October 7 – October 13, 2016

There are the pension obligations kept on the books based on industry guidelines and then there are the books that track what they really think. America’s tech boom has been great for the consumer, but not so much for the employees that have been displaced.



    • “Sovereign wealth funds have pulled almost $90bn from asset managers over the past two years, as state-backed investment vehicles grapple with low commodity prices and disappointed returns.”
    • “The Norwegian government has tapped the Scandinavian country’s $890bn oil fund, the largest sovereign wealth fund in the world, for almost $6bn this year.”
    • “Moody’s, the rating agency, has predicted that sovereign outflows would be at least 25% higher in 2016 than in 2015, due to the low oil price.”
    • Other reasons stated for the pullback include: poor performance from fund groups, bringing investment management in-house, diversification, and having cash-on-hand for opportunistic investments.
    • “Between 20 and 30% of people in the US and Europe are working independently in the so-called “gig economy” according to a new study that counts moonlighters as well as full-timers.”
    • While many are satisfied with their gig arrangement, “about 30% are doing it as a last resort.”
    • Further, ‘gig’ work is not only for the young. “The survey found that in the UK, 39% of adults aged 55 and over were working independently versus 31% of 25 to 54 year olds. The same pattern was found in Sweden and Germany.”
    • “Scaling up the results of our survey suggests that 50 million Americans and Europeans are independent out of necessity, and more than 20 million of them rely on independent work as their primary source of income.”
    • In an effort to grow its inventory, Airbnb is reaching out to apartment landlords to rent out some of their vacant inventory. So far, most landlords have been declining.
    • Why?  1) “Under Airbnb’s new plan, called the Friendly Building Program, if landlords allow tenants to lease units on Airbnb, they have an opportunity to take a cut of the nightly revenue at a suggested rate of 5% to 15%.” I.E. for a “one-night, $200 stay that means the landlord would make $30 or less, an amount that many landlords say doesn’t justify the hassle.” And 2) as illustrated by “Cortland Partners, which owns 36,000 apartment units primarily in the Southeast, in a recent survey found that nearly 40% of residents would be significantly less likely to renew their leases if the company allowed tenants to rent out units on Airbnb.” Basically, as Margette Hepfner, Senior VP of Lincoln Property Co (manages or owns 175,000 units), so aptly puts it “There’s just inherent risk in allowing unknown guest to come onto your property.”
  • Josh Zumbrun of the Wall Street Journal discussed the findings from the Journal’s recent economist survey. Essentially, economists believe a recession is likely within the next four years.
    • “Economists in The Wall Street Journal’s latest monthly survey of economists put the odds of the next downturn happening within the next four years at nearly 60%.”
    • Why… because “the American economy has never grown for more than a decade without a recession.”
    • “The current expansion began in June 2009, and has now continued for 88 months, making it the fourth-longest period of growth in records stretching to 1854.”
    • However, “to be clear, the length of an expansion bears little relation to its strength. The U.S. economy has grown at a 2.1% annual pace since 2009. That is the slowest growth of any expansion after World War II.”
    • “But over the next four years, few think a recession is absolutely guaranteed. A quarter of economists place the odds below 50%.”
    • “It is precisely because the economy has grown slowly that some think the recovery could last a long time. ‘Slow and steady leaves plenty of fuel to keep going,’ said Russell Price, senior economist for Ameriprise Financial.”
  • Henny Sender of the Financial Times covered the continuing bull run in the Chinese property sector.
    • “Property as an asset class has become important in China – maybe too important. It is critical to the financial system (since 70% of all bank loans are backed by real estate collateral), as a source of economic growth and as a source of savings and wealth for many households.”
    • As Nicole Wong, the regional head of property research for CLSA in Hong Kong puts it “property is an alternative currency in China.”
    • “But no asset class is as sensitive to liquidity’s soothing effect as property and there is a lot of liquidity in China. And as it always does, liquidity is buoying the property market, well beyond the first-tier cities where so many couples go through staged divorces just so that they can each buy a starter home on more attractive terms.”
    • “‘Liquidity is coming from the sky,’ says one Hong Kong-based hedge fund manager, noting that 40% of all global money supply in recent years has come from China. So even as central banks in Japan and the US debate helicopter money for local infrastructure and other ambitious development projects, China comes closest to realizing that concept as it ramps up its money printing presses. China’s total social financing for August was again at highs set earlier this year, while for the first half it amounted to $1.5tn, he adds.”

Special Reports / Opinion Pieces

  • FT – Investors ignore messages from ‘global AGM’ at their peril – Mohamed El-Erain 10/9
    • “In sum, the AGM (Annual General Meeting) reinforces three concerns about the global economy. 1) Its prospects are becoming more fragile in terms of growth, financial stability, indebtedness and, therefore, inclusive prosperity. 2) Bizarre political dynamics add fuel to the fire, directly and by holding back timely policy adjustments. 3) The potential damage now extends beyond forgone opportunities to also undermining future potential, including open trading systems and politically-autonomous central banks.”


FT – Gap widens between China’s ‘old’ and ‘new’ economies – James Kynge 10/6

FT_New China economy companies outperforming_10-6-16

Bloomberg – Grocery Prices Are Plunging – Craig Giammona 9/26

Bloomberg_Falling Food Prices_9-26-16

FT – China anti-corruption campaign backfires – Hudson Lockett 10/9

FT_China's top concerns_10-9-16

WSJ – Worries Grow That China Faces a Perilous Property Bubble – Dominique Fong and Lingling Wei 10/7

WSJ_Chinese lending growth_10-7-16

WSJ – Mainland China’s Property Bubble Leaks Into Hong Kong – Jacky Wong 10/12


Visual Capitalist – These 3 Maps Help to Visualize America’s $18 Trillion Economy – Jeff Desjardins 10/12



*Note: bold emphasis is mine, italic sections are from the articles.

A Sour Surprise for Public Pensions: Two Sets of Books. Mary Williams Walsh. New York Times. 17 Sep. 2016.

Turns out, the California Public Employees Retirement System (CalPERS) – and many similar pension funds for that matter – keep two sets of books on calculating their pension obligations and funding requirements.  One based on actuarial values and another based on “market values.”  Well the issue just came to light in a small case for the Citrus Pest Control District No. 2 that just received a very hefty bill to cover a shortfall (plus interest) for deciding to convert to a 401(k) plan.  What changed at the moment of that decision…basically Calpers went from calculating the benefit owed based on actuarial tables to using a more prudent ‘market approach’ considering it no longer had the right to go after the community for future contributions.

What is the ‘market value?” Basically, “the market value of a pension reflects the full cost today of providing a steady, guaranteed income for life – and it’s large. Alarmingly large, in fact. This is one reason most states and cities don’t let the market numbers see the light of day.”

If you want to see the difference between the two values, the Stanford Institute for Economic Policy Research now publishes the two for California pensions.

Thing is that pensions operate on the actuarial standards, standards which exacerbate pension shortfalls.  “Actuarial values determine the annual contributions that states and local governments make to their pension plans, so if the target numbers are too low, the contributions will always be too small. Shortfalls will be compounding, invisibly.”

As Jeremy Gold, an actuary and economist, made note in a speech last year “actuaries shamelessly, although often in good faith, understate pension obligations by as much as 50%… Their clients want them to.”

In the case of Citrus Pest Control District No. 2, Calpers was calculating the municipality’s obligations at an assumed rate of return on assets “now generally around 7.5%,” but when calculating the ‘market value’ of the obligation when the Citrus made the switch, Calpers used a more realistic (based on the current risk-free rate for a similar duration) 2.56%.  Boom, $447,000 shortfall – this is for only 6 people.

‘Houston we have a problem.’

America’s Dazzling Tech Boom Has a Downside: Not Enough Jobs. Jon Hilsenrath and Bob Davis. Wall Street Journal. 12 Oct. 2016.

The highlight is that for all the wealth created from the tech boom, jobs have been cut rather than added.

“Google’s Alphabet Inc. and Facebook Inc. had at the end of last year a total of 74,505 employees, about one-third fewer than Microsoft Corp. even though their combined stock-market value is twice as big. Photo-sharing service Instagram had 13 employees when it was acquired for $1 billion by Facebook in 2012.

“American tech workers are getting a smaller piece of the economic pie created from what they produce. As of 2014, employee compensation in computer and electronic-parts making was equal to 49% of the value of the industry’s output, down from 79% in 1999, according to the Commerce Department.”


“WhatsApp had more than 450 million users world-wide when Facebook bought the messaging service for $19 billion in 2014, turning founder Jan Koum into a billionaire several times over. At the time of the acquisition, WhatsApp had 55 employees.

“Economist call the phenomenon ‘skill-biased technical change.’ The spoils of growth go to those few people with skills and luck and who are best positioned to take advantage of new technology.”

“The five largest U.S.-based technology companies by stock market value-Apple, Alphabet, Microsoft, Facebook and Oracle Corp.-are worth a combined $1.8 trillion today. That is 80% more than the five largest tech companies in 2000.”

“Today’s five giants have 22% fewer workers than their predecessors, or a total of 434,505 as of last year, compared with 556,523 at Cisco Systems Inc., Intel, IBM, Oracle and Microsoft in 2000.”

“Harvard University economist David Deming estimates that the hollowing-out of work spread to programmers, librarians and engineers between 2000 and 2012. As much as $2 trillion worth of human economic activity could be automated away using existing technologies, such as Amazon’s robots, in coming years, consulting firm McKinsey & Co. estimates.”

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – China Property Bubble Could Cause $600 Billion in Bad Debts 10/6

FT – Italy’s 50-year bond – mind the valuation gap 10/6

FT – Renminbi eyes lows as China enjoys reserve currency status 10/9

FT – The Saudis’ strategic failure 10/9

FT – China approves controversial debt-for-equity program 10/10

FT – More millennials switch off social media 10/10

FT – Norway’s oil fund warns on lack of stock market listings 10/11

FT- China corporate raider’s wealth soars ninefold to $17bn 10/12

FT – Dividend or disaster? Nigeria grapples with demographic conundrum 10/12

NYT – Behind Duterte’s Bluster, a Philippine Shift Away From the U.S. 10/9

NYT – This City Is 78% Latino, and the Face of a New California 10/11

WSJ – Recession Odds: Fed Says Don’t Count On It 10/9

WSJ – WeWork Raises $260 Million, Capping Off $690 Million Funding Round 10/12


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