Intel and Delta Airlines Lead US In Underfunded Pensions (The Illlinois of Corporate Pensions)

Its not only State pension funds that are woefully underfunded (like Illinois at 43.4%), many corporate pension funds are worefully underfunded as well. 

The biggest offenders? Tech giant Intel and Delta Airlines (that includes the former Northwest Airlines, Western Airlines and parts of Pan American airlines) are the two most underfuded penions at 46.6% and 49.4% underfunded, respectively. So, Intel and Delta Airlines are the Illinois of the corporate pension world.

People who rely on their company pension plans to fund their retirement may be in for a shock: Of the 200 biggest defined-benefit plans in the S&P 500 based on assets, 186 aren’t fully funded. Simply put, they don’t have enough money to fund current and future retirees. The situation worsened for more than half of these funds from fiscal 2015 to 2016. A big part of the reason is the poor returns they got from their assets in the superlow interest-rate environment that followed the financial crisis. It’s left a hole of $382 billion for the top 200 plans.

Of course, the percentage of workers covered by traditional defined benefit plans—those that pay a lifetime annuity, often based on years of service and salary—has been declining for decades as companies shift to defined contribution plans such as 401(k)s. But each time a pension plan is terminated, canceled or altered, thousands of workers are affected.

Last month, the 70,000 participants in the United Parcel Service Inc. pension plan learned they won’t earn increased benefits if they work after 2022. Late last year DuPont Co. announced it would stop making payments into its pension plan for 13,000 active employees, and Yum! Brands Inc. offered some former employees a lump-sum buyout to offload some of its pension liabilities. General Electric Co. has a major problem. The company ended its defined benefit plan for new hires in 2012, but its primary plan, covering about 467,000 people, is one of the largest in the U.S. And at $31 billion, GE’s pension shortfall is the biggest in the S&P 500.

So, it isn’t just State and Local government pension plans that are woefully underfunded. Corporate America.

What happens when the global central banks stop their monetary nonsense?

Just like the dinosaurs, pension fund recipients face a bleak future.

Volatility Repression: VIX Hits 4th Lowest Level Since 1990

The Chicago Board Options Exchange SPX Volatility Index (aka VIX) just hit the 4th lowest since 1990.

In fact, the low VIX regimes are 1) May 2017 to today and 2) December 1993).

Of course, the current low volatility VIX regime is courtesy of The Federal Reserve and their low interest rate policies.

November and December 2006 was a third low volatility regime, shortly before the housing bubble burst. So, low stock market volatility is not necessarily a good sign.

Here is a closer look at VIX before The Great Recession and after, with The Fed’s massive intervention. No the VIX repression in 2005 and 2006. Then KABOOM!


Finally, here is a close-up of 2000-2008 showing VIX repression in 2003-2006.


And VIX has been under 10 only during period episodes such as December 1993, May-July 2017 and Nov-Dec 2006.


Let’s see what Janet and the FOMC do over the next twelve months and how that impacts VIX.


US Treasury 10Y-2Y Slope Declines as Gold Rises

After a yield curve rally in late June that sent the 10Y-2Y slope almost to 100, it has started declining once again and is down to 91.425. But notice that gold rose today and continues to be generally inverse to the Treasury curve slope.

Inflation continues to be under The Fed’s 2% target and has averaged a meager 1.1% under Yellen’s management.

Here is Fed Chair Janet Yellen looking for 2% inflation and not finding it.

Debt Star! Trump May Need Obama’s Secret Debt Plan, Worrying Markets

So, President Obama had a secret plan to default on the US public debt all along. And President Trump may have to use it.

(Bloomberg) Deep within the Treasury Department sits a once-secret plan written by the Obama administration that could lead to the first-ever default on U.S. debt. Bond traders are worried that Donald Trump’s Treasury secretary may have to use it.

The U.S. government will reach its statutory limit on borrowing some time in October, the Congressional Budget Office estimates. The Trump administration has asked Congress to raise the ceiling before then, but it is running into the same complications the Obama White House encountered: lawmakers, mostly Republicans, who want to use the debt limit as leverage for controversial policy changes.

Treasury Secretary Steven Mnuchin has said there are “plans and backup plans” to keep the government solvent through September. Bond traders suspect he is referring to preparations made in 2011 in case the Obama administration had to prioritize payments on government securities over other obligations. The Treasury chief got fresh hope that Congress may raise the debt limit before leaving for its August recess after Senate Majority Leader Mitch McConnell delayed the break by two weeks.

Yes, Congress and the US Treasury has a debt problem. Explosive debt, thanks to chronic spending by Congress, will really be facing a problem if Treasury rates rise.

Healthcare spending (such as Medicare) is growing exponentially.

Leading to a CBO forecast of over $30 trillion in the near future.

And then we have the massive underfunding of government pension plans which will require bailouts by taxpayers. Look at Illinois, for example at 40% funded.

The good news is that markets aren’t pricing in excessive debt … yet.

With Senators like Maria Cantwell running things in Congress, how bad can it be?

Moody’s Down Grades Hartford CT As Wage-to-Cost Of Living Gap Drives Household Debt Growth

Despite what is touted by the Federal Reserve (debt is good!), states and municipalities are drowning in debt. As are US households.

Moody’s Investors Service has downgraded the City of Hartford, CT’s general obligation debt rating to B2 from Ba2. The outlook is negative.

The Hartford General Obligation bond is at 6.971% based on $82.768.

The rating was placed under review for possible downgrade on May 30, 2017. The par amount of debt affected totals approximately $550 million.

The downgrade reflects the increased likelihood that the city will pursue debt restructurings to address its fiscal challenges. Last week, the city hired a law firm to advise it on debt restructurings. City management has made public statements indicating they will need to have discussions with bondholders about restructuring its debt regardless of the outcome of the state’s biennial budget as debt service costs escalate sharply leading to budget deficits over the next five years.

The rating also reflects the city’s challenging liquidity outlook in the current fiscal year and weak prospects for achievement of sustainably balanced financial operations. The city currently projects a fiscal 2018 deficit of $50 million and is seeking incremental funding from the state to close that gap. The state has not yet adopted a budget specifying aid for the city for the fiscal year beginning July 1. Even if the state’s biennial budget allocates sufficient funds to address the current and following years deficits and create a fiscal oversight structure, the budget is still unlikely to provide a pathway to structural balance over the longer term. City deficits, partially attributable to escalating debt service costs, are projected to grow to $83 million by 2023, making the city’s weak financial position vulnerable to further deterioration.

Rating Outlook

The negative outlook reflects the possibility that the city will restructure its debt in a way that will impair bondholders. The outlook also incorporates uncertainty over state funding in the current fiscal year and beyond and the associated impact on reserves, liquidity and the ability to achieve sustainably balanced operations.

That is the City of Hartford that is in trouble due to excessive debt relative to tax receipts. But what about US households?

The rising cost of living relative to wage growth is leading to excessive debt use to maintain a standard of living.


Mortgage Applications Plunge As Rate-Hikes Tank Refis

Fed Chair Janet Yellen shot an arrow into the air,  It fell to earth, but now we know where!

Mortgage applications decreased 7.4 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending July 7, 2017. This week’s results include an adjustment for the Fourth of July holiday.

The unadjusted Purchase Index decreased 22 percent compared with the previous week and was 3 percent higher than the same week one year ago. The seasonally adjusted Purchase Index decreased 3 percent from one week earlier.

The Refinance Index decreased 13 percent from the previous week to the lowest level since January 2017.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($424,100 or less) increased to its highest level since May 2017, 4.20 percent, from 4.13 percent, with points decreasing to 0.31 from 0.32 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.

The Fed And The Second (Housing) Bull Run: Home Price Growth 2X Hourly Wage Growth

Housing is on its second leg of a bull run after the first bull run crashed and burned in 2007/2008. The growth in home prices has outstripped average hourly income since 1999.

Here is a chart comparing home price growth YoY and average hourly wage growth YoY.  Notice that is has stabilized to 2x (home prices growing twice as fast as average wage growth).

The ratio of home price growth to average hourly wage growth peaked in July 2004 at 10.52.

Of course, the highest rates of home price growth occurred during the early-to-mid 2000s after The Fed’s rapid rate cuts related to the 2001 recession.

Unfortunately, average hourly wage growth fell after 2001 as home prices were accelerating.

Despite 10 years at near-zero Fed Funds target rates and $4.4 TRILLION in Fed asset purchases (and an almost doubling of the M2 money stock since 2007), all The Fed has to show for it is the worst wage recovery after a recession in modern history. And elevated asset prices.

All that Fed stimulus and home prices growing at 2x wage growth.

Lest we forget, household consumer purchasing power has fallen by more than a half since 1988.

The Fed’s chronic (and sustained) intervention has been a nightmare.