Today’s News 15th March 2017

New European Regulations Set To Crush Equity Research Budgets By $300 Million

Literally no one knows the true ‘value’ of equity research, not even the investment banks that are selling it. Up until now, equity research has been treated as a ‘freebie’ given away to institutional clients in return for trading commissions but that is all about to change thanks to the European Union’s MiFID II regulations, which require asset managers to separate trading commissions from investment-research payments.

Unfortunately, at least for the Investment Banks of the world, while the cost of generating equity research may be substantial, it turns out that the true ‘value’, as defined by institutional clients’ maximum willingness to pay for reports, may be much less. Which is shocking given the creativity required to constantly generate new variations of daily reports politely suggesting that you “Buy The Fucking Dip.”

As Bloomberg notes today, the regulatory change slated to take effect next January could cost the I-banks $300 million in fees.

Asset-managers in Europe and the U.S. will probably cut more than $300 million from research budgets in anticipation of regulations aimed at rooting out conflicts of interest in the market for investment information.

That’s according to a survey of 99 fund managers and traders conducted by consulting firm Greenwich Associates, which assessed the shake-up coming to the multi billion-dollar market for investment research over the next year.

The European Union’s MiFID II regulations, which require asset managers to separate trading commissions from investment-research payments, will have a “clearly negative” impact on the amount of commission money that is spent on research and advisory services, according to the Stamford, Connecticut-based firm’s findings released Tuesday. While the budget cuts will be “relatively modest” at individual asset-managers, research providers across the board fear the new law will prompt “a substantial decrease” in buy-side spending.

The findings equate to a 7% drop in overall commission spend for European institutions and a 5% drop in the U.S.. Those reductions would contribute to a nearly $200 million decrease in U.S. research commission spend and a decrease of more than 100 million euros in Europe.

While the rules are technically only applicable within the confines of the European Union, U.S. asset managers with substantial business in the U.K. and Europe are also preparing for the changes and are choosing to adopt global standards. Meanwhile, more than half of U.S. survey participants and almost three quarters in Europe expect the rules to result in a slimming of their counterparty list for research and advisory services. Moreover, 40% of U.S. respondents and more than 50% of European ones expect to limit the number of brokers they trade with.

In response to the changing regulatory environment, Macquarie recently launched a new a la carte product, called “Macquarie Dimension” that allows institutional clients to purchase research reports, managements meetings, analyst calls, etc. on a pay-as-you-go basis. Per Bloomberg:

Macquarie Group Ltd. is trying a new way to charge clients for research: unbundling it.

The Australian bank introduced a service this year that helps solve two problems facing asset managers: they have to trade a lot before getting access to research from big brokers; and regulations taking effect next year will prohibit that kind of arrangement. The new a la carte system, called “Macquarie Dimension,” provides access to research reports, corporate meetings and phone calls with analysts on a pay-as-you-go basis alongside its usual equity-research offerings.

The move is part of a broader trend where specialized financial companies are struggling to find ways to pay for work their clients used to fund with trading piggybacks. The new approach meets Macquarie’s goal of servicing more accounts and monetizing its content, Peter Bentley, managing director at Macquarie Dimension, said in an interview last week at Bloomberg’s New York headquarters.

Bentley sees opportunity in what he calls “regulatory tailwinds” and a chance to service under-appreciated clients. Macquarie isn’t “trying to be particularly disruptive about how people consume research, but we are trying to be innovative in how to commercialize it,” he said.

Of course, as we said before, almost any amount of money seems, at least to us, to be too much to have the same people give you the same advice over and over again, namely “buy more stocks, faster.” There, we just summarized 90% of all equity research that will ever be written for the rest of history in 4 simple words and completely free of charge. You’re welcome.
After Destroying Cambodia, The US Wants The Country To Repay It For The Bombs They Dropped

Authored by Nika Knight via TheAntiMedia.org,

Cambodians are responding with outrage to the U.S. government’s demand that the country repay a nearly 50-year-old loan to Cambodia’s brutal Lon Nol government, which came to power through a U.S.-backed coup and spent much of its foreign funds purchasing arms to kill its own citizens, according to Cambodia’s current prime minister Hun Sen.

While the U.S. was backing the Lon Nol government, it was also strafing the Cambodian countryside with bombs—a carpet-bombing campaign that would eventually see over 500,000 tons of explosives dropped on the small Asian country, killing hundreds of thousands of civilians and leaving a legacy of unexploded ordnances.

“[The U.S.] dropped bombs on our heads and then they ask us to repay. When we do not repay, they tell the IMF [International Monetary Fund] not to lend us money,” Hun Sen said at an Asia-Pacific regional conference earlier this month.

“At the same time the U.S. was giving weapons to Lon Nol, it was bombing the Cambodian countryside into oblivion and creating millions of refugees fleeing into Phnom Penh and destroying all political fabric and civil life in the country,” former Australian ambassador to Cambodia Tony Kevin told Australia’s ABC.

“And all of this was simply to stop the supplies coming down to South Vietnam, as it was then, from the north,” Kevin added. “So the United States created a desert in Cambodia in those years, and Americans know this.”

Hun Sen has argued that the U.S. has no right to demand repayment of its “blood-stained” funds.

“Cambodia does not owe even a brass farthing to the U.S. for help in destroying its people, its wild animals, its rice fields, and forest cover,” wrote former Reuters correspondent James Pringle for The Cambodia Daily.

In fact, during his tenure as prime minister Hun Sen has asked the U.S. to drop the “dirty debt” several times, but American leaders have refused.

“[The] U.S. would not drop it. It would have been so easy to forgive the repayment, it would have been easy to refinance it for education like they did in Vietnam,” the reporter Elizabeth Becker, who covered the Cambodian genocide in the 1970s, told Al Jazeera.

“The U.S. intervention in Cambodia was easily the most controversial that we had in that era,” Becker said. “[The U.S.] dragged Cambodia into the Vietnam War for hopes that by expanding it they could win, the complications now are that even 50 years later, the Khmer Rouge legacy is horrible.”

“The U.S. owes Cambodia much more in war debts that can be repaid in cash,” Becker argued to The Cambodia Daily.
Savage on Alex Jones: ‘We Are in a Civil War Now’

The good Doctor was on Alex Jones for 45 mins today — discussing a variety of topics.

Some of the notable moments were:

We’re in a civil war with the left
The left in the GOP are part of the democratic party
How the family structure was targeted by Marx and now by the left
Soros, Pelosi, Maxine Waters
Healthcare
Taxes
Cuba and Castro
War
His dinner with Trump and his sit down with him over a large bowl of iced cream
He hinted at a class action lawsuit against some of radios ad agencies

Content originally generated at iBankCoin.com
Ruled By Thieves: One Week In The Life Of The American Kleptocracy

Authored by John Whitehead via The Rutherford Institute,

“The first and most important thing to understand about politics is this: forget Right, Left, Center, socialism, fascism, or democracy. Every government that exists — or ever existed, or ever will exist — is a kleptocracy, meaning ‘rule by thieves.’ Competing ideologies merely provide different excuses to separate the Productive Class from what they produce. If the taxpayer/voters won’t willingly fork over to end poverty, then maybe they’ll cough up to fight drugs or terrorism. Conflicting ideologies, as presently constituted, are nothing more than a cover for what’s really going on, like the colors of competing gangs.” — Author L. Neil Smith

The American kleptocracy (a government ruled by thieves) continues to suck the American people down a rabbit hole into a parallel universe in which the Constitution is meaningless, the government is all-powerful, and the citizenry is powerless to defend itself against government agents who steal, spy, lie, plunder, kill, abuse and generally inflict mayhem and sow madness on everyone and everything in their sphere.

Case in point: in the same week that Wikileaks dropped its bombshell about the CIA’s use of spy tools to subject law-abiding Americans to all manner of government surveillance and hacking—a revelation that caused barely a ripple of concern among the citizenry—the government quietly and with little fanfare continued to wage its devastating, stomach-churning, debilitating war on the American people.

Incredibly, hardly anyone noticed.

This begs the question: if the government is overstepping its authority, abusing its power, and disregarding the rule of law but no one seems to notice—and no one seems to care—does it matter if the government has become a tyrant?

Here’s my short answer: when government wrongdoing ceases to matter, America will have ceased to be.

Just consider the devastation wrought in one week in the life of our American kleptocracy:

On Monday, March 6, police were given the go-ahead to keep stealing from Americans who were innocent of any wrongdoing.

In refusing to hear a challenge to Texas’ asset forfeiture law, the U.S. Supreme Court allowed Texas police to keep $201,000 in ill-gotten cash primarily on the basis that the seized cash—the proceeds of a home sale—was being transported on a highway associated with illegal drug trade, despite any proof of illegal activity by the owner. Asset forfeiture laws, which have come under intense scrutiny and criticism in recent years, allow the police to seize property “suspected” of being connected to criminal activity without having to prove the owner of the property is guilty of a criminal offense.

On April 1, 2013, James Leonard was driving with a companion, Nicosa Kane, on U.S. Highway 59 in Texas when the vehicle was stopped by a state police officer for allegedly speeding and following another vehicle too closely. A subsequent search of the vehicle disclosed a safe in the trunk, which Leonard explained belonged to his mother, Lisa Leonard, and contained cash. When the police officer contacted Lisa Leonard, she confirmed that the safe’s contents belonged to her, that the contents constituted personal business, and that she would not consent to allowing the officer to open the safe. After police secured a search warrant, the safe was opened and found to contain $201,000 and a bill of sale for a home in Pennsylvania.

Neither the Leonards nor Kane were found to be in possession of illegal drugs. However, the state initiated civil forfeiture proceedings against the $201,100 on the ground that it was substantially connected to criminal activity because Highway 59 is reputed to be a drug corridor. At trial, Lisa Leonard testified that the money was being sent to Texas so that she could use it to purchase a home for her son and Kane. Both the trial and appeals courts affirmed the authority of state officials to seize and keep Leonard’s funds under the state’s asset forfeiture law, basing their ruling on wholly circumstantial evidence and the reputation of Highway 59. Leonard then asked the U.S. Supreme Court to compel Texas to return her money, given that she was innocent of any crime. In refusing to hear the case on a technicality, the Supreme Court turned its back on justice and allowed the practice of policing for profit to continue.

On Tuesday, March 7, hacked information about the surveillance state was met with a collective shrug by the public, a sign of how indifferent the citizenry has become to living in an electronic concentration camp.

Wikileaks confirmed what we’ve suspected all along: the government’s ability to spy on law-abiding Americans is far more invasive than what we’ve been told. According to the Wikileaks Vault 7 data dump, government agencies such as the CIA and the NSA have been spying on the citizenry through our smart TVs, listening in on our phone calls, hacking into our computerized devices (including our cars), and compromising our security systems through the use of Trojan horses, spyware and malware.

As this Wikileaks revelation confirms, we now have a fourth branch of government. This fourth branch came into being without any electoral mandate or constitutional referendum, and yet it possesses superpowers, above and beyond those of any other government agency save the military. It is all-knowing, all-seeing and all-powerful. It operates beyond the reach of the president, Congress and the courts, and it marches in lockstep with the corporate elite who really call the shots in Washington, DC.

You might know this branch of government as Surveillance, but I prefer “technotyranny,” a term coined by investigative journalist James Bamford to refer to an age of technological tyranny made possible by government secrets, government lies, government spies and their corporate ties. Beware of what you say, what you read, what you write, where you go, and with whom you communicate, because it will all be recorded, stored and used against you eventually, at a time and place of the government’s choosing.

Privacy, as we have known it, is dead.

On Wednesday, March 8, police were given further incentives to use the “fear for my life” rationale as an excuse for shooting unarmed individuals.

Upon arriving on the scene of a nighttime traffic accident, an Alabama police officer shot a driver exiting his car, mistakenly believing the wallet in his hand to be a gun. From the time the driver stumbled out of his car, waving his wallet in the air, to the time he was shot in the abdomen, only six seconds had elapsed. Although the Eleventh Circuit Court of Appeals concluded “that a reasonable officer in Hancock’s position would have feared for his life,” the video footage makes clear that the courts continue to march in lockstep with the police, because no reasonable person would shoot first and ask questions later.

A report by the Justice Department on police shootings in Philadelphia, which boasts the fourth largest police department in the country, found that half of the unarmed people shot by police over a seven-year span were “shot because the officer saw something (like a cellphone) or some action (like a person pulling at the waist of their pants) and misidentified it as a threat.”

What exactly are we teaching these young officers in the police academy when the slightest thing, whether it be a hand in a pocket, a man running towards them, a flashlight on a keychain, a wallet waved in a hand, or a dehumanizing stare can ignite a strong enough “fear for their safety” to justify doing whatever is deemed necessary to neutralize the threat, even if it means firing on an unarmed person?

On Thursday, March 9, police were given even more leeway in how much damage they can inflict on those they serve and the extent to which they can disregard the Constitution.

The Fourth Circuit Court of Appeals ruled in favor of a police officer who allowed a police dog to maul a homeless man innocent of any wrongdoing. The case arose in 2010 after a police dog attacked a homeless man near an abandoned house where police were tracking a robbery suspect. The cop refused to call off the dog immediately, despite the man’s pleading and the fact that he did not match the description of the robbery suspect. The homeless man suffered deep bites on his hand, arm and thigh, that required a nearly 16-inch skin graft, as well as severe bleeding, bruising, swelling and an arterial blood clot. Incredibly, not only did the court declare that the police officer was protected by qualified immunity, which incentivizes government officials to violate constitutional rights without fear of repercussion, but it had the nerve to suggest that being mauled by a police dog is the equivalent of a lawful Terry stop in which police may stop and hold a person for questioning on the basis of “reasonable suspicion.”

Also on March 9, government officials assured the Michigan Supreme Court that there was nothing unlawful, unreasonable or threatening about the prospect of armed police dressed in SWAT gear knocking on doors at 4 a.m. and “asking” homeowners to engage in warrantless “knock-and-talk” sessions. Although government lawyers insist citizens can choose to say no to such heavy-handed requests by police to conduct unwarranted interrogations, if such coercive tactics are allowed, it would give SWAT teams further incentive to further terrorize anyone even remotely—or mistakenly—suspected of wrongdoing without fear of repercussion.

On Friday, March 10, the military industrial complex continued to wage war abroad, while government agencies, including members of the military, remained embroiled in controversies over sexual misconduct.

A day after military brass defended the U.S.-led raid in Yemen that killed 10 children and at least six women, Gen. Joseph Votel, the head of U.S. Central Command, informed members of Congress that even more U.S. troops were needed in Afghanistan to combat the Taliban. Some 8400 American troops have been stationed in Afghanistan since the U.S. invaded the country post 9/11. Approximately 400 more Marines are being sent to Syria to aid U.S. forces in their fight against ISIS.

That same day, news reports indicated that members of several branches of the U.S. military, including the Marines, have been using online bulletin boards to either share or solicit nude or explicit photos and videos of women in the military. One Facebook page for Marines, which has nearly 30,000 followers, contained graphic language about how the women photographed, some without their knowledge or consent, should be treated. As the Center for Investigative Reporting (CIR) revealed, “One member of the Facebook group suggested that the service member sneaking the photos should ‘take her out back and pound her out.’ Others suggested more than vaginal sex: ‘And butthole. And throat. And ears. Both of them. Video it though … for science.’” According to CIR, the photo sharing began less than a month after the first Marine infantry unit was assigned women.

The FBI has also been getting in on the photo-sharing gig, only its agents have been distributing child porn, allegedly in an effort to catch consumers of child porn. Curiously, the Department of Justice has opted to drop its case against a man accused of child pornography rather than be forced to disclose the FBI’s tactics for spying on suspected child porn consumers and entrapping them as part of its Operation Pacifier sting. What the case revealed was that for a little while, in its single-minded pursuit of lawbreakers, the FBI became a lawbreaker itself as the largest distributor of child pornography. All told, the FBI uploaded tens of thousands of images of child pornography to the “dark web.”

As reporter Bryan Clark points out:

At the intersection of technology and law, we’ve proven two things as the result of Operation Pacifier: 1. Government bodies have proven their willingness to circumvent — or even break — the law to capture suspected criminals it’s not even willing to prosecute. 2. We’re living in an age where — to agencies like the FBI — criminals and their victims are less important than the tools used to track them down. It’s hard to argue on the side of an alleged pedophile. But in this case, the FBI was the pedophile’s equal. It was the agency, you’ll recall, that disseminated these images to some 150,000 registered members… this means the FBI perpetrated the same heinous crime it attempted to charge others with, all while securing what could result in zero convictions.

Mind you, this was just one week of shootings, degradation, excessive force, abuse of power and complicity in the American police state. Magnify the impact of these events 52 times over, because they are taking place every week in this country, and you will find yourself weak at the knees.

Somewhere over the course of the past 240-plus years, democracy has given way to kleptocracy, and representative government has been rejected in favor of rule by career politicians, corporations and thieves—individuals and entities with little regard for the rights of American citizens.

This dissolution of that sacred covenant between the citizenry and the government—establishing “we the people” as the masters and the government as the servant—didn’t happen overnight. It didn’t happen because of one particular incident or one particular president. It is a process, one that began long ago and continues in the present day, aided and abetted by politicians who have mastered the polarizing art of how to “divide and conquer.”

Unfortunately, there is no magic spell to transport us back to a place and time where “we the people” weren’t merely fodder for a corporate gristmill, operated by government hired hands, whose priorities are money and power.

Our freedoms have become casualties in an all-out war on the American people.

As I make clear in my book Battlefield America: The War on the American People, this war is being fought on many fronts, with bullets and tasers, with surveillance cameras and license readers, with intimidation and propaganda, with court rulings and legislation, with the collusion of every bureaucrat on the government’s payroll, and most effectively of all, with the complicity of the American people, who continue to allow themselves to be easily manipulated by their politics, distracted by their pastimes, and acclimated to a world in which government corruption is the norm.

How do we stop the hemorrhaging?

Start by waking up. Pay attention to what’s going on around you. Most of all, think for yourself.

As H. L. Mencken observed:

The most dangerous man to any government is the man who is able to think things out for himself, without regard to the prevailing superstitions and taboos. Almost inevitably he comes to the conclusion that the government he lives under is dishonest, insane and intolerable, and so, if he is romantic, he tries to change it. And even if he is not romantic personally he is very apt to spread discontent among those who are.
The Elite Are Prepped And Ready For The Economic Crisis

The following is an interesting overview, via X22Report.com, of our current economic situation and the behavior of the elites going into the next stage of the collapse process.

As Alt-Market’s Brandon Smith notes, take special note of the information on the abrupt decline in bank issued loans (debt); is it not rather coincidental that as the Federal Reserve presses forward with the interest rate hiking process that credit issuance suddenly freezes up?

This is what I have been warning about since last year, and now we are watching it unfold…
Saudi King Arrives In Japan: 10 Aircraft, 500 Limos, 500 Tons Of Luggage, 12,000 Hotel Rooms, 2 Golden Escalators

When Saudi King Salman bin Abdulaziz of Saudi Arabia visited Georgetown in September 2015, the Four Seasons hotel did some serious redecorating. As we reported at the time, eyewitnesses at the luxury hotel had seen crates of gilded furniture and accessories being wheeled into the posh hotel over the past several days, culminating in a home-away-from-home fit for the billionaire Saudi monarch, who was in Washington then for his first White House meeting with President Barack Obama.

“Everything is gold,” said one Four Seasons regular. “Gold mirrors, gold end tables, gold lamps, even gold hat racks.” Red carpets were been laid down in hallways and even in the lower parking garage, so the king and his family never have to touch asphalt when departing their custom Mercedes caravan

The guests staying at the 222-room hotel for the next couple of days are all part of the 79-year-old king’s entourage of Saudi diplomats, family members and assistants, one source said; a full buyout of the entire property was reserved for the visit. Guests who had booked to stay at the Four Seasons during the royal visit have apparently been moved to other luxury hotels in town. A call to the Four Seasons confirmed the hotel is sold out Thursday, Friday and Saturday nights.

Fast forward to this week, when the same King Salman bin Abdulaziz al-Saud landed in Japan, leading to largely to the same reaction, namely people stunned at the size of his delegation and his 500 tons of luggage. The king made quite an entrance, descending from his plane on one of his two golden escalators. The four-day visit, which began Sunday, is part of the Saudi royal’s month-long Asia trip, as the kingdom looks to diversify its economy from oil dependency. Saudi Arabia is Japan’s largest oil supplier.

The king’s delegation arrived in Japan on 10 aircraft and according to the Japanese press, an entourage so large even Japanese government officials didn’t have an accurate number of how many people to expect. In preparation for the royal visit, 1,200 rooms in Tokyo’s best hotels were booked for the delegation.

King Salman appears to have upped his game since visiting the US and, most recently, Indonesia, where he brought two limousines with him. In Japan, an entire fleet of up to 500 limousines were sourced from around the country according to RT. “Maintenance costs for luxury models are high and there is little constant demand for such vehicles,” a limousine industry insider told Asahi Shimbun. “Because we are unable to secure the needed number only in Tokyo, we are gathering the vehicles from Kanagawa and Saitama prefectures as well as the Tokai region.”

While he was in Indonesia, the king also had a special toilet built for him inside a mosque, and another inside the House of Representatives.

On Monday, King Salman met with Japanese Prime Minister Shinzo Abe. King Salman visited the country as a prince in 2014, but this is the first Saudi Arabian king to visit in 46 years. Salman told Abe that the Middle East is facing diplomatic issues involving the Palestinians, Japan Times reported, and cited humanitarian crises in Yemen and Syria. A Saudi-led coalition has been bombing Yemen for almost two years. “Unfortunately, those crises are now giving negative impacts to the region,” the king said.

The Saudi royal’s trip caused many on social media to react in anger, comparing the king’s lavish travel to the situation in war-torn Yemen.

But perhaps the most important part of King Salman’s trip has yet to come: his visit to China. As the SCMP reported in “Why King Salman bin Abdulaziz al Saud upcoming visit to China is important to Beijing … and a worry for Washington“, the trip by King Salman comes amid uncertainty in the kingdom’s ties with Washington, and Beijing’s push to strengthen its presence in the Middle East.

Oil and Beijing’s “One Belt, One Road” trade initiative are expected to head the agenda when the king of Saudi Arabia stops in China as part of his Asian tour.

Dates for the trip have yet to be announced, but diplomatic observers said the king’s agenda would probably include oil exports to China – the world’s second-biggest buyer of the fuel– infrastructure projects for Beijing’s trade initiative linking Asia, Africa and Europe.

The 81-year-old king embarked on his Asia-Pacific trip late last month and is travelling with 25 princes and 10 ministers. After stops in Malaysia and Indonesia, he is taking a break in Bali.

His 1,500-member delegation and 459 tonnes of luggage will go on to Brunei, Japan, China, the Maldives and Jordan.

Saudi Arabia’s alliance with the US has been overshadowed by issues such as the Iran nuclear deal, the war in Syria and Islamic extremism. US President Donald Trump’s policy on the region is also unclear.

China has boosted ties with the kingdom, with President Xi Jinping visiting Riyadh early last year before going to Tehran. Security ties between the two nations have also strengthened, with Saudi Arabia buying Chinese military technology and a Chinese naval fleet visiting the port of Jeddah in January.

In other words, if the Saudis want to pivot from the US and toward China, King Salman’s visit to Beijing will be the perfect opportunity.

Or maybe not, because while the king is courting Asian leaders, his son, Deputy Crown Prince, and Defense Minister Mohammed bin Salman are currently in the US meeting with President Trump, and as the WSJ reports, “seeking to reset ties as Trump meets the prince.”
Illinois General Assembly Retirement System Only 13.52% Funded
Authored by Michael Shedlock via MishTalk.com,

Despite a massive rally in the stock market, Illinois public pension liabilities continue to grow.

GARS, the Illinois General Assembly Retirement System, is only 13.52% funded, down from 17% funded in 2013. How long can GARS last?

Meanwhile, Illinois has accrued a combined net pension liability of roughly $130 billion on which it assumes a 7% return.

Effectively, that is an interest liability of $9.1 billion a year even though that liability technically does not bear interest.

This is a guest post from Michael Lucci at the Illinois Policy Institute.

Interest on Illinois’ Pension Debt is $9.1 Billion Per Year

Illinois isn’t covering the interest payments on its pension debt. Those interest payments total $9.1 billion a year.

This is the reason Illinois’ pension debt continues to grow. As with personal credit card debt, until the interest is paid off none of the actual debt gets erased. Illinois’ pension debt is so large that it’s unlikely payments will cover the interest on the pension debt until 2028, according to a November 2016 special pension briefing from the Commission on Government Forecasting and Accountability.

Illinois politicians have known for years about the state’s pension crisis, even if they have not taken serious steps to address the problem. Gov. Bruce Rauner recently spoke out on the cost of interest on the pension debt. Former Gov. George Ryan weighed in as well, saying:

“First off, the biggest problem we got with the budget right now is the interest they are paying on the debt. If I were the governor, … I’d say we are never going to be able to pay the full debt back, so let’s eliminate half the debt right now and write it off.

“If that’s not constitutional, it might be worth changing the constitution. That would dramatically reduce the amount of interest that they’re paying. The bond ratings would go up and the interest would go down.”

Ryan seemed to be referring to the annual “interest cost” on Illinois’ pension debt, which is about $9.1 billion per year, or $25 million per day. The portion of interest cost that isn’t covered each year is simply added to the debt.

Why Illinois’ pension debt keeps growing

Illinois has about $78 billion in assets on hand to pay for pensions. But the present value of the state’s accrued liability is $208 billion. That leaves a difference of $130 billion, which is money the state owes – but doesn’t have.

Illinois pension math assumes an annual investment return rate of just over 7 percent on $208 billion in pension assets. If pension assets end up returning less than 7 percent per year, then the actual pension liability will end up being much larger than is currently assumed.

However, $130 billion of that accrued pension liability doesn’t exist, which is considered the pension debt. This debt does not bear interest like a bond does – but it functions the same way in reality. Because $130 billion is missing, Illinois will automatically miss out on the 7 percent annual investment return on that nonexistent $130 billion. This “missed” investment return is about $9.1 billion per year, and is essentially the interest cost on the $130 billion pension debt.

Illinois’ type of payment plan, which fails to cover interest, is called “negative amortization.” The debt principal continues to grow because the pension payment does not cover the interest cost. The portion of the interest payment that isn’t covered is added to the debt.

As actuary Tia Goss Sawhney explained, a full pension payment is made up of three parts:

Full payment = Employer normal cost + interest cost + principal reduction payment

However, Illinois’ scheduled pension payments are too small to cover the normal cost and interest cost, causing the unfunded liability to go up. For example, in fiscal year 2018, Illinois will make an $8.9 billion pension payment, which will cover the $2.1 billion employer normal cost and $6.8 billion of annual interest cost. However, the annual interest cost is actually $9.1 billion, meaning that after the employer’s portion of the normal cost, Illinois will come up $2.3 billion short on the interest payment. The unpaid portion of the interest cost is added to the debt, just as if a person didn’t cover the full interest payment on a home loan or credit card. In Illinois’ case, that $2.3 billion shortfall will be added to the pension debt.

The reason the principal reduction payment is negative is because the debt grows.

Illinois needs a constitutional amendment to allow for real pension reform

As Ryan pointed out, Illinois’ pension math might never add up without reducing the $130 billion pension debt, which the Illinois Constitution currently protects from being restructured. Even though Illinois is already overtaxed, and pension costs are driving up taxes more each year, the state still can’t cover the interest cost on the pension debt until 2028. On top of that, many local communities like Chicago have pension problems that are even more severe than the state’s problems. And the math gets even worse if Illinois doesn’t hit investment returns of 7 percent per year.

A golden rule of finance is this: Debt that can’t be paid won’t be paid. The state should develop a contingency plan to repeal the Illinois Constitution’s pension protection clause and restructure pension obligations to pull Illinois out of a potential death spiral should the need arise. Such a plan should preserve benefits for government workers with modest pensions while means-testing the richer pension benefits. This would almost certainly be challenged as a violation of the contracts clause of the U.S. Constitution, and the U.S. Supreme Court might ultimately decide the matter.

Illinois might be one serious recession away from a financial death spiral. A deep recession would reduce the value of pension assets while also causing tax revenues to decline. Illinois’ pension obligations would increase just as tax revenues dried up. After such a recession ended, out-migration would likely surge as Illinoisans increasingly realized the impossibility of financing their government’s spending promises. If financial assets fall and do not recover, Illinois’ pension math might be doomed.

The battered ship of Illinois’ finances is lurching toward a rocky shore. Lawmakers should develop a contingency plan for an emergency situation, and be prepared to enact it in order to salvage the state’s finance.

Michael Lucci

Start Mish Comments – Death Spiral

Lucci noted: “Illinois might be one serious recession away from a financial death spiral.”

He is too optimistic. Illinois’ pension is in a financial death spiral whether a recession hits or not.

Despite a massive rally, state of Illinois pension liabilities grew. It will not take a recession for a crisis to hit. Illinois is in a crisis now.

That crisis will be obvious to everyone when a big correction hits the stock market. Like it or not, a big correction is guaranteed at some point.

Blowing Bubbles

Thanks to the monetary policies of the Fed, ECB, Bank of China, Bank of Japan, and central banks in general, stock markets have now surpassed the 1929 high in bubbliness.

Only the dot-com bubble was bigger.

John Hussman has an excellent write-up of the bubble in When Speculators Prosper Through Ignorance.

Pater Tenebrarum at the Acting Man blog continues the discussion with Speculative Blow-Offs in Stock Markets – Part 2

Destructive Bubbles

Central banks’ seriously misguided attempts to fight routine consumer price deflation, fueled very destructive asset bubbles that eventually collapse.

Worse yet, many pension plans did not even benefit from the speculative boom, but they sure will participate in the next collapse.

GMO 7-Year Forecast

As of the end of 2016, GMO forecast real (inflation-adjusted) losses in both US stocks and bonds for the next seven years!

Things are so bubbly now, that GMO now foresees nominal losses in US equities. At this juncture, even gains of say 3.5% for the next seven years would sink the system.

Pension Reality

Public unions are already screaming for tax hikes to bail them out. Giving in to such an approach would do nothing but further drive businesses and wealthy Illinoisans out of the state, compounding the problem.

It’s time to admit reality: The Illinois pension system is insolvent, and not just at the state level. Illinois cities are also impacted.

Illinois Cure
- At the municipal level, we need bankruptcy legislation so that cities and municipalities can shed liabilities in bankruptcy proceedings.
- At the state level, we need pension reform. I propose taxing pension benefits above a certain level at a high enough rate to make the system solvent.
How likely is that?

For the answer, please recall my opening remarks: GARS, the Illinois General Assembly Retirement System, is only 13.52% funded, down from 17% funded in 2013.

Illinois is in a pension crisis. Forced admission of that fact will soon be thrust on Illinois politicians who will undoubtedly have an eye on your pocketbook. In fact, they already do: Mary Pat at Stump reports Illinois wants to tax ALL THE THINGS!

National Problem

Lest you think only Illinois is affected by this mess please consider:
National Cure

Every state in the union will be affected as soon as the stock rally subsides. Even flat returns for seven years would bankrupt most state pension systems.

Corrupt states like Illinois will never address the problem properly.

We need national bankruptcy legislation to allow municipal bankruptcies in every state, national right-to-work legislation, and the end of prevailing wage laws to lower cost burdens on cash-strapped cities and states.
Turkish Foreign Minister: EU Falling Apart, "The Futures Of Europe Will Not Be Pleasant"

The diplomatic scandal between Turkey and the Netherlands continued for a fourth day on Tuesday, just hours ahead of the Dutch general election on Wednesday, when Turkish President Recep Tayyip Erdogan once again accused the Netherlands of state terrorism and having a “rotten” character as the diplomatic spat between the two countries deepens, adding he would mobilize the Islamic world to fight xenophobia, racism and Islamophobia.

Speaking at a medical conference in Ankara on Tuesday, Erdogan accused the Netherlands of being responsible for the 1995 Srebrenica massacre during the Bosnian War. Dutch peacekeepers have been accused of standing down and letting Bosnian Serb forces kill up to 8,000 Bosnian Muslims in the city considered a UN “safe area.”

“We know the Netherlands and the Dutch from the Srebrenica massacre,” Erdogan told his audience. “We know how rotten their character is from their massacre of 8,000 Bosnians there. Nobody should try to give us lessons on morality, especially not those who have blood on their hands.”

“The Netherlands, with its display of state terrorism, has caused huge damage to Europe and the EU,” Erdogan said on Tuesday as cited by the Hurriyet. “Now, for those who want to cooperate with the EU, it has ceased to be a symbol of human rights and freedom. Europe is too important to be left at the mercy of rogue states.”

But it was the statement by Erdogan’s foreign minister Melvut Cavusoglu that was more notable than the, by now repetitive Erdogan, because what Cavusoglu said was far more accurate than Erdogan’s deranged accusations of fascism this, and naxism that..

The Turkish Foreign Minister accused the European Union of resorting to double standards in relations with Turkey. “Do you know why? It is due to fear… The European Union is falling apart,” the foreign minister said, as quoted by the Anadolu news agency.

Cavusoglu pointed out that the European countries were united around certain values, which were now “disappearing one-by-one” and added that “the future of Europe will not be pleasant at all.”

For those who may have missed the events over the past few days, Turkish-EU relations have collapsed in recent days amid the Netherlands’ refusal to let Turkish officials organize demonstrations supporting the constitutional amendments that will be subject to the referendum scheduled for April 16 and, if endorsed, will give more powers to country’s President Recep Tayyip Erdogan. Ankara reacted furiously, promising reciprocal actions and launching sanctions against the Netherlands, while Turkish President Recep Tayyip Erdogan labeled the Dutch authorities’ behavior as “Nazism.” On Monday, Ankara suspended high-level political contacts with the Netherlands and sent the country a diplomatic note, criticizing the treatment of Cavusoglu. Dutch authorities, in turn, demanded an apology for being compared to Nazis.

The diplomatic fallout has boosted the approval rating of Dutch anti-immigration populist Geert Wilders, although as Bloomberg notes, it is not clear if it will be enough just hours before the Netherlands general election.
Idaho House Votes Overwhelmingly To End Income Taxation Of Precious Metals

Authored by Stefan Gleason via Money Metals Exchange,

By an overwhelming 56-13 margin, the Idaho House of Representatives today voted to end all Idaho taxation on precious metals, e.g. gold and silver coins and bars.

Bill sponsor Representative Mike Moyle (R) and the entire Republican caucus voted for the measure. If the Republican-controlled Idaho Senate follows suit and Governor Butch Otter (R) signs the bill, Idaho citizens will better be able to use gold and silver as a form of savings which protects against ongoing devaluation of America’s currency.

Backed by the Sound Money Defense League, Idaho Freedom Foundation, Money Metals Exchange, and grassroots activists, HB 206 expands Idaho’s existing sales tax exemption to end Idaho income taxation of sales of “precious metals bullion” and “monetized bullion.”

“According to the U.S. Constitution, Article I, Section 10, there is only one thing that a state can declare as currency if they think that our federal currency is going out of whack and some might argue that they think our federal currency is going out of whack already,” said Representative Ron Nate (R) from the House floor.

“If we are not going to allow people to declare capital losses on their Federal Reserve Notes or their dollar holdings, it would also be unfair to tax people for their gold and silver holdings. Gold and silver is an alternative to holding Federal Reserve Notes and it is the ONLY alternative that the U.S. Constitution says that the state can allow as another currency. It’s unfair to tax it just as [it’s unfair] to tax losses on Federal Reserve Notes” continued Rep. Nate.

Under current law, the taxpayer who sells their precious metals may end up with a capital “gain” in terms of Federal Reserve Notes – commonly referred to as “dollars.” This capital ‘gain’ is not necessarily a real gain. It’s often a nominal gain that simply results from the inflation created by the Federal Reserve and the attendant decline in the dollar’s purchasing power. Yet this nominal gain is taxed at the federal level – and taxed again by Idaho.

Under HB 206, precious metals gains and losses reported on a taxpayer’s federal income tax return would be removed from the calculation of the taxpayer’s Idaho taxable income.

“Policies that discourage precious metals ownership reduce the likelihood that Gem State citizens will take prudent steps to insulate themselves from the inflation and financial turmoil caused by the Federal Reserve System,” said Stefan Gleason, director of the Sound Money Defense League. “Precious metals bullion is already exempt from Idaho’s sales tax. HB 206 removes the final disincentive in Idaho tax law that stands against ownership of the monetary metals.”

States are taking actions to defend sound money because the monetary system in America, largely run by the Federal Reserve, has dramatically undermined the purchasing power of the currency to the detriment of savers and wage-earners in particular.

Legislators in Utah and Oklahoma have already enacted similar income tax measures and Arizona may enact its own version of HB206 in the new few weeks. Other states such as Tennessee, Maine, and Alabama are working to remove precious metals from the sales tax – just like Idaho and over 20 states have already done.

For more information on House Bill 206, please follow this link.