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Wednesday 03.22.2017

Is the Dallas Police and Fire Pension Crisis the Canary in a National Coal Mine?

If you follow Dallas politics at all, the scope and scale of the impending Dallas Police and Fire Pension Crisis has probably sunk in by now. Even if you don’t quite grasp the finer details of the problem and the various plans to fix it, it is easy to see that the pension situation threatens to leave Dallas in a very precarious financial position.

This city is already struggling to keep its streets from degrading even further than they already are, and has a huge inventory of general maintenance and repair needs, plenty of underfunded or mismanaged departments, and a litany of other problems and issues. Thanks to the pension, Dallas could find itself in an even deeper financial hole if it is on the hook for contributing 34.5% of computation pay plus $11 million per year towards the pension, which is what State Rep. Dan Flynn’s remedy for the crises proposes.

The word “bankruptcy” has been floated around. But even if it doesn’t come to that, a severe tightening of the municipal belt buckle could impact even the basic services we take for granted. That’s the scary news for Dallas. Perhaps what’s scarier is that Dallas isn’t alone.

Across the United States, municipalities and states are struggling with similar unfunded liability crises regarding pensions and civil service retirement packages. For example, Los Angeles is facing $15 billion in debt for its public safety, water, power workers, and general employees pension. In South Carolina, a state plan that serves one in nine South Carolina residents is looking at a $24.1 billion shortfall. Philadelphia woke up last year to the fact that its municipal pension was $5.7 billion in the red. The state of Oregon’s pension is underfunded by $22 billion. Late last year, the Laura and John Arnold Foundation published a report that looked at the Dallas Police and Fire Pension Crisis in light of the situation in other Texas cities. The report found that Texas municipalities owe $18 billion in pension debt. All told, by some estimates, state and local governments in the United States are looking at a cumulative total of over $5 trillion in unfunded pension liabilities.

Is this the Sound of the Bottom Falling Out of the Auto Industry?

Let’s hope that the problems piling up in the used vehicle market — and their impact on new vehicle sales, automakers, $1.1 trillion in auto loans, and auto lenders — is just a blip, something caused by what has been getting blamed by just about everyone now: the delayed tax refunds.

In its March report, the National Association of Auto Dealers (NADA) reported an anomaly: dropping used vehicle prices in February, which occurred only for the second time in the past 20 years. It was a big one: Its Used Car Guide’s seasonally adjusted used vehicle price index plunged 3.8% from January, “by far the worst recorded for any month since November 2008 as the result of a recession-related 5.6% tumble.”

The index has now dropped eight months in a row and hit the lowest level since September 2010. The index is down 8% year over year, and down 13% from its peak in 2014.

The price decline spanned all segments, but it hit the two ends of the spectrum — subcompact cars and the luxury end — particularly hard.

Americans Are Dying With an Average of $62K of Debt

You’re probably going to die with some debt to your name. Most people do. In fact, 73% of consumers had outstanding debt when they were reported as dead, according to December 2016 data provided to Credit.com by credit bureau Experian. Those consumers carried an average total balance of $61,554, including mortgage debt. Without home loans, the average balance was $12,875.

The data is based on Experian’s FileOne database, which includes 220 million consumers. (There are about 242 million adults in the U.S., according to 2015 estimates from the Census Bureau.) To determine the average debt people have when they die, Experian looked at consumers who, as of October 2016, were not deceased, but then showed as deceased as of December 2016. Among the 73% of consumers who had debt when they died, about 68% had credit card balances. The next most common kind of debt was mortgage debt (37%), followed by auto loans (25%), personal loans (12%) and student loans (6%).

These were the average unpaid balances: credit cards, $4,531; auto loans, $17,111; personal loans, $14,793; and student loans, $25,391. That’s a lot of debt, and it doesn’t just disappear when someone dies.

For the most part, your debt dies with you, but that doesn’t mean it won’t affect the people you leave behind. “Debt belongs to the deceased person or that person’s estate,” said Darra L. Rayndon, an estate planning attorney with Clark Hill in Scottsdale, Arizona. If someone has enough assets to cover their debts, the creditors get paid, and beneficiaries receive whatever remains. But if there aren’t enough assets to satisfy debts, creditors lose out (they may get some, but not all, of what they’re owed). Family members do not then become responsible for the debt, as some people worry they might.

Road to Investing Success Paved With Gold, Not Oil? Bloomberg Intelligence

Retailers Closing the Most Stores

This March, for the second time in just over two years, RadioShack filed for Chapter 11 bankruptcy protection. In the wake of the announcement, the company has already made plans to close more than 500 stores nationwide. It has yet to announce what it would do with its remaining 1,000 locations. During the 2015 bankruptcy, about 2,000 RadioShack stores closed.

RadioShack’s bankruptcy announcement is the latest in what has been a disastrous year for retailers. Many of the nation’s largest retailers have closed or are in the process of shutting down operations. These retailers are shuttering a varying number of locations. Including the RadioShack announcement, just a few of the major retailers alone that are going bankrupt or restructuring plan on closing well over 2,500 stores nationwide, often at some of the biggest malls in the country.

American Apparel, The Limited, and others have declared bankruptcy and will be gone by the end of the year. Big names such as Kmart, Macy’s, J.C. Penney, and others will each close dozens of stores as they attempt to respond to the changing shopping habits of Americans, who more and more consumers choose to shop online. These are the 18 retailers closing the most stores in 2017.

Many of the companies on this list have long fought an uphill battle — and many would say a losing one — against surging e-commerce companies such as Amazon. Amazon’s revenue reached $136 billion in fiscal 2016, about nine times its revenue a decade ago. It is now, according to the National Retail Federation, the eighth-largest U.S. retailer based on annual sales.

New World Bank chief stumps for global trade

The World Bank’s newly appointed chief executive gave a spirited defense of globalization during her first official visit to China, saying it had helped richer and poorer countries, and economic integration made it hard for any nation to walk away.

Kristalina Georgieva, a Bulgarian who took up her post at the multilateral development lender at the start of this year, also praised China for its commitment to economic reforms and open markets. “Open markets, trade, division of labor has worked extremely well for the poorer countries,” she told Reuters in an interview late on Monday.

But wealthier countries also have benefited from rising middle classes, which are demanding more exports from advanced economies, said Georgieva, a former vice president of the European Commission.

In Germany over the weekend, finance ministers and central bankers from 20 rich nations dropped a former pledge in their communique to keep global trade free and open, acquiescing to an increasingly protectionist U.S. administration. Georgieva called for an “intelligent, calm conversation” about sharing the benefits of globalization more broadly.

Gold is marooned between U.S. rates and India demand: Russell

It's not unusual for a financial market to be pulled in different directions simultaneously by competing influences, but what is notable for gold currently is the apparent inability of the contradictory factors to gain momentum. History and logic suggest that when the United States starts a monetary tightening cycle, gold will underperform, since as a non-yielding asset it loses out to instruments that will enjoy higher yields from the rising rates.

The Federal Reserve lifted interest rates on March 15 for the second time in three months, with expectations that it will raise at least twice more this year and perhaps three times in 2018. But spot gold didn't drop when the Fed pulled the rates lever, gaining 1.7 percent the day of the increase, and closing at $1,233.15 an ounce on Monday, up almost 3 percent since the day before the Fed move and 9.9 percent since the recent low in mid-December.

So, why is the gold market being sanguine about rising U.S. interest rates? Part of the answer may be that investors are taking a view that the rise in real yields may not be as dramatic given U.S. inflation is also on an upward trend. There also may be a U.S. dollar effect, with analysts at JP Morgan noting that it's likely that the greenback has already seen the bulk of its rally in this tightening cycle.

"In the current cycle, the broad U.S. dollar has so far appreciated by 22 percent, and we see the dollar rallying another 2 percent higher into midyear before retracing to current levels by the first quarter of 2018," JP Morgan said in a note published March 15. "In short, the lion's share of this cycle's U.S. dollar appreciation could potentially be behind us," the note said.

‘A slap in the face to U.S. taxpayers’: Most vehicles imported from China are made by an American company

The Buick Envision comes with a peculiar label for a foreign-made car: Designed in the United States. The midsize luxury SUV, a product of General Motors, is the top-selling vehicle imported from China in the United States. This alarms union leaders, who call for American companies to build cars in America, and could make General Motors a target for President Trump’s tirades on trade.

The Envision, which debuted last year, was the first Chinese import from any of the U.S.’s Big Three automakers. “The Invasion,” United Auto Workers president Dennis Williams called it. Now, as Trump gears up for a fight with China over auto imports, the model could become a symbol of the administration’s efforts to discourage American companies from moving more business out there.

The Envision accounts for about 44,000 of an estimated 55,000 imports from China this year, according to IHS Automotive, a global analytics firm. That’s a fraction of the number of cars imported from Mexico last year, which accounted for 1.8 million vehicles, mostly small cars.

But White House officials have signaled Trump will try to renegotiate how China treats U.S. automakers when he meets next month with Chinese President Xi Jinping, according to an Axios report. The officials don’t think American companies should pay 25 percent import taxes to reach Chinese consumers, while foreign automakers pay just 2.5 percent to access the U.S. market. GM sells most of its Envision models in China, but U.S. sales have been steadily climbing — from 89 in May 2016 to 3,139 last month.

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$20 trillion debt deserves as much attention as Dow hitting 20,000

The media and Wall Street got all excited when the Dow Jones industrial average hit 20,000 earlier this year — and justifiably so.

But why not give the same sort of attention to the US federal debt, which will slip past $20 trillion later this year or in early 2018. The symmetry of these two numbers is just too precious to ignore.

As of Monday afternoon, the US debt, according to usdebtclock.org, stood at $19.849 trillion — and was rising at the rate of $13,404,542 an hour. That’s $321,709,008 million a day.

At this pace, the first digit on the tote board will flip in 469 days — on July 2, 2018. But don’t trust me when it comes to predicting the exact circumstances of a future event — my bracket had Duke winning the NCAA tournament. Of course, a lot of things can happen between now and July 2, 2018. Some of those things, like spending a lot of money on infrastructure or on the Mexican border wall, will speed up the clock while other “things,” like more revenue pouring into the Treasury from added jobs and a faster-growing economy, will slow the debt clock down.

Carlsbad to photograph every car entering city

Carlsbad is expanding its use of automated license plate readers into a system that aims to collect the registration information of every vehicle that enters the city.

The $1 million Police Department project — which will add stationary cameras at 14 key Carlsbad intersections, creating a virtual gateway at the city’s borders — was approved by the City Council last week, sparking outrage over privacy rights and government control from several residents and one council member.

Four council members, however, said they’re confident the information can be kept secure and that the system will increase safety for residents and police officers. They also said it may deter criminals from breaking the law in the city.

“To me, $1 million is a drop in the bucket when you are trying to protect 100,000 or more people, and everyone who comes into our city every day,” said Councilman Keith Blackburn, a retired police officer. “I don’t think this ... is going to violate privacy.”

Greek bailout talks to 'intensify'

Greece and its creditors decided on Monday (20 March) to "intensify" talks to agree on reforms needed to unblock a new tranche of financial aid, amid concerns over the country's economic situation. The talks will take place in Brussels this week. They will involve representatives from the creditor institutions - the European Commission, the European Central Bank, the European Stability Mechanism (ESM) and the International Monetary Fund (IMF) - and from the Greek government, including finance minister Euclid Tsakalotos.

Talks could last two or three days, according to a source that will be involved, who added that "the number of issues is not so big that we need longer than that".

The conclusion, agreed in 2015, of the second review of the bailout programme, has been blocked for several months. The main obstacles are the reforms of the labour market and of the pension system, as well as the fiscal targets that need to be reached after the end of the programme in 2018.

In total, the Greek government needs to adopt measures that will cut spending by €1.9 billion and increase revenues by €1.9 billion. When a so-called staff level agreement between the Greek government and the institutions is reached, eurozone finance ministers will have to approve it in order to unblock a new loan - the amount of which is still unknown.

Wall Street sinks on tax cut fears

This New Bubble Is Even Bigger Than The Subprime Fiasco

In 1988, a bank called Guardian Savings and Loan made financial history by issuing the first ever “subprime” mortgage bond. The idea was revolutionary.

The bank essentially took all the mortgages they had loaned to borrowers with bad credit, and pooled everything together into a giant bond that they could then sell to other banks and investors. The idea caught on, and pretty soon, everyone was doing it. As Bethany McLean and Joe Nocera describe in their excellent history of the financial crisis (All the Devils are Here), the first subprime bubble hit in the 1990s.

Early subprime lenders like First Alliance Mortgage Company (FAMCO) had spent years making aggressive loans to people with bad credit, and eventually the consequences caught up with them. FAMCO declared bankruptcy in 2000, and many of its competitors went bust as well.

Wall Street claimed that it had learned its lesson, and the government gave them all a slap on the wrist. But it didn’t take very long for the madness to start again. By 2002, banks were already loaning money to high-risk borrowers. And by 2005, all conservative lending standards had been abandoned. Borrowers with pitiful credit and no job could borrow vast sums of money to buy a house without putting down a single penny. It was madness.

NY Fed president compares Wells Fargo fake account scandal to subprime mortgage crisis

The president of the Federal Reserve Bank of New York told the Banking Standards Board in London on Tuesday that he sees quite a few similarities between the Wells Fargo fake account scandal and the subprime mortgage crisis of the late 2000’s.

New York Fed President William Dudley, in a speech entitled “Reforming Culture for the Long Term,” said that the goal-driven sales culture at Wells Fargo, which drove 5,000 of the bank’s former employees to open as many as 2 million accounts without authorization in order to get sales bonuses, reminded him of the environment that led to the mortgage crisis.

“As I have argued before, incentives shape behavior, and behavior drives culture. If you want a culture that will support your long-term business strategy, you need to align incentives with the behaviors that will sustain your business over the long haul,” Dudley said in his speech across the pond.

“Incentives—compensation and promotion, in particular—are powerful tools for communicating the conduct and culture you desire for your firm. Of course, the cultures of firms can and should vary,” Dudley continued. “But, the culture of every bank should share a common theme: stewardship—a word that implies professional care, exercised year after year for the benefit of the firm and its stakeholders,” Dudley said. “A commitment to the long term must be at the core of banking. Incentives within a firm should support that goal, not undermine it.” Dudley then notes that “bad incentives were a key contributing factor in the financial crisis” of the last decade.

Diaper dilemma: Child care costs as much as a year of college

Cash-strapped millennials now have another expense to juggle, in addition to saving for retirement and paying student loans: They're shelling out tens of thousands for someone to watch Junior.

Across the country, the average annual cost of child care is approaching parity with the cost of in-state tuition at some universities, according to data from Child Care Aware of America, an advocacy group.

To put things into perspective, a year of in-state tuition, room and board at the State University of New York at Albany adds up to $22,205.

In the Empire State, the annual cost of placing your infant and 4-year-old in a care center is $25,844, accounting for more than 12 percent of median income in the state, according to Child Care Aware. "A lot of clients are entering the phase of their life where having a family is top of mind," said Douglas Boneparth, president of Bone Fide Wealth in New York. "Child care can be like a second rent payment."

Crisis-hit Venezuela halts publication of another major indicator

Venezuela has stopped publishing money supply data, depriving the public of the best available tool to ascertain soaring inflation in one of the world's worst-performing economies.

The country quit issuing inflation data more than a year ago, but annual consumer price rises are widely seen to be in triple digits, driven by an unraveling socialist system in which many people struggle to obtain meals and medicines.

A money supply indicator known as M2 was up by nearly 180 percent in mid-February from a year earlier, according to the central bank before it halted the release of the weekly data without explanation last month. In contrast, neighboring Colombia's M2 was up 7 percent in the same period and the United States' was up 6 percent.

"If they are not publishing, you know it must be skyrocketing," said Aurelio Concheso, director of the Caracas-based business consultancy Aspen Consulting. The central bank and ministry of communications did not respond to a request for comment. An increase in M2, the sum of cash together with checking, savings and other deposits, means more currency is circulating.

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1 in 4 workers have less than $1,000 saved for retirement

You're not alone if you have next to nothing saved for retirement. But that doesn't mean you're in good company. Almost one-quarter of workers said they and their spouse combined have less than $1,000 saved for retirement, according to a report from the Employee Benefit Research Institute. Nearly half of everyone surveyed said they had less than $25,000.

Sure, $25,000 can sound like a lot. But it's a reasonable goal to have that much stashed away by the time you're 30 years old. Someone in their early 30s earning $50,000 a year should have about $30,000 saved, according to one calculator. This it totally doable if that person has been saving 10% of their income annually, which is the rule-of-thumb suggested by many financial planners.

But more than one-third of those surveyed said they're saving less than that. When it's time to retire, most people believe they'll need at least $500,000. (Though, 41% couldn't even guess how much their nest egg should be.)

There's one big difference between those who are on track and those who aren't. Most of those workers who said they've saved less than $1,000 don't have access to a savings account like a 401(k) at work. There are roughly 55 million workers in the U.S. who don't have access to an employer-sponsored plan. To try to help those Americans, President Obama launched a program called the myRA. It's a starter retirement account that's similar to a Roth IRA and sponsored by the federal government. But you can only save up to $15,000 in the myRA, and you can't invest that money in a diversified portfolio -- only in a set of conservative investments.

One-third of Americans say they’d have trouble coming up with an emergency $2,000

About a third of consumers say they would have trouble coming up with an emergency $2,000, according to a new study released Monday. The New York Fed, as part of its survey of consumer expectations, has begun releasing the answers to questions about financial fragility. The study found around 67% said they were likely to come up with $2,000 in a month, meaning nearly 33% said they weren’t likely.

The differences were most pronounced by credit score — only 11% of those with a credit score of 760 and above said they would have difficulty, versus 64% of those with a credit score of 680 and below.

The survey is consistent with other findings. The more than one-third of families that had large fluctuations in their incomes were more likely than those with stable incomes to say they wouldn’t be able to come up with $2,000 for an unexpected need, according to a study by the Philadelphia-based nonprofit Pew Charitable Trusts released in March.

The difference with the New York Fed report is the timeliness — it’s based on responses to a survey conducted in February. So it means that even an economy where the unemployment rate has been driven down to 4.7% hasn’t really changed the perceived vulnerability of Americans.

Rising Pension Debts Checking Muni Supply, Morgan Stanley Says

A drop in the sale of state and local government debt this year may have a culprit other than rising interest rates. Analysts at Morgan Stanley, led by Michael Zezas, said the rising retirement-system costs has made government more leery of running up new debts. State and local revenues have not kept pace with growth in total liabilities that now amount to $4.97 trillion, the analysts say.

Despite January seeing a year-over-year rebound in tax revenues, the unfunded pension liabilities pressures “would make this a hollow victory if they aren’t sustained,” the analysts added. Unfunded pension obligations have risen to $1.9 trillion from $292 billion since 2007, according to data compiled by Bloomberg.

The drop-off in muni new money issuance comes as unfunded pension liabilities continue to pressure many municipalities’ budgets, ranging from Chicago Public Schools to the Dallas Police and Fire Pension.

Escalating pension bills for the city of Chicago triggered Moody’s Investors Service to downgrade its credit to junk. S&P Global Ratings has warned Dallas and Houston could have their ratings lowered if they don’t shore up their pension funds while New Jersey’s rating has been cut repeatedly due to underfunded pension obligations.

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