Entries in federal debt (11)


2015 Q4 Review and Outlook: What Every Flying Machine Man Thinks

Updated on Monday, January 4, 2016 at 02:11PM by Registered Commenterhb

Updated on Monday, January 4, 2016 at 02:13PM by Registered Commenterhb

Updated on Wednesday, January 13, 2016 at 07:33AM by Registered Commenterhb

Updated on Thursday, February 4, 2016 at 08:33AM by Registered Commenterhb

Updated on Thursday, February 4, 2016 at 08:33AM by Registered Commenterhb

“Monetary policy made itself ineffective with low interest rates, which were seen as a cure rather than a transitory painkiller.” - Nassim Taleb

Our economic view remains from last quarter’s. We anticipate a recession in the US with about a ~60-70% probability starting sometime in the next 6 to 24 months, assuming that we are not unknowingly in the front end of one now. Given the timing of the national elections, we do not anticipate any material reform of our wayward domestic policies. Political paralysis with essentially a sideways and weak GDP, say ~2%, seems our best case.

To the downside we see an increasing likelihood of a disruptive environment

Click to read more ...


Aggregate funded and unfunded liabilities of the states divided by the number of taxpayers

We came across The 2013 Financial State of the States and wanted to bring broader attention to it. The report addresses the scale of the problem of unfunded liabilities of state pensions & other retirement benefits. Recall these amounts are typically off balance sheet items, unseen & poorly understood by the public, and therefore a great source of financial & fiscal abuse by politicians. They are very real and large.

Below is an estimate of the scale of the aggregate problem: you can see that only $195 billion of the estimated $1.1 trillion of liabilities are actually reported on states’ balance sheets. So how is a citizen to know? Well, the intent was that citizens were not supposed to know and that’s the point of abuse. The deception has largely been successful:

Click to read more ...


Read Cochrane's New Keynesian Liquidity Trap

This is a big deal and just in. The emperor's new clothes revealed. Will Yellen read it?

"Technical regress, wasted government spending, and deliberate capital destruction do not work. Growth is good, not bad. That outcome is bad news for those who found magical policies an intoxicating possibility, but good news for a realistic and sober macroeconomics." - John Cochrane

The New-Keynesian Liquidity Trap


What happened to the red line? The blue line?


The red line is total government expenditures as a % of GDP (which excludes accurals for unfunded liabilities). The blue line is velocity of M2 which Jim Paulsen, who is very good, advises is "the rate at which the money supply is converted into nominal GDP". Think of it as the turnover of the money supply, that is, like inventory turnover. Faster means a lot of activity & demand for product, in this case money. Slower means you're not selling what you have on the shelf.

Do we see a pattern?





Comments on Q1 2012

Equities got a year's worth of return in the first ninety days of this year, but the glide path that took us there was not encouraging. We take what we can get, however, we have not had a recovery:

The current recovery began in the second half of 2009, but economic growth has been weak. Growth in 2010 was 3% and in 2011 it was 1.7%. Who knows what 2012 will bring, but the current growth rate looks to be about 2%, according to the consensus of economists recently polled by Blue Chip Economic Indicators. Sadly, we have never really recovered from the recession...

Click to read more ...


That which is seen and that which is unseen by the Fed

Updated on Monday, February 6, 2012 at 09:01AM by Registered Commenterhb

Updated on Tuesday, February 7, 2012 at 08:22AM by Registered Commenterhb

Updated on Monday, February 13, 2012 at 08:05AM by Registered Commenterhb

The testimony of Ben Bernanke yesterday (2/2/2012) to the Committee on the Budget of the U.S. House of Representatives was marked by an assertion as to the health of the US capital markets, that in response to a question that cited an opinion piece in the WSJ by Kevin Warsh excerpted below:

 "Private investors are crowded out of the market when the Fed shows up as a large and powerful bidder. As a result, the administration and Congress make tax and spending decisions—with huge implications for our standard of living—with heightened risks around future funding costs."

The transcript of the testimony has not yet been published as of this writing, so we quote, sort of, Bernanke's response:

 “The capital markets are all okey dokey. Never better. Next question.”  

We return to that issue because we disagree. We think the narrow context of his response is facially misleading. First, we stipulate

Click to read more ...


Watson Wilkins & Brown, LLC, on the debt deal

What has changed with the new debt deal?

In the debt deal we had a large scale and global demonstration that there is a fundamental, costly, and cumulative flaw in the governance process of the US. One suspects that very few people actually understand the magnitude of the problems of our debt, unfunded liabilities, and increasing macro-economic drag of the costs of regulation.

I don’t buy the notion that the debt ceiling deal is a model of American republican democracy at work.  To the contrary: it is emblematic of the problem. We don’t know if we want to be a market economy driven by innovation and freedom or a socialist economy driven by redistribution of wealth. 

The markets know that and are just going to hang out and price in, every day, the continuing drag of opportunity cost and inefficiency, until we get the major question sorted out.

As it stands now, citizens shall soon lack even the ability to buy an incandescent light bulb. This, perhaps a small thing, but one that diminishes that Shining City on the Hill.

Won’t it save the AAA ratings? Are AAA ratings important to the US?

Let me answer your question with a question. What was the economic value of the enterprise of the United States three weeks ago?  What will it be three weeks from today? The answer to both is about the same as it is today, maybe a bit less, maybe a bit more.

What do we know today that we didn’t know before? Well, we know that Lisa Jackson thinks that under the Clean Air Act "For every $1 we have spent, we have gotten $40 of benefits in return. So you can say what you want about EPA's business sense. We know how to get a return on our investment…" and that this ethos, certainly not logic, remains a driving force behind our national policies that drive capital formation, investment, and employment. There are manifold examples of other continuing policies of the administration that are even more destructive of economic opportunity which we leave to others to explore.

We boldly predict the AAA ratings of the US will not hold because we have too much debt and a decreasing ability and willingness to pay it off. The ratings are largely irrelevant except as an indicator of long term economic & cultural decay. They may be seen as an accumulation of bad policy, bad political decisions rendered by the voters, and poor leadership over time.

We do note that even if we are wrong on the ratings call, we will be right in this ken: recall GM’s paper trading at junk levels in the capital markets while carrying investment grade ratings all around?  As a capital markets issue, generally, the rating agencies are irrelevant. They are generally behind the game and even if they understand the credit, which sometimes they don’t.  And by the way, aren’t the agencies regulated as deemed systemically important institutions?

The capital markets price credit risk every day. Go look.  Last count there were about 65 entities trading better in the markets than the US government.  Probably more today.

How will this be fixed?

People will vote in November 2012.

We have to decide whether we want to be a market & innovation driven economy or an economy based on redistribution of declining stocks of wealth. Productive people and capital will decide whether to stay or go elsewhere.

In the meantime the debt will compound, the spending will compound, the demographics of the country will age, domestic capital formation will stagnate, investment will decrease, interest rates will go up (barring another recession), and investors will look for ways to mitigate financial & regulatory oppression.

How will the market be changed by this deal?

I don’t know, but this is one of the few times in modern history when retail and large scale institutional investors may come close to informational parity, largely due to the complete unpredictability of political outcomes, the lack of enforceability of political contracts (will the SOB’s do what they promise?), and the now increasingly valid questions about the sustainability of rule of law in the US.

Try to allocate capital to create wealth in that environment.

Go hire a Wall Street law firm and ask about the certainty of senior secured creditors’ rights in “systemically” important credits, like Chrysler or GM or GE. Or compare the answers to “What do you think about the possibility of something big & bad happening in the markets?”  A quant geek will talk about six sigma events, kurtosis and the like, while Joe Everyman will say, “Sure seems more likely”.  Which can you take to the bank?  And meanwhile, some Wall Street analyst demonstrates complete dis-utility while bleating that XYZ Company is $.01 over expected EPS. No one cares.

No one cares because it does not solve the problem.

Is the debt ceiling deal good thing?

No, not really. In one sense it is very destructive because it perpetuates the language and manner of a continuing fraud on the American people … by that I mean the entire construct of disinformation where by common meaning and reference are inverted and no longer have validity.  Disinformation & newspeak are working.

Material liabilities are hidden, off budget, and off balance sheet. Taxes are no longer called taxes, but ‘revenues’ and tax reductions are not tax reductions but ‘tax expenditures’. Reductions are not real reductions but reductions from some fictional abstraction called a Baseline which has no relation to actual spending except to facilitate more of it.  Debt limits don’t limit debt, but provide a forum for an increase in debt. "Investments" are not investments, but political allocation of scarce capital resouces away from highest & best use. The government wants to invest in a high speed train, you want to invest in your kid's college education. Your personal priorities as to how you want to allocate your resources count less and less every day. Same with corporations, it just takes a different form.

So we are where our governance has delivered us. No one should be surprised at bad outcomes. Most know that if an entity repeatedly consumes rather than invests, it doesn't work. Or if an entity makes lots of bad, over leveraged investments over time, it doesn't work. 

More problematic is that no one believes the process or manner of conduct of the game is effective or reputable anymore. A friend commented “I don’t know what can be done to get these guys into reality”. The reality of the political class is different: they are in the wealth transfer business, not the wealth creation business.

They are in the business of monetizing their ability to dispense economic privilege to their preferred constituencies, the costs of which are huge & borne by all of us. They extract a variety of personal commissions in currencies that are mostly alien to those in the commercial world (extortions, soft emoluments of political votes or payments for economic privilege, power or other) and create macro costs that are huge & real, but kind of hidden.  

The target has always been other peoples’ money, but now the incremental drag on GDP and force of unsustainable leverage has upped the urgency: “I’m out of money. Give me yours.”

The target is other peoples’ money, and it is a target rich environment … your firm's money, your money, your parent’s money, your kids’ money.

Tell them no.

What is your economic outlook?

WWB are not economists, and we generally don’t fare well in any forecasting. But you asked, so … from our perspective, we just locked in a huge cloud of uncertainty across all dimensions of the US economy until well after the 2012 election. That uncertainty will be transmitted to global economies.

Look for nominal growth of 0%<GDP<2%, if not a few quarters of negative numbers. We expect employment will flatline, go sideways to nominally up, but would not be surprised to see that too go negative from time to time.  We anticipate corporate capital budgets will be trimmed, limited to only near term high certainty payoffs or strategically important or competitively disruptive initiatives. Emerging markets may continue to attract new capital investments on the margin, but that goes away in a heartbeat if corporations see uncertainty in global demand: “Who shall buy these widgets?” And that likely happened today.

So our takeaway

  • Liquidity first, long term investment second. We could be sideways for a while.
  • Diversification & risk parameters run the book.
  • Now is not a good time to reach for higher expected returns or yield ("never" is a good time to reach for yield)
  • If you think you have a good macro bead on what happening, you’re likely wrong.

Look for some more big volatility, perhaps some Europigbanks go boom and get nationalized … again … and then it’s going to get really quiet. Volatility will vanish, but it will be the scary kind of quiet, when absence of volatility indicates fear.  People will have their risk books tucked away. Volatility will drop because nothing will be happening.   

The Fed’s out of ammo.  The banks are out of capital. The government’s broke. The language is false. Prices are unreliable. Things get quiet during a rebuild.  Standards of living decline. It’s a grim business, and it's slow.

Where we go from there is the issue.

If you believe that the US will be a market driven economy, equities actually look good if you have staying power.  Private investment in wealth creating businesses (non-listed, low/no regulation risk) will be increasingly more attractive IF there is a restoration of rule of law, contract rights, and sensible regulatory costs.

If you believe that the US will devolve more completely into a redistributionist economy, gold, diamonds and portables look good as do opportunities in the black market. The alternative will be to join Jeff Imeldt on the President’s Council on Employment or get a job with the government. FDIC and FINRA will be hiring. 

I’d personally not bank on the shovel ready stuff: it might be a while. So the short answer is that we have to wait until the elections for clarity and then probably another year after that to even have a clue.



In case you were wondering

This sent in from London by an institutional credit salesperson, a friend and former colleague.

A Visualization of United States debt

We have not verified the analysis, but thought it intriguing enough to share.


No mas! I’ll take #1, Monty!

Updated on Wednesday, June 15, 2011 at 08:51AM by Registered Commenterhb

"Every normal man must be tempted, at times, to spit on his hands, hoist the black flag, and begin slitting throats." — H.L. Mencken (Prejudices: First Series)

We have arrived. We encourage other citizens and investors to arrive as well. We call for no increase whatsoever in the federal debt limit. We call for scheduled real reductions in the aggregate consumption by state, local, and federal government of GDP.  We believe that we are nearing the point where time is of the essence  and further believe in the necessity of enlisting the discipline of the capital markets to achieve that objective.  If the political circumstances require a technical or substantive default to invoke the discipline of the capital markets, so be it.

No more kicking the country’s can down the road. Fix it now. This posting has been simmering for a while, and the catalyst for publication, perhaps prematurely so, was Larry Summer’s article in the June 13th edition of the Financial Times, How We Can Avoid Stumbling Into Our Own Lost Decade.  His thesis, reductively put, is an infinite do-loop,

Click to read more ...


US Gross Debt as % of Gross Domestic Product

Source: FRED, Gross Federal Debt (FYGFD), Annual, Fiscal Year and Gross Domestic Product

This data series series did not include Q1 2011 data at time of posting.




The USA as a business: say it with pictures

Kudos to Ms. Mary Meeker and her firm, Kleiner Perkins Caufield & Byers. They have done a public service by putting together a comprehensive analysis, USA Inc., that tries to answer the question, "What if we looked at our country as a business and applied some related analytics & disciplines?"  I only wish it had gotten more visibility.

Some of the analysis is compelling, and stunningly, much of this basic data is simply not surfacing from the imbecilic cacophony of mugwumps in media, policy or politics. We can understand why the politicians don't want these pictures to see the light of day. Broad understanding would reveal the great unpleasantness and failure of political leadership that brought us here. They communicate quite clearly what our problems are.

Entitlements alone consume nearly all revenue, and it will get dramatically worse going forward:



Our balance sheet is fraudulent in that it does not disclose all liabilities. When we put those liabilities on the balance sheet we become book insolvent. So the next time a politician says the words "trust fund" make sure that he means that an independent, non-governmental third party trustee will hold the funds for your benefit.




And our debt outstanding only reflects what's the on balance sheet!  Through the wisdom of governmental accounting orange stuff above isn't reported as a real obligation on the balance sheet! In the private sector this omission would be garden variety 10(b)(5) fraud but as Marilyn Monroe once said, "It's different for girls..." so when you start thinking about the debt crisis, don't forget to put the orange stuff on the balance sheet.  The omission is a fraud: a game of 'Hide the ball' that government has played so long. Game over.

 Lastly, while we're spending a lot on defense it does not appear to be out of line historically.



Spend some time with the study & share it with fellow citizens. I'm not buying into all the recommendations as some obvious private sector solutions have been given short shrift (more on that later), but defining the problem is a first step to solving anything.

For context of the magnitude of this problem consider that: 

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., eliminated government-related debt from his flagship fund last month as the U.S. projected record budget deficits

And folks, that's the home team voting with their feet.