#shutdown

Gym for me, but not for thee

San Francisco gym owners have recently discovered that gyms inside government buildings for public servants have been open for months.

Never mind that private gyms remain shut due to the dangers of coronavirus.

Dave Karraker, owner of MX3 Fitness, said,

It just demonstrates that there seems to be some kind of a double standard between what city employees are allowed to do and what the residents of San Francisco are allowed to doWhat the city has unwillingly done is created this great case study that says that working out indoors is actually safe…So, at this point, we’re just demanding that they allow us to have the same workout privileges for the citizens of San Francisco that the employees of San Francisco have.

Never mind that private citizens are suffering fines for opening their businesses just to feed their families. Public service seems to be there to serve the public servants, not the the public.

Everyday we get more confirmation that the pandemic is nowhere near as virulent as made out. The CDC has reported that only 6% of deaths in America have been directly from COVID-19.

Actions speak louder than words. If public servants can pump iron indoors they can go to a polling booth.

Experts inside YouTube ride roughshod over medical opinion

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The video of Bakersfield-based microbiology experts, Drs Dan Erickson and Artin Massihi, discussing a contrarian view on COVID19 that YouTube took down is still available on this link.

In what world are we living where a video channel prioritises a groupthink generated political opinion that overrides medical experts who have based their findings on available hard data, not wildly inaccurate models? The video was taken down for a ‘violation of community standards.’ You can read the YouTube statement here.

We would understand this if the doctors had no medical training and were pushing wild conspiracy theories. They simply weren’t. All that happened was a sensible presentation of data coupled with opinions based on their background as microbiologists. They think the fears have been overblown.

If you listen to the dialogue, the hard data confirms what we had been saying about the statistics of the pandemic. The doctors compared the data of an open Sweden vs a closed Norway and concluded the data discrepancies of COVID19 were statistically insignificant.

Many of our readers know we are contrarians by nature. We are more curious about what we might be missing rather than just accepting what is commonly reported. When opinions support the data, it isn’t an exercise in confirmation bias. We are genuinely interested as to whether the arguments sound convincing enough to validate them. We are even more concerned when the other side of the debate seek to shut it down rather than expose the flaws in Erickson and Massihi’s thinking.

Is the dissenting view more widespread than the media given credit for? After all the data is a moving feast. We are learning about COVID19 on a daily basis so sticking to the thinking of 2 months ago may not be relevant if the course shifts. Why are governments setting fixed future dates? Why not open up when the data supports it? Hardly any science in politically driven decision making.

An ER doctor in Wisconsin confirmed Drs Erickson and Massihi’s view that it isn’t about science. He wondered why someone in a hazmat suit was taking his temperature when there were next to no patients inside, something that is borne out by the data with so many beds available. Should we fear politics more than the pandemic?

Are governments following a herd mentality which uses poorly interpreted data as opposed to considering herd immunity based on medical science? The economic fallout will likely be way worse than any impacts of the virus itself. As we wrote earlier this week, governments carry zero responsibility for their actions because they can hide behind telling us it was for our own good. We bear the lot in terms of consequences. A terrible equation.

We believe that groupthink is the more dangerous pathogen in society. Whether financial crises or topics such as climate change, dissenting voices have repeatedly been terminated, especially by media outlets. Surely if the data sits with the prevailing sentiment, why not pick the bones out of Erickson and Massihi’s statement and debunk it with more prescient facts? In what world does it help to suppress information? Defeat data with data. This is why we remain contrarians.

The medical discussion surrounding the live clinical data of Erickson and Massihi makes plausible sense. We have all grown up learning that a baby gnawing a dog lead helps its body work out how to fight future infections. The doctors argue that keeping people locked down decreases one’s immunity to fight against COVID19.

The Bakersfield doctors believe that preventing the body from being able to combat coronavirus by not being exposed to it could have the opposite of the intended effect when people start to mingle again. Many people may not even know they have it. So when those people who caught it in a supermarket could restart the process. Does the government return to lockdown again and restart the negative loop?

These doctors claimed to have done the majority of testing for Kern County, California. The data backs up what is being experienced around the world positive test rates for infection are far higher than what is being reported but the death rates are way lower. Having said that, these two owners of seven clinics noted (some might argue somewhat selfishly) that the amount of people getting tested is way lower than their installed capacity. Irrational fear has been keeping people away. Then we are surprised when the natives get restless?

The two doctors recommend putting kids back into school. Slowly reopen other businesses and eventually sporting venues. The doctors questioned how it is OK to go to Costco but not a small cafe. It is reverse logic. There is a far higher exposure in a large business than a local cafe.

The adverse economic impacts don’t match the behaviour of the coronavirus in their opinion. Until a vaccine is found, the human body has the best chance of defeating it. Erickson and Massihi argued that 94% of the people recorded as dying from coronavirus had comorbidities – heart failure, immunodeficiencies, HIV etc. The death toll related to COVID19 alone is a speck.

The doctors added that there has been a sharp rise in domestic violence, child abuse, suicide, depression or mental health issues during the stay home orders. The campaign of fear exacerbated by the media is viewed as a far bigger problem than the coronavirus itself. Massihi suggested that people are becoming afraid to see the doctor for completely non-virus related reasons for fear of catching COVID19 by going to seek medical help. He argued that someone with symptoms of appendicitis avoiding the doctor for fear of contracting coronavirus may die of sepsis.

We don’t pretend to be doctors for a second. We offer no medical opinions here. We merely question why a social media channel decides it knows better than medical experts?

We understand a private business has the freedom to act in ways it sees as best for shareholders, but this seems far more sinister –  using its power to shut down free speech. Perhaps the doctors should sue YouTube for violating their first amendment rights. If there was ever a need for control over media censorship, this makes a great test case.

Only one you can’t stop crashing at your place during COVID19 is the economy

Warning Signs Investors Ignored Before the 1929 Stock Market Crash ...

Brace yourself.

COVID19 will be defeated but the cure is turning out to be way worse than the disease.

Unfortunately, the sad reality is that at the rate governments are tightening legislation to keep us in shut down mode, we are day-by-day staring at a great depression.

While some will praise governments for throwing the kitchen sink at the economy with all manner of stimulus packages, the relief will be temporary because all of the ammunition for a sustainable recovery had been depleted years earlier. It is like supplying an alcoholic on rehab with an all-you-can-drink open bar.

Our feckless RBA has just embarked on QE, a mission that has failed every other central bank that has tried it. The velocity of money has been falling for decades. Who will be given access to borrowing at zero interest rates when the economy is in freefall? Which banks will lend against properties that will likely implode in value? 50% down? To think of all the reckless “first home buyer” schemes that loaded young people at the top of the property market. The RBA has been complicit. Not wanting to put pressure on the government to reform, it just kept cutting rates to keep housing afloat. It was totally negligent in its duty even though it will signal its role as a rescuer of last resort.

When will banks be forced to mark to book the value of mortgages on their balance sheet? Equity is thin as it is. 15-20% equity buffer to mortgages is pretty wafer-thin. They need to do this immediately so we can properly assess risk. Forget stress tests by APRA. They’re meaningless. Our housing market will collapse with higher unemployment. 50% falls from here are possible. Remember there will be hardly any buyers. Prices fell up to 90% in Japan after its property bubble popped.

Worse our regulators have been asleep at the wheel chasing financial institutions on their commitment to climate change, the absolute least relevant metric to save them from here. It shows how complacent they became.

Australia has made some interesting crisis policy choices. For instance, PM Scott Morrison is trying to pass rent moratoriums where landlords suspend payments from tenants until things return to normalcy. It is not enshrined in law yet. In principle that is a nice gesture even if the government is subsidizing the banks for forgone interest due to short term loan repayment moratoriums. Let’s assume this continues for 6 months. Apart from the astronomical size of the subsidy, who will ultimately end up sacrificing the 6 months? Landlords? It won’t be the tenants.

Shouldn’t landlords be free to choose whether they are prepared to forgo rent or not as a purely rational business proposition? Shouldn’t a landlord be free to enforce a rental agreement? Will contracts matter anymore?

At some stage, the free market must be allowed to function and the government will hit a tipping point of weighing stopping economic armageddon by allowing businesses to function and the marginal risk of infections. The people will be crying for this if shutdowns remain.

Landlords may be labelled un-Australian or worse but in 6 months time, if unemployment has surged to nose bleed levels well above the 6% we saw during GFC at what point will disposable income be able to support a daily coffee at a cafe?

A cafe might soldier on for a further 3 months on skeleton staff before realising that they can’t cover costs. A landlord would be well within reason to demand that early cancellation clauses and fees are enforced.

Then what of all the invoices to coffee suppliers, bakeries who provide muffins and croissants and utilities? Who misses out? What about the invoices of the coffee supplier? Will the bakery get called on by its flour supplier to pay upfront for future deliveries when it has no operating cash flow, instead of the long-standing 60-90 day terms? That happens overnight. It isn’t a managed outcome. Cash is king.

The question is why hasn’t the government taken advice from the banks on business lending so it can better assess the risks involved from those that deal every day with small companies?

We can’t just shut an economy down for 6 months and expect a return to normal when it is all over. Unemployment rates are likely to surge well above 10%.

As we wrote in an earlier piece, there are 13.1 million Australians employed as of February 2020. Full-time employment amounted to 8,885,600 persons and part-time employment to 4,124,500 persons. Retail trade jobs come in at a shade over 1.2 million jobs. Construction at 1.15 million. Education 1.1 million. Accommodation/restaurants /bars etc at 900,000. Manufacturing another 900,000. Noticing a trend in our employment gearing?

We can fudge the unemployment figures however we like. We can pay $1,500 a fortnight for 6,000,000 workers to pretend they still have a job. That is $18bn a month. The PM can talk about how this will help us bounce on the other side. If it continues for just over 6-months can the budgeted $130 billion will be spent. This is separate to NewStart payments too.

Yet, will people lavishly spend or pay down debt and economise as best they can? We think the latter unless moral hazard has truly sunk in.

What people need to understand is that our Treasury expects to raise $472.8 billion in taxes for FY2019-20. Throw in sales of services, interest and dividend income and that climbs to a total of $511 billion. Expenses are forecast at $503 billion. In the following three years Treasury anticipates $490.0 billion,  $514.4 billion and $528.9 billion in taxes. Expect those totals to be cut significantly.

So if ScoMo’s JobKeeper rescue package for workers goes beyond 6 months, that is equivalent to 27% of annual tax revenues. That doesn’t take into account the slug to tax collections of lower GST and vastly lower income tax for individuals and corporates. That is just at the federal level.

Note, states such as NSW have recently waived payroll taxes for small businesses in a  $2.3bn stimulus package. We shouldn’t forget that the NSW Government is the largest employer in the Southern Hemisphere at 327,000 staff.

We remind readers that according to the RBA small businesses employ 47% of the workforce. Medium enterprises employ 23%. That is 70% of the entire workforce who are most at risk from a slowdown.

In 2019-20 income tax collections will make up $220 billion. Company tax was forecast to generate $99.8 billion. GST $67.2 billion. Excise taxes (petrol, diesel, tobacco etc) $44.7 billion. This data can be found on page 21 here.

Local cafes are reporting a 60~80% fall in revenue. Pretty much all casuals have been let go. It is a bit hard to survive on coffee when a lot of stores aren’t stocking pastries for fear of spoilage.

It is not hard to assume a scenario where government income taxes fall to $160 billion (-28%) due to mass layoffs. One assumes many people will be able to get a tax rebate come June 30th. So this number may end up being conservative on an annualised basis.

Company tax could plunge to $40 billion annualised due to the drastic fall in revenues as customers change the manner of contracts and reign in their own spending. Anyone that thinks that business will resume as normal is crazy. The ripple effects will be huge.

Excise taxes may drift to $35 billion as people cut back on drink (currently $7bn in tax revenue), are limited in places to drive negating the need to fill up (currently $18bn in total tax take). The $17 billion in tobacco excise may weather the storm better than most.

GST could fall to $50 billion. People just aren’t spending much outside of food. Massive retail discounts will not make much difference. GST will be the best indicator of how much the economy has slowed. Even if we start to see a massaging of the GDP numbers, GST won’t lie. It will be the safest indicator.

If our assumed tax revenue sums to $285 billion annualised from the budgeted $472 billion that equates to a 40% haircut.

Trim the ‘other revenue’ column to $30 billion from $39 billion and we have $315bn. Will the government then chop away at the $503 billion in expenses? All of the stimuli doesn’t arrive at once but a lot of it in relatively short order. Surely a $300~400 billion deficit is a fait accompli?

We should also anticipate forward year tax revenues be cut c.30% for several years after. The question is when does the government realise that it must cut the public service and scrap wasteful projects like French submarines and other nice-to-have quangos? We won’t see a budget surplus for decades.

We must careful not to fall into the trap Japan finds itself in. It has a US$1 trillion budget funded by US$600bn in taxes and US$400bn in JGB issuance. Every. Single. Year.

Nothing short of drastic tax and structural reform will do. Instead of behaving more prudently by cutting budgets when we had the chance, instant gratification created by governments desperate to stay in power has only weakened our relative position. Since 2013, the Coalition has been responsible for 46% of the total amount of all debt issued since 1854.

States should quickly realise that the $118 billion in federal grants going forward will also be curtailed. NSW will likely fare the worst because its financial position is by far the best.

If the government had a proper plan, it would be looking to what essential industries have been given up to the likes of China that we need to onshore. Medical equipment, masks or sanitiser. For cricketer Shane Warne to be converting his Seven Zero Eight gin factory to produce hand sanitiser shows how much of a joke our local manufacturing has become.

We must never forget that a Chinese government-owned company displayed the Communist Party’s mercenary credentials by (legally) buying 3,000,000 surgical masks, 500,000 pairs of gloves and bulk supplies of sanitiser and wipes. So not only was it responsible for covering up the truth surrounding the virus in the early stages of the pandemic, we openly let it compromise our ability to combat the virus when it hit our shores.

China has shown it doesn’t give a hoot for ordinary Australians. So why should we continue to fold to its whims and cowardly surrender our industries for fear it’ll stop dealing with us? It is nonsense. We have some of the highest quality mineral resources which it depends on. We can bargain. We have chosen to appease a bully.

Our Foreign Investment Review Board (FIRB) needs to be far more vigilant to prevent takeovers by Chinese businesses. We should openly accept the way China conducts business practices and recognise that it is often incompatible with ours when national security is at stake. Surely this crisis has highlighted the true colours of the political system in Beijing.

That leads us to Japanese companies. Many are seriously cashed up, have a favourable exchange rate and have a long-standing history of partnering with local businesses. We should be prioritising our relationship with Japan and look to have them invest in our inevitable capital works programs – specifically high-speed rail. It is the type of project that has meaning for the future and a long enough timeline to turn an economy around.

People need to be prepared for the reckoning. There is no point softening the blow. The brutal truth will eventually arrive and we will have only put ourselves in an even weaker position with the policy suite enacted so far. Time to be rational about risk/reward. Whether we like it or not, the minimum wage will need to be cut substantially in order to get the jobs market alive again. Don’t worry, unemployment will be so high that people will demand minimum wages are cut because it is far superior to the alternative!

(Time to ditch your industry super and start shovelling your superannuation into gold)

KK acknowledges gender politics for without it…

…she would not be where she is. She has been a disaster. She led Labor to its worst ever election defeat in NSW. The Libs have been in government ever since. She only got the premiership thanks to the Labor factions which turfed incumbent Premier Nathan Rees mid-term. NSW Premier Gladys Berijklian won in her own right. It can be done with competence.

Keneally was trounced in the Bennelong by-election and has not been elected as a senator in her own right. Her velcro side kick role beside Bill Shorten helped him clutch defeat from the jaws of victory and now Albanese has sunk the fortunes of competent and popular Labor figures Ed Husic and Don Farrell to make way for Keneally’s gender. Progress? Regress.

Is this the way we create inclusion by encouraging exclusion? Why couldn’t Keneally have got thru solely on merit? Everyone (including CM) would have endorsed such a move. Sadly her record is abysmal.

At zero for three, it must be even worse for Husic and Farrell to make way for an inferior candidate who condescendingly praises their sacrifice despite no record to speak of.

No wonder Albanese was so quick to shut down the press conference after she driveled, when he closed with, “we have two ears and one mouth so we should listen more than talk and we’ve done enough talking“. It shows he is not leading a unified ship to bend to such stupidity thinking it is a vote winner.

Should we trust ratings agencies on US state credit?

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The Financial Crisis Inquiry Commission concluded in 2011 that “the global financial crisis could not have happened without the ‘Big Three’ agencies – Moody’s, Standard & Poor’s and Fitch which allowed the ongoing trading of bad debt which they gave their highest ratings to despite over three trillion dollars of mortgage loans to homebuyers with bad credit and undocumented incomes.” The table above tabulates the deterioration in US corporate credit ratings since 2006. The ratings agencies have applied their trade far more diligently.

As written earlier in the week, US state public pensions are running into horrific headwinds. Unfunded pension liabilities are running at over double the level of 2008. With asset bubbles in stocks, bonds and property it is hard to see how plugging the gap (running at over 2x (California is 6x) the total tax take of individual states) in the event of a market correction is remotely realistic. However taking a look at the progression of US states’ credit ratings one would think that there is nothing to worry about. Even during GFC, very few states took a hit. See below.

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Looking at the trends of many states since 2000, many have run surpluses so the credit ratings do not appear extreme. It is interesting to flip through the charts of each state and see the trajectory of revenue collection. A mixed bag is putting it lightly. Whether the rebuild after Hurricane Katrina in 2005, since 2008 revenue collection in Louisiana has drifted.

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Looking through S&P’s own research at the end of last year it included an obvious reference.

U.S. state and local governments can use pension obligation bonds (POBs) to address the unfunded portion of their pension liabilities. In certain cases, POBs can be an affordable tool to lower unfunded pension liabilities. But along with the issuance of POBs comes risk. The circumstances that surround an issuance of POBs, as well as the new debt itself, could have implications for the issuer’s creditworthiness. S&P Global Ratings views POB issuance in environments of fiscal distress or as a mechanism for short-term budget relief as a negative credit factor.”

Perhaps the agencies have learnt a painful lesson and trying to stay as close to being behind the curve as possible. It doesn’t seem like public pensions are being factored at levels other than their actuarial values. Marked-to-market values would undoubtedly impact these credit ratings.

As mentioned in the previous piece on public pensions, a state like Alaska has public pension unfunded liabilities equal to $145,000 per household, treble the 2008 figure. It is 3.5x annual tax collections. The state’s per capita operating budget of $13,728 per person is way above the national average of $6,826 per person. Alaska relies on oil taxes to finance most of its operating budget, so a sudden drop in oil prices caused tax revenues to sharply decline. The EIA’s outlook doesn’t look promising in restoring those fortunes in any scenario. So S&P may have cut Alaska two places from AAA in 2015 to AA in 2017.

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While pension liabilities aren’t all due at once, the last 8 years have shown how quickly they can fester. It wasn’t so long ago that several Rhode Island public pension funds reluctantly agreed to a 40% haircut, later retirement ages and higher contributions with a larger component shifted from defined benefits to defined contributions raising the risk of market forces exerting negative outcomes on the pension fund.

In 2017, despite a ‘robust’ economy, 22 states faced revenue shortfalls. More states faced mid-year revenue shortfalls in the last fiscal year than in any year since 2010, according to the National Association of State Budget Officers.

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Pew Charitable Trust (PCT) notes in FY2015 federal dollars as a share of state revenue increased in a majority of states (29). Health care grants have been the main driver of this. FY2015 was the 3rd highest percentage of federal grants to states since 1961.

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By state we can see which states got the heftiest federal grants. Most states with higher federal shares expanded their Medicaid programs under Obamacare (ACA) and got their first full year of grants under the expanded program in FY2015.

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PCT also wrote “At the close of fiscal year 2017, total balances in states’ general fund budgets—including rainy day funds—could run government operations for a median of 29.3 days, still less than the median of 41.3 days in fiscal 2007…North Dakota recorded the largest drop in the number of days’ worth of expenses held in reserves after drawing down almost its entire savings to cover a budget gap caused by low oil prices. It held just 5.4 days’ worth of expenditures in its rainy day fund at the end of fiscal 2017 compared with 69.4 days in the preceding year… 11 states anticipate withdrawing from rainy day funds under budget plans enacted for fiscal 2018

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Looking at the revenue trends of certain states, the level of collection has been either flat or on the wane since 2010 for around 26 states. As an aside, 23 of them voted for Trump in the 2016 presidential election. The three that didn’t were Maine, NJ and Illinois.

Optically US states seem to be able to justify the credit ratings above. Debt levels aren’t high for most. Average state debt is around 4% of annual income. Deficits do not seem out of control. However marking-to-market the extent of public pension unfunded liabilities makes current debt levels look mere rounding errors.

Considering stock, bond and property bubbles are cruising at unsustainably high levels, any market routs will only make the current state of unfunded liabilities blow out to even worse levels. The knock on effects for pensioners such as those taking a 40% haircut in Rhode Island at this stage in the cycle can only feasibly brace themselves for further declines. This is a ticking time bomb. More states will need to address the public pension crisis.

A national government shelling out c.$500bn in interest payments on its own debt in a rising rate environment coupled with a central bank paring back its balance sheet limits the options on the table. Moral hazard is back on the table folks. Is it any wonder that Blackstone has increased its short positions to $22 billion?

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Usually a mutually exclusive headline in WaPo

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Surprising to see such an opinion piece in WaPo. Usually mutually exclusive subject matter with such a title. Admittedly the author said she had incredibly low expectations.