The Market Ticker
Commentary on The Capital Markets
2016-12-09 11:32 by Karl Denninger
in Market Musings , 413 references
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Oh, you wish to extend maturities eh?  You think it would be a good idea to issue some 50 or 100 year bonds, you say?

May I politely inquire where you will get the funds to service those, particularly given the relatively-short duration on the existing Treasury portfolio, since it appears you intend to roll duration out longer and this will, uh, "slightly" impact your coupon payment requirements....

PS: Price tends to fall when supply goes up (more of something tends to make it cheaper...)

PPS: Last fiscal year interest was $241,000,000,000.  Public debt was $14,173,423,516,895.82, so the blended average coupon was ~1.7%.  Note that the current coupon on 10 year paper is materially higher than that....

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The election is over, and the naming of most of Trump's cabinet is as well.  Among the most-important to you as a US Citizen are:

  • Mnuchin, Treasury.  Not only is a former squid (Goldman Sachs) he was responsible for "rescuing" IndyMac after it blew up and in the process of "rescuing" it siphoned off about a billion of FDIC funds for himself and his private equity buddies while foreclosing on thousands of homeowners, most in California, and many under dubious circumstances (e.g. by refusing to participate in modification programs or obfuscating response so as to cause people to miss deadlines.)  I grant you that a huge percentage of those who got foreclosed on were not blameless and many in fact were chasing the impossible -- and thus deserved what happened.  Nonetheless Mnuchin is not an outsider and has drained taxpayer funds for his own benefit.

  • Price, HHS.  Price has a long record of how he "sees" health care reform (read: removal of Obamacare.)  Obamacare must go away but what Price wants to do, including block granting Medicaid, will not only fail to stop the destruction of the health care system and the federal budget it will accelerate it.  For all the horrors of Obamacare (and there are many) there have been winners -- Obama bought two years of very slow expense growth in Medicare and Medicaid with it (out of a 30 year trend!), which is not enough to matter but it is what it is.  It also provided a lot of people with health care they wouldn't have otherwise gotten, albeit through slight of hand and destruction of the tax base (the subsidies are likely why tax growth last year was 0.5%, by the way.)  Price's ideas on this matter are essentially indistinguishable from Paul Ryan's, and I've critiqued both in the past.

  • Ross, Commerce.  Wilbur Ross is one of the few with a reasonable mind in my opinion.  He is an advocate for tariffs and getting rid of bad trade deals.  This is good.  What I haven't heard, however, is the phrase "wage and environmental parity tariffs."  But Wilbur might come to see this, as his mind is open to the idea. 

  • Betsy DeVos, Education. Betsy DeVos is a board member of an organization that was strongly for common core despite the screams from supporters of her nomination otherwise.  She has a long history in Michigan that is exactly the opposite of how supporters are painting her.  In short if you have kids in school you're really ****ed with her running Education -- don't believe the BeeEss coming from people on this one.  I'm cooking up extra crow for those of you who like this pick and expect to serve it to you moldy, cold and well-done within a year.

  • Sessions, Attorney General.  Good on immigration and getting rid of the illegal invaders and "common" criminal behavior, bad everywhere else.  Most-specifically there is zero indication that he will go after anyone when it comes to monopolies and restraint of trade issues, and prosecution of these matters rests in the AG's office.  There are plenty of people who could have been worse, but given that the AG's office is critical to actually solving the key problems we face as a nation I'm not a big fan.

There are many others but these are the ones that will either screw you or help you.

There is only one bright light -- trade and illegal immigration.  The rest, however, is terrifyingly bad.  Let me remind you that if we do not destroy medical monopolist practices throughout the industry immediately we are screwed, and we have less than one year to do it before Congress starts running for re-election again.

Folks, despite many people holding out hope I simply do not believe it's going to happen.  Look at this article from Politico where they say that the GOP is now contemplating "delaying" Obamacare's replacement.  There is no time to delay because the fiscal impact from Medicare and Medicaid either has to be reversed -- not just halted -- right now or it will detonate the federal budget at some point before 2020.

Now maybe I'm wrong on this, but if I am we'll know very, very soon -- within weeks.  But unless I'm wrong the math and outcome it will produce is crystal-clear.

Therefore you have somewhere between three and five years before it all goes to hell.  Trump might buy a year or two with various changes to Health Care, such as block-granting Medicaid.  If he does that, by the way, the result will be a couple of million people who die first, then it will go to Hell.  Vouchers for Medicare will destroy the system entirely, but before they do they will kill millions more who are dependent on continual medical care, all Seniors.

You must, at this point, expect that high-cost medical services and drugs will disappear entirely for other than those who can afford to pay for them directly within the next three to five years and will start doing so in as little as one year.  If you need these services and/or drugs and cannot travel to obtain them (e.g. medical tourism) you're not going to get them and for a very large percentage of people who currently require them this means you will die.

It's also possible that the "core breach" accelerates -- in other words, three years might be optimistic.  Markets are like that -- they anticipate outcomes but exactly when that anticipation enters public consciousness is almost impossible to time in advance.  There is no way to know exactly when things will blow, but this much is certain: $600 billion in additional debt per year from Medicare and Medicaid alone before Trump finishes his first term will not be able to be financed and that is where we will be in FY2020 (that is, 9/30/2020.)  In short those two programs will go from $1.4 trillion this last fiscal year to $2.0 trillion in 2020, which is almost exactly a clean $600 billion a year increase.  I remind you that those who say it won't happen have 30 years of history to try to argue against because that ~9% rate of increase is what has been happening, and Obama bought exactly two years of reprieve with the ACA after which the previous rate of change resumed unaltered.

It would only get worse from there if not stopped but that won't happen because the federal budget and financing capacity will all go to Hell first, as will our way of life.  "Hell" means the destruction of pension funds and their payments, destruction of virtually all forms of welfare and destruction of your ability to obtain and afford any sort of organized medical care of any sort in the United States without extreme waits (months to years in some cases) or even worse, no availability at all.

Despite my repeated noting of this along with a few others exactly no public alarm has been raised and there has been no pointed or cohesive push-back that has developed in the American people.  We the people have the ability to demand this process stop through either a general strike or other lawful and peaceful acts but have refused because doing so means taking more than 10 minutes out of our lives and pulling our damned noses out of a flickering high-def screen playing "OITNB."  We've squandered the entire period I've been writing about this on The Market Ticker and time's now up -- it is no longer rational to think any such cohesive action will ever take place nor that any material percentage of the public will ever give a damn and decide to act via lawful and effective means to put a stop to this crap.

Therefore there is only one rational set of actions you can take:

  • If you are currently dependent on the medical system you must eliminate that requirement.  This risk is why, to a large degree, I undertook the changes in my personal life that I did back in 2011 -- I saw this coming and no intention among anyone in the government to do anything positive about fixing it.  When I undertook those steps in 2011 I had not yet developed any sort of medical ailment that required routine care or drugs but the path that I was on, as most Americans are on, was crystal clear and absent change in my lifestyle the odds of that outcome were extremely high.  I have repeatedly warned in these pages that being dependent on the medical system in this country means you are at high risk of a very nasty death.  You're nearly out of time to make the changes in your lifestyle that will free you from medical dependency if that is still an option for you given your present physical condition.  If you cannot do so because of a condition that is both chronic and irreversible irrespective of lifestyle change then make your peace with God (if you believe in him), determine if you're afraid of consequences in the afterlife (if you believe in one) and then figure out how you're going to spend whatever time you have left.

  • You must expect the government will attempt to compensate for these events.  No, they won't just roll over in Washington DC -- government never does.  This will lead to increasingly-extreme outcomes of all types -- legislative, law enforcement and otherwise, and it will also lead to increasingly-extreme "responses" by the disaffected.  Living in parts of the country where these stresses are concentrated, which includes any big city and most medium and smaller-sized ones -- basically anywhere with a large percentage of the population is reliant on government handouts -- is a horrifyingly bad idea.  While I fully expect Trump to attempt to get passed something like US-wide concealed carry and that will help to a degree the fact remains that one against six is a losing position and armed thugs do not care about the law. Desperate thugs not only do not care about the law they are ridiculously dangerous with or without guns.  In short, while the market is still decent for real estate and interest rates still reasonably low get out of such places and figure out how to reduce your needs whether by changing where you live, what you need to consume to live or how you live.  It is entirely possible to do reasonably well on an income small enough to be below where you will get monkey-hammered provided you do not have a continuing need for medical attention and you choose to live somewhere away from the crapstorm.  There is still time to make that change but if I'm right deterioration in the markets will make this increasingly difficult to pull off while preserving whatever you have now, especially if any of it is illiquid (e.g. in housing), which means you need to start planning and acting now.  The next 12-18 months are likely the outside edge of your window to execute on that, if you're going to.

  • Do not think for a moment you can find some sort of "investment profile" that will shield yourself from all of this.  For the last eight+ years that's been the #1 question that I get asked whether on the radio or when speaking in-person and my response has remained the same: The solutions to this problem are political and attempting to shield yourself personally is like trying to take shelter during an incoming hurricane or wildfire when there is no subsequent help arriving -- you may succeed in not dying immediately but that does you little good when everything around you has been laid waste.  Governments have a very long and successful history of preventing people from successfully executing on such plans; those who bought gold, for example, into the crash of the Depression were able to keep it (so long as they did so on the down low) but couldn't exchange it for anything useful for 40 years.  At the point the horizon of your actions exceeds your life expectancy you've wasted your effort.

In short you had better prepare for some ugly times ahead as they are now visible well inside the horizon and the storm is incoming at a speed that exceeds your ability to outrun it.

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2016-11-29 07:41 by Karl Denninger
in Editorial , 560 references
[Comments enabled]  

Price (Trump's pick for HHS, which I remind you oversees Medicare and Medicaid) has given zero indication that he has any intention of reforming any of the monopolist practices in the health care industry.

Price insisted that Republicans can keep the protections for those with existing medical conditions without mandating that all individuals carry coverage or pay a penalty to support an expanded insurance pool. Price said Republicans want to address "the real cost drivers" of health care price spikes, which he said were not necessarily sicker patients, but a heavy regulatory burden, taxes and lawsuits against medical professionals.

Not one word about monopolist pricing structures.  Not one word about CON laws.  Not one word about drugs that are 10, 20 or even 100x as expensive here as in other OECD nations and laws banning the arbitrage of those prices which would instantly collapse said price structure.  Not one word about a system that has expanded "administrators" at 5x the rate of care-givers, all of whom you pay for.  Not one word about a so-called "insurance" system that demands you pay continuing deductible amounts after the insured event happens should a calendar boundary be crossed, which is an out-and-out fraud.  Not one word about a refusal to post prices and presenting you with a document demanding that you accept any bill for anything done, with no cap and no binding estimate.  Not one word about charging different prices after the fact based on how you pay rather than what is done, which is not only improper it quite-arguably is felonious on its face as it constitutes a kickback (which are in many cases illegal and in all cases are taxable yet are not reported as such nor are the taxes paid.) Not one word about forcing you pay to correct errors made by the physician or, even worse, to treat infections and diseases contracted as a result of being in said hospital and inadequate sanitation.

Yes, lawsuits add cost. If you got rid of all of them you'd cut cost by.... a single-digit percentage. But, not all medically-related lawsuits are baseless or harmful; some are both reasonable and necessary. In other words while the issue of lawsuit abuse is real it's worthless and would do exactly nothing in terms of actually addressing the problem of medical cost -- and Price knows this.

Look to the right, click the topic entitled The CERTAIN Destruction of our Nation, and read it.

Then go get a drink.

Or three.

Or **** it, just drink the whole bottle.

The good news is that if you have no need for health care because several years ago when I started raising hell about this and writing about how you can change outcomes, and you did it, the "mandate" will almost-certainly disappear and you can stick up the middle finger and spend zero - for real.

The bad news is that if you do need health care you're going to be bankrupted, dead, or both unless you can manage to employ medical tourism. But for any given situation that might work and.... it might not.  If this becomes a matter of a chronic condition rather than something that is acute, and especially if it takes you out of the job market then you're flat-out hosed.

You might also want to contemplate, if the bad happens to you personally and you discover that your hourglass will run dry absent that which you can't afford or obtain whether you are afraid of consequences in an afterlife or not.

I'll leave the rest up to you to think about on your own because the fact is that as a nation it appears we are truly and completely ****ed.  Enjoy the next couple of years as we're now odds-on that they'll be the last good ones.

That's math, not politics.

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2016-11-28 00:00 by Karl Denninger
in Musings , 681 references
[Comments enabled]  

So Bernie Sanders wants Trump to use defense contracts as a cudgel to force Carrier to keep its air conditioner assembly jobs in the United States?

"I call on Mr. Trump to make it clear to the CEO of United Technologies that if his firm wants to receive another defense contract from the taxpayers of this country, it must not move these plants to Mexico," the senator from Vermont said in a statement.

Why doesn't Sanders (or Trump for that matter) talk about what's really going on here?

The media has, accidentally.  They have pointed out that the cost of assembling air conditioners -- that is, manufacturing labor -- in Mexico is about $3/hour.  Incidentally it's probably not much more for assembling cars.

There are two options folks:

1. Make it uneconomic for companies to take such an action by causing the cost of labor there to reach effective parity with the cost herein which case the offshoring of labor will disappear


2. Accept a $3/hour wage here in America as the labor rate to assemble air conditioners in Indiana.

The logic and math on this is pretty simple; if a company can have labor performed for $3/hour they will not pay $20/hour.  Nobody in their right mind will.  The problem is that you can always find a third-world ****hole where the rate of labor is $3/hour or less.

As such you either drag your wage rate down to that price or you make it uneconomic for companies to do this sort of thing.

The same is true for environmental laws.  It costs money to not dump your toxic waste into the water, air or on the land.  If you can place your factory in a location where such dumping is not illegal and does not lead you to go to prison then you will do so and thus the "cost" of producing that good or service appears to fall.

It did not, however, actually go down.  Instead the producer shifted the cost onto the people who live there in that environment without their consent.

The answer to both problems is, as I pointed out in Leverage,  to impose wage and environmental parity tariffs in an across-the-board fashion.  If the cost of labor in the United States is $20/hour and in Mexico it is $3/hour for comparable work then determine how many man-hours go into assembling an air conditioner, multiply by $17 and that's the tariff on said air conditioner.

If companies are in fact moving factories because it's "better" for their global supply chain or somesuch (which is the usual excuse) then this will not change their decision.  They will still put the factory there and pay the tariff, since it will not disadvantage them.

However, if the real reason is that they're exploiting the $3/hour wage then the factory will either not leave at all or will come back to the United States.

Do the same for environmental parity -- if the ability to pollute in location "A" .vs. not being able to pollute in the United States provides a "savings" of $100 million a year and the factory produces 1 million things in a year then the per-item tariff is $100.

This can easily be applied to steel, cars, computer chips -- or anything else.  Determining the value of such despoiling of the environment is not very difficult, since we know what it costs to prevent it here in the United States -- and we also know what sort of******of the land, air and water takes place "over there" on a top-to-bottom basis, including the production of energy (e.g. coal-fired power plants without scrubbers.)

Will Trump do this?  Probably not as I don't believe he really means a damn thing he said about it on the campaign trail, but he damn well should.

The usual argument is that if we do this then manufacturers will choose instead to build using robots.  Fine, let them.  That doesn't change a thing in terms of the calculations nor the business decision.  The environmental side still applies and if the assembly happens here but with robots then someone still has to build and maintain the robots and we'd prefer that to happen here, right?  Never mind that the labor rate to build the robots also goes into a wage parity tariff computation should a manufacturer choose to build "over there" with said robots!

In short the usual argument from various advocates of "offshoring" is that these choices are all about global supply chain management, not labor and environmental arbitrage.

I believe those claims are lies; the real choice is over 90% cost of labor reductions and billions of dollars of imputed costs to the people of a given region imposed by pollution that we do not allow here in the United States.

But the truth of my beliefs, or of the claims made by advocates of offshoring, is easily tested -- impose the tariffs and see what happens.  If the jobs keep leaving then I'm wrong but we still get the tax revenue from the tariffs and thus we can offset the social benefit costs of our lower-skill workers increasingly being left unemployed.

But if I'm right then the jobs come right back here -- we don't get the tariff revenue but we also don't need it for said social programs since instead of welfare we'll have jobs and people will be working for a living.

It's a win-win -- well, except for those in the business sector who are financially and environmentally raping people.

So what will it be, Mr. Trump?

Or, if you prefer and somewhat more to the point: What will you allow, America?

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The lieberal left is all over the news today since Castro has died.

Let's cut the crap, eh?

Mourn for a man who murdered on a mass-basis, including by firing squad?  **** that.

"Respect" a man who had zero compunction about shooting his political opponents?  Only his guns can be respected by anyone with an ounce of common sense, and since he's now dead and can't use them anymore, **** that again.

But let's have some cognitive dissonance along with our "news" today eh?  How about Saudi Arabia?  They stone you to death for any act of sodomy (as long as one of the participants is either Muslim or married) and have imprisoned, flogged and sentenced people to death for "apostasy."

Is this any better than Castro?  NO.

How about Qatar?  Any extramarital sex there if you're Muslim is good for the death penalty.

Oh there's more nations like that too, but those are a couple with which we actually maintain some sort of "relationship."  In the case of the former we also sell them a lot of weapons and buy a lot of their oil, never mind giving them carte blanche to engage in felony criminal conduct (15 USC Ch. 1 vis-a-vis OPEC) by specific exemption passed into law in the 1970s.

So before you simply blast the left (which they deserve) let's make sure we also blast the political right for their refusal to apply the same standards to a couple of nice little nations over in the Middle East.

As for Castro may he be eaten by snakes and burn in Hell, and I don't much care which comes first either.

PS: This applies to Trump too -- unless, of course, he keeps his promise on banning Saudi Oil imports and cuts them off militarily, along with telling Qatar to **** off.  I'll believe it when I see it.

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