Cops retiring as millionaires

A Forbes blogger does the math:

It is said that government workers now make, on average, 30% more than private sector workers. Put that fantasy aside. It far underestimates the real figures. By my calculations, government workers make more than twice as much. Government workers are America’s fastest-growing millionaires.

Doubt it? Then ask yourself: What is the net present value of an $80,000 annual pension payout with additional full health benefits? Working backward, the total NPV would depend on expected returns of a basket of safe investments–blue chip stocks, dividends and U.S. Treasury bonds.

Investment pros like my friend Barry Glassman say 4% is a reasonable return today. That’s a pitiful yield, isn’t it? It is sure to disappoint the scores of millions of baby boomers who will soon enter retirement with nothing more than their desiccated 401(k)s, down 30% on average from 30 months ago, and a bit of Social Security.

Based on this small but unfortunately realistic 4% return, an $80,000 annual pension payout implies a rather large pot of money behind it–$2 million, to be precise.

That’s a lot. One might guess that a $2 million stash would be in the 95th percentile for the 77 million baby boomers who will soon face retirement.

Cops have a better racket these days than during prohibition. It’s not just cops, either — millions of teachers, firefighters, administrators, transit workers, janitors and all kinds of unionized government employees are effectively millionaires.

Good Faber interview on Bloomberg: manipulation, GS, Fed, Greece, etc

He basically expresses my opinion when it comes to manipulation: the Fed manipulates interest rates and bails out banks by accepting crappy collateral and buying bonds, and of course things like FX swaps manipulate that market. GS and others may front-run, but he doesn’t seem to believe in the futures/PPT theory of manipulation. He and I agree that poor traders use that as a mental crutch when they get frustrated.

Lots of other topics are covered, including Greece (he calls it a write-off, and says that the bailout of course was of the European banks, not Greece, which can never pay back its debt).

Watch the video here.

Video: Public employee of the year awards (SNL)

Mish put this up a few days ago. If you haven’t seen it, it’s a must-watch.
http://www.popmodal.com/nvp/player/nvplayer.swf?config=http://www.popmodal.com/nvp/econfig.php?key=eb054f3ea718f61adfa1

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This version may play better in the US:

http://www.hulu.com/embed/AmuCTb1tvO-5YOc5N-97Mg

This is why your state and local governments are bankrupt, as well as the national governments of Greece, Portugal, Spain, Italy and probably soon France.

Selling munis today is like selling Greek bonds six months ago — the numbers guarantee default. The only question is whether or not there are bailouts, but like with the GIPSI states, there will be a lot of uncertainty leading to higher rates in the interim, and in the end they can’t all be bailed out.

Look at these rates. Considering the risks, that’s a pretty skimpy premium over Treasuries, even considering the tax advantage.

Source: Bloomberg.com

Listen to Mish: Public unions and their pensions have bankrupted your city and state.

I don’t care where you live, odds are that your local politicians have put you and your fellow taxpayers on the hook for unpayable quantities of debt, mostly to fund government salaries and benefits that are way out of line with the private sector. This is a huge issue, and the only people who cover it in detail are the blogger Mish Shedlock and author Stephen Greenhut.

This is exactly what has happened in Greece and the rest of the GIPSI states in Europe, and for that matter the US Treasury since FDR introduced the Keynesian the welfare/stimulus state to those shores.

The only ethical solution to the problem is a swift, honest default. Public debt is a racket, the advance sale of stolen goods (interest, extorted at gunpoint) and just another capital transfer from producers to lazy government workers, politicians, bankers, government contractors and other moochers. The alternative to default is a slow death by debt slavery, all to prop up a corrupt system that will fail in the end anyway.

As Murray Rothbard responded to the idea that public debt is ok because “we owe it to ourselves,” the problem is “who’s the we, and who’s the ourselves?”

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See more here: Default, Greece, Default

Murray Rothbard on repudiating the public debt (mises.org)

Applause for the governor of New Jersey (really)

I can’t believe it, but New Jersey seems to have elected a real, live fiscally responsible politician to the governorship, Chris Christie. Read this speech on Mish’s blog – it’s refreshing.

The man seems to be genuine in his desire to confront the public union thugs who are bleeding their fellow citizens dry during a depression. Harsh language is indeed called for here — the actions of public employees are contemptible, demanding 4, 6, 8% wage hikes, generous benefits and early, cushy retirement at a time when the public coffers are dry and the citizenry is broke.

The government sector is the only sector that thinks it can just grow regardless of economic conditions. Tax receipts went up with the bubble, and instead of saving that cash or reducing tax rates, politicians bought union votes by often doubling employee pay over the last decade. They even tapped the bond market and pledged future taxes!

Unions got used to steady raises, and they have the gall to still demand them, knowing full well where that money has to come from — raised at the barrel of a gun from their neighbors.

Public employees, like military contractors, don’t pay taxes. If I give you $100 and immediately take back $30, I really just gave you $70.

I hope Christie gets the support he needs. NJ is indeed a tough state, full of tough people on both sides here.

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PS – The most ethical solution to the public debt crisis is immediate default. Just say no to debt slavery and bloated government.

Bonds vs. stocks

New lows for stocks overnight, and new highs for bonds (man, do I wish I hadn’t gone flat yesterday afternoon). By the way, that fractal played out, since the small decline into the close yesterday foretold a greater decline overnight.

S&P futures in white, 30-year treasury futures in blue here. You can see that they have each formed a megaphone pattern. We’ll see if they respect them today or slice right through in a panic.

Source: Interactive Brokers

And for those who are waiting with baited breath for the long bond to collapse, consider this 3-month chart of futures for 30, 10, 5 and 2 year treasuries. They all still move together, and they all go up as stocks go down.

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But of course risky debt moves opposite to treasuries — just when you most need bonds for safety, it trades like the stock market. Here’s a 3-month shot of TLT (blue, 20-30 year T-bonds), JNK (red, junk bonds) and HYD (green, high-yield munis):

Source: Yahoo! Finance

Almost every city and state is bankrupt.

Mish has been swamped lately, posting what seems like at least two stories a day about the insolvency and incredible stupidity of state and local governments.

See these stories for examples:

School Crisis in Nevada: Governor Seeks to Cancel Collective Bargaining With Schools Because the State is Broke

Economically Illiterate Quote of the Day 2010-02-03: This Quote Concerns the LA Budget

Neil Barofsky Promises Handcuffs; Police Pay Dispute In Miami; Workers Protest In NM; California Muni Bond Outlook, Other Potpourri

During the boom, as tax receipts increased, it became the norm for state and local governments to inflate their budgets by five, eight or ten percent per year, mainly in the form of guaranteed pay raises and defined benefit retirement plans for goverment workers, as well as excessive hiring for jobs that have no use or would be better left private.

I can’t tell you how many times I’ve read about little towns paying mid six figure salaries for cops who’ve only been on the force for 5-10 years, or 100-200k for firemen or mid-level admininstrators. Even secretaries for city executives often make 80-150k, and most of these people get to retire with guaranteed cushy benefits at a much earlier age than in the private sector.

Many public employees belong to what have become the most powerful unions in the country. Their pull with politicians delivers fat pay raises and insurance benefits that almost nobody else gets these days. It used to be that government jobs were the worst — where the class idiots ended up working, but now it seems like the joke is on the high-achievers, since government unions have become the best racket in town.

The Ponzi is over.

What all of this has lead to is states taking on incredible amounts of debt to cover these costs, while counting on increased tax reciepts forever. Now that the real economy is hurting and taxes are down, governments find themselves struggling pay. They are using all kinds of gimmicks to keep the game running, like accelerated tax payment schedules, higher fees on car registration, public transit, toll roads and the like, and installing more of those Orwellian traffic cameras.  They are also making a big stink about how essential services like schools (better left private anyway), police (too many bullies with war toys), fire (better all-volunteer) and trash pickup (why on earth not fully private?) will be cut unless they pass tax increases.

These threats are all nonsense — governments always cut the stuff that people notice in order to show how important they are to daily life and to trick the public into assenting to taxes, when the real problem is the outlandish pay of the tax-feeders. Think about it: do you get more from your government than 10 years ago? Better roads, more frequent trash pickup, cleaner parks, better schools, safer streets? I doubt it, but I bet your state and local governments are spending twice as much as they were in 2000 (7% spending increases for 10 years doubles the budget).

The gimmicks aren’t going to last. The debt is unpayable unless the federal government covers it (since the feds have a Fed to buy unlimited debt with funny money), and I doubt that this is going to happen. It is just not a priority for the individuals who control Congress and the White House. They need the Treasury’s last bit of credit to keep the wars going, backstop the next round of banking losses, and to keep the unemployment, medical and social security checks flowing (if entitlements are halted, things will get ugly).

Cities can declare bankruptcy, and they have from time to time. States cannot declare bankruptcy, but they can sure default.

Joe Q. Investor is certain that bonds are safe.

This whole situation seems lost on the investing public, which piled into municipal bonds during 2009’s credit binge. After all, stocks are too risky! Municipal and low-quality corporate debt is likely to be one of history’s major crashes, and these markets seem to be rolling over already. Debt investors looked into the abyss in 2008, but in this climate of record complacency, people have forgotten how little is backing up these securitized promises.

This is not an easy sector for retail investors to short, but there are some instruments available. I’m either short or planning to take short positions in the following ETFs: HYD (high-yield munis), JNK (junk corporates) and LQD (investment-grade corporates). This is not a short-term play, but with patience this market should roll over big time.

Here’s a chart (click the image for a larger view):

Source: yahoo! finance

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A pure play on wider credit spreads could be made by also going long Treasury debt at durations that match the average in these bonds. IEF is a 7-10 year Treasury ETF, TLT is 20-30 year T-bonds, and of course there are very liquid futures markets in 2, 5, 10 and 30 year Treasuries.

Another good week for bond spreads

Bonds are a key indicator of the health of the risk trade. So long as treasuries are shunned and junk is bid, it is likely that stocks and the commodity complex hold up. This week, long-dated Treasuries have gained a couple more points as junk bonds continued to lose their mojo:

Source: google finance

Here are the same ETFs going back to the start of the bear market in stocks. You can see that despite a huge correction in 2009, treasuries are still over 20% ahead of junk:

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The collapse of the long bond has been eagerly awaited since 2007, and TBT (the 2X short bond fund) is still often mentioned in online chatter. The crowd is almost never right about these things, so I suspect that T-bonds will remain strong for the next leg down in stocks.

2008 was just been the “first look” at what can happen in the aftermath of a debt bubble — why couldn’t the same price action continue as risk in priced in again? Even if 2008 turns out to have been the “Prechter point” of greatest recognition and panic (and not what is coming), I doubt that many final price extremes were set last year.

For the yeild on the long bond, at the very least I expect another dip into the sub-3.5% area (it’s 4.5% now, and it touched 2.5% a year ago). Then we can talk about setting up long-term short positions for a secular (15-30 year) bear market.

At any rate, if think yields are going up from here, you’ve got much better odds with shorting corporate or municipal bonds, since those things are priced for perfection and defaults are going to be rampant. Even if treasury yields stay flat or go up, weak credit should collapse.

Oh, and if you just can’t wait to short long-dated sovereign debt, how about Japan at 2%? Or Greece at 6%? Or Spain, Italy, Ireland… all of this stuff is in trouble. Why pick the senior currency?

Among financial planners, the equity culture lives on.

Bloomberg columnist Jane Bryant Quinn reports that most financial planners still view stocks as the cornerstone of a retirement plan. An informal survey of planners showed overwhelming support for an equity allocation of 50-60%, although many have a new found respect for cash.

It still sounds as if most financial advisers are pretty worthless, just dishing up the same bad advice you could get from the New York Times:

Most of the planners are advising their clients to rebalance their portfolios, which effectively means putting money into stocks at current prices. They’re buying slowly, dollar-averaging into the market month by month. For taxable accounts, they’re also harvesting tax losses, to use against the capital gains that some mutual funds will be reporting, based on gains taken earlier this year. They also love municipal bonds.

Any adviser who had clients in more than a token amount of stocks by 2007 should be fired for incompetence. Same goes for those who still advise 50% or who like municipal bonds, which are an accident waiting to happen.

A good adviser doesn’t just deploy static formulas for asset allocation, but has the historical (100+ year) perspective required to identify periods of relative over- and under-valuation in various asset classes. Stocks were a time-bomb after about 1995. Commodities should have been avoided by early 2007. Real estate was on a crash course post-2004. Munis and corporates were also all risk an no reward after 2004.

This is pretty simple stuff, really. Just look at the relationships of various assets to one-another and to consumer prices, and don’t forget that metrics like PEs and yields can reflect overvaluations for so long that up begins to look like down.

As asset classes get way out of whack with historical averages, they should be sold or bought accordingly. People often forget that cash is an asset class, perhaps the most important one, and should be bought in spades when it is cheap and held until it is dear. It is still cheap.

The Bond Bubble is in Munis, not Treasuries

Investors looking for bonds to short should look here:

Source: bloomberg.com

Not here:

Source: bloomberg.com

Talk about all risk and no reward! Township and state revenues are falling through the floor, and politicians are exceedingly reluctant to cut bloated budgets. Next year, I bet the default rate on Munis will be as high as the Florida mortgage default rate (well into the double digits). Vallejo California was just the canary in the coal mine. Not every town pays their firemen $250k, but most pay $55-70k with full benefits and retirement by age 48. Here’s a look at firemen in Vallejo making 200-300k per year. This is too absurd not to publish:

Source: sfgate.com

Yes, the federal government is just as broke, but its powers of taxation are practically absolute, and it has a central bank to print up any shortfalls. Hence, US debt is the ultimate near-to-intermediate term safe-haven. This Treasury rally is no bubble. This is what a good, hard, deflation looks like.