California Pensions Underfunded By $1 Trillion Or $93k Per Household (Irwindale Leads At $134,907)

“California Pensions Underfunded By $1 Trillion Or $93k Per Household.” And this dramatic headline was written BEFORE the staggering $1.7 TRILLION loss in the bond market market.

To shore up rapidly deteriorating finances, CalPERS will consider significantly reducing its investment forecast in a long-overdue move that could shake up government retirement funds across the country.

The reduction would mean that local governments and the state would be required to contribute more to the California Public Employees’ Retirement System, the nation’s largest pension plan.

Public employee unions object because that would leave government agencies with less money for salaries and benefits. But the move would slow the soaring growth in pension debt for which California taxpayers are liable.

CalPERS currently assumes that its investments will earn 7.5 percent annually. But its consultant warns that it should anticipate only an average 6.2 percent in each of the next 10 years.

CalPERS staff next week will issue its recommendation on how far to reduce the investment assumption. They won’t suggest a one-step drop to 6.2 percent because the corresponding increase in contributions would financially devastate state and local governments.

But some expect a recommendation of around 7 percent annually. If the board agrees, that would set a new national benchmark.

Last year, the forecasts of the top 25 state pension systems averaged 7.64 percent, according to Nation’s data. Only one state system, Virginia, used a 7 percent forecast. Locally, the San Jose and Contra Costa County pension systems currently use a 7 percent rate.

CalPERS has consistently undercollected from government workers and employers, instead counting on overly optimistic investment forecasts to help fund retirees’ pensions.

That’s in large part why CalPERS has only 68 percent of the assets it should have. CalPERS’ paltry 0.61 percent investment return last fiscal year left the system with a record $139 billion shortfall. That’s $46 billion more than just two years ago.

Meanwhile, the pension system’s investment consultant this year radically adjusted its projections of future earnings, dropping its forecast from 7.1 percent annually to 6.4 percent and then to 6.2.

CalPERS’ investment officer, financial officer, actuary and consultants all warn that the system must stop using the rosy 7.5 percent prediction and instead seek more money from workers and employers.

The leader in California in terms of pension debt per household? Irwindale at $134,907! Irwindale is a small city located directly east of downtown Los Angeles in the San Gabriel Valley.


In terms of states, Alaska leads the nation in pension debt per household followed by California and Illinois.


Here is a typical home in Irwindale, California featuring an open-air living room that can also function as a bus stop.


Not In Labor Force Jumps 446K In November, Wage Growth Declines

The Bureau of Labor Statistics (BLS) has released their “jobs report” for November.

The good news? The unemployment rate declined to 4.6%.


The bad news? An additional 446,000 people are no longer in the labor force.  To give you a sense of proportion, that is like the entire population of Fresno, California switching to Not In Labor Force. There are now 95.1 million folks NOT in the labor force.

Average hourly earnings YoY fell to 2.5%, which is the same as September 2009 levels (just after The Great Recession ended).


U-6 underemployment did fall. That is the good news (but remember 446,00o dropping out of the labor force). The bad news? U-6 underemployment is still too high (relative to recoveries from previous recessions under Presidents Clinton and George W. Bush.


Labor force participation? Back to Jimmy Carter levels!


Food services and drinking places added 18.9k jobs while physicians office workers increased by 7.4k jobs. So that is almost 3 bartenders/restaurant staff added to every physicians office employee.


At least more people can now sell “Snake Juice,” created by Tommy Haverford. Since the labor report is largely snake oil.


The Presidential Election Effect In Six Charts (Hensarling Correction & Wage Growth Slows To 2009 Levels)

The US Presidential Election was held on November 8, 2016 and resulted in a victory for Donald Trump rather than Planet Hillary (Clinton).

What has happened since November 8th? Here is the reaction in the yield curve. Nearly a 60 basis point increase at the 7y and 10y tenors.


Dollar swaps? Over a 40 basis point increase at 4 years and beyond.


The US dollar basket? A sudden rise, then a fade.


Same for the S&P 500 index.


How about Fannie Mae and Freddie Mac preferred stock prices? A gradual rise at first, then the “Mnuchim bump” (based on Trump’s selection for Treasury Secretary saying that he prefers F&F be released from conservatorship), then the “Hensarling correction” (with the market realization that F&F may be shut down).


Of course, we received the jolt of reality with the jobs report that US Average Hourly Earnings All Employees Total Private YoY fell to 2009 stagnant levels.


Let’s see if this is a real burst of optimism … or just a “Tommy Fresh” moment.



US Treasury 10Y-2Y Yield Curve Surges To Highest Level Since December 7, 2015 (Break-even Rate Rises Above 2%)

The US Treasury 10 year- 2 year yield curve slope surged to its highest level since December 7, 2015.


The yield spread between 10-year U.S. Treasury bonds and similar-maturity Treasury Inflation Protected Securities, or TIPS, climbed above 2 percentage points Thursday for the first time since 2014. Known as the break-even rate, the measure reflects investor expectations for average annual consumer-price gains over the next decade. Inflation expectations have soared on bets that Donald Trump’s policies will fast-track economic growth, while the Federal Reserve’s preferred gauge of price pressures — at about 1.7 percent — is closing in on the bank’s 2 percent target.


Now that we have at least one measure that the US has 2% inflation, should The Fed “team” be celebrating?


I don’t think the worst wage/earnings recovery from a recession since LBJ is any reason to celebrate.






Global Bonds Suffer Worst Monthly Meltdown as $1.7 Trillion Lost

It has been over 30 years since 10 year Treasury yields peaked at 15.84% on September 30, 1981. The 10 year Treasury yield is now 2.406%. That is one heck of a bull market!

(Bloomberg) — The 30-year-old bull market in bonds looks to be ending with a bang.


The Bloomberg Barclays Global Aggregate Total Return Index lost 4 percent in November, the deepest slump since the gauge’s inception in 1990. Bonds in Europe extended declines with their U.S. peers as OPEC’s agreement on Wednesday to cut oil production added to prospects of higher inflation. The reflation trade has been driving markets since Donald Trump’s presidential election win due to promises of tax cuts and $1 trillion in infrastructure spending. All this has prompted investors to dump debt that was offering near-record-low yields and pile into stocks.

Calling an end to the three-decade bond bull market is no longer looking like a fool’s errand: the Federal Reserve is expected to start raising interest rates — and do so more often than once a year, inflationary expectations are climbing and there are hints global central banks may be buying fewer sovereign securities going forward. Investors pulled $10.7 billion from U.S. bond funds in the two weeks after Trump’s victory, the biggest exodus since 2013’s “taper tantrum,” while American stock indexes jumped to record highs.

Apart from “OPEC’s intentions to support prices, the broader pressures as regards rising inflationary expectations and the impact this is having in terms of upward pressure on yields is notable,” said Matthew Cairns, a strategist at Rabobank International in London. “The market has moved with remarkable swiftness to price in the anticipated reflationary impact of a Trump administration.”

“This has, in turn, prompted a notable rotation out of fixed income and into equities,” Cairns said. Still, he cautioned that moves are “remarkable given the distinct lack of clarity as regards what policies the president elect will actually pursue.”

November’s rout wiped a record $1.7 trillion from the global index’s value in a month that saw world equity markets’ capitalization climb $635 billion.

The yield on 10-year U.S. notes rose 56 basis points in November, the biggest jump since 2009, and was at 2.41 percent as of 7:07 a.m. in New York. Yields on similar-maturity German bunds reached a two-week high of 0.32 percent, while those on U.K. gilts rose four basis points to 1.46 percent.

The average yield on the Bloomberg Barclays Global gauge climbed to 1.61 percent on Nov. 23, after touching a record low of 1.07 percent on July 5.


In terms of the 10Y-2Y Treasury yield curve slope, we have seen a gradual steepening over the past month.


It remains to be seen if President Trump and Congress can pull the US economy out of its Carterish malaise (low wage and economic growth). Particularly since the tools available are reduced after the disastrous credit bubble of the last decade helped double the Federal debt.


The bond market bubble was a big one, now let’s see if it bursts for real.



“Duke” Mnuchin Strikes Again! Suggests 50-100 Year US Treasuries (Drops A Duration Bomb)

The US has a staggering amount of Treasury debt outstanding that has doubled in size (actually up 105% since October 2008).


And as interest rates rise, the US Treasury will have to figure out how to refinance the debt as it matures.

In an interview on CNBC Wednesday, Steven Mnuchin said about the current mix of U.S. debt issuance: “we’ll look at potentially extending the maturity of the debt because eventually we are going to have higher interest rates and that is something this country is going to need to deal with.”

Prodded further, he indicated that he may look at issuing debt that doesn’t come due for as long at 50 or 100 years, among other options, a much more distant maturity than the longest-term 30-year bond that’s currently outstanding.

So, Treasury Secretary in waiting, Steven “Duke” Mnuchin is following the UK and France’s model of 50 year sovereign debt.


His suggestion was brought on my rising Treasury rates that could literally break the back (and fiscal budget) of the Federal government.


So, longer duration bond issuance from Treasury? Duke Mnuchin just dropped a bomb on Treasury investors.


Fannie, Freddie Soar After Mnuchin Comments (Duke Nuchin?)

Trump’s choice for Treasury Secretary, former Goldman Sachs partner and film producer (American Sniper and Mad Max: Fury Road), said that mortgage giants Fannie Mae and Freddie Mac should be released from the grip of the Federal government.

If Mnuchin does make inroads into releasing Fannie Mae and Freddie Mac into the wild (or shut down), he will probably be nick-named “Duke Nuchin.” Or “The Munchkin,” I haven’t decided which, depending on what he is intending.

(Bloomberg) -By Kasia Klimasinska and Felice Maranz- Fannie up as much as 33% to highest intraday since Aug. 2014; Freddie up as much as 32%, also highest since Aug. 2014, after Steven Mnuchin, Donald Trump’s choice for Treasury secretary, says FNMA, FMCC should exit government’s grip, didn’t appear to mimic Republicans who’ve said they should
be wound down or eliminated.

* Mnuchin’s comments “certainly positive” for GSE pfd, common shareholders,’’ Height Securities analyst Edwin Groshans writes in note

* At the same time, “any path” that leads to GSEs exiting govt control needs to permit the GSEs to rebuild capital; estimates FNMA would need to raise at least $190b of capital, FMCC would need $119b in order to meet minimum risk-based capital requirements — which means no capital would flow to shareholders for a decade or longer

* Mnuchin has “significant powers” related to FNMA, FMCC conservatorship; tenure as head of mortgage bond trading at GS, role at OneWest demonstrate “significant background” in mortgage industry, FBR’s Edward Mills writes in note.

Here is the reaction in the stock market to Duke Nuchin’s comment.


The alternatives facing Duke Nuchin and Congress are 1) shut down Fannie Mae and Freddie Mac, 2) turn Fannie and Freddie loose in the wild with sufficient capital (either externally raised OR a Federal government “loan” with no strings attached), or 3) fold Fannie and Freddie into a Federal government insurance “corporation” per the Parrott, Ranieri, Sperling, Zandi, Zigas “A More Promising Road to GSE Reform” plan.

Someone mention a fourth option, making Fannie and Freddie a clone of FHA and Ginnie Mae (which is similar to the Parrott, Ranieri, et al plan. But one FHA/Ginnie is enough, thank you.

But whatever course Duke and Congress agree on, there has to be TRANSPARENCY as to what mortgage loans are being insured/purchased in terms of average LTV, FICO, and other measures (e.g. loan type).


Duke Nuchin is clearly preferable to being nick-named “The Munchkin.” But if he and Congress succeed in getting Fannie and Freddie loose from the grip of the Federal government, they can all sing together!!