Monthly Archives: October 2016

Calpers: one pension, two sets of books

October 17, 2016 By in C, Uncategorized Tags: , , 1 Comment

For some time, the Los Angeles Times has been running articles aleerting readers to the troubles that California’s famous Calpers retirement system is having.  In a nutshell, the assets Calpers has on hand to meet future municipal employee pension benefits fall far short of what it will likely need.

The New York Times chimed in last week with a story about the troubles that individual cities, worried about their future and seeking to extract themselves from Calpers, are experiencing.

There are two parts to the latter:

–the “official” Calpers books give a relatively rosy picture of the current situation for each municipality.  They do this essentially by assuming the pension plan will eventually grow itself out of the problem.  The issue here is that their actuarial assumptions have lnot been adjusted down enough to account for today’s low-inflation, near-zero interest rate world.  In a sense, that pie-in-the-sky attitude would be ok with cities that want to leave Calpers   …except that Calpers presents potential leavers with a far different–and much higher–bill to bring their accounts up to full funding so they can depart.

–The Stanford Institute for Economic Policy Research has developed a Pension Tracker website where Californians in many areas can quickly look up how deeply in the hole their cities are.

Irwindale, a small town in the San Gabriel Valley of Los Angeles County, has the dubious honor of being #1 on the Stanford list of most exposed to pension shortfalls.  Irwindale’s Calpers account is short by $134, 907 per household of having its municipal pension funded.  Irwindale has other woes–Huy Fong Srirscha, for example.  But with the Stanford pension info a mouse click away, who is likely to move to Irwindale?    …or to other cities high on the unfunded list?

Worse than that, I’d certainly be thinking of moving elsewhere.

 

California may be the most high profile instance of municipal pension underfunding, but it’s certainly not the only one.

“hard” Brexit, not “soft”

October 14, 2016 By in Brexit, Uncategorized Tags: , , , , , , Leave a comment

Ever since the Leavers overwhelmed the Remain faction in the UK’s Brexit vote, observers have been wondering how the UK is going to effect its break with the EU   …and how complete the breach with continental Europe will be.

The two main approaches were dubbed soft, meaning that negotiations would be held at a leisurely pace, the break would come eventually–but not soon–and that the UK would retain as many of the privileges of EU membership will shedding as many obligations as possible.

Article 50 of the Lisbon Treaty lays out the process for a country to withdraw from the EU.  It provides that a state that wishes to leave sets the process in motion by invoking Article 50. That starts a two-year clock running, at the end of which the separation occurs.  Since two years is a relatively short period in diplomatic time, especially to arrange complex future trade agreements, conventional wisdom has been that a country like the UK would begin negotiations first and only trigger Article 50 when the negotiating finish line was in sight. Taking this path would be the more economically sensible.  It would also be a clear sign that soft is the ultimate goal.

The alternative would be “hard,” meaning basically getting out of Dodge as fast as possible.  Why do so when collateral economic damage would result?    …because other political considerations, like halting immigration from the rest of the EU, have a higher priority.

 

Over the past week or so, Prime Minister Theresa May has been signalling that Brexit will not be put on the back burner, and that, in consequence, the UK government is opting for the “hard” road.  She will invoke Article 50 by next March, at the latest.  And she has packed her negotiating committee with the most anti-EU people she can find.

This decision has a number of consequences:

–Scotland, where two-thirds of voters cast their ballots to Remain in the EU, is reviving its own referendum to withdraw from the UK and enter the EU as a sovereign country itself

–putting itself under time pressure by effectively starting a two-and-a-half-year clock running, the UK has revealed its sense of urgency.  That may have lost it negotiating leverage

–half of the UK’s exports go to the rest of the EU.  Time constraints may see it leaving the EU in early 2019 without trading agreements with countries where its major customers reside–meaning export sales may fall off a cliff

–similarly, it becomes less likely that bankers based in London can retain their current unfettered access to clients in other EU countries.  This suggests that banks may begin to shift operations to the Continent

–sterling will continue to slide.  For portfolio investors like you and me, this has perhaps the most important near-term implications.  There’s no need now, nor in the near future, to change from favoring London-traded stocks whose assets and earnings are outside the UK.  Better still if the firms’ borrowings and SG&A expenses are in sterling.

 

 

 

the presidential election (iii)

October 13, 2016 By in Uncategorized Leave a comment

This is, I hope, my last post ever about politics in the US.

In early 1991, I met a political analyst who worked for what was then Prudential Securities.  His main idea was that even then the two major political parties were finding it difficult to retain relevance for contemporary Americans.  Leaders who were fundamentally shaped in the early twentieth-century economic struggle between working people and big business–long since been decided (in favor of labor)–were finding it hard to move on.

As a result, he thought, Democrats had a social/cultural program that defined them but no economic one.  Republicans still had their small government and laissez-faire ideas, which had only narrow popular relevance.  The GOP was–mistakenly, in his opinion–trying to broaden its appeal beyond its small base by courting the religious right.  (My acquaintance remained silent about the subtly racist the “Southern strategy” embraced by Republicans since Nixon as another means of bulking up.)

That was twenty five years ago…

…but to my admittedly not so politically-oriented mind, it remains a good description of today’s state of play.

Maybe that’s the fundamental problem.  Hillary Clinton is a Democratic figure my grandfathers (both immigrants, both Democrats, both union members–a longshoreman and a NYC trolley car driver) would have loved.  The Republicans have so little cohesion that their standard has been hijacked by an outsider winning discontented party members with a ludicrous promise to reinvigorate industries that prospered in the US of the 1950s.

The popularity of Bernie Sanders and the lack of a viable alternative to Donald Trump illustrate how out of touch the leadership of both parties has become.

My guess is that we’re in the early stages of a fundamental rethink of the political status quo that has dominated the US for generations.

 

 

the presidential election (ii)

October 12, 2016 By in Uncategorized Leave a comment

This is a continuation of yesterday’s post on why I think the upcoming presidential election is, unusually, important for investors and why I think electing Donald is a recipe for disaster.

partnering not a priority

The most successful entrepreneurs I’ve studied create an ecosystem in which suppliers, customers and co-investors all benefit together.  In contrast, all the discourse I’ve read/heard from Mr. Trump stresses how an endeavor has benefited him personally.  Yes, the project may not have gotten off the ground, investor/customers/suppliers may have lost money–but Trump collected licensing fees or a salary/bonus or otherwise received a large benefit. And that’s all that seems to matter to him.  The upcoming fraud trial about Trump University will likely shed more light on this issue.

A careful analysis of the inner workings of publicly traded Trump Hotels and Casino Resorts (DJT) would doubtless provide more fodder.  (I haven’t made the effort, but News Corp’s Market Watch wrote “Donald Trump was a stock market disaster,” observing that DJT lost 90% of its value during a time when US stocks in general were doubling.  The New York Times penned “How Donald Trump Bankrupted His Atlantic City Casinos, but Still Earned Millions,” which says he shifted personal debts to the public company, while extracting millions for himself from it as the enterprise failed.)

a knowledge shortfall?

If the debates are any indication, Donald’s communication comes solely in short semi-coherent bursts of buzzwords and bluster that give me no indication that he understands much about the issues he purports to be talking about.  (I was recently watching a PBS documentary about the two presidential candidates in which one of Trump’s creditors in a bankruptcy proceeding comments that, while a brilliant promoter, Trump doesn’t seem to understand anything about either economics or accounting.  I don’t see evidence for the other side of the argument.)

His economic ideas are mostly wacky, and the sell-by date of his factual information passed maybe twenty years ago.

If I understand him correctly, he thinks, among other things, that:

–Russia, which is highly reliant on commodity exports, whose economy has shrunk in US$ by a third over the past five years and which is a dictatorship controlled by a former secret policeman, is a good model to emulate

–Japan is still a formidable economic rival to the US

–China is an exporter of labor-intensive, low value-added goods, not a burgeoning capital goods, tech and biotech nation

–erecting tariffs that substantially raise the price of imported goods will make consumers better off.  Smoot-Hawley, anyone?

–cities like Pittsburgh, now a tech hub, would be better off giving up their futures and going back to blast furnace steelmaking.

Worse than this, Republicans who have chosen not to support Trump comment that although he’s poorly informed, he has no desire to learn.

professional help?

Pro-Trump people may argue that if elected, Donald will have expert advisers.  If all else fails, his looniest ideas would be neutralized by Congress.  I think this is incorrect.

unacceptable social views

Trump is anti-women, anti-Hispanic, anti-Muslim, anti-gay.  He has been embraced by the American Nazi Party and the Ku Klux Klan.  From his earliest emergence as a candidate, other Republicans have referred to Trump supporters as Vichy Republicans, an allusion to the French citizens who collaborated with Hitler during WWII.  They’ve also described backing Trump as a “McCarthy moment,” referring to the decision to support the witch hunt for supposed Communists by Senator Joseph McCarthy in the 1950s that tarnished the legacies of those who made it.

Who would be willing to work for a man like this?  We know the answer already.

Just as important, if he becomes the chief of the Executive branch of government, who is he going to put in charge of the Justice Department, or the State Department, or any of the other cabinet posts?  I think this is a very scary prospect.

 

the presidential election (i)

October 11, 2016 By in Uncategorized Leave a comment

In the opening scenes of a popular new TV show, Designated Survivor, the leading lights of the Washington political establishment are all blown to bits during the State of the Union address–leaving Tom Kirkman, a nerdy, ineffective, Everyman political outsider as the new President.  We assume Washington will gradually learn that Kirkman will channel his inner Jack Bauer and put the Federal government back on the right track.

I think the acceptance of this fantasy reveals how deep the popular mood of dissatisfaction with a corrupt and dysfunctional Washington is.

Although the Democrats have traditionally had a strong presence in Hollywood, they don’t seem to have noticed what’s going on.  They’ve nominated Hillary Clinton, perhaps the ultimate conventional political insider, for President.  I’ve heard her say virtually nothing that addresses this discontent.

In contrast, the Republicans have opted for political neophyte Donald Trump, who is promising to “Make America Great Again,” as their candidate.

As I understand him (read:  to the degree he has a coherent economic message), Mr. Trump, the P.T. Barnum of our age, is saying that he wants to return the US to the 1950s or 1960s, when the country was the only superpower in the world.  We also had the only industrial base not ravaged by war; protectionist legal barriers prevented many of the foreign products there were from entering the US.   Change occurred only slowly, so jobs were for life.  The women’s movement had barely started.  Landmark civil rights legislation hadn’t been passed.  There was no internet, no personal computers, no smartphones.

Turning back the clock is a pipe dream, in my view.  Trying would create economic decline, not prosperity.  But studies I’ve read suggest the Trump platform resonates strongly in blue-collar, mostly-white enclaves where the current generation is relatively prosperous but where there is little possible upward mobility for the next.

 

I normally don’t write about politics.  That’s both because in my thirty+ years in the stock market, politics really hasn’t mattered much for equity investors.  In addition, the investors I’ve know who have spent the most time on reading the political runes have generally been the least successful at making their portfolios grow.  Better to study industry dynamics and company financials and leave Washington to play out as it may.

I think this year is different, though.  Although many seem to have framed this election as being a choice between the lesser of two roughly equivalent evils, I think that this is far from the case.  It seems to me that Hillary is clearly a superior choice to Donald.

How so?

a checkered business career

As far as I can see, Donald Trump is not the successful businessman he portrays himself as being.

He was born into a wealthy and successful real estate family, which supported him financially and with professional advice.  He also launched his own career during a golden age for real estate, driven by falling interest rates and the development of New York as a world financial center–a time when it was hard not to make money.  But, despite his advantages, according to a study cited in Forbes Trump made about half the money the average real estate investor did while taking on more risk.

He was/is a brilliant marketer.  He was undone, however, by being too highly leveraged and by a series of expensive and ill-timed acquisitions, including a white elephant hotel, a money-losing airline and a massive expansion in Atlantic City shortly after Steve Wynn, the mastermind of casino gambling, packed his bags and left–correctly predicting the demise of the NJ seaside resort.

My conclusion is that the legend of financial success is mostly the result of Trump’s skillful self-promotion and of the backstory created for the hard-nosed business character Trump portrayed for fourteen seasons on The Apprentice and The Celebrity Apprentice.

 

More tomorrow.