high ARRs when calculating their funding ratios. This is a dirty secret and nothing more than an accounting gimmick.

So the 38% or whatever is calculated by assuming 8% investment returns. That's very high and not achievable unless you engage in more risky strategies like we do at our fund.

The problem is pension funds are not designed to take on excessive risk as they have pension employees. Our situation is different where it's a eat what you catch situation.

Plus we have investors not pension obligations. The pension funds cannot afford to lose money and take excessive risks due to their obligations.

[ChromeHearts]

When I adjusted the rate to 4-5% which is more realistic the funding ratio goes way down. What I have seen is that typically whatever funding ratio a pension fund 'states' you can haircut it by 10-11% and that is more likely the 'real' funding ratio.

[sargent]

The problem is that a lot of the pension funds use high ARRs when calculating their funding ratios. This is a dirty secret and nothing more than an accounting gimmick.

So the 38% or whatever is calculated by assuming 8% investment returns. That's very high and not achievable unless you engage in more risky strategies like we do at our fund.

Another reasons to have little faith in some (many....I think most) state pension funds.

I assume that the Feds pensions are safer because it's well....the federal government. At least 3 states have changed and have new employees enroll in a 401K like system foregoing the defined pensions benefit system, and I think 1 or more states have had employees change mid-career from defined pension benefit to the 401K-like system.

Nonetheless, we're on are own (those of us under say, 55 or so).

I see Illinois in big trouble. A couple of other states also.

As for the fiscal cliff 2 GOP Tea Party advocates were removed from the House Budget Committee yesterday so as you state (and I also believe) a deal will be made by the end of the month.

The recent false news hysteria out of talk-radio land is that "Obama will make the US intentionally go over the fiscall cliff and then save it afterwards to known knowns as the "savior" or get political points.

I do not see any evidence of this? Any truth to this anyone? Any valid sources? I think this is just more lies to fill air time and get the sheep jumping up and down.

Opinions?

[sargent]

The bottom part in bold reveals the strategy. Is this nothing? Just a strategy move? Another form of a QE? Article below ---

Treasury Scarcity to Grow as Fed Buys 90% of New Bonds

By Liz Capo McCormick & Daniel Kruger - Dec 3, 2012


Even as U.S. government debt swells to more than $16 trillion, Treasuries and other dollar fixed-income securities will be in short supply next year as the Federal Reserve soaks up almost all the net new bonds.

The government will reduce net sales by $250 billion from the $1.2 trillion of bills, notes and bonds issued in fiscal 2012 ended Sept. 30, a survey of 18 primary dealers found. At the same time, the Fed, in its efforts to boost growth, will add about $45 billion of Treasuries a month to the $40 billion in mortgage debt it’s purchasing, effectively absorbing about 90 percent of net new dollar-denominated fixed-income assets, according to JPMorgan Chase & Co.

Treasury Scarcity to Grow as Fed Absorbs 90% of New U.S. Bonds


Even after U.S. public borrowings outstanding grew from less than $9 trillion in 2007 as the U.S. raised cash to pay for spending programs designed to pull the economy out of the worst financial crisis since the Great Depression, rising demand coupled with a drop in net supply means bonds will be scarce.

“The shrinking amount of bonds in the market is lowering rates and not just benefiting the Treasury, but providing lower rates for private-sector decision-makers as well,” Zach Pandl, a senior interest-rate strategist in Minneapolis at Columbia Management Investment Advisers LLC, which oversees $340 billion, said in a Nov. 30 telephone interview. “The Fed is not creating this scarcity to help out the Treasury, it’s primarily to get the economy going.”

Entire: http://www.bloomberg.com/news/2012-1...new-bonds.html

[ChromeHearts]

QE 4 kicked off this week and everyone yawned. The Federal Reserve will electronically print reserves of $85billion/month to buy Treasuries and MBS. This equates to a little over $1 trillion/year balance sheet expansion.

[Danny Manslaughter]

It certainly is going to get much worse over the next five years; at least for the working class. To think anything else is ridiculous

[ChromeHearts]

Well the easiest way to think about the situation is that all Governments around the world are pushing the pedal all the way down. I think most people would agree that things are full throttle at this point.

So given that is the case, we are still so fragile to the point of tipping into a recession ? Imagine anything even less than full power. That's what concerns everyone is that we are already redlining so there is nothing left anymore to address further issues down the line.


Btw we have had a massive short position we accumulated on both Ruger and Smith and Wesson stock. Mainly Ruger.

I feel horrible about the shootings in OR and CT but both stocks have absolutely cratered.

[sargent]

Well the easiest way to think about the situation is that all Governments around the world are pushing the pedal all the way down. I think most people would agree that things are full throttle at this point.

So given that is the case, we are still so fragile to the point of tipping into a recession ? Imagine anything even less than full power. That's what concerns everyone is that we are already redlining so there is nothing left anymore to address further issues down the line.

QE 4 kicked off this week and everyone yawned. The Federal Reserve will electronically print reserves of $85billion/month to buy Treasuries and MBS. This equates to a little over $1 trillion/year balance sheet expansion.

QE4....

I know little but I will guestimate that gold may hit $2,000, not that I'm buying.

[ChromeHearts]

Gold will likely not rise. Given the ongoing QE intervention there are still large deflationary forces, mainly debt that have been pressuring economic growth and stifling GDP.

While inflation expectations have increased the velocity of money still remains sluggish. Also banks are not reserve constrained at all.

[sargent]

^ Chrome,

A lot of the big banks have been absorbing (swallowing) up the smaller banks. Is this normal captilistic forces given the environment or is their a banking + government agenda?

2. Is it still difficult for business to get loans. Some business folks are telling me that they are having trouble getting loans (but I suspect their companies owe already and have not been able to pay).