- "This Is A Crisis Greater Than Any Government Can Handle": The $400 Trillion Global Retirement Gap
Submitted by John Mauldin of Mauldin Economics
Today we’ll continue to size up the bull market in governmental promises. As we do so, keep an old trader’s slogan in mind: “That which cannot go on forever, won’t.” Or we could say it differently: An unsustainable trend must eventually stop.
Lately I have focused on the trend in US public pension funds, many of which are woefully underfunded and will never be able to pay workers the promised benefits, at least without dumping a huge and unwelcome bill on taxpayers. And since taxpayers are generally voters, it’s not at all clear they will pay that bill.
Readers outside the US might have felt smug and safe reading those stories. There go those Americans again, spending wildly beyond their means. You are correct that, generally speaking, we are not exactly the thriftiest people on Earth. However, if you live outside the US, your country may be more like ours than you think. Today we’ll look at some data that will show you what I mean. This week the spotlight will be on Europe.
First, let me suggest that you read my last letter, “Build Your Economic Storm Shelter Now,” if you missed it. It has some important background for today’s discussiion.
Global Shortfall
I wrote a letter last June titled “Can You Afford to Reach 100?” Your answer may well be “Yes;” but, if so, you are one of the few. The World Economic Forum study I cited in that letter looked at six developed countries (the US, UK, Netherlands, Japan, Australia, and Canada) and two emerging markets (China and India) and found that by 2050 these countries will face a total savings shortfall of $400 trillion. That’s how much more is needed to ensure that future retirees will receive 70% of their working income. This staggering figure doesn’t even include most of Europe.
This problem exists in large part because of the projected enormous increase in median life expectancies. Reaching age 100 is already less remarkable than it used to be. That trend will continue. Better yet, I think we will also be healthier at advanced ages than people are now. Could 80 be the new 50? We’d better hope so, because the math is pretty bleak if we assume people will stop working at age 65–70 and then live another quarter-century or more.
That said, I think we’ll see a great deal of national variation in these trends. The $400 trillion gap is the shortfall in government, employer, and individual savings. The proportions among the three vary a great deal. Some countries have robust government-provided retirement plans; others depend more on employer and individual contributions. In the aggregate, though, the money just isn’t there. Nor will it magically appear just when it’s needed.
WEF reaches the same conclusion I did long ago: The idea that we’ll enjoy decades of leisure before our final decline simply can’t work. Our attempt to live out long and leisurely retirements is quickly reaching its limits. Most of us will work well past 65 whether we want to or not, and many of us will not have our promised retirement benefits to help us through our final decades.
What about the millions who are already retired or close to retirement? That’s a big problem, particularly for the US public-sector workers I wrote about in my last two letters. We should also note that we’re all public-sector workers in a way, since we must pay into Social Security and can only hope Washington gives us something back someday.
Let’s look at a few other countries that are not much better off.
UK Time Bomb
The WEF study shows that the United Kingdom presently has a $4 trillion retirement savings shortfall, which is projected to rise 4% a year and reach $33 trillion by 2050. This in a country whose total GDP is $3 trillion. That means the shortfall is already bigger than the entire economy, and even if inflation is modest, the situation is going to get worse. Further, these figures are based mostly on calculations made before the UK decided to leave the European Union. Brexit is a major economic realignment that could certainly change the retirement outlook. Whether it would change it for better or worse, we don’t yet know.
A 2015 OECD study (mentioned here) found that across the developed world, workers could, on average, expect governmental programs to replace 63% of their working-age incomes. Not so bad. But in the UK that figure is only 38%, the lowest in all OECD countries. This means UK workers must either build larger personal savings or severely tighten their belts when they retire. Working past retirement age is another choice, but it has broader economic effects – freezing younger workers out of the job market, for instance.
UK employer-based savings plans aren’t on particularly sound footing, either. According to the government’s Pension Protection Fund, some 72.2% of the country’s private-sector defined-benefit plans are in deficit, and the shortfalls total £257.9 billion. Government liabilities for pensions went from being well-funded in 2007 to having a shortfall 10 years later of £384 billion (~$500 billion). Of course, that figure is now out of date because, just a few months later, it’s now £408 billion – that’s how fast these unfunded liabilities are growing. Again, that’s a rather tidy sum for a $3 trillion economy to handle.
UK retirees have had a kind of safety valve: the ability to retire in EU countries with lower living costs. Depending how Brexit negotiations go, that option could disappear.
Turning next to the Green Isle, 80% of the Irish who have pensions don’t think they will have sufficient income in retirement, and 47% don’t even have pensions. I think you would find similar statistics throughout much of Europe.
A report this summer from the International Longevity Centre suggested that younger workers in the UK need to save 18% of their annual earnings in order to have an “adequate” retirement income – which it defines as less than today’s retirees enjoy. But no such thing will happen, so the UK is heading toward a retirement implosion that could be at least as damaging as the US’s.
Swiss Cheese Retirement
Americans often have romanticized views of Switzerland. They think it’s the land of fiscal discipline, among other things. To some extent that’s true, but Switzerland has its share of problems, too. The national pension plan there has been running deficits as the population grows older.
Earlier this month, Swiss voters rejected a pension reform plan that would have strengthened the system by raising women’s retirement age from 64 to 65 and raising taxes and required worker contributions. From what I can see, these were fairly minor changes, but the plan still went down in flames as 52.7% of voters said no.
Voters around the globe generally want to have their cake and eat it, too. We demand generous benefits but don’t like the price tags that come with them. The Swiss, despite their fiscally prudent reputation, appear to be not so different from the rest of us. Consider this from the Financial Times:
Alain Berset, interior minister, said the No vote was “not easy to interpret” but was “not so far from a majority” and work would begin soon on revised reform proposals.
Bern had sought to spread the burden of changes to the pension system, said Daniel Kalt, chief economist for UBS in Switzerland. “But it’s difficult to find a compromise to which everyone can say Yes.” The pressure for reform was “not yet high enough,” he argued. “Awareness that something has to be done will now increase.”
That description captures the attitude of the entire developed world. Compromise is always difficult. Both politicians and voters ignore the long-term problems they know are coming and think no further ahead than the next election. The remark that “Awareness that something has to be done will now increase” may be true, but there’s a big gap between awareness and motivation – in Switzerland and everywhere else.
Switzerland and the UK have mandatory retirement pre-funding with private management and modest public safety nets, as do Denmark, the Netherlands, Sweden, Poland, and Hungary. Not that all of these countries don’t have problems, but even with their problems, these European nations are far better off than some others.
(Sidebar: low or negative rates in those countries make it almost impossible for their private pension funds to come anywhere close to meeting their mandates. And many of the funds are by law are required to invest in government bonds, which pay either negligible or negative returns.)
Pay-As-You-Go Woes
Pay-As-You-Go WoesThe European nations noted above have nowhere near the crisis potential that the next group does: France, Belgium, Germany, Austria, and Spain are all pay-as-you-go countries (PAYG). That means they have nothing saved in the public coffers for future pension obligations, and the money has to come out of the general budget each year. The crisis for these countries is quite predictable, because the number of retirees is growing even as the number of workers paying into the national coffers is falling. There is a sad shortfall of babies being born in these countries, making the demographic reality even more difficult. Let’s look at some details.
Spain was hit hard in the financial crisis but has bounced back more vigorously than some of its Mediterranean peers did, such as Greece. That’s also true of its national pension plan, which actually had a surplus until recently. Unfortunately, the government chose to “borrow” some of that surplus for other purposes, and it will soon turn into a sizable deficit.
Just as in the US, Spain’s program is called Social Security, but in fact it is neither social nor secure. Both the US and Spanish governments have raided supposedly sacrosanct retirement schemes, and both allow their governments to use those savings for whatever the political winds favor.
The Spanish reserve fund at one time had €66 billion and is now estimated to be completely depleted by the end of this year or early in 2018. The cause? There are 1.1 million more pensioners than there were just 10 years ago. And as the Baby Boom generation retires, there will be even more pensioners and fewer workers to support them. A 25% unemployment rate among younger workers doesn’t help contributions to the system, either.
A similar dynamic may actually work for the US, because we control our own currency and can debase it as necessary to keep the government afloat. Social Security checks will always clear, but they may not buy as much. Spain’s version of Social Security doesn’t have that advantage as long as the country stays tied to the euro. That’s one reason we must recognize the potential for the Eurozone to eventually spin apart. (More on that below.)
On the whole, public pension plans in the pay-as-you-go countries would now replace about 60% of retirees’ salaries. Further, several of these countries let people retire at less than 60 years old. In most countries, fewer than 25% of workers contribute to pension plans. That rate would have to double in the next 30 years to make programs sustainable. Sell that to younger workers.
The Wall Street Journal recently did a rather bleak report on public pension funds in Europe. Quoting:
Europe’s population of pensioners, already the largest in the world, continues to grow. Looking at Europeans 65 or older who aren’t working, there are 42 for every 100 workers, and this will rise to 65 per 100 by 2060, the European Union’s data agency says. By comparison, the U.S. has 24 nonworking people 65 or over per 100 workers, says the Bureau of Labor Statistics, which doesn’t have a projection for 2060. (WSJ)
While the WSJ story focuses on Poland and the difficulties facing retirees there, the graphs and data in the story make clear the increasingly tenuous situation across much of Europe. And unlike most European financial problems, this isn’t a north-south issue. Austria and Slovenia face the most difficult demographic challenges, right along with Greece. Greece, like Poland, has seen a lot of its young people leave for other parts of the world. This next chart compares the share of Europe’s population that 65 years and older to the rest of the regions of the world and then to the share of population of workers between 20 and 64. These are ugly numbers.
Source: WSJThe WSJ continues:
Across Europe, the birthrate has fallen 40% since the 1960s to around 1.5 children per woman, according to the United Nations. In that time, life expectancies have risen to roughly 80 from 69.
In Poland birthrates are even lower, and here the demographic disconnect is compounded by emigration. Taking advantage of the EU’s freedom of movement, many Polish youth of working age flock to the West, especially London, in search of higher pay. A paper published by the country’s central bank forecasts that by 2030, a quarter of Polish women and a fifth of Polish men will be 70 or older.
Source: WSJNext week we will look at the unfunded liabilities of the US government. It will not surprise anyone to learn that the situation is ugly, and there is no way – zero chance, zippo – that the US government will be able to fund those liabilities without massive debt and monetization.
Now, what I am telling you is that every bit of analysis about the pay-as-you-go countries in Europe suggests that they are in a far worse position than the United States is. Plus, the economies of those countries are more or less stagnant, and they are already taxing their citizens at close to 50% of GDP.
The chart below shows the percentage of GDP needed to cover government pension payments in 2015 and 2050. But consider that the percentage of tax revenues required will be much higher. For instance, in Belgium the percentage of GDP going to pensions will be 18% in about 30 years, but that’s 40–50% of total tax revenues. That hunk doesn’t leave much for other budgetary items. Greece, Italy, Spain? Not far behind.
And there is other research that makes the above numbers seem optimistic by comparison. The problem that the European economies have is that for the most part they are already massively in debt and have high tax rates. And they can’t print their own currencies.
Many of Europe’s private pension companies and corporations are also in seriously deep kimchee. Low and negative interest rates have devastated the ability of pension funds to grow their assets. Combined with public pension liabilities, the total cost of meeting the income and healthcare needs of retirees is going to increase dramatically all across Europe.
Macron, the new French president, really is trying to shake up the old order, to his credit; and this week he came out and began to lay the foundation for the mutualization of all European debt, which I assume would end up on the balance sheet of the ECB. However, that plan still doesn’t deal with the unfunded liabilities. Do countries just run up more debt? It seems like the plan is to kick the can down the road just a little further, something Europe is becoming really good at.
In this next chart, note the line running through each of the countries, showing their debt as a percentage of GDP. Italy’s is already over 150%. And this is a chart based mostly on 2006 and earlier data. A newer chart would be much uglier.
I could go on reviewing the retirement problems in other countries, but I hope you begin to see the big picture. This crisis isn’t purely a result of faulty politics – though that’s a big contributor – it’s a problem that is far bigger than even the most disciplined, future-focused governments and businesses can easily handle.
Look what we’re trying to do. We think people can spend 35–40 years working and saving, then stop working and go on for another 20–30–40 years at the same comfort level – but with a growing percentage of retirees and a shrinking number of workers paying into the system. I’m sorry, but that’s magical thinking. And it’s not what the original retirement schemes envisioned at all. Their goal was to provide for a relatively small number of elderly people who were unable to work. Life expectancies were such that most workers would not reach that point, or would at least live just a few years beyond retirement.
As I have pointed out in past letters, when Franklin Roosevelt created Social Security for people over 65 years old, US life expectancy was about 56 years. If the retirement age had kept up with the increase in life expectancy, the retirement age in the US would now be 82. Try and sell that to voters.
Worse, generations of politicians have convinced the public that not only is a magical outcome possible, it is guaranteed. Many politicians actually believe it themselves. They aren’t lying so much as just ignoring reality. They’ve made promises they aren’t able to keep and are letting others arrange their lives based on the assumption that the impossible will happen. It won’t.
How do we get out of this jam? We’re all going to make big adjustments. If the longevity breakthroughs I expect happen soon (as in the next 10–15 years), we may be able to adjust with minimal pain. We’ll work longer years, and retirement will be shorter, but it will be better because we’ll be healthier.
That’s the best-case outcome, and I think we have a fair chance of seeing it, but not without a lot of social and political travail. How we get through that process may be the most important question we face.
I haven’t even thrown in the complications that are going to arise because of changes in the nature of employment and the future of work that will be caused by technological change in the next 10–20 years. That will mean even fewer workers for each retiree. Facebook’s Zuckerberg talks about a basic minimum income. I think that is the wrong thing to do. It is the nature of human beings to need to do things that contribute meaningfully to the lives of their family and society. But the reality is that increasing numbers of people are already having trouble finding that sort of work.
Maybe we should think about basic minimum employment. FDR put a generation of people to work building public projects that helped get us through the Great Depression. Our world is going to change in ways that we don’t yet understand and that we are not prepared for, psychologically, socially, politically, or economically.
In the US and much of Europe we have developed social echo chambers in which we talk just to ourselves and those who are like-minded, ignoring or demonizing the other side. We have lost the ability to disagree rationally and productively. When the children’s books written by Dr. Seuss are considered by some to have been written by a white racist and are therefore deemed unacceptable to be in a public library, you know the quality of civil discourse has spiraled downward.
I do not like that, Sam I am.
- NBA Orders Players To Stand For The National Anthem
With the NFL finding itself trapped in a vise of sliding viewership on one hand, and a sudden plunge in its favorability as a result of the ongoing “kneeling” feud with President Trump, which according to a just released POLITICO/Morning Consult poll has plunged from 30% on September 21 to just 17% on September 28, the most unfavorable in history…
… other sports franchises are desperate to avoid the backlash that NFL Commissioner Roger Goodell appears to have unleashed upon his league.
As a result, the NBA which has seen a similar steep drop in viewership in recent years is taking emergency proactive measures, and according to the Associated Press, NBA Commissioner Adam Silver said he expected players would stand for the anthem, followed up by a memo in which the NBA “recommended teams address fans or show videos expressing themes of unity before their first home games,” while again reminding them of the rule that players must stand for the national anthem.
In the memo, obtained by the Associated Press, Deputy Commissioner Mark Tatum suggested teams use their opening games “to demonstrate your commitment to the NBA’s core values of equality, diversity, inclusion and serve as a unifying force in the community.” He recommended an address by a player or coach to fans before the anthem, or a video featuring players or community leaders speaking about important issues and showing photos from past community events.
Tatum said the league supports and encourages players to express their views on matters that are important to them, while reminding of the rule that players, coaches and trainers stand respectfully for the anthem.
“The league office will determine how to deal with any possible instance in which a player, coach or trainer does not stand for the anthem. (Teams do not have the discretion to waive this rule),” the memo says.
The memo comes as the NBA’s preseason schedule is set to begin on Saturday with two games, including the NBA champion Golden State Warriors hosting Denver. As a reminder, the feud between Trump and certain sport players escalated last Saturday when Trump withdrew an invitation to Warriors’ Stephen Curry:
Going to the White House is considered a great honor for a championship team.Stephen Curry is hesitating,therefore invitation is withdrawn!
— Donald J. Trump (@realDonaldTrump) September 23, 2017
//platform.twitter.com/widgets.js
This in turn prompted the entire Warriors team to announce that “while we intended to meet as a team at the first opportunity we had this morning to collaboratively discuss a potential visit to the White House,” the statement read, “we accept President Trump has made it clear that we are not invited.”
As the AP adds, the memo builds on discussions held by the NBA’s Board of Governors this week, and follows up on one Silver and players association executive director Michele Roberts sent to players recently. It recommends that teams organize internal discussions to hear the players’ perspectives, if they haven’t already, and to start or expand programs within their communities.
“The players have embraced their roles in those efforts and we are proud of the work they do in our communities,” Tatum wrote.
While the NFL never made an explicit demand of players to stand for the national anthem, prompting many teams to do the opposite, or simply not leave the locker room, now that the NBA has taken the extra step of reminding players of what the rules are and that they “do not have the discretion to waive this rule”, it will be especially interesting to observe how many players will flaunt the commissioner’s demand, what the NBA’s response to said rule violation will be, and whether the NBA’s viewership and ad revenues will see a similar sharp decline which ultimately will have an adverse impact on the players’ own bank accounts.
- Georgetown Bank Teller Steals $185,000 From Homeless Customer With Garbage Bag Full Of Cash
Where did all this money come from?
That’s probably the first question that Phelon Davis of District Heights, Maryland, asked himself when a homeless man shuffled into the Wells Fargo branch in Georgetown where Davis worked as a teller three years ago and tried to deposit a garbage bag full of cash.
His next question was probably "do you think he'd notice if some of it went missing?"
Instead of helping the customer deposit the money into his account, Davis instead decided to take advantage of the situation, setting up a fraudulent second account under the customers’ name and eventually stealing more than $185,000 from the man, according to the Washington Post.
The 29-year-old bank teller stole more than $185,000 from a homeless customer who tried to deposit a garbage bag full of cash at a Wells Fargo branch in Georgetown.
In a deal with prosecutors, Davis pleaded guilty this week to one federal felony count of interstate transportation of stolen property, which is punishable by up to 10 years in prison.
Deepening the intrigue surrounding the story, the court filings didn’t name the man, or furnish an explanation as to how he came to possess such a large sum of cash. It describes the man only as a "street vendor."
Here’s WaPo with more:
The victim was unnamed in court filings but was described as a homeless street vendor and longtime Wells Fargo customer who had more than one account that had gone dormant because of a lack of activity.
Court filings did not identify the customer or say why a homeless person would have a large amount of cash in a bag when he showed up at the M Street NW branch where Davis worked. Outside the courtroom, Davis’s attorney, Bruce Allen Johnson Jr., said he also did not know how the individual came to have the cache of cash. “That’s the million-dollar question,” Johnson said.
In plea papers, Davis acknowledged that the customer had “thousands of dollars of cash” that he wanted to deposit in October 2014, but he lacked identification. Davis told the customer where to get ID documents and a Social Security card, and also noted the customer “had a surprisingly large balance with the bank,” according to a signed, three-page statement of the crime.
Soon after the customer tried to deposit the cash, Davis fraudulently opened a new account by forging the customer’s signature, set up an ATM card, personal identification number, email address and online logon that he controlled.
He initially funded the account with $3,000 from one of the customer’s other accounts, according to WaPo.
Slowly over the next two years, Davis transferred $177,400 between the customer’s accounts, withdrew $185,440, and transported at least $5,000 withdrawn from ATMs in DC to his home in Maryland – triggering the federal charge.
The customer remained oblivious to the fraud, as he could only see the balance by checking on his account at an ATM.
Davis used the stolen money for a down payment on his home, to pay off personal debt, and fund vacations in Aruba, Jamaica, the Dominican Republic and Mexico.
As part of his plea, Davis agreed to pay back the stolen money, and Assistant US Attorney Kondi J. Kleinman said he would likely face a sentence of 18 to 30 months under federal guidelines. However, the sentencing judge has discretion to assign a longer, or shorter, sentence.
“Did you, in fact, take money from an account as Mr. Kleinman described?” U.S. Magistrate Robin M. Meriweather asked in the Thursday plea hearing.
“Yes, ma’am, I did,” said the soft-spoken Davis.
Davis’s attorney, Johnson, said outside of court that “he greatly regrets the decisions he made and is dedicated to doing everything he can to make it right, including restitution. He is putting everything aside to repay the money and do what he can to repair what he’s done to his name, his reputation and to the victim.”
WaPo reports that a date for Davis’s sentencing hasn’t been set.
- Wheels And Deals: Trouble Is Brewing In The House Of Saud
Authored by Pepe Escobar via The Asia Times,
Saudi women being allowed to drive is a smokescreen – Salafi-jihadism is alive and well inside the Kingdom. What's more, another coup may be along shortly…
Suddenly, the ideological matrix of all strands of Salafi-jihadism is being hailed by the West as a model of progress – because Saudi women will finally be allowed to drive. Only next year. Only some women. And still subject to many restrictions.
What’s certain is that the timing of the announcement – which comes after years of liberal American pressure – was calculated with precision, arriving only a few days before House of Saud capo King Salman drops in for a chat at Trump’s White House. The soft power move was coordinated by the 32-year-old Crown Prince Muhammad bin Salman, a.k.a. MBS, the Destroyer of Yemen; the king merely added his signature.
The diversionary tactic masks serious trouble in the court. A Gulf business source with intimate knowledge of the House of Saud, having held a number of personal meetings with members, told Asia Times that “the Fahd, Nayef, and Abdullah families, the descendants of King Abdulaziz al Saud and his wife Hassa bin Ahmed al-Sudairi, are forming an alliance against the ascendancy to the Kingship of the Crown Prince.”
No wonder, considering that the ousted Crown Prince Mohammed bin Nayef – highly regarded in the Beltway, especially Langley – is under house arrest. His massive web of agents at the Interior Ministry has largely been “relieved of their authority”. The new Interior Minister is Abdulaziz bin Saud bin Nayef, 34, the eldest son of the governor of the country’s largely Shi’ite Eastern Province, where all the oil is. Curiously, the father is now reporting to his son. MBS is surrounded by inexperienced thirty-something princes, and alienating just about everyone else.
Former King Abdulaziz set up his Saudi succession based on the seniority of his sons; in theory, if each one lived to the same age all would have a shot at the throne, thus avoiding the bloodletting historically common in Arabian clans over lines of succession.
Now, says the source, “a bloodbath is predicted to be imminent.” Especially because “the CIA is outraged that the compromise worked out in April, 2014 has been abrogated wherein the greatest anti-terrorist factor in the Middle East, Mohammed bin Nayef, was arrested.” That may prompt “vigorous action taken against MBS possibly in early October.” And it might even coincide with the Salman-Trump get together.
ISIS playing by the (Saudi) book
Asia Times’ Gulf business source stresses how “the Saudi economy is under extreme strain based on their oil price war against Russia, and they are behind their bills in paying just about all their contractors. That could lead to the bankruptcy of some of the major enterprises in Saudi Arabia. The Saudi Arabia of MBS features the Crown Prince buying a US$600 million yacht and his father spending US$100 million on his summer vacation, highlighted on the front pages of the New York Times while the Kingdom strangles under their leadership.”
MBS’s pet project, the spun-to-death Vision 2030, in theory aims to diversify from mere oil profits and dependency on the US to a more modern economy (and a more independent foreign policy).
That’s completely misguided, according to the source, because “the problem in Saudi Arabia is that their companies cannot function with their local population and [are] reliant on expatriates for about 70% or more of their staff. Aramco cannot run without expatriates. Therefore, selling 5% of Aramco to diversify does not solve the problem. If he wants a more productive society, and less handouts and meaningless government jobs, he has to first train and employ his own people.”The similarly lauded Aramco IPO, arguably the largest share sale in history and originally scheduled for next year, has once again been postponed – “possibly” to the second half of 2019, according to officials in Riyadh. And still no one knows where shares will be sold; the NYSE is far from a done deal.
In parallel, MBS’s war on Yemen, and the Saudi drive for regime change in Syria and to reshape the Greater Middle East, have turned out to be spectacular disasters. Egypt and Pakistan have refused to send troops to Yemen, where relentless Saudi air bombing – with US and UK weapons – has accelerated malnutrition, famine and cholera, and configured a massive humanitarian crisis.
The Islamic State project was conceived as the ideal tool to force Iraq to implode. It’s now public domain that the organization’s funding came mostly from Saudi Arabia. Even the former imam of Mecca has publicly admitted ISIS’ leadership “draw their ideas from what is written in our own books, our own principles.”
Which brings us to the ultimate Saudi contradiction. Salafi-jihadism is more than alive inside the Kingdom even as MBS tries to spin a (fake) liberal trend (the “baby you can drive my car” stunt). The problem is Riyadh congenitally cannot deliver on any liberal promise; the only legitimacy for the House of Saud lies in those religious “books” and “principles.”
In Syria, besides the fact that an absolute majority of the country’s population does not wish to live in a Takfiristan, Saudi Arabia supported ISIS while Qatar supported al-Qaeda (Jabhat al-Nusra). That ended up in a crossfire bloodbath, with all those non-existent US-supported “moderate rebels” reduced to road kill.
And then there’s the economic blockade against Qatar – another brilliant MBS plot. That has only served to improve Doha’s relations with both Ankara and Tehran. Qatari Emir Tamim bin Hamad Al Thani was not regime-changed, whether or not Trump really dissuaded Riyadh and Abu Dhabi from taking “military action.” There was no economic strangulation: Total, for instance, is about to invest US$2 billion to expand production of Qatari natural gas. And Qatar, via its sovereign fund, counterpunched with the ultimate soft power move – it bought global footballing brand Neymar for PSG, and the “blockade” sank without a trace.
“Robbing their people blind”
In Enemy of the State, the latest Mitch Rapp thriller written by Kyle Mills, President Alexander, sitting at the White House, blurts, “the Middle East is imploding because those Saudi sons of bitches have been pumping up religious fundamentalism to hide the fact that they’re robbing their people blind.” That’s a fair assessment.
No dissent whatsoever is allowed in Saudi Arabia. Even the economic analyst Isam Az-Zamil, very close to the top, has been arrested during the current repression campaign. So opposition to MBS does not come only from the royal family or some top clerics – although the official spin rules that only those supporting Muslim Brotherhood, Turkey, Iran and Qatari “terrorism” are being targeted.
In terms of what Washington wants, the CIA is not fond of MBS, to say the least. They want “their” man Nayef back. As for the Trump administration, rumors swirl it is “desperate for Saudi money, especially infrastructure investments in the Rust Belt.”
It will be immensely enlightening to compare what Trump gets from Salman with what Putin gets from Salman: the ailing King will visit Moscow in late October. Rosneft is interested in buying shares of Aramco when the IPO takes place. Riyadh and Moscow are considering an OPEC deal extension as well as an OPEC-non-OPEC cooperation platform incorporating the Gas Exporting Countries Forum (GECF).
Riyadh has read the writing on the new wall: Moscow’s rising political / strategic capital all across the board, from Iran, Syria and Qatar to Turkey and Yemen.
That does not sit well with the US deep state.
Even if Trump gets some Rust Belt deals, the burning question is whether the CIA and its friends can live with MBS on the House of Saud throne.
- To Increase America's Productivity, Ban This…
Aside from short-lived booms in the 1990s and 2000s, US productivity growth has averaged just 1.2% from 1975 up to today after peaking above 3% in 1972.
As we detailed previously, adjusting for the WWII anomaly (which tells us that GDP is not a good measure of a country’s prosperity) US productivity growth peaked in 1972 – incidentally the year after Nixon took the US off gold.
The productivity decline witnessed ever since is unprecedented. Despite the short lived boom of the 1990s US productivity growth only average 1.2 per cent from 1975 up to today.
If we isolate the last 15 years US productivity growth is on par with what an agrarian slave economy was able to achieve 200 years ago.
As we reported last year, users spent 51% of their total internet time on mobile devices, for a total of 5.6 hours per day snapchatting, face-booking, insta-graming and taking selfies.
It's an everyday sight – people using their phones while sitting on the train, waiting for a bus, or even having a meal with their partner.
What exactly are they doing the whole time though?
When it comes to social networks, Verto Analytics may have the answer. The most time spent in the U.S. on a 'mainstream' app is the 899 minutes per month of the average Facebook user.
The social network whose users invest the most time though is a networking app for gay, bi, and curious men – Grindr. WIth a huge 1,040 minutes on average, that's over 17 hours every month.
In third place, Growlr is also a networking/dating app for homosexual men. The average user here spends 665 minutes per month.
In eighth, Twitter's struggles are again highlighted, with only 176 minutes in Q3 2017.
Figures refer to usage across all platforms, not just mobile.
You will find more statistics at Statista
So, maybe in their next wide-ranging study, economists could include a test group of workers who leave their phones in a locker at the beginning of the work day, and try to measure how much their “productivity” improves. So, while every effort can be made by Ivory Tower academics to solve the problem of American worker productivity, perhaps it can be summed up simply as "Put The Smart-Phone Down!"
- The Truth About Nuclear Proliferation And North Korea
The U.S. is communicating with North Korea about its nuclear program and testing Pyongyang’s appetite for negotiations, Secretary of State Rex Tillerson said in the first public acknowledgment by a senior administration official of direct contact on the matter. As Bloomberg reports,Tillerson, speaking to reporters on Saturday after meeting Chinese officials in Beijing, insisted that the U.S. would never accept a nuclear-armed North Korea.
His remarks offered the clearest glimpse so far into U.S. strategy, and suggested a willingness to get to the negotiating table with Kim Jong Un’s regime — even after President Donald Trump tweeted in August that “talking is not the answer!”
“We are probing, so stay tuned,” Tillerson said.
“We can talk to them, we do talk to them directly, through our own channels,” adding that the U.S. has “a couple, three channels open to Pyongyang.”
All of which was 'good' news in a time when we need some. However, a few hours later, the State Department commented that…
"North Korean officials have shown no indication that they are interested in or are ready for talks regarding denuclearization."
And that, as Jim Rickards warns below, is why war is coming…
Authored by James Rickards via The Daily Reckoning,
I’ve been arguing for months that we are headed for war with North Korea because of its nuclear program.
This brings us to the topic of nuclear proliferation.
Nuclear proliferation of the kind we are seeing in North Korea is nothing new. The U.S., Soviet Union (now Russia), U.K. and France all had nuclear weapons by 1960. China joined the club in the mid-1960s.
India and Pakistan started becoming nuclear powers in the 1970s. Israel has never officially announced it has nuclear weapons, but it is well-known that Israel possesses them. At various times, South Africa, Brazil, Iran, Syria, Iraq and Libya have pursued nuclear weapons development.
The Iranian program is the only one of those that is still active.
Critics of any effort to attack North Korea to stop its nuclear weapons program point to this extensive proliferation over 60 years as a reason not to risk war.
According to these critics, the world has learned to live with eight nuclear powers. One more won’t matter. Deterrence works.
North Korea knows that if it uses nuclear weapons, it will be subject to a nuclear attack by the U.S., and therefore it won’t use them.
But this analysis is wrong on a number of levels.
The U.S. began its nuclear program to end World War II. The U.K., French, Russian and Chinese nuclear programs were part of a Great Power dynamic in the Cold War that does not apply to lesser powers like North Korea.
For the Great Powers, deterrence does work.
Israel’s program is a response to an existential threat from the Arabs (four large wars and many smaller ones in less than 70 years) and Israel’s lack of strategic depth. India and Pakistan are mutually hostile and their weapons are aimed at each other, not at the west.
North Korea is different because it continually threatens to use nuclear weapons on the U.S. and its allies, like Japan.
Deterrence does not work on Kim Jong Un. The North Korean leader will be safe in his nuclear bombproof bunker. He does not care about his people.
Kim’s threats involve actual nuclear missiles striking cities and a potential electromagnetic pulse weapon (EMP) detonated in the high atmosphere that produces a power surge that would destroy the U.S. power grid.
All communications, cellphones, computers, bank ATMs, debit and credit cards, gas station pumps and lights would be disabled. U.S. civilization would last about three days before food and water were depleted and society descended into rival gangs of looters and vigilantes.
That may sound paranoid or alarmist, but it’s not. It’s a legitimate possibility.
This is why North Korea will not be allowed to have nuclear weapons.
This is why war is coming.
- TEPCO Admits Contaminated Water Leaked Into Fukushima Groundwater "Due To Erroneous Gauges"
In a revelation that, for some, will dredge up memories of TEPCO’s stunning admission back in 2013 that nearly 300 tonnes of radioactive material had leaked from the ruins of the Fukushima Daiichi nuclear-power plant into the water outside, contaminating virtually the entire Pacific Ocean, officials at the Japanese power company told the Associated Press that contaminated water may have leaked into the soil surrounding the plant after human error caused safety mechanisms to fail.
TEPCO officials said the settings on six of the dozens of wells surrounding the plant’s ruined reactors were accidentally set 70 centimeters below the required levels, briefly causing groundwater at one well to sink below the contaminated water inside in May, possibly allowing radioactive water to leak into the soil.
Fortunately, groundwater samples have shown no abnormal increase in radioactivity and leaks to the outside are unlikely, according to TEPCO spokesman Shinichi Nakakuki.
The problem with the wells – most of which were drilled in April to help pump groundwater, reducing the possibility that it would be exposed to contamination – was discovered earlier this week while the company was preparing to drill another well. While Tepco maintained several wells around the plant before the disaster, many more have been drilled since to try and stanch the flow of radioactive materials from the plant.
It has been six-and-a-half years since a massive earthquake and tsunami critically damaged the Fukushima-Daiichi nuclear-power plant, located about 200 miles away from Tokyo, triggering the worst nuclear accident since Chernobyl – and the Japanese people are still uncovering new evidence of TEPCO's dishonesty and incompetence demonstrated during the aftermath of the disaster.
Of course, while the coverup was happening, few in the media dared to entertain suspicions that the company might be acting in bad faith – after all, what serious organization would so brazenly defy the public’s trust, not to mention local laws?
But five years later, those conspiracy theories were transformed into conspiracy facts when TEPCO’s then-President Naomi Hirose admitted last year on NHK that his company intentionally concealed the reactor meltdowns at the Fukushima plant immediately after the storm. The power company didn't officially admit the meltdowns until more than 2 months after the accident.
"I would say it was a cover-up," Hirose said during a news conference. "It's extremely regrettable."
Earlier this year, TEPCO ignited a public controversy after sharing its plans to start pumping radioactive water contaminated with tritium into the Pacific Ocean – a tactic that has met with vociferous opposition from Japan’s fishing industry.
Tepco has claimed that the radioactive water, pumped from inside the three reactors that melted down following the tsunami, would quickly disperse and not pose a threat to marine life. With the cleanup effort expected to take decades (although we imagine that President Shino Abe would like to accomplish as much as possible before the 2020 Olympics, which will be held in Tokyo), TEPCO has this year dispatched robots into the reactors to try and find the damaged nuclear core material, to mixed results.
Back in February, TEPCO revealed that it had discovered a hole at least one square meter in size beneath the pressure vessel in the plant’s damaged No. 2 reactor, potentially exposing the surrounding area to record-high radiation. Back in 2011, radiation levels of 530 Sieverts per hour had been detected inside the reactor (8 Sieverts is enough to kill a human).
These reports should be particularly dismaying for the thousands of Japanese who’ve begun returning to their homes inside the exclusion zone after the Japanese government ended its subsidy payments to disaster victims earlier this year, effectively forcing many of them to choose between financial hardship or living in a home they believe to be unsafe.
Meanwhile, photos taken earlier this year by journalists who traveled inside the Fukushima exclusion zone – a 20 kilometer perimeter around the plant – depicted a “nuclear nightmare” consisting of eerie ghost villages populated by radioactive wild boars…
…not exactly the kind of place we’d want to raise our kids.
- Welcome To The Hunger Games: Trump's Tax Plan To Unleash Battle Royal Among D.C. Lobbyists
Authored by Michael Snyder via The Economic Collapse blog,
Are you ready for mass chaos in Washington?
There are lobbyists for just about every cause that you can possibly imagine, and they are always working hard to influence members of Congress on their particular issues. But when you are talking about a major tax reform bill, that is something that virtually every single lobbyist in the entire city will want to be involved in. Our tax code is over two million words long, and the regulations are over seven million words long, and any changes to our immensely complex system could have absolutely enormous implications. There will be winners and there will be losers with any piece of legislation, and lobbyists will zealously fight to defend the turf belonging to their particular clients. Often lobbyists from different sides will literally be pitted directly against one another, and it won’t be pretty.
In fact, one analyst that works for Cowen Washington Research Group says that we could soon be watching “the corporate hunger games”…
Almost every industry, special interest, and consumer group has an interest in the tax code, especially if the package ends up being as ambitious as Trump and Republican leaders want it to be. Chris Krueger, an analyst at Cowen Washington Research Group, told Business Insider that the battle over which loopholes to keep and which to throw out could get nasty.
“Welcome tribunes to the corporate hunger games!” Kruger said in an email.
“Only one-sixth of lobbyists were involved with health care (give or take — assuming it is one-sixth of economy). Six-sixths of lobbyists are involved in taxes.”
There is so much at stake, and if the Republicans are able to get something passed it probably won’t look much like the plan that Trump originally proposed. But it is so important to do something, because today Americans spend more on taxes than they will on food, clothing, and housing combined. That is morally wrong, and we desperately need tax relief.
Trump’s tax plan would nearly double the standard deduction, and that would be a wonderful thing. It would provide instant tax relief to working class Americans, and that is something that I would greatly applaud.
Trump’s tax plan would also great reduce the tax rate for corporations. Our big corporations certainly don’t need the help, but we do want to get our rate more in line with the rest of the planet. Because our corporate tax rate is one of the highest in the world, it actually encourages companies to set up shop some place else. Being more competitive with the rest of the world would likely mean more jobs for the American people.
Trump’s tax plan would also reduce the number of tax brackets for individuals. Instead of seven, now there would just be three tax brackets of 12 percent, 25 percent and 35 percent. To me, those rates are way too high, but of course I would like to eliminate the individual income tax entirely.
Many are criticizing Trump’s plan for proposing to raise at least a trillion dollars over the next decade by getting rid of the deduction for state and local income taxes. For those that live in very high tax states such as California, that deduction is a really big deal…
High-income Californians, for instance, pay as much as 13.3 per cent of their income to the state in addition to their federal taxes. New Yorkers can pay up to 8.82 per cent.
Just seven U.S. states have no personal income taxes, including Texas, Florida and Nevada.
Hopefully the Republicans can pass some sort of tax reform in the short-term, because the status quo is definitely not acceptable.
When the income tax was first introduced in 1913, the vast majority of taxpayers were being taxed at a rate of just one percent. The following comes from Politifact…
The 1913 law imposed a tax of 1 percent on income up to $20,000, for both individual and joint filers. However, exemptions from the tax — the first $3,000 of income for individuals and the first $4,000 for joint filers — meant “virtually all middle-class Americans” were excused from paying, according to W. Elliot Brownlee’s book, Federal Taxation in America.
The law also put in place a graduated surtax on incomes above $20,000; the highest rate paid, 7 percent, applied to Americans making more than $500,000 (about $11.4 million in 2011 dollars).
Today, Americans are being taxed into oblivion. It has been reported that we spend more than 6 billion hours a year on our taxes, and I once wrote an article detailing 97 different ways that various levels of government extract revenue from all of us.
Every year government just gets bigger and bigger on the federal, state and local levels. And the bigger government gets, the more oppressive it tends to become.
Personally, I would love to start starving the beast that the left has created, and a great way to do that would be to completely eliminate the federal income tax.
A lot of people could not even imagine a world without a federal income tax. But the truth is that our country once thrived under such a system. In fact, the greatest period of economic growth in U.S. history was between 1872 and 1913 when there was no income tax at all.
And we could do it again. Today, the individual income tax only accounts for about 46 percent of all federal revenue, and if we reduced the federal government to a size that our founders would have wanted, we would be more than okay.
But even if we can’t greatly reduce the size of the federal government in the short-term, we can at least go to a very basic flat tax or a fair tax, and both of those systems would be far superior to what we have today.
If we can’t get a flat tax or a fair tax right now, we should at least try to dramatically reduce tax rates and simplify the tax code as much as humanly possible.
But if we do get a short-term victory, the battle is definitely not over. In the long-term, we need to be very clear that our goal should be to abolish the income tax, the IRS and the Federal Reserve entirely. Anything short of that is not good enough.
* * *
Michael Snyder is a Republican candidate for Congress in Idaho’s First Congressional District, and you can learn how you can get involved in the campaign on his official website. His new book entitled “Living A Life That Really Matters” is available in paperback and for the Kindle on Amazon.com.
- A Market In Which "Shocks No Longer Shock": Deutsche's Kocic Explains How To Trade It
Back in June, one of Wall Street’s more philosophical derivatives strategists, DB’s Aleksandar Kocic looked at the state of the market and postulated that far from “stable” the existing risk “equilibrium” is one which can be described as “metastable“, the result of widespread complacency, and which he compared to an avalanche where “a totally innocuous event can trigger a cataclysmic event (e.g. a skier’s scream, or simply continued snowfall until the snow cover is so massive that its own weight triggers an avalanche.” Putting it in his usual post-modernist style, Kocic said that “complacency encourages bad behavior and penalizing dissent – there is a negative carry for not joining the crowd, which further reinforces bad behavior.”
This is the source of the positive feedback that triggers occasional anxiety attacks, which, although episodic, have the potential to create liquidity problems. Complacency arises either when everyone agrees with everyone else or when no one agrees with anyone. In these situations, which capture the two modes of recent market trading, current and the QE period, the markets become calm and volatility selling and carry strategies define the trading landscape. But, calm makes us worry, and persistent worrying causes fear, and fear tends to be reinforcing.
Kocic framed the current state of the market as follows:
Unfortunately, the relentless grind ever lower in volatility, which as reported yesterday has resulted in both the lowest average September VIX on record…
… as well as the lowest September monthly settlement on record and only the second sub-10 monthly settlement…
… appears to have finally unsettled Kocic’ expectations, even if ever so tacitly implied, for a spike higher in suppressed vol, and as he writes in his latest ruminations on volatility, “as volatility continues to be unfazed by what lies ahead in the near term, short of surprises in inflation, we are likely to linger at low levels.”
Following up to his note from last week, which explained how the Fed’s fake “transparency” killed long-term investor, Kocic writes that “as transparency became the word of the decade, by its very nature it created the forces that push everything to the surface. Things exist thanks only to the attention they produce. There is no room for ambiguity.”
Which ties in to the current news cycle, a relentless barrage of flashing red headlines, one scarier than the other, yet which on aggregate have zero adverse impact on volatility, and certainly on risk assets, which on Friday spiked to a new all time high following the latest last-second VIX-smash. Or, as Kocic puts it, “although shocks (political and other) keep arriving in the market, they seem to be appearing at what looks like predictable time intervals (usually, on Fridays). Practically every week, there is a new issue that eclipses the previous one, and we lose interest in past issues, before there is any semblance of resolution.”
And with traders’ attention spans already severely lacking, this habituation to hyperbolic, staccato newsflow means that not only is the market not discounting the future as Matt King postulated several months ago, but it is no longer able to even respond to the present, to wit:
Shocks, if they are predictable, lose their spell and gradually become facts of life. Predictable political shocks feed back into their source. Due to their antagonistic character, they gradually erode the ability to make consensus and reduce the ability to legislate, making further reforms at least questionable, if not highly unlikely. The market “euphoria” (aka the Trump trade) that followed immediately after the elections is being perceived as increasingly remote. Despite all the promises of reflation of the economy, fiscal stimulus, expectation of economic turnaround, no change is on the horizon. We are stuck with the status quo, albeit a noisy one.
So what does this mean for risk assets, and markets? According to the Deutsche analyst, “despite all the distortions and disruptions introduced by the central banks’, which has created a semi-permanent state of exception, markets have not lost one main characteristic, their adaptability. As the markets are getting inoculated against event risk, volatility continues to be under pressure. While we are distancing ourselves from the idea of political change, the Fed is seen, once again, as the main source of volatility. However, the Fed’s position is an uncomfortable one. The main problem it faces is the balance between preventing inflation from becoming a risk while at the same time not causing a rapid and substantial rise of rates. This requires a high level of fine tuning. It means that the Fed has to continue with rate hikes, but the hikes have to be done carefully without triggering the bond unwind.”
The implication for vol traders is that contrary to warnings of market “metastability” and “suppressed cataclysmic vol events”, Kocic – in many ways pulling a Hugh Hendry of his own – comes to the admission that fighting the Fed’s control over vol has become a futile pastime, and even though further complacency is in the cards, “continued vol selling” is encouraged.
… the market gradually, and reluctantly, trails behind the Fed, one hike at a time, and adjusts expectations on the go, without taking a longterm view on the Fed. It is difficult to see how this can lead to any excitement capable of inspiring higher volatility. As long as things evolve according to this scenario, everything shoiuld remain “predictable” with occasional noise that the market has learned to ignore. This is an environment that is bearish for volatility. It fosters further complacency and encourages continued vol selling.
Finally, Kocic takes a “Greek” detour and asks whether in this environment, in which every shock is ignored by a market now programmed to sell vol no matter what, “there is hope for Gamma?” Here is his answer:
In our recent publications, we have extracted one possible measure of liquidity from the volume data of Treasury futures. This measure quantifies sensitivity of the price to changes in trading volume. The liquidity index is expressed as a negative log of this sensitivity, so that large sensitivity corresponds to low liquidity and vice versa. The figure shows the (smoothed) liquidity (on the inverted axis) overlaid with the 3M10Y– low vol goes hand in hand with high liquidity.
Liquidity has a logical connection with volatility. This starts at the very short end and propagates across the term structure: By making a price, market makers are implicitly short volatility for which they are required to allocate risk capital and the bid/ask spread (which is an indirect measure of liquidity) is the compensation they receive for this risk exposure. All else equal, the ability to hedge an option is a function of liquidity of the underlying, and the option prices should reflect that. From the figure, we note that post 2004, with the disappearance of mortgage negative convexity hedging and the growth of volume on the exchanges, liquidity has been providing a lower bound for gamma – whenever gamma reached this lower bound, it has been pushed up. Also, the departures from that lower bound have been increasingly rarer and short lived. This holds not only for rates, but for equities as well.
As volatility continues to be unphased by what lies ahead in the near term, short of surprise in inflation, we are likely to linger at low levels. In that context, liquidity constraints are going to define the lower bound on gamma.
As a reminder, none of this is new: those who have traded this market (for more than just a few years) instead of merely commenting on it, will recall all those vol traders who lost their jobs in early 2007 when vol crashed so hard, there literally wasn’t a swaptions market. If Kocic is right, vol traders in 2017 (and perhaps 2018) will suffer the same fate. Of course, the 2007 episode is best remembered not for the the vol linked pink slips, but the explosion in VIX shortly thereafter and the resultant near collapse of the US financial system. Despite the Fed’s relentless pressure, trillions in liquidity injections and vol selling, we see nothing that has changed since then, and no reason why this time will be different.
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