Tag: Lobbyists

July 26, 2017July 25, 2017

July 26, 2017

If you were to read only one thing…

NYT – 110 N.F.L Brains 7/25

“Dr. Ann McKee, a neuropathologist, has examined the brains of 202 deceased football players. A broad survey of her findings was published on Tuesday in The Journal of the American Medical Association.”
“Of the 202 players, 111 of them played in the N.F.L. – and 110 of those were found to have chronic traumatic encephalopathy, or C.T.E., the degenerative disease believed to be caused by repeated blows to the head.”
“The brains here are from players who died as young as 23 and as old as 89. And they are from every position on the field – quarterbacks, running backs and linebackers, and even a place-kicker and a punter.”

Perspective

WSJ – Daily Shot: Forbes – Large Tech Firm Lobby Budgets 7/25

WSJ – U.S. Military’s Space in Trump Tower Costs $130,000 a month – Paul Sonne 7/19

It’s a 3,475 sq. ft. space, so $37.41 per sq. ft. per month. Mind you, “the most expensive Trump Tower listing recently was a 3,725 sq. ft., three-bedroom apartment on the 62nd floor. It was listed in the spring of 2016 for $50,000 a month unfurnished and $60,000 a month furnished, according to Streeteasy.com.”
Basically, Trump’s neighbor recognizes they have a captive audience.

FT – Google and Facebook lay foundations for modern-day company towns – George Hammond 7/19

Worthy Insights / Opinion Pieces / Advice

Bloomberg – Fund Managers and Strategists Think the Bull Market Is Ending Next Year – Adam Haigh, Natasha Doff, Dani Burger and Julie Verhage 7/25

“We have had a liquidity-fueled bull market. If that is taken away, there is a pressure point.” – Remi Olu-Pitan, Schroder Investment Management Ltd.

WP – Disabled and disdained – Terrence McCoy 7/21

“In rural America, some towns are divided between those who work and those who don’t.”

FP – The argument to be a buyer of the Saudi Aramco IPO – John Dizard 7/21

“As one international oil analyst says, though: ‘The Permian is preventing high prices today, but ensuring high oil prices tomorrow. The low prices are holding back investment in most of the world, and that is storing up a significant problem in meeting demand in the future.'”
“That is the argument to be a buyer of the Saudi Aramco IPO.”
“There are two bets involved in the listing. Can Saudi Arabia contain the social and strategic pressures caused by cheap oil? And will the capital markets eventually stop subsidizing shale producers?”

WSJ – Investors, Stop Worrying About Why ‘Nobody’ Is Worrying – Jason Zweig 7/21

Markets / Economy

WSJ – In Reversal, Colleges Rein In Tuition – Josh Mitchell 7/23

“U.S. college tuition is growing at the slowest pace in decades, following a nearly 400% rise over the past three decades that fueled middle class anxieties and a surge in student debt.”
“Abundant supply is running up against demand constraints. The number of two-year and four-year colleges increased 33% between 1990 and 2012 to 4,726, Education Department data show. But college enrollment is down more than 4% from a peak in 2010, partly because a healthy job market means fewer people are going back to school to learn new skills.”
“Longer-running economic and demographic shifts also are at play. Lower birthrates and the aging of baby boomer children have reduced the pool of traditional college-age Americans. The number of new high-school graduates grew 18% between 2000 and 2010 but only 2% in the first seven years of this decade, Education Department data show.”
“Another factor: Congress last increased the maximum amount undergraduates could borrow from the government in 2008. Some economists have concluded schools raise prices along with increases in federal financial aid. A clampdown on aid, in turn, could limit the ability of schools to charge more.”
“But other factors could keep cost pressures rising. George Pernsteiner, head of State Higher Education Executive Officers, a trade group that tracks state funding for schools, notes that many states are on track to experience budget crunches as the population ages and health-care and public pension costs rise. That could squeeze public support for schools.”

Real Estate

WSJ – Americans Pour Record Sums Into Home Improvements – Laura Kusisto and Sarah Chaney 7/25

“A shortage of new single-family homes across the U.S. is pushing up prices and locking many buyers out of the market. The silver lining: a boom in renovations of existing homes.”
“Americans are expected to pour a record $316 billion into home remodeling this year, up from $296 billion a year earlier, according to Harvard University’s Joint Center for Housing Studies.”

FT – Funds hunt for cracks in most-prized US shopping malls – Miles Johnson 7/21

“A defining feature of the financial crisis was a group of hedge funds making vast sums by wagering against supposedly AAA-rated mortgage debt well before markets imploded in 2008.”
“Now some believe a similar story will play out for US shopping malls — that the most risky investments will end up being those that investors now believe to be the safest. Central to their premise is the idea that too much faith may be being placed in a classification system used for shopping malls that is little known outside of the real estate sector.”
“Malls are given ratings by a small group of property consultants generally ranging from A++ to C based on factors that include their sales per square foot and location. While there is no universally accepted system for ranking the malls, with each consultant having slightly different methodologies, banks and investors tend to rely on these ratings to make decisions over how secure each mall is as a creditor or investment.”
“The stock market has until recently appeared to believe that prime ‘A’ malls are largely insulated from the pain being felt across a US retail sector being shaken by e-commerce.”
“Yet there is growing evidence to suggest that these prime malls, which have been treated by investors and lenders alike as rock solid bets in the face of the internet headwinds, are not as protected as once thought.”
“The hedge funds wagering against the highest quality malls believe that the wider market will come to believe these A-quality malls are far more similar to lesser ranked ones. ‘This idea that there are these magic malls in America that are immune to secular change is a myth,’ the US-based hedge fund manager says.”
“Some argue that the market underappreciates that A class mall operators and B and C class mall operators all have very similar tenant bases, in spite of being in different locations.”

Energy

BloombergGadlfy – Venezuela’s Perfect Storm for Oil May Be About to Break – Liam Denning 7/21

“We may be about to see the first sovereign producer to unequivocally fail.”
“The oil producer in question is Venezuela, and that assessment comes courtesy of Helima Croft, who is global head of commodity strategy at RBC Capital Markets and formerly worked with both the Council on Foreign Relations and the CIA.”
“But things are building to a head, partly due to the relentless logic of the bond market and partly due to the more proprietary logic of U.S. foreign policy.”
“Venezuelan bonds, which haven’t looked rock-solid for a few years, crashed this week as embattled President Nicola Maduro renewed calls to rewrite the country’s constitution, which would effectively disenfranchise the millions of Venezuelans who oppose him and entrench his regime. The U.S. has warned it may impose much tougher sanctions if Maduro goes ahead with his plan.”
“Venezuela’s economy is in free-fall: By the end of this year, it will have shrunk by 32% compared to where it was at the end of 2013, according to International Monetary Fund forecasts. Also by the end of this year, the government is on the hook to pay back more than $5 billion in debt — including bonds owed by the state-owned oil champion, Petróleos de Venezuela, S.A., or PdVSA — plus billions more in interest. As of this week, Venezuela’s international reserves stood at less than $10 billion.”
“Meanwhile, mismanagement, a lack of investment and re-nationalization of foreign oil companies’ interests have caused Venezuela’s oil production to slump from around 3.3 million barrels a day a decade ago to about 2 million now. Even allowing for the fact that domestic consumption has dwindled along with GDP, Venezuela’s surplus of oil available for earning export dollars has shrunk considerably.”
“Compounding this is the fact that the country must devote a lot of its output to paying off loans from China and Russia, further reducing the actual amount it can use to generate cash. Francisco Monaldi, a fellow in Latin American energy policy at Rice University’s Baker Institute for Public Policy, estimates that could be as little as 800,000 barrels a day.”
“For three years, oil watchers have been waiting for a chaotic wave of bankruptcies in places like Texas and North Dakota to jolt the market. They’ve been looking in the wrong place.”

FT – Coal has no future, says US railroad boss – Gregory Meyer 7/19

“One of the largest haulers of US coal says fossil fuels have no future, despite pledges to the contrary from President Donald Trump.”
“CSX, a freight railroad company with origins in the bituminous coal seams of Appalachia, will not buy a single new locomotive to pull coal trains, chief executive Hunter Harrison told analysts on Wednesday.”
“’Fossil fuels are dead,’ Mr Harrison said. ‘That’s a long-term view. It’s not going to happen overnight. It’s not going to be in two or three years. But it’s going away, in my view.’”
“North American railroads have reshaped their asset holdings in acknowledgment that coal’s apex has passed.”
“Lance Fritz, chief executive of the Union Pacific railroad, said in a recent interview that Mr Trump’s move to scrap Clean Power Plan regulations was unlikely to grow its coal business. ‘It takes away a headwind,’ he said.”

Tech

NYT – Silicon Valley Giants Confront New Walls in China – Paul Mozur and Carolyn Zhang 7/22

“It’s basically like someone who has been training for Olympic taekwondo going up against a street fighter. The Olympic fighter is waiting for the whistle, and the street fighter already has him on the ground hitting him with elbows. There’s no rules.” – Andy Tian, co-founder of Asia Innovations Group and former general manager of Zynga China

FT – Uber, Amazon and Microsoft braced for accounting shake-up – Leslie Hook and Richard Waters 7/19

“Uber’s reported revenues are being cut in half and sales at Amazon and Microsoft could be higher than previously stated — all thanks to a forthcoming change to accounting rules.”
“An update to generally accepted accounting principles (GAAP) for US companies is turning out to have particularly large consequences in parts of the tech industry, which is having to overhaul the way it reports revenues and costs.”
“One of the more dramatic impacts will affect car-booking services such as Uber, a private company whose GAAP revenue drops by more than half when it adopts the new standard, which it plans to do this year.”
“Uber’s first-quarter revenue this year was $3.4bn under old GAAP accounting, but it says that under the new rules its revenue would have been just $1.5bn for the same period. Uber has already started sharing the lower figure with investors.”
“Under the old standard, car-booking services such as Uber and Lyft counted their commissions from regular rides, plus the entire fare of carpool rides, as revenue. Under the new standard, only the commissions from both regular and carpool rides will count as revenue.”
“The shift is due to changes to the ‘principal versus agent’ rules that determine when a company is acting as a principal and when it is acting as an agent. The car-booking services were previously considered the ‘principal’ for carpooled rides. As private companies, they must adopt the new standard by the beginning of 2019, although Uber has moved to do so much earlier.”
“The new standard, known as Revenue from Contracts with Customers, is designed to narrow the distance between US GAAP rules and International Financial Reporting Standards (IFRS).”

Agriculture

WSJ – Daily Shot: CBOT Soft Red Winter Wheat Futures 7/24

“The recent wheat rally has been almost entirely reversed.”

Asia – excluding China and Japan

FT – Jailed Duterte foe prepares for long haul – Michael Peel 7/20

“Philippine Senator Leila de Lima, 57, was arrested at her senate office in February on charges that she received payoffs from jailed drug lords. She has branded the allegations ‘simply surreal’ and said they were part of a ‘personal vendetta’ by a president who is ‘rather obsessed with me’.”
“Ms. de Lima has certainly earned implacable enmity from Mr. Duterte for her efforts to probe his bloody drugs wars first as a provincial mayor and now as president. She maintains her innocence but also accepts her stay in jail could be a long one. The same day she marks five months in detention next week, Mr. Duterte will give an annual state of the nation speech against a background of soaring approval ratings.”
“I think as long as Duterte is president (5 more years), I will be locked up in jail,” Ms. de Lima says. “I have no false hopes about achieving justice very soon.”

China

NYT – In China, Herd of ‘Gray Rhinos’ Threatens Economy – Keith Bradsher and Sui-Lee Wee 7/23

“Let the West worry about so-called black swans, rare and unexpected events that can upset financial markets. China is more concerned about ‘gray rhinos’ — large and visible problems in the economy that are ignored until they start moving fast.”
“The rhinos are a herd of Chinese tycoons who have used a combination of political connections and raw ambition to create sprawling global conglomerates. Companies like Anbang Insurance Group, Fosun International, HNA Group and Dalian Wanda Group have feasted on cheap debt provided by state banks, spending lavishly to build their empires.”
“Such players are now so big, so complex, so indebted and so enmeshed in the economy that the Chinese government is abruptly bringing them to heel. President Xi Jinping recently warned that financial stability is crucial to national security, while the official newspaper of the Communist Party pointed to the dangers of a ‘gray rhinoceros,’ without naming specific companies.”

FT – China’s LeEco appoints new chairman from Sunac – Emily Feng 7/21

Sunac continues to be busy. In addition to its property acquisitions from Dalian Wanda, Sunac’s chairman – Sun Hongbin, is adding a new chairmanship to his belt, that of the struggling Chinese tech company, LeEco.

WSJ – The Saga Isn’t Over for Dalian Wanda – Jacky Wong 7/20

NYT – At the Finish, Dalian Wanda of China Rewrites a Blockbuster Sale – Sui-Lee Wee and Zhang Tiantian 7/19

“Dalian Wanda Group, the Chinese conglomerate, tore up a $9.3 billion agreement to sell a portfolio of hotels and theme parks, unexpectedly reaching new deals on the properties that highlighted uncertainty over the financial health of the country’s biggest companies.”
“Wanda had reached an overall agreement with the property firm Sunac China Holdings last week, but Wanda announced at a signing ceremony on Wednesday that it was backtracking and would instead sell just the theme parks to Sunac. The hotels will instead be sold to R&F Properties, based in the southern Chinese city of Guangzhou.”
“The hasty reorganization of the deals has raised concern about the due diligence conducted by many of China’s first-generation dealmakers as they seek to become bigger players domestically and around the world.”
“The signing was dominated by the announcement that Sunac would pay $6.5 billion for a 91% stake in Wanda’s 13 theme parks across China, while R&F Properties would buy 77 hotels from Wanda for $3 billion. In a sign of the wildly fluctuating valuations of assets, however, Wanda had said last week that it was selling Sunac only 76 hotels, but that they were worth $5 billion.”

South America

WSJ – Daily Shot: Venezuelaecon.com – Venezuelan Bolivar Black Market Exchange Rate 7/25

Turkey

NYT – Turkey Sees Foes at Work in Gold Mines, Cafes and ‘Smurf Village’ – David Segal 7/22

“Since then (after the failed attempt to overthrow the government of President Recep Tayyip Erdogan on July 15, 2016), more than 950 companies have been expropriated, all of them purportedly linked to Fethullah Gulen, the Muslim cleric who Turkish leaders say masterminded the putsch.”
“About $11 billion worth of corporate assets — from small baklava chains to large publicly traded conglomerates — have been grabbed by the government, a systematic taking with few precedents in modern economic history. Several thousand dispossessed executives have fled overseas to cities as far-flung as Nashville and Helsinki. The less fortunate were imprisoned, part of a mass incarceration campaign that has included purged members of the military, judiciary, police and news media, adding 50,000 new inmates to the prisons.”

March 10, 2017March 9, 2017

March 3 – March 9, 2017

In the UK the economy has grown but wages have declined. Does your bond index have Chinese bonds – it will soon. The Puerto Rican teacher’s pension ponzi scheme (really several US states and cities aren’t far away from a similar situation).

Headlines

WSJ – Macau Casinos Face Impending Shuffling of Decks 3/2. Two of the six casino operators will see their gambling concessions expire in 2020 and the other four in 2022. At that time expect the cost-of-doing business to increase enormously, the public tender to go to mainland Chinese companies (as opposed to foreigners), or the number of concessions to increase – either way, competition will be fierce.

NYT – Sweden Reinstates Conscription, With an Eye on Russia 3/2. Abolished in 2010, Sweden is reinstating the draft starting next year.

FT – Wealth of China’s richest 200 lawmakers tops $500bn 3/2. “According to Hurun data, the 200 richest members of the National People’s Congress and Chinese People’s Political Consultative Congress, an advisory body, have combined fortunes worth nearly Rmb3.5tn ($507bn). The wealth of the 100 richest lawmakers soared over the past four years to Rmb3tn, up from Rmb1.64tn in 2013.”

FT – US and North Korea on collision course, says China 3/7. The U.S. has sent its THAAD missile defense system to South Korea in light of increasing aggression from North Korea – despite concern from China.

Bloomberg – L.A. Voters Reject Measure AIDS Group Backed, Developers Opposed 3/8. LA voters rejected ballot Measure S that sought to put a two-year moratorium on development in LA.

Economist – The Iraqi army is on the brink of defeating Islamic State 3/8. “But the government must move fast if it is not to squander its victory.”

Bloomberg – Manhattan Rents Fall for Every Apartment Size, Even Studios 3/9. “Apartments available for rent at the end of February totaled 6,872, a jump of almost 12% from a year earlier. The number of new leases fell 28% last month to 3,634, while the median monthly rent for units of all sizes slipped 0.9% to $3,350.”

Special Reports / Opinion Pieces

NYT – How to Escape Your Political Bubble for a Clearer View – Amanda Hess 3/3
FT – A word of caution on the bond-stock decoupling – Mohamed El-Erian 3/6
- “The net impact of all this is not to doubt the validity of the view that bond and stock markets are on different wavelengths. Rather, it is to caution against making too much of the divergence at this stage, pending more detailed analysis.”
FT – Investors spy clouds on the bond market horizon – Danielle DiMartino Booth 3/6
- “What a difference a few months can make. In August 2016, the value of negative-yielding bonds reached $13.4tn as QE shifted into overdrive. Should next week’s Fed Statement nod to the possibility of shrinking the balance sheet, investors would be well advised to make sure their seat belts are fastened in the event that the brakes are slammed on the bond market’s magnificent 36-year run.”
NYT – Self-Driving Cars Can’t Cure Traffic, but Economics Can – Conor Dougherty 3/8
FT – Pope Francis’ reforms spark revolt of the hard-right – James Politi 3/7
WP – Laziness isn’t why people are poor. And iPhones aren’t why they lack health care. – Stephen Pimpare 3/8
Civil Beat – Honolulu Rail Is Too Much, Too Late – Cliff Slater and Randall Roth 3/9

Briefs

Cat Rutter Pooley and Attracta Mooney of the Financial Times highlighted that US pension funds have halved their private equity allocations.
- “Big US investors have halved their allocations to private equity this year. It is the first sign that pension funds are concerned investment returns will suffer as buyout houses struggle to deploy record levels of cash.”
- “Pension funds and other institutional investors gave $3.2bn to private equity funds in January and February compared with $8.9bn announced during the same period last year, according to data from MandateWire, the FT news service that collected the figures.”
- Why… “investors are now worried about lower returns and difficulties exiting their investment in the future, as the number of initial public offerings decreases.” Further, “there are also concerns that the private equity market has become overcrowded, with buyout companies struggling to find suitable businesses to back.”
- “According to a report from Pitchbook, the data provider, the level of cash, so-called dry powder, that private equity companies have to invest hit a record high of $754bn in 2016.”
- “More than 80% of the capital raised by private equity companies in 2015 has yet to be deployed, said Pitchbook.”
Gabriel Wildau of the Financial Times covered the milestone that China has overtaken the eurozone as the world’s biggest banking system.
- “China’s banking system has surpassed that of the eurozone to become the world’s largest by assets, a sign both of the country’s increased influence in world finance and its reliance on debt to drive growth since the global financial crisis.”
- “While China’s gross domestic product surpassed the EU’s economic bloc in 2011 at market exchange rates, its banking system did not take over the top spot until the end of 2016, Financial Times analysis shows.”
- “Chinese bank assets hit $33bn at the end of 2016, versus $31tn for the eurozone, $16tn for the US and $7tn for Japan. The value of China’s banking system is more than 3.1 times the size of the country’s annual economic output, compared with 2.8 times for the eurozone and its banks.”
- As Esward Prasad, former China head at the International Monetary Fund and an economist at Cornell University, “the massive size of China’s banking system is less a cause for celebration than a sign of an economy overly dependent on bank-financed investment, beset by inefficient resource allocation, and subject to enormous credit risks.”
Bloomberg News illustrated that capital controls have triggered a backlash amongst China’s corporate titans resulting from scrapped deals.
- “Chinese corporate chiefs are turning vocal critics of the nation’s capital controls as the pile of scrapped deals grows.”
- “The complaints reflect a tumble in foreign deals, with the $19 billion of acquisitions abroad announced by Chinese companies so far this year amounting to a 74% drop from a year ago, according to data compiled by Bloomberg.”
- “China’s leadership faces a balancing act in trying to stoke domestic companies’ influence on the international stage while avoiding the kind of bad investments that Japanese firms became famous for in the 1980s. The more immediate concern has been record outflows of capital that have only diminished in recent months after a steady tightening in oversight of and limits on cross-border transactions.”
Justin Lahart of The Wall Street Journal discussed a taxing problem for investors…
- “A corporate tax cut could provide a big boost to companies’ profits. The boost might not be quite as big, or come as soon, as investors think, though.”
- “Yes, the U.S. corporate tax rate, at 35%, is among the world’s highest. President Donald Trump and the Republican-led Congress aim to change that. Mr. Trump has proposed dropping it to 15%, while the plan that House Republicans drew up last June would lower it to 20%.”
- “So by how much would a tax cut juice corporate profits? The first thing to recognize is that few large public companies pay the statutory rate. By Goldman Sach’s reckoning, the effective tax rate for companies in the S&P 500 – which includes not just federal, but also state and local taxes – is 28%. Under the House plan, Goldman figures it would drop to 24%, boosting after-tax earnings by about 10%.”
- “That could make the stock market look significantly less rich. The S&P 500 now trades at about 18 times analysts’ expected earnings for 2016, according to FactSet. Raise earnings by 10% and that price / earnings ratio slips to a more reasonable but still expensive 16.4.”
- However, “a lower corporate tax rate also might convince some companies to reassess their use of tax havens, notes Tax Policy Center co-director Eric Toder. Any profits they direct toward the U.S. would then be subjected to a higher tax rate (20% is low, but Bermuda’s 0% is lower), raising their tax rate. Thus, the effective rate might not fall as much as advertised.”
- Bottom line, “stock prices are supposed to be a reflection of expected future earnings. If investors are expecting too much from a corporate tax cut, and expect it to come too early, then prices will have to come down.”
Ben McLannahan and Barney Jopson of the Financial Times highlighted that over the past election cycle Wall Street spent a record $2bn on US election influence.
- “Wall Street spent a record $2bn on lobbying and campaign contributions during the last US election cycle, according to a new survey, as big banks, hedge funds and other financial institutions stepped up efforts to reshape rules to their advantage.”
- “Contributions of $1.1bn in the two years ended December 2016, combined with payments to lobbyists of $898m, meant that spending by Wall Street topped $2bn, about 25% higher than the previous high in 2007-2008.”
- “The election contributions went to both presidential campaigns and congressional races, with donors sticking to the common practice of spreading their largesse across both parties.”
- “The sums do not include so-called ‘dark money,’ or support to non-profits which do not have to disclose their donors. Nor do they include spending on research or policy staff who are not registered as lobbyists.”
- “The financial sector is by far the largest source of campaign contributions to federal candidates and parties and ranks as the third-largest spender on lobbying, according to the survey [done by Americans for Financial Reform, a left-leaning coalition of consumer, labor and community groups], which was based on data collected by the Center for Responsive Politics. Insurers (excluding health insurers) were the biggest spenders during the last cycle, with $224m, followed by securities and investment ($192m) and real estate ($183m).”
- Lisa Donner, executive director of Americans for Financial Reform, “noted that there were few outright victories for Wall Street in recent years, as lobbyists sought to roll back Dodd-Frank reforms. One example was a battle in December 2014 which allowed the big banks to continue to fund derivatives trades using federally-insured deposits.”
- “But she said that much of the lobbying had succeeded in ‘slowing or weakening’ proposed reforms. Rules on curbing incentive pay, for example, have yet to see the light of day, even though such measures appear to have broad support among voters.”
- “‘That is really what the money story is about; we end up with outcomes that are not what people voted for,’ said Ms. Donner.”

Graphics

WSJ – Daily Shot: Statista – Tech IPO performance 3/2

WSJ – Daily Shot: Reliance on Undocumented Labor 3/2

WSJ – Daily Shot: Migrant Hosting and Sending Countries 3/2

WSJ – China Shifts Stance, Letting Dying Firms Go Bankrupt – Chuin-Wei Yap 3/3

WSJ – Daily Shot: Goldman Sachs – US Auto Inventory 3/5

Bloomberg – Saudi Arabia Still Bears Brunt of Oil Cuts as OPEC Output Drops – Angelina Rascouet and Julian Lee 3/2

NYT – ‘Superstar Firms’ May Have Shrunk Workers’ Share of Income – Patricia Cohen 3/8

WSJ – Americans Are Richer Than Ever, But They Don’t Feel That Way – Steven Russolillo 3/8

Featured

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

How wages fell in the UK while the economy grew. Valentina Romei. Financial Times. 2 Mar. 2017.

“Between 2007 and 2015, the UK was the only big advanced economy in which wages contracted while the economy expanded. In most other countries, including France and Germany, both the economy and wages have grown.”

“Britain’s GDP went back to pre-crisis levels in the third quarter of 2013 and it is now nearly 10% larger than in the second quarter of 2008. Yet in 2014 wages were almost 10% lower than seven years before. During the same period, salaries in France and Germany grew 7%.”

“Only the US and Canada have greater flexibility in labor market regulation than the UK, according to the OECD. Thanks to a more flexible job market, people were able to find jobs quicker than in other countries. Employment expanded by 2.4% in the six years to 2013, while in France there was no job expansion and the EU as a whole experienced job losses.”

What gives…

“After the crisis, labor supply increased, but these ‘unusual increases in labor supply’ were absorbed by the market, writes the OECD in its latest country survey. Pension reform and other policies contributed to the increase in supply with a rising number of older workers and incentives to work rather than live off benefits. Meanwhile ‘sustained inflows of well-educated immigrants have boosted the working-age population,’ says the OECD.”

“Such employment expansion coincided with the loss of labor bargaining power due to the risk of unemployment and ‘slack’ remaining higher than pre-crisis levels. Unemployment, underemployment and involuntary part-time working, for example, were far above their levels in 2008. Coupled with low and falling levels of unionization, employment growth came at the expense of a fall in real wages.”

While the economy is close to full employment, instead of tight labor conditions pushing up wages, there is enough slack and labor demand that wages are soft.

Unfortunately, “inflation is likely to squeeze real wages in the next couple of years just as it did after the crisis.” Rather than higher prices for goods and services feeding into higher profits and higher wages, productivity growth has languished, so people are dealing with lower living standards.

“Between 2007 and 2015 the UK had one of the highest inflation rates among big advanced economies, largely because of high energy prices and the depreciation of the pound. Consumer prices expanded at an annual rate of over 5% at their peak in September 2011, well above the rate of expansion of nominal earnings.”

Further “employment growth was driven largely by self-employment and part-timers, while the number of full-time jobs shrank. ‘The rapid rises in employment over the past few years have been made up by a larger than usual share of low-skilled jobs which tend to be lower paid,’ say Capital Economics.”

China’s Massive Bond Market Coming to Index Near You. Anjani Trivedi. The Wall Street Journal. 7 Mar. 2017.

“China’s bond-market dreams could finally be coming true. But global investors should tread with care.”

“Citigroup announced Tuesday that mainland Chinese bonds were eligible for inclusion in its widely followed indexes of investment-grade bonds. Once included, most passive investors could end up holding Chinese bonds in some way in their portfolios. Citi says the entry will be staggered over three months given the overall Chinese market’s $9 trillion size.”

“Index inclusion is big business – and isn’t a sleep subject. Opening the world up to China, also opens the world up to a host of risks that investors haven’t quite figured out how to price.”

“Even though Beijing is seemingly freeing up its bond markets, repatriating funds remains an issue. A recently introduced currency-hedging tool helps, but details are still fuzzy. And the risk of sudden capital controls perpetually looms.”

“For China, this could mean much needed inflows into its financial markets to counter the billions of monthly outflows. Around $2 trillion of assets under management track Citi’s World Government Bond Index. That could mean inflows of up to $120 billion if China has a 5% to 6% weight, according to Goldman Sachs. ETF’s like Tokyo-listed Listed Index Fund also track the Citi World Government Gond Index as do some BlackRock government bond funds.”

To be fair, it’s hard not to include bonds from the world’s second largest economy.

“There are fundamental issues to contend with especially the market’s lack of discernment between safe and risky bonds as reflected in narrow credit spreads. Foreign presence is unlikely to instill such discipline anytime soon.”

“Concerns around a host of trading technicalities abound…. Along with adding China to its main indexes, Citi has created two new ones that cap exposure, perhaps a hint that for many, China’s inclusion is too soon.”

“Ready or not, China’s bond market is joining an important club.”

The Chinese government, but more importantly, Chinese corporates will be able to pass on their debt risks to foreign investors and the sheer mechanics of indexes create a relatively indiscriminate buyer… the proverbial can continues to be kicked down the road.

In Puerto Rico, Teachers’ Pension Fund Works Like a Ponzi Scheme. Mary Williams Walsh. The New York Times. 8 Mar. 2017.

“Puerto Rico, where the money to pay teachers’ pensions is expected to run out next year, has become a particularly extreme example of a problem facing states including Illinois, New Jersey and Pennsylvania: As teachers’ pension costs keep rising, young teachers are being squeezed – sometimes hard. One study found that more than three-fourths of all American teachers hired at age 25 will end up paying more into pension plans than they ever get back.”

“‘I think they’re really being taken advantage of,’ said Richard W. Johnson of the Urban Institute, a co-author of the research. ‘What’s so tragic about this is, often the new hires aren’t aware that they’re getting such a bad deal.'”

“The problem is magnified by the fact that the Puerto Rico teachers union – like many teachers and police unions around the country – opted out of Social Security long ago, hoping it could save both workers and the government money by not paying Social Security taxes.”

Conceptually, “pension funds are supposed to be giant, largely self-sustaining pools of money, contributed by taxpayers and often workers, that earn investment income. Over time, the money is supposed to grow enough to pay retirees. Knowing this, teachers might reasonably expect to get a pension worth more than what they invested.”

However, in Puerto Rico “the pension funds are so short of cash that money contributed by working teachers basically flows straight out to retirees. None of Puerto Rico’s current teachers can expect to get their money back, because the fund is due to run out of money in 2018, long before they retire.”

“That is, essentially, a Ponzi scheme. But this structure is legal in Puerto Rico because of a complicated series of changes in the law brought about in recent years by the island’s financial crisis.”

Back to pension programs in general, “benefits are typically backloaded. This means that teachers build up their benefits very slowly in their early years – even as they make big contributions – then speed up in middle age and earn the biggest part just before they retire.”

“But because of high turnover and other factors, relatively few teachers reach the sweet spot where they earn a pension larger than their contributions. Most change jobs or move away first, leaving behind money that subsidizes the pensions of the relative few who teach for decades.”

Regardless, pension stress resulting from largess promised in good times and a lower investment return world have led to major cuts to younger teachers in the system. “In Illinois, for example, Mr. Johnson of the Urban Institute found that a teacher hired at age 25 who worked for 35 years could earn a pension worth $1.3 million – as long as that teacher had been hired before 2011. If hired after 2011, the same teacher would earn a pension worth only $609,000, even though both groups contribute 8.4% of every paycheck.”

“‘Overall, 84% of all newly hired teachers lose money’ in Illinois, Mr. Johnson said.”

Further, eight states (Delaware, Hawaii, Illinois, Maryland, New York, North Carolina, Pennsylvania, and West Virginia) recently doubled their vesting periods (“the time a teacher must work before vesting, or earning a nonforfeitable right to a pension”) to 10 years. “That is more than three times the maximum allowed for companies.” On top of that, “three of every 10 new teachers will quit in five years or less.” Basically free money for these pension programs.

“Martin F. Lueken of EdChoice, formerly the Friedman Foundation for Educational Choice, looked at the largest school districts in each state and found three where, because of cost-cutting, newer teachers might work their whole careers without ever earning a pension worth the value of their contributions: Boston, Chicago and the northern suburbs of Minneapolis.”