About that "Beat the Street" GDP Number

Wednesday, July 31, 2013
GDP beat second quarter estimates of 1 percent easily. However, the BEA revised first quarter growth down from 1.7% to 1.1%.

Is this a good thing, a bad thing, or nonsense?

The correct answer is "nonsense". One look at BEA GDP Release is all it takes to determine the answer.
The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 0.3 percent in the second quarter, compared with an increase of 1.2 percent in the first. Excluding food and energy prices, the price index for gross domestic purchases increased 0.8 percent in the second quarter compared with 1.4 percent in the first.
How Convenient

My friend "BC" says

How convenient, otherwise real GDP would have printed at 0.8%, prices constant. 

Yet, the yoy rate of real final sales per capita is below 1% for the second quarter in a row, whereas the second quarter annualized rate is near contracting. Had the deflator been reported at the rate in Q1, the yoy and 2-qtr. annualized real final sales per capita rates would have been reported as contracting.

Doug Short at Advisor Perspectives came up with similar conclusions via email.

Doug writes

  • Official GDP with the BEA’s GDP deflator (0.71% which is rounded in the popular press to 0.7%) gives us the official GDP of 1.67%,  which rounds to 1.7%
  • GDP with a hypothetical 1.6% deflator (as forecast by Briefing.com) would have been 0.78%, which rounds to 0.8%. 
  • GDP with the average deflator over the past 14 quarters (which is 1.75%) would have been 0.64%, which rounds to 0.6%.


Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Economic Recovery in Spain? Tax Collections, Retail Sales Prove Otherwise

In an attempt to distract voters from all the political scandals in his administration, Prime Minister Mariano Rajoy is talking about the pending economic recovery in Spain. Don't believe it.

Huky Guru at Guru's Blog in Spain takes a good look at numbers that prove Rajoy is disingenuous.

Via Mish-modified Google translation, please consider Debt Remains Uncontrolled, €40 Billion Deficit in First Half
First Half Deficit 3.81% of GDP

The government deficit totaled €40 billion in the first six months of the year in terms of national accounts, 3.81% of GDP, according to data released Tuesday by the Ministry of Finance and Public Administration.

The figure represents a decline of 8.2% compared to the same period last year, although an increase of 19.9% ​​compared to the figure recorded until May, which was around €33.3 billion.

The result of the shortfall until June due to an income reached €49.528 billion euros (+12%) and expenditure of €89.529 billion euros, up 2%.

Revenues Drop 7.1%

Cumulative to June, revenues fell by 7.1% and non-financial payments fall by 1%. What's worse, is that for nearly every euro that enters government coffers, it is burning one euro in cash.

VAT Shows Decline in Economic Activity

State revenue from indirect taxes, with €36.221 billion, an increase of 5.1%. But remember the VAT went from 18% to 21%, an increase of 17%, so that a rise of only 5.6% in revenue means that economic activity or the collection capacity of the tax has diminished.

Expenditures

On the expenditure side, the financial payments made by the State stood at €82.921 billion euros, up 1%. This result has been influenced by higher financial expenses and personnel, but were offset by declines in other chapters.

Personnel expenses stood at €13.892 billion euros, representing an increase of 1.3%, while collecting 1.9% decline in wages and salaries, to €6.798 billion euros. Social benefits grew by 5.6% on account of an increasing number of pensioners and 1% increase of pensions.

Transfer payments current until June totaled €50.551 billion, representing a decrease of 0.8%. Finally, payments for real investments, with €2.116 billion euro, fell 6.4%, while the capital transfer payments decreased by 2% to €1.961 billion euros due.
Spain's Retail Sales Decline 36th Month

Reuters reports Spain's retail sales slump stretches to three years, hampering recovery
Spanish retail sales fell for the thirty-sixth month running in June, offering a snapshot of the shrinking consumer spending that is hampering a long-awaited economic recovery.

With Spain increasingly reliant on exports to generate growth, its current account - the broadest measure of a country's terms of trade - turned to a surplus in May.

The recession has lasted since the end of 2011, though economic output fell just 0.1 percent between April and June, leading the government to state the slump was over.

Calendar-adjusted retail sales fell 5.1 percent year-on-year in June, according to National Statistics Institute data on Wednesday, while the Bank of Spain said the current account posted a 2.4 billion euro surplus in the previous month.

Spain's unemployment rate is above 26 percent. That has impeded spending on the high street, as have the high budget gaps that have forced the government of Prime Minister Mariano Rajoy to cut expenditure and hike taxes.

"Whenever the economy starts breathing, you'll have additional pressure to start cutting the deficit, so we get in to additional austerity and spending will fall. It's going to be a choppy ride," Moec said.

"Of the IBEX companies, practically the only thing carrying them are contracts and business volume out of Spain," said Pedro Alvarez, trader at Banco Sabadell.

"If you look at (Spain's largest department store) Corte Ingles, which is having problems, you get a good idea of how things are going in the country."
Spain finally met its revised-four-times-lower deficit targets. Don't mistake that for an economic recovery.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

"Tax Nightmare" of Eminent Domain Mortgage Seizures

Gayle McLaughlin, mayor of Richmond, California is hell-bent on her plan to seize mortgages via eminent domain, then provide "mortgage forgiveness" for the homeowners.

I smacked the idea from a legal standpoint in Illegal Public Seizure of Mortgages Via Eminent Domain in the Spotlight.

Tax Nightmare

Legalities aside, there are also huge tax consequences to consider.

A local attorney and real estate broker posting under the name "davecherr" commented on the problem of debt forgiveness.
There is a massive and thus-far unremarked upon problem with this ED scheme: it would result in a MASSIVE INCOME TAX BILL FOR THE HOMEOWNER. Under the tax code, discharge of indebtedness is counted as income. There is a safe harbor for people who lose their primary residence to foreclosure, but it would not apply to these Richmond residents, since they would keep their house with magically reduced debt.

That debt reduction would NOT be tax-free. If a homeowner's mortgage goes from $400K to $190K under the proposed scheme, they would owe taxes on $210K of discharged debt (it would likely be much more, because all missed payments, late fees, and missed property tax and insurance payment, and interest on all of that, would be folded into principal -- such costs can easily drive principal from $400K to $500K over the course of 1-2 years of non-payment).

The federal taxes on that would be around $50K, and the state taxes $15K, for a total tax bill of $65K, or around $7K per year on a 15 year payment plan. As a local, I can tell you that most residents of Richmond do not have an extra $7K/year of income to pay such a bill. 

Who will tell the people of Richmond, and their craven politicians, that their scheme will lead to tax nightmares exploding all across their fair city?
Mortgage Forgiveness Act of 2007 Expires

Sure enough, "davecherr" is correct. Details can be found in the IRS publication Home Foreclosure and Debt Cancellation.
Update Dec. 11, 2008 — The Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualify for this relief.

This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion doesn’t apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.

1. What is Cancellation of Debt?

If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.

2. Is Cancellation of Debt income always taxable?

Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:

  • Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
  • Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets. Insolvency can be fairly complex to determine and the assistance of a tax professional is recommended if you believe you qualify for this exception.
  • Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income. The rules applicable to farmers are complex and the assistance of a tax professional is recommended if you believe you qualify for this exception.
  • Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences
Conclusions

It's safe to say this is not 2012. And even if the law was extended, there may still be huge tax consequences.

There is no bankruptcy, proving insolvency can be problematic, these are not farm debts, and the paragraph on non-recourse loans does not apply because there is no default.

The very purpose of the eminent domain seizure is to prevent default.

Bankrate has more on the insolvency issue in What does it mean to claim insolvency?
Q: Dear Tax Talk ...Can you explain what insolvency is? Is our 401(k) balance included in our assets? Thank you. -- Beverly

A: Dear Beverly, While your creditors may not have access to your retirement accounts, the IRS does. The general rule is that if you have a debt that is forgiven, you recognize income. Exceptions exist for primary home debt forgiven as well as debts forgiven in bankruptcy proceedings and when a taxpayer is insolvent.

The cancellation of your primary home debt is not considered income provided that the debt was used to purchase the home and was not increased by a cash-out refinance.

For many years, the tax law has given bankrupt and insolvent taxpayers a break when it comes to forgiven debt. It's pretty well established that if you enter into bankruptcy, certain assets, depending on your state of residency, are exempt from creditor claims. Generally, these assets are homestead property, insurance products and retirement accounts. What had not been clear is how these assets were treated in the case of insolvency; neither the law, IRS regulations, announcements or rulings explained it.

Prior to the real estate crisis, the IRS took a taxpayer's claim of insolvency to tax court. The taxpayers sought to exclude assets exempt from creditor's claims when measuring insolvency. The theory being that if the assets are exempt in bankruptcy proceedings, the taxpayer shouldn't be forced into bankruptcy just for the favorable tax consequences. The IRS and the U.S. Tax Court couldn't have disagreed more.

Hence, in determining the extent of your insolvency, you will have to count your 401(k) as an asset. I recommend you have your tax adviser work out the consequences more concisely so that you can measure the benefit of declaring bankruptcy.
For those who are not careful, this ill-conceived socialist wealth redistribution scheme of Mortgage Resolution Partners LLC will leave unsuspecting recipients with huge tax bills should it erroneously survive court challenges that are surely coming.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Why Student Loan Consolidation Programs Are So Popular Amongst Graduates

Tuesday, July 30, 2013
A college education is viewed as a worthwhile investment, but it is certainly not cheap. The overall cost of 4 years at university can take 6 or 7 years to earn back as a professional, and with most students needing several loans to finance tuition and living expenses, the debt can take decades to repay. Little wonder student loan consolidation programs are so popular.

Surveys have shown that on average, students attending US colleges graduate with between $30,000 and $50,000 debt on their shoulders. So, in reality, their careers begin, not with progress in mind, but simply with clearing college debts. This can prove crippling in the early years of working life, when salaries are at their lowest.

But through a consolidation program, the balances on numerous student loans can be paid off in one go, and replaced by a single loan that boasts better terms and greater affordability. As always, there are some factors to consider before signing up to one.

How Consolidation Programs Work

Student loan consolidation programs are highly effective in replacing difficult debt terms with much better ones. On the face of it, it may seem that replacing multiple loans with one loan is hardly progressive, but with the right terms, it can save hundreds of dollars in payments every year.

Most students take on at least 5 loans while attending college, but as well as the individual balances owed, this also means 5 individual interest rates and repayment schedules. This arrangement means that costs are much higher than they need to be, and only complicates the task of clearing college debts.

But taking on one loan makes everything simple. One repayment date means less chance of repayments being missed, while one interest rate means interest is lower overall. And when student loans are replaced by a long-term consolidation loan, the monthly repayment sum is much lower.

How the Program Benefits Students

Other than lower interest, lower monthly repayments, and less pressure, a student loan consolidation program has a number of long and short-term benefits. The key is the fact that the college debt is marked down as having been repaid in full, even if it has been replaced by a consolidation loan.

Once the task of clearing college debts is accomplished, the credit score of the student is increased in their credit record. And with higher credit scores comes an entitlement to lower interest rates when applying for a loan.

Even while repaying the consolidation loan, there is more cash freed up to meet other bills and debts with. For example, a $50,000 debt may need combined monthly student loan repayments of $850 over 60 months; but over 120 months, payment on a single loan of the same sum fall to $420.

Sealing an Affordable Option

The whole idea of taking on a student loan consolidation program is that a crippling financial situation can be alleviated quickly. But real benefit can only be enjoyed when the right terms are secured. This basically translates to getting the most affordable option.

To accomplish this, there are some simple factors to look out for. The most obvious is the term of the consolidation loan, with the maximum term available for graduates being 30 years. This makes any debt affordable, though bear in mind that clearing college debts in this way means much more is paid in interest too.

But securing a competitive interest rate is another consideration. Searching online can reap good options, with comparison sites making that job all the easier. Just remember that the student loans being cleared are the priority, and reducing its monthly impact is the key to affordability.

Illegal Public Seizure of Mortgages Via Eminent Domain in the Spotlight

Bloomberg reports Richmond Escalates Eminent Domain Plan With Loan Offers.
Richmond, California, is backing a plan to buy mortgages in low-income areas for as little as 25 cents on the dollar and may force the sales under eminent domain laws, moving forward with a controversial program that would potentially seize control of home loans from investors.

Richmond is the farthest along in a plan advocated by Steven Gluckstern’s Mortgage Resolution Partners LLC for U.S. cities to confiscate mortgages and write them down in an effort to help homeowners escape oversized debt burdens. The idea has drawn opposition from bondholders such as Pacific Investment Management Co. and DoubleLine Capital LP and at least 18 trade groups representing the finance industry, homebuilders and real estate firms. 

None of the 32 servicer and bond trustees that oversee the loans will likely sell willingly, Chris Killian, head of the securitization group for the Securities Industry and Financial Markets Association, Wall Street’s largest lobbying group, said in a phone interview.

“You just can’t really sell performing loans out of securitizations,” Killian said. “Additionally, everybody we talk to in the industry thinks this is a bad idea that will be bad for the mortgage markets.”
Eminent Domain

Eminent domain (confiscation of private property for the public good), have been upheld time and time again, most recently in the infamous US Supreme Court decision Kelo v. City of New London.
Kelo v. City of New London, 545 U.S. 469 (2005) was a case decided by the Supreme Court of the United States involving the use of eminent domain to transfer land from one private owner to another private owner to further economic development. In a 5–4 decision, the Court held that the general benefits a community enjoyed from economic growth qualified private redevelopment plans as a permissible "public use" under the Takings Clause of the Fifth Amendment.

The case arose in the context of condemnation by the city of New London, Connecticut, of privately owned real property, so that it could be used as part of a “comprehensive redevelopment plan.” However, the private developer was unable to obtain financing and abandoned the redevelopment project, leaving the land as an empty lot, which was eventually turned into a temporary dump.

Public reaction to the decision was highly unfavorable. Much of the public viewed the outcome as a gross violation of property rights and as a misinterpretation of the Fifth Amendment, the consequence of which would be to benefit large corporations at the expense of individual homeowners and local communities. Some in the legal profession construed the public's outrage as being directed not at the interpretation of legal principles involved in the case, but at the broad moral principles of the general outcome. Federal appeals court judge Richard Posner wrote that the political response to Kelo is "evidence of [the decision's] pragmatic soundness." Judicial action would be unnecessary, Posner suggested, because the political process could take care of the problem."

Prior to Kelo, seven states specifically prohibited the use of eminent domain for economic development except to eliminate blight: Arkansas, Florida, Kansas, Kentucky, Maine, New Hampshire, South Carolina and Washington. As of June 2012, 44 states had enacted some type of reform legislation in response to the Kelo decision. Of those states, 22 enacted laws that severely inhibited the takings allowed by the Kelo decision, while the rest enacted laws that place some limits on the power of municipalities to invoke eminent domain for economic development. The remaining eight states have not passed laws to limit the power of eminent domain for economic development.
End Result of Seizure: A Dump

There you have it. The result of the seizure (whose intent was a mall), turned useful tax-payer property into a vacant lot, then a dump when the developer could not get financing.

44 states passed laws restricting eminent domain as a response to that poor US supreme court decision. One of those states was California.

Proposition 99

California passed Proposition 99 in 2008.
Summary Prepared by the Attorney General

  • Bars state and local governments from using eminent domain to acquire an owner-occupied residence, as defined, for conveyance to a private person or business entity.
  • Creates exceptions for public work or improvement, public health and safety protection, and crime prevention.
Ridiculously Broad Interpretations

What constitutes "public work or improvement, public health and safety protection, and crime prevention"?

The statement is so broad as to be 100% meaningless. Was that the intent of Prop 99 all along?

Non-Fair Value Seizures

The law requires the owner to receive "fair value" for the seizure. Of course it is the state that gets to define "fair value".

Richmond does not even want to pay fair value for the mortgages. Please consider these additional details in the New York Times article A City Invokes Seizure Laws to Save Homes.
On Monday, the city sent a round of letters to the owners and servicers of the loans, offering to buy 626 underwater loans. In some cases, the homeowner is already behind on the payments. Others are considered to be at risk of default, mainly because home values have fallen so much that the homeowner has little incentive to keep paying.

Many cities, particularly those where minority residents were steered into predatory loans, face a situation similar to that in Richmond, which is largely black and Hispanic. About two dozen other local and state governments, including Newark, Seattle and a handful of cities in California, are looking at the eminent domain strategy, according to a count by Robert Hockett, a Cornell University law professor and one of the plan’s chief proponents. Irvington, N.J., passed a resolution supporting its use in July. North Las Vegas will consider an eminent domain proposal in August, and El Monte, Calif., is poised to act after hearing out the opposition this week.

 The city is offering to buy the loans at what it considers the fair market value. In a hypothetical example, a home mortgaged for $400,000 is now worth $200,000. The city plans to buy the loan for $160,000, or about 80 percent of the value of the home, a discount that factors in the risk of default.

Then, the city would write down the debt to $190,000 and allow the homeowner to refinance at the new amount, probably through a government program. The $30,000 difference goes to the city, the investors who put up the money to buy the loan, closing costs and M.R.P. The homeowner would go from owing twice what the home is worth to having $10,000 in equity.

All of the loans in question are tied up in what are called private label securities, meaning they were bundled and sold to private investors. Such loans are generally the most unfavorable to borrowers and the most likely to default, Mr. Gluckstern said. But they are also the most difficult to modify because they are controlled by loan servicers and trustees for the investors, not the investors themselves.
Sappy Details

The Times article disclosed the sappy details of a person who paid $420,000 for a home now worth $125,000.

To what extent should government intervene in such affairs?

The obvious answer is "none". The homeowner can walk away is he wants, and if he doesn't want, then he can keep paying the mortgage.

Questionable Details

As long as someone is willing to keep paying the mortgage, then the value of the loan is more than the alleged "fair value" offered by the city.

And note the $30,000 difference to the city and the new investors in the proposed scheme.

In essence, the city wants to confiscate private property not for the "public good" but for the good of its own finances, for the good of new lenders, for the good of one set of private persons, at the expense of another set of private persons, at a very questionable "fair value" price.

I contend this is not only morally wrong, but blatantly illegal.

Should this socialist wealth redistribution scheme actually be upheld by the courts, it will unleash a torrent of increasingly ridiculous schemes, while further undermining property ownership rights, the very thing governments ought to protect.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Retail Sales Rise in Germany and France, Decline in Italy; Margin Squeeze in Germany and France

It's a mixed bag of retail PMI news in Europe today (assuming of course one believes that spending is good).

Italy: Sharpest drop in retail sales since April

In Italy, Markit reports Sharpest drop in retail sales since April
Key points

  • Rate of decline in retail sales accelerates for second straight month
  • Stocks levels fall amid sharp drop in retailers’ purchasing activity
  • Purchase price inflation dips to modest rate



Summary

The downturn in Italy’s retail sector gained further momentum in July. The level of trade fell at a faster rate, leading to an accelerated decline in retailers’ purchasing activity and contributing to a deterioration in business sentiment. There were also further notable reductions in profitability, employment and inventory levels on the month.

July saw an acceleration in the month-on-month rate of decline in Italian retail sales, as highlighted by a drop in the headline Markit Italy Retail PMI® from 40.7 in June to 38.2. This was its lowest reading since April, and one that was indicative of a sharp pace of contraction overall. The level of trade has fallen continuously on a monthly basis for almost two-and-a-half years.

The gap between actual and planned sales was the widest for four months in July, as almost half of businesses missed their targets. Firms attributed their underperformance to a combination of uncertainty and pessimism among consumers.
Germany: strongest sales growth for two-and-a-half years

In Germany, Retail PMI indicates strongest sales growth for two-and-a-half years.
Key points

  • Retail PMI hits highest level since January 2011
  • New job creation maintained in July
  • Wholesale price inflation eases since June



Summary

The seasonally adjusted Germany Retail PMI – which measures month-on-month sales on a like-for-like basis – registered above the 50.0 nochange mark for the third consecutive month in July. At 56.0, up from 55.3 in June, the latest reading signalled the strongest month-on-month increase in sales since the start of 2011.

Margins decrease again in July

German retailers pointed to a reduction in their gross operating margins for the thirty-second consecutive month, with the rate of decline little changed since June. Survey respondents widely suggested that higher cost burdens had offset the boost to margins from increased sales during July.

Latest data signalled a steep rate of input price inflation, although it was the second-slowest since September 2012. Some retailers commented on higher food costs, especially for fresh fruit and vegetables.

Comments

Commenting on the Markit Germany Retail PMI® survey data, Tim Moore, senior economist at Markit and author of the report said:

“July data shows a continuing improvement in German retail sector performance, as month-on-month sales growth hit a two-and-a-half year high. More favourable weather conditions and signs of rising consumer confidence helped underpin the acceleration in retail sales. Margins nonetheless remain under pressure as retailers indicated that they were forced to absorb sharp increases in their cost burdens during the latest survey period.”
France: Retail Sales Rise for First Time in 16 Months

In France, the Markit PMI shows Retail Sales Rise for First Time in 16 Months
Key Points

  • Slight expansion of sales recorded in July
  • Slowest fall in employment for over a year
  • Further reduction in purchasing activity



Summary

French retailers signalled a return to growth in sales during July. Although modest, the month-on-month increase was the first recorded since March 2012. Sales were also marginally higher on an annual basis. Employment continued to fall, but the rate of job shedding eased to a marginal pace. Retailers’ margins remained under considerable pressure, despite a weaker rise in purchasing costs.

The headline Retail PMI registered 51.0 in July, up from 48.9 in June and above the 50.0 threshold for the first time in 16 months. Anecdotal evidence suggested that sales growth was supported by improved demand conditions and promotional offers.

When compared with previously set plans, actual like-for-like sales once again fell short in July. However, the degree to which sales disappointed was the least marked since January.

Comment

Jack Kennedy, Senior Economist at Markit and author of the France Retail PMI, said:

“The French retail sector finally snapped out of its extended downturn in July. Although sales were up only slightly, it was the first growth in 16 months, amid reports of firmer demand conditions. However, retailers were again faced with a considerable squeeze on their margins, as they competed to offer discounts in a bid to stimulate sales. Meanwhile, the slowest drop in employment for over a year points to an easing of the gloom that has enveloped the retail sector in recent times.”
Europe Synopsis 

  • The economic depression lingers in Italy.
  • Germany is back in growth mode but with strong inflation and inability of retailers to pass on input cost increases.
  • France, is barely back in expansion, but only after strong discount promotions. French retailers also suffer from a margin squeeze. Employment is still shrinking, albeit at a slow pace.

These imbalances highlight the structural problem of one centrally-planned Euro-interest rate across widely varying economic conditions.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Municipal Bonds an "Outrageous Bargain"? Compared to What? Shifting Sands of Muni Bond Market; Three Bad Assumptions

Monday, July 29, 2013
David R. Kotok, Cumberland Advisors Inc.’s chairman and chief investment officer believes Municipals Cheap After Detroit Filing

Municipal bonds are an “outrageous bargain” in the wake of Detroit’s bankruptcy filing, according to David R. Kotok, Cumberland Advisors Inc.’s chairman and chief investment officer.

Kotok bases his arguments on a comparison on General Obligation Yields to US Treasuries.

Muni vs. Treasury Yields



More on Munis

In a followup guest post on the Big Picture blog, Kotok offers More on Munis, Detroit, Bloomberg, Whitney & Wilson.
In our recent commentary on municipal bonds and Detroit, we argued in favor of buying the highest-grade AAA tax-free municipal bond It currently yields more than the corresponding taxable US Treasury obligation.

Meredith Whitney, Muni Cassandra emeritus (ae?), weighed in against Munis (FT) and used the Detroit default to say her version of “I told you so.” Bloomberg reported both sides of the argument.

Readers may seek Whitney’s positions and her history of Muni-forecasting on their own. Our position is clear: do the research and buy the bonds that make sense. There are many of them. This is an idiosyncratic market of $3.8 trillion; painting it with a broad brush is a mistake.

We took the position that the default history of the true AAA-rated tax-free municipal bond has the same default history as the US Treasury bond: neither has ever defaulted.

Remember, we are referring to the natural rating of the bond. We are not referring to those bonds that were insured by various bond insurers and thus elevated to an AAA rating because of the bond insurance. Bonds that were rated AAA only because of the insurance have defaulted, but the underlying ratings of those insured bonds always fell below AAA. No true AAA credit ever needed bond insurance to sell a new issue.

Our bottom line: high grade, tax-free bonds are really cheap and their credit support is improving. Score one for Munis; score zero for Detroit; score evenhandedness for Bloomberg media in reporting. We will leave the Whitney scoring to our readers.
The Muni Market's Shifting Sands

Writer, Mark J. Grant, author of Out of the Box expresses a different viewpoint in The Muni Market's Shifting Sands, a guest post on ZeroHedge.
I began my career in this space. Fresh off my internship I was assigned to cover small banks in Missouri and Kansas and sell them Municipal Bonds. My fondest recollection was of a small bank in western Kansas that said he couldn't buy bonds now because, "There are green bugs in the milo." I had no idea what green bugs were then and wasn't too sure about milo.

Almost forty years later and having supervised the municipal trading/sales and banking areas at four different investment banks I still am on the watch for the green bugs in the milo.

Detroit is now teaching us several lessons and you can feel the sand shifting yet again. The normal credit analysis performed by many money managers is insufficient in my estimation and because of this losses will be taken. The issue here is the pension funds that may have priority over the general obligation bonds. This is made clear, as an example, in the Michigan State laws and I am expecting new laws and new State and Federal regulations to be passed to guarantee this priority. Pensions will trump the bond holders and General Obligation bonds must now be viewed in the light of a subordinated position. This may shift ratings but it will certainly shift the appreciation of risk in Municipal Bonds and will most probably cause them to widen against both Treasuries and other forms of debt.

General Obligation bonds no longer have the first call on assets.

Specifically, if you are analyzing a Municipal credit, you should look carefully at the size of their pension obligations and calculate the ratio for pension obligations divided by their G.O. debt. Then you should examine the unfunded pension liabilities, add them to their pension obligations and divide that number by their G.O. debt. These calculations will help you get a more realistic handle on the risk that you are assuming when buying the G.O. debt of a municipality. It is not enough, any longer, to examine a Municipal credit in the same way that you examine a corporate credit because Detroit is setting a new standard where pension obligations have the first call on assets and General Obligation bonds have been pushed into a secondary position.

The psychology of the Municipal market is also shifting in the sand. It was once a widely held belief that the State would stand behind any large Municipal credit in its domain. Detroit is proving this to be an inaccurate observation. There was even the notion that if the Municipal credit was large and systemic enough that the Federal government might step in to help. Detroit is exemplifying that this was a second mistake in thinking. We are now learning that each Municipal credit is a stand-alone situation which is a break from the traditional thinking of days past.

I think it is true that Municipalities can meander along longer than corporate credits and certainly than mortgage credits because they can increase their taxes and/or increase what is taxed. So the time-line is longer when a credit is in trouble but, if a Municipal credit falls over the edge, the consequences for debt holders have now become more severe. Detroit brings Chicago to mind and then my caution widens as you look at other large cities. Greater care must now be exercised and I would suggest that many of you should begin a re-examination of what you own and whether you wish to keep owning it.
Expect More Fallout

The fallout in Detroit is not over. There will be more Detroits for sure.

However, we have not seen the final ruling from bankruptcy court. To what extent, if any, will courts rule "General Obligation bonds no longer have the first call on assets"?

I don't know and no one else does either. Yet, I suspect that both bondholders and pensioners will take a decent-sized hit. A friend emailed a commonsense point of view earlier today.

"Fairness of the pension level is irrelevant. It's what the debtor can afford. And Detroit can't afford much. In municipalities, as in private employment, the cost of getting a pension package your employer can't afford is ultimately that you don't have a pension package. This will be much tougher than private bankruptcies, though, because the PBGC does not cover municipal employee plans. So the estate of Detroit will have to pay something, because it is intolerable that old policemen and firemen suddenly resort to complete welfare. But it can't pay much. This will be brutal."

Three Bad Assumptions

Kotok points out that no AAA rated GO bond has ever defaulted. OK, but have we ever had a pension crisis before? 

Please consider three widely-held assumptions on GO bonds.

  1. Bondholders have first call on obligations
  2. Taxes can always be raised
  3. The state or federal government will bail out the municipality

All three of those assumptions are false. And how many bonds are rated AAA because of those assumptions?

Definition of "Cheap"


The top chart shows that munis are cheap compared to treasuries (assuming no defaults). But does that make them cheap?

This is not a position I endorse, but for the moment let's assume that Kotok is correct.  That AAA rated bonds will not default.

Are they cheap? Compared to what?

It depends on the definition of cheap. What if treasuries are not "cheap"?  After all, the same chart Kotok showed a few days ago would have shown the same thing at the beginning of May.

10-Year Treasury Yield



Yield on the 10-year treasury rose over 100 basis points since the beginning of May. US treasuries were not cheap then. Thus, the notion of something is cheap compared to something else is a false dichotomy.

At the beginning of May, neither treasuries nor munis were cheap. And what if neither is still cheap? What if the pension crisis shifted the sands? What if widely-held assumptions about AAA and defaults are invalid?

As you can see, it's not as simple as Kotok's "GO's will not default so buy them because they are cheap compared to treasuries" point of view.

Things changed, sands shifted, and right now, we really do not know by how much. So it's quite the stretch, for numerous reasons, to say munis are an "Outrageous Bargain".

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Carl the Robot Bartender Mixes Drinks and Chats With Customers

Robots are taking on increasingly complex tasks. As a case in point, Carl the robot bartender serves customers at German bar.
He's handy with a shot glass and customers travel from far and wide to admire him at work.

The only strange thing about Carl the bartender is that he's not quite human.

The humanoid robot mixes drinks for guests at the Robots Bar and Lounge in Ilmenau, eastern Germany.





The robot is the creation of mechatronics engineer Ben Schaefer, who has spent 23 years working in the field.

He built Carl from the parts of disused industrial robots from the German firm KUKA.

Writing on the bar's website, Mr Schaefer said his company aims to make humanity in humanoid robots closer to reality and show that 'scenes as in science fiction films are quite possible'.

Carl can also conduct short conversations with the customers who take up the bar's nine seats, though they probably don't sparkle like the drinks because his speech recognition skills and ability to interact are, for the moment, limited.

For now, Carl will be part-tourist attraction and part test-dummy while Mr Schaefer and his team work out how to shake humanoid robotics out of its 'stagnant' state.
Carl-like robots are not about to replace human bartenders en masse just yet, but technology is certainly advancing at breakneck speed.

I find these kinds of articles fascinating.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Former ECB Chief Economist Warns "ECB Will Soon Have to Support France with Bond Purchases"

Sunday, July 28, 2013
Juergen Stark, former ECB chief economist (who resigned in 2011 over a dispute regarding bond purchases), says in an interview in Handelsblatt "The Euro crisis will worsen in late autumn"

Via Google Translate
A year ago, ECB chief Draghi announced plans to do anything to save the euro. The former ECB chief economist Juergen Stark considers this fatal. He fears that the ECB will soon have to support France with bond purchases.

"I think the crisis will come to a head in late autumn. We are entering a new phase of crisis management, "Stark told the Handelsblatt (Friday edition). After the parliamentary elections in late September that France would increase the pressure on the ECB and Germany. The government bond purchase program OMT should actually be used in Spain and Italy. "But the pressure will be enormous, use the instrument in France. And without that, the country must go to the rescue, "said Stark.

A year ago the head of the ECB, Mario Draghi announced in London to do anything to save the euro. A little later, he presented the plans for the bond purchase program OMT.

Draghi bought the governments in Europe time. "But this time was wasted," Stark said.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Euro Sucks Italian Blood; Prime Minister Blames Tax Evasion; Reflections on Italy's Shadow Economy

This summer a private air plane has been flying over Italian beaches with a banner message Euro is Sucking Italian Blood



The article states "Italians have only one solutions to fight against this situation : leave Italy."

No End in Sight to Italy's Economic Decline

Der Spiegel says No End in Sight to Italy's Economic Decline
The Italian economy may be the third largest in the euro zone, but it is also plagued by inefficiency and continues to shrink. The country's political leadership has proven unable to implement badly needed reforms and the future looks grim.

Italy, despite being the third-largest economy in the euro zone after Germany and France, finds itself in dire straits, having been in decline for years. Its GDP has dropped by 7 percent since 2007. The last few years, says Gianni Toniolo, an economics professor in Rome, represent "the worst crisis in (the country's) history," even more devastating that the period between 1929 and 1934.

Some sectors have lost even more capacity, with the automobile industry having declined by 40 percent. According to Paolazzi, Italy is experiencing an "unprecedented process of deindustrialization."

But why?

Wages aren't the problem. They are 15 percent lower than Belgian and French wages and 30 percent lower than wages in Germany, according to a current Bank of Italy comparison. But according to Confindustria, the Italian economy faces a tax burden that is 20 percent higher than in Germany. And unit labor costs are about 30 percent higher than German levels, say central bank officials.

The CGIA research institute in Mestre, near Venice, found that one in two small businesses was only able to pay its employees in installments. Three out of five companies are forced to take out loans to pay their high tax bills.

In addition to the tax burden, a bloated bureaucracy obstructs almost all economic activity, an inefficient judiciary deters potential investors with trials that can last for decades. Italy has a relatively low education level and a poor infrastructure characterized by potholed streets, an energy supply prone to failure, constantly delayed trains and outmoded communication networks.

As a result, Italy continues to fall behind internationally as a place to invest. It is now 44th in the World Competitiveness Center (WCC) ranking, below the Philippines, Latvia, Russia and Peru, and only slightly above Spain and Portugal.

Populists like Berlusconi and the founder of the "Five Star" protest movement, Beppe Grillo, are not the only ones advocating the most radical of all solutions for Italy's problems. The country has "a lot of vitality and great potential," says US economist and policy advisor Allen Sinai, but it can only benefit from these strengths "by withdrawing from the euro."
Structural Problems

The Euro is clearly a problem, but leaving the Euro without fixing the other structural problems will not fix anything.

Letta Declares War on Tax Evasion

The Telegraph reports Italian Prime Minister Enrico Letta pledges war on tax evasion
Italian prime minister Enrico Letta pledged Wednesday to "fight relentlessly" against tax evasion in the recession-hit country, as the government pushed new growth measures through the lower house of parliament.

Letta blamed Italy's underground economy - which ranges from simple tax evasion to organised crime and accounts for some 25 percent of the overall economy according to most studies - for damaging competitiveness.
Reflections on Italy's Shadow Economy

Letta has things ass backwards. Tax evasion and the underground economy is not destroying Italy. Rather, Italy's massive underground economy is a symptom of the dysfunctional nature of the real economy.

The underground economy thrives because of high taxes, poor infrastructure, political favoritism, and inane labor rules.

A crackdown on tax evasion (a symptom of the problem, not the problem) will only make matters worse.

Only Hope is Bankruptcy 

For more on Italy, please note the opinion of Enrico Colombatto, Professor of Economics at the University of Turin who says "Only Hope For Italy is Bankruptcy".

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

How Debt Consolidation Loans For Bad Credit Can Solve Financial Heartache

The pressure that can build up when trying to control mounting debts can be so great that bankruptcy seems to be the only answer. But it would be unwise to file an application unless it is completely necessary. But how can anyone deal with the problem? Well, a debt consolidation loan for bad credit management is probably the best option.

There is no doubt that getting a loan to clear existing debts is effective, but it is as important to get good terms on these loans as it is to get good terms on a normal loan. The challenge then is to find a lender offering low interest consolidation programs.

This is where the effort put into searching for the right debt consolidation loan company can pay dividends. But the starting point for all bad credit borrowers is to ensure they know where they stand before beginning the search for any loan.

How Consolidation Loans Work

The workings of consolidation may be a little confusing, but in fact the concept is very straightforward. Basically, all of the various debts are clumped together into a single sum, and bought out with a single loan. Therefore, the advantage of a debt consolidation loan for bad credit borrowers is principally that it creates a chance to restructure debts completely.

The issue with having several individual debts is that there are separate repayment sums with different interest rates due on different repayment dates. It can mean the pressure is practically constant. However, with a single loan the array of concerns is kept under much better control.

What is more, a low interest consolidation program means that the interest paid each month is much lower than the total combined interest paid for the 4, 5 or 6 individual loans. And, if the debt consolidation loan term is long enough, the size of the repayments can fall to as much as 50% of the combined total of the original repayments.

Check Your Credit Status

When starting to seek a company that grants debt consolidation loans for bad credit borrowers, the first thing to do is find out your actual credit situations This means getting a copy of your credit report and looking at the official score, and the reasons it was calculated.

There is always the chance that a score is inaccurate, with recent loan repayments perhaps not being noted, and sometimes even the full clearance of a debt. It is important that, should anything seem to be missed out, that the score is reviewed. Addressing the score can help in securing a low interest consolidation program.

If the score is accurate, then the information is valuable anyway since it is the key to assessing the terms of the debt consolidation loan. Remember, any consolidation company will look to buy out your debts completely and then receive repayments back, so the interest charged is important too.

Factors To Consider

It is not always necessary to find a company, with some lenders willing to provide debt consolidation loans for bad credit management purposes. However, this can depend greatly on the sum required, with large loans harder to secure from independent lenders.

Of course, as with all loans, providing some security can all but make approval certain. This can mean providing collateral, such as car or home equity. However, it is better to find a cosigner – someone that guarantees that monthly repayments will be made. Getting a low interest consolidation program is therefore easier.

However, when considering a lender, make sure they satisfy the highest standards set by the Better Business Bureau. Check their grade on the BBB website, and only choose an A+ lender for a debt consolidation loan.

Farm Robots to Make Migrant Worker Vegetable Pickers Obsolete; Welcome the "Lettuce Bot", the "Grape Bot", the "Strawberry Bot"

Saturday, July 27, 2013
The migrant worker agricultural jobs that few legal US citizens are willing to do for the price farmers are willing to pay will vanish within a decade as robots will soon be able to perform even those tasks cheaper.

Welcome the "Lettuce Bot", the "Grape Bot", the "Strawberry Bot"

Time reports Robots to Revolutionize Farming and Ease Labor Woes.
On a windy morning in California’s Salinas Valley, a tractor pulled a wheeled, metal contraption over rows of budding iceberg lettuce plants. Engineers from Silicon Valley tinkered with the software on a laptop to ensure the machine was eliminating the right leafy buds.

The engineers were testing the Lettuce Bot, a machine that can “thin” a field of lettuce in the time it takes about 20 workers to do the job by hand.

The thinner is part of a new generation of machines that target the last frontier of agricultural mechanization – fruits and vegetables destined for the fresh market, not processing, which have thus far resisted mechanization because they’re sensitive to bruising.

Researchers are now designing robots for these most delicate crops by integrating advanced sensors, powerful computing, electronics, computer vision, robotic hardware and algorithms, as well as networking and high precision GPS localization technologies. Most ag robots won’t be commercially available for at least a few years.

On the Salinas Valley farm, entrepreneurs with Mountain View-based startup Blue River Technology are trying to show that the Lettuce Bot can not only replace two dozen workers, but also improve production.

“Using Lettuce Bot can produce more lettuce plants than doing it any other way,” said Jorge Heraud, the company’s co-founder and CEO.

The Lettuce Bot uses video cameras and visual-recognition software to identify which lettuce plants to eliminate with a squirt of concentrated fertilizer that kills the unwanted buds while enriching the soil.

Blue River, which has raised more than $3 million in venture capital, also plans to develop machines to automate weeding – and eventually harvesting – using many of the same technologies.

Another company, San Diego-based Vision Robotics, is developing a similar lettuce thinner as well as a pruner for wine grapes. The pruner uses robotic arms and cameras to photograph and create a computerized model of the vines, figure out the canes’ orientation and the location of buds – all to decide which canes to cut down.

In southern California, engineers with the Spanish company Agrobot are taking on the challenge by working with local growers to test a strawberry harvester.

The machine is equipped with 24 arms whose movement is directed through an optical sensor; it allows the robot to make a choice based on fruit color, quality and size. The berries are plucked and placed on a conveyor belt, where the fruit is packed by a worker.
End of the Migrant Worker

Natural News reports Farm robots to make human ag workers obsolete within a decade.
Technology is about to take over America's fruited plains - robots, it seems, are all the rage down on the farm, and their introduction and spread will make human farm work a thing of the past.

Right now hordes of migrant workers tend to "America's Salad Bowl," located in sunny California, as they have for the past 100 years. But the coming machines will usher in the end of an era.

And many farmers are welcoming the technological advances. They see bots as easing the illegal immigration problem, increasing productivity at less cost (which could be passed onto consumers even as farm profits are bolstered), boost quality and provide a more consistent product.

"Almost three-fourths of all U.S. hired farm workers are immigrants, most of them unauthorized. The U.S. food system - particularly fruit and vegetable production - depends on immigrants more than any other sector of the U.S. economy," says a report by the Bread for the World Institute.

Robots will cost plenty - for the largest farming operations, millions of dollars - but farm operators say the expense will be worth it.

Still, there is much research and development to be done. Right now, bots - machines in general - are clumsy and bulky. They are not always able to detect when fruit and vegetables are ready to be harvested or picked. They can't always detect between produce and leaves. And they don't have the dexterity of a seasoned farm worker.

Machinery and machine technology has made farming easier and more efficient for centuries. The development continues.
Two Predictions

  1. Technology will improve much faster than currently estimated
  2. By the time Congress addresses the illegal immigrant problem, the nature of the problem will have radically changed


Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Supply Chain Management for Successful Business

To achieve high profit margins in your line of business, it's necessary to excel not only in making more money than you invest, but ensuring impressive sales are possible. You must choose quality products to warehouse or drop ship, budget your marketing wisely to attract the most traffic for the lowest spends, and maintain good relationships with the other links in your supply chain. These include the suppliers of raw materials, the manufacturers who turn that into your finished products, suppliers of other necessities like packaging, and finally your clientele. As you delve deeper into international business by way of aglobal trade portal for connections, you'll find the opportunities for finding specific needs to populate your inventory are limitless. Maintaining good relations with suppliers, however, may require some care.

Important Steps to Ensure a Strong Chain

1) Study all trade agreements made between you and your suppliers and vendors carefully. If you supply a product, take care to look for exclusivity in clauses; if you wish to broaden your business, it may not always help to give all rights of sale to one vendor. If you import goods, know whether or not suppliers have a clause prohibiting you from selling competing products.

2) Clear away any language barriers before you get serious about negotiations. When dealing with overseas companies, there is the likelihood for things to get lost in translation. If necessary, consult with somebody who speaks the language of your supplier to make sure everybody is on the same page.

3) Keep an honest profile of your business. When you join a supply chain portal for the purpose of attracting contacts, your profile is often the first impression they will have of your company. Make sure all information is accurate, that supplemental websites and social networks are updated, and that all contact information is valid.

Payroll Employment for Age Group 18 to 29 Shows Fewer Full-Time Employment "Regardless of Education"

A Gallup Poll on US Payroll Employment for Age Group 18 to 29 shows Fewer Young Adults Holding Full-Time Jobs in 2013.
Fewer Americans aged 18 to 29 worked full time for an employer in June 2013 (43.6%) than did so in June 2012 (47.0%), according to Gallup's Payroll to Population employment rate. The P2P rate for young adults is also down from 45.8% in June 2011 and 46.3% in June 2010.



Younger Americans Less Likely to Have Full-Time Work Now, Regardless of Education



Older Americans More Likely to Hold Full-Time Jobs Now Than a Year Ago

The lack of new hiring over the past several years given a recovering economy seems to have disproportionately reduced younger Americans' ability to obtain full-time jobs. On the other hand, Americans aged 30 to 49 this June were, at 61.4%, about as likely to have a full-time job as they were in June of each of the prior three years.

The percentage of Americans aged 50 to 64 who have a full-time job increased in June 2013, to 48.2%, from 46.6% a year ago and 45.7% in June 2010. Similarly, 8.4% of Americans 65 or older had a full-time job in June 2013, compared with 7.2% in June 2012 and 6.2% in June 2010.

The slow economy of recent years has limited new hiring. This has likely increased the percentage of older Americans with jobs, as companies may be placing a greater value on their experience and productivity and as older workers decide to continue to work when given the opportunity to do so. It also may suggest that far fewer workers are retiring voluntarily. In turn, this may imply that the current labor participation rate will increase, as those who involuntarily left the workforce return in greater numbers than expected once the U.S. economy begins to grow significantly.
These results are not surprising. Here is a snip from my May 1, 2008 post on the Demographics Of Jobless Claims

Ironically, older part-time workers remaining in or reentering the labor force will be cheaper to hire in many cases than younger workers. The reason is Boomers 65 and older will be covered by Medicare (as long as it lasts) and will not require as many benefits as will younger workers, especially those with families. In effect, Boomers will be competing with their children and grandchildren for jobs that in many cases do not pay living wages.

Social Security Cliff in Sight

And so here we are. Boomers are competing with their children and grandkids for jobs. Demographics are awful. And the ramifications of an aging workforce with fewer workers than ever vs. retirees puts stress not only on public union pension plans, but also on Social Security.

For further discussion, please see Social Security Cliff in Sight; Retirees Will Outlive Trust Fund; Ramifications of Nonmarketable IOUs and Privatization

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Disability Insurance For Fee For Service Professionals

Friday, July 26, 2013

The Risks of A Long Term Disability

Let us first define what a "fee for service professional" truly is. There are thousands of possible occupations that could use this tag, the important part for this article is that you are clearly able to distinguish between a professional who generates income based upon his or her ability to perform a service, and somebody who is going to earn a salary for the year simply by being employed. People who have occupations that result in income only when he or she performs the duties of their occupation are considered fee for service professionals. Physicians only get paid after they have seen patients and treated them, lawyers get paid for working with clients on all sorts of legal matters, realtors get paid only when they sell a home, and consultants get paid for working with their clients. The systemic problem we have is that so many professionals don't realize just how vulnerable their financial worlds are. One long term disability could wipe out all of their savings in a short period of time, and most professionals don't realize that without them going to work their is no further source of income.

Some Professionals Understand

It is not entirely fair to say that all fee for service professionals don't understand how vulnerable they are. While some occupations seem to walk around with blinders on like consultants, salesman, and attorneys, physicians and nurses all understand just how vulnerable they are. There is a reason physicians buy disability insurance more than any other occupation, they see how people become disabled every day. While a computer consultant may think that if they can think and type that they can work, and physician knows that is just not true. Disabilities are most often illness claims, not accident claims. Many professions think of becoming disabled from a car accident or other accident, reality is that most claims come from illnesses like cancer, diabetes, back problems, heart disease, and hundreds of other diseases. Every professional needs to know that a disease does not care what you do for a living, and will most likely disable everybody in the same way, regardless of what you do for a living. I don't know any computer engineers that are still able to generate new business, and perform consulting services while dealing with something like ALS, Parkinsons, or cancer.

What to Look For as a Professional

There are a decent amount of quality disability insurance policies on the market today. Most of the good policies are Non-Cancellable and Guaranteed Renewable, and I believe you should also own a pure own-occupation definition of total disability. The real key, in my honest opinion, is the residual disability benefits offered to you. You need a disability insurance policy that has a very long recovery benefit, and most of the major carriers differ greatly when it comes to the recovery benefit. While many carriers have Non-Can benefits, and a few good one's also offer a pure own-occupation definition of total disability, there are only a couple that have a recovery benefit for the entire benefit period. Most disability insurance companies have to specify their recovery benefit period in the contract. Some will offer 6 months, some will go out to 2 years, but the best have a residual disability benefit that allows for an unlimited recovery benefit.

Ask Yourself One Question

If you were totally disabled for a period of one year, and one day you were miraculously recovered back to work full time, how long would it take you to achieve your pre-disability earnings level? Many fee for service professionals, when faced with this question, realize it would be a matter of rebuilding their entire business again. Clients and patients typically cannot wait for you to recover from your disability, and end up moving on to your competition while you are disabled. It may have taken you a decade to achieve the level of earnings you had before you were disabled, and it may be another decade before you get back to that level again. Many times you end up starting over when recovering from a long term disability, or even worse you may never financially recover. This is the exact reason why fee for service professionals need to have an individual disability insurance policy that has an unlimited recovery benefit. An unlimited recovery benefit will allow this person to receive monthly disability payments every month while they set back to rebuild their business.

Scary Thing About Some Policies

The scary thing about some disability insurance policies is that they require a loss of time or duties in order to pay any residual or partial disability benefits. Make absolutely sure that the disability insurance policy you end up purchasing does not require a loss of time or duties in order to pay a recovery benefit, or residual disability benefit. If the policy requires a loss of time or duties, when you are back to work full time the disability benefit would be over. As we just reviewed, it may be years until you financially recover, so make sure to buy a disability insurance policy that will pay you until you financially recover with an unlimited recovery benefit, not just until you physically recovery.

Funniest and Most Absurd Real Estate Promotion in Years

Those attending the iProperty.com International Property Expo in Singapore, to learn about "the best property in Asia" can win a free house by attending.



Guess where the house is located.

One might think somewhere in Asia because that's the focus of the expo. But No! The free house is located in the mother of all choice spots, Detroit, Michigan.

Check out the image.



Note the creative description: "Yes, it’s true we are giving away a home! This is a gorgeous 3 bedroom brick home located in an excellent neighbourhood just a stone’s throw away from key facilities like the Triumph Hospital and the Bel Air Shopping Centre. It boasts a garage and basement and has just been newly furnished. It’s Freehold Landed U.S property with 3 bedroom and 1 bathroom. A lot size of 4,225 sq ft with Garage, basement and tenant included! This property has a net selling price US $38,000."

Is this ad supposed to entice people to attend or scare them away?


It's Too Late

The iProperty promotion clearly needs a nice corresponding "better buy now before it's too late" message.

And I have just the right promotional idea in mind. It's from my December 13, 2005 article It's Too Late.
I think it's too late.
In fact I know it's too late.
How do I know?
The following Email I received tonight should explain it nicely.
When you see stuff like this, not only is it too late, it's way too late.


Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Best Health Insurance Company Review Comments 2013

Kaiser Permanente is the Best Health insurance Company in 2013, Kaiser Permanente has received the most positive comments from its competitors. see picture of customer satisfaction ratings below!




Here are positif comments for Kaiser Permanente Insurance Company

Excellent coverage for staying healthy.
No need to be referred out, everything is right there & I think that's very important.

Spain Levies Consumption Tax on Sunlight

Proving that idiocy truly has no bounds, Spain issued a "royal decree" taxing sunlight gatherers. The state threatens fines as much as 30 million euros for those who illegally gather sunlight without paying a tax.

The tax is just enough to make sure that homeowners cannot gather and store solar energy cheaper than state-sponsored providers.

Via Mish-modified Google Translate from Energias Renovables, please consider Photovoltaic Sector, Stunned
The Secretary of State for Energy, Alberto Nadal, signed a draft royal decree in which consumption taxes are levied on those who want to start solar power systems on their rooftops. The tax, labeled a "backup toll" is high enough to ensure that it will be cheaper to keep buying energy from current providers.

Spain Privatizes the Sun

Via Google translate from El Pais, please consider Spain Privatizes The Sun
If you get caught collecting photons of sunlight for your own use, you can be fined as much as 30 million euros.

If you were thinking the best energy option was to buy some solar panels that were down 80% in price, you can forget about it.

“Of all the possible scenarios, this is the worst,” said José Donoso, president of the Spanish Photovoltaic Union (UNEF), which represents 85% of the sector’s activity.

Before the decree it took 12 years to recover the investment in a residential installation of 2.4 kilowatts of power. Following the decree, it will take an additional 23 years according to estimates by UNEF.
Petition of the Candle Makers Revisited

And so the "Petition of the Candle Makers" comes to pass.

I have written about the "petition" on many occasions, but here is the latest reference: Extremely Difficult to Keep Up With Economic Stupidity
Reflections on "Unfair Competition"

Corporations always consider it "unfair" when any other company can do things faster, smarter, or cheaper than they can. The buggy whip industry once protested cars.

Today, land-line telecom companies have to compete with wireless and they don't like it. Now, we see protests about VOIP (voice over internet protocol).

Technology marches on. But France does not like it. The French solution is to tax Skype because it has an "unfair advantage".

This is an age-old unwinnable argument.

Petition of the Candle Makers

The ultimate irony is France's preposterous "unfair advantage" argument was lampooned by French economist Frederic Bastiat back in 1845 when he penned 'Petition of the Candle Makers'.

In his article, candle makers were incensed that the light of the sun could be had for free. The sun's unfair trade advantage was to the "detriment of fair industries" who could not compete against the sun's price.

Something had to be done to "shut off as much as possible, all access to natural light, and thereby create a need for artificial light" so that "industry in France will encouraged".
The moral to this story is "Don't propose something purposefully stupid hoping to make a point. Some idiot might actually think it's a good idea and do it".

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Interesting Hussman Tweets on Case Shiller PE, Institutional Selling, Book Values

Thursday, July 25, 2013
Here are a few interesting John Hussman Tweets from today.

On Valuations

Valuation Note: Shiller earnings = 6.3% of current S&P revenues vs. historical norm of 5.3%. At normal margins, Shiller P/E would now be 29

On Institutional Unloading vs. Retail Buying

Institutions have never dumped more stock onto retail investors as they have in the past 4 weeks.

On Book Value (Re-tweeted by Hussman)
Chanos says more companies >3x book value now than March 2000.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Durable Goods: Seen and Unseen (the Good, the Bad, the Ugly)

Inquiring minds are digging into the latest Durable Goods Report by the Census Bureau.

New orders for manufactured durable goods in June increased $9.9 billion or 4.2 percent to $244.5 billion, the U.S. Census Bureau announced today. This increase, up four of the last five months, followed a 5.2 percent May increase and was at the highest level since the series was first published on a NAICS basis in 1992. Excluding transportation, new orders increased slightly. Excluding defense, new orders increased 3.0 percent. Transportation equipment, also up four of the last five months, led the increase, $9.9 billion or 12.8 percent to $87.1 billion. This was led by nondefense aircraft and parts, which increased $6.5 billion.

Durable Goods Seasonally Adjusted

Durable GoodsSeasonally Adjusted
MonthlyPercent Change
June 2013May 2013April 2013May-JuneApril-MayMarch-April
Total:
Shipments…………229,757229,773226,9150.01.3-0.6
New Orders…………244,494234,581223,0034.25.23.6
Excluding transportation:
Shipments…………160,646160,465160,2110.10.2-0.4
New Orders……………157,420157,369155,7740.01.01.8
Excluding defense:
Shipments………217,464217,701215,110-0.11.2-0.3
New Orders………………230,302223,629213,1243.04.92.6
Manufacturing with unfilled orders:
Shipments……161,645161,836158,586-0.12.0-0.9
New Orders………183,051173,160161,8425.77.04.8
Primary metals:
Shipments…………24,91524,37924,6982.2-1.30.6
New Orders………25,40525,46625,307-0.20.62.3
Fabricated metal products:
Shipments………28,94329,00929,090-0.2-0.32.2
New Orders……29,61729,59329,7120.1-0.41.2
Machinery:
Shipments…………34,21734,62434,255-1.21.1-2.3
New Orders………35,39234,57234,3962.40.51.2
Computers and electronic products:
Shipments………27,47127,25927,5690.8-1.1-3.1
New Orders………21,66122,23921,541-2.63.24.6
Computers and related products:
Shipments………2,2832,3072,336-1.0-1.2-5.9
New Orders…………2,2652,3132,362-2.1-2.1-3.7
Communications equipment:
Shipments……………4,0494,1173,960-1.74.00.6
New Orders…………4,6205,2334,543-11.715.211.9
Electrical equipment, appliances, components
Shipments…………10,30010,40510,195-1.02.1-0.8
New Orders…………10,51910,71210,358-1.83.40.1
Transportation equipment:
Shipments…………69,11169,30866,704-0.33.9-1.0
New Orders…………87,07477,21267,22912.814.88.0
Motor vehicles and parts:
Shipments…………45,16144,56445,1581.3-1.32.3
New Orders………45,34044,75845,1271.3-0.82.3
Nondefense aircraft and parts:
Shipments………11,84012,6379,709-6.330.2-10.0
New Orders………27,26720,75012,34631.468.118.4
Defense aircraft and parts:
Shipments………4,6274,6694,618-0.91.1-9.5
New Orders………5,1074,3034,10618.74.842.8
All other durable goods:
Shipments………34,80034,78934,4040.01.10.8
New Orders………34,82634,78734,4600.10.91.3
Capital goods:
Shipments…………84,18785,51080,950-1.55.6-3.8
New Orders………103,59695,06483,8079.013.45.4
Nondefense capital goods:
Shipments………74,25375,77071,394-2.06.1-3.5
New Orders………91,60186,19076,3746.312.93.5
Excluding aircraft:
Shipments………65,82266,39965,164-0.91.9-2.1
New Orders……69,52669,01367,5310.72.21.2
Defense capital goods:
Shipments………9,9349,7409,5562.01.9-5.7
New Orders………11,9958,8747,43335.219.429.9


Easily Seen 

Note how orders for aircraft can skew the overall numbers. A closer look at the "New Orders" components will show precisely what I mean.

New Orders

  • Total +4.2%
  • Excluding Transportation +0.0%
  • Primary Metals -0.2%
  • Fabricated Metals +0.1%
  • Machinery +2.4%
  • Computers and Electronic Products -2.6%
  • Computers Related Products -2.1%
  • Communications Equipment -11.7%
  • Electrical Equipment -1.8%
  • Transportation Equipment +12.8%
  • Motor Vehicles and Parts +1.3%
  • Non-Defense Aircraft and Parts +31.4%
  • Defense Aircraft and Parts  +18.7%
  • Other Durable Goods +0.1%

One quick glance at new orders will give you the "easily seen" look at the durable goods numbers. Although such analysis is "easily seen" not many bother. Instead, many rely on the baseline reported number.

But what about the "not-so" easily seen? I am talking about constant revisions and the overall use of the report in general.

Revisions

Alan Hartley of Black Cypress Capital says Beware Revisions.
Today the U.S. Department of Commerce reported new orders for manufactured durable goods. One data point often analyzed by investors within the report is “non-defense capital goods ex aircraft”. This is considered a good proxy for business capital spending in the U.S.

That is all well and good, but we find the data less useful than most.

Why? Heavy revisions.

Take June 2012 for instance.

When non-defense capital goods ex aircraft (non-seasonally-adjusted) was originally reported in 2012, it was $67,693. The following month it was revised to $66,452. It was then revised to $64,906. Today June 2012 was revised yet again to $68,555. Over the course of the year, June 2012 looked as though it had fallen nearly 5% from June 2011, only to be revised today to show an actual gain of 0.5%.
History of Non-Defense Capital Goods Ex-Aircraft Revisions 

Here is the telling chart that  Hartley put together.



Core Durable Goods

"Core Durable Goods" are the "total durable goods orders excluding transportation equipment. The new orders numbers are closely followed by market participants as they provide indications on current economic conditions as well as future production commitments in the manufacturing sector."

Today we see Durable Goods Excluding Transportation is +0.0%. If June 2012 is any guide, the number may be off by 5% in either direction.

Of what use is that?

And the reported baseline number of +4.2% is even more useless. Non-defense aircraft orders are up a whopping 31.4% on the strength of 287 new orders for Boeing aircraft.

Such orders are extremely volatile, and cancelable.

The Good, The Bad, The Ugly

  • The Good: The basline number was up 
  • The Bad: The overall core number was flat; Numerous core numbers were negative 
  • The Ugly: Over the course of the next year (or longer), the census bureau is likely to significantly revise all of the numbers in multiple directions, multiple times.

The bad and the ugly clearly outweigh any good in this report. So don't take today's surprisingly good number seriously.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Only Hope For Italy is Bankruptcy

Via Mish-modified Google translation from Libre Mercado (LM), Enrico Colombatto, Professor of Economics at the University of Turin says in an interview "The only hope for Italy is the bankruptcy of the State"
Enrico Colombatto (EC), Professor of Economics at the University of Turin and director of the Center of Economic Research in the Piedmontese town, offers a groundbreaking proposal: "Do not pay the debt."

It seems unthinkable, but he believes it will be the only way to start fresh, leaving those who have lent money to irresponsible politicians pay for their mistake.

LM: Spain and Italy have very large states, but they are very inefficient. Our laws are stifling, heavy.

EC: In Italy, the public sector is not intended as an aid to the production of wealth and public goods and services. It has been conceived as an observatory to generate political consensus and to please the own clientele. The concept of public is of assistance but not to the public, but the public sector employee. The beneficiary of the public sector is dependent on this sector, not the public.

LM: After six years of crisis we have more spending, more laws, more intervention, ... Where does change start?

EC: By the mentality. It has aggravated the welfare spirit that we have within us. The state is the problem, not the solution.

LM: It's counter-intuitive, but when politicians fail, they want more power. And politicians who are succeeding all want more power to the state. In Spain, demonstrations call for a public banking as a solution to problems. Can we escape this trap?

EC: If we think that the state is the solution, all the problems are going to focus in that perspective. The problem is cultural and ideological. It starts when our children go to school and get to talk about social justice. Children are taught the state should solve every problem: pensions, sickness, education ... The solution is to drop the veil that protects the state. In bankruptcy, people will realize that giving loans to the State, and state guarantees are useless.

LM: A few days ago there was a poll in which the public demanded more taxes.

EC: It is a matter of propaganda. The State says "do not worry, I will only raise taxes on the rich". However, the rich pay more, but also the poor. For example, in Italy, the Monti government introduced a tax on real estate, and 85% of Italians are owners. This is a middle class tax hike. And a country that stifles and suffocates its middle class can not grow.

LM: From your perspective as a university professor, do you have bad omens in regards to a lost generation for Italy and Spain?

EC: Yes and no, It could be 50 years, not just 15. The key will be in the new political class.

LM: Some people think it might not be so bad that we intervene. They prefer to let Germany or the troika decide instead of our politicians.

EC: Because the Germans have many Spanish and Italian bonds, they always favor higher taxation so Southern Europe can pay back those loans. I trust the Chinese more than the Germans. We need a new ruling class because the existing system is corrupt and must be eliminated - No IMF, EU bureaucrats, or Germany.

LM: Where to begin?

EC: You have to start by deregulation. Monti's government has made things worse, especially in the labor market. The regulation is where it was 10 years ago ... well, maybe as it was 150 years ago.

LM:  It is always said that Spain and Italy need to get to compete globally, but many of the labor laws limit the growth of companies, with more regulation and more taxes to the largest companies.

EC: Yes, there are two elements. First regulation, both in general and the labor market in particular, changes to the size of companies. Often the entrepreneur thinks "it's not worth growing, because I will have many new demands." There is also an issue of tax evasion: it is much harder to do it when you're big. And finally, we have the element of funding. To grow need a functioning credit market. And in Italy in the last thirty years, the credit market has served to finance the public debt. There are so many resources that should be used to finance the growth of businesses, but only served to finance the growth of the state. As a result, businesses remain small, because they are funded with self-financing.

LM: Correct. But with this in mind, is there way out of this? Because Italian public debt is the highest in Europe after Greece.

EC: The only hope is the default by the State. We paid about 90,000 million euros in interest. And along with this, we have to face the return of credit. It can't be done.

LM: And the financial system does not collapse?

EC: Why? The underlying conviction is that we will emerge from the crisis by printing money. It is a politically attractive solution, but destructive. The last example in Europe led to Nazism. I do not think we'll get to that, of course, but inflation certainly create social problems and tensions. The question is who should pay? The one who has financed the bad debtor [Spanish or Italian politicians] or the community via higher taxes? The European socialist solution is that losses should be disseminated throughout the population. But this has failed.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com