Another Pension Fund Crashes

June 13, 2014

The highest profile pension crashes of late have all been in states long considered financial basket cases – California, Illinois, Michigan and the like.

As recent events show, however, public employee pension funds in states that have shown stronger economic growth are not immune from the same fundamental problem:  namely, their realistic investment returns do not come even remotely close to covering the funds’ obligations.

The latest disaster-in-waiting is the City of Dallas Police and Fire Pension System, which just terminated its top administrator.  During his nearly 20 year tenure, Richard Tettamant pushed the fund toward a wide variety of “alternative” investments.

According to the Dallas Morning News, the fund made “large, speculative bets on real estate and other private ventures,” including such gems as a tract of land near Tucson that cost $27 million in 2006.

Unfortunately for the City’s finest, Tettament “disclosed last month that those investments are performing worse than previously thought.”  For instance, that $27 million Tucson property is now on the market for $7.5 million – a loss of 72%.

Of course, after dumping the administrator, the Pension System’s board then took up the next most important agenda item:  replacing the System’s PR firm!

According to the Morning News, one trustee wondered how the fund will handle communications while it looks for a new firm.

But since the System “aims to achieve an annual return of 8.5% to meet its obligations” – and since such returns are manifestly impossible in the Bernanke-Yellen ZIRP world – the System really doesn’t need a PR firm.

A brief, succinct message to the City of Dallas retirees would suffice:  “You’re f***ed.”

Sometimes it really is that simple.

Private Equity Mule Salesmen

January 23, 2014

In an old joke, two south Louisiana Cajuns are in the business of selling mules.  Boudreaux  sells a mule to Thibodeaux for $100, who then turns around and sells it back to Boudreaux for $200.  The cycle repeats for a while, when finally Thibodeaux sells the mule to a visiting city slicker for $2,000.  Upon being informed of the sale, Boudreaux replies, “Why in the world did you do that?  We were making a very good living with that mule.”

But is it really a joke?  Or does this describe the true economics underlying much of today’s private equity world?

According to the most recent Economist, the answer is the latter.

In the popular imagination, private-equity moguls unearth their targets by scouring obscure corners of the business world for corporate diamonds-in-the-rough. They buff such firms up and sell them for a fortune a few years later. The truth is rather more prosaic: often the buy-out barons merely take over companies owned by their private-equity rivals.

And how do their investors fare?  (cue hysterical laughter)

Investors who back private-equity firms—typically pension funds, endowments and the like—are less than happy with the rise of secondaries. They offer much less scope for operational improvements, the main way in which private-equity firms purport to create value. Worse, the same institutions have sometimes invested in both the fund doing the buying and the one doing the selling. Strip away the financial montages, and they are in essence buying firms from themselves, with hefty transaction costs, including a 20% cut of the profit (if any) to the managers of the divesting fund.

So how do these private equity firms win?

Like Boudreaux and Thibodeaux, they ultimately need a naive or greedy third party to enter the scene and overpay.

As the Economist describes,

Pets at Home, a purveyor of dog toys which three private-equity funds have chewed over in a decade, will deliver a handsome return for KKR if a proposed flotation goes ahead this year, for instance.

So the bag-holders will once again be you, the retail investors who buy this garbage at the IPO, or your local pension managers who continue to invest your money on the basis of extravagant, but completely false, expectations of high returns.

Wake up America!

And especially wake up Republicans, who continue to fall for the notion that these corporate strip-miners resemble anything like the free-enterprise capitalists of the storybooks. 

Tow, Tow, Tow Your (Land) Boat

October 15, 2013

Yesterday, the unpleasant experience of a failed alternator that left me stranded on the side of the road led to an unexpected insight into the lives of the working poor.

I’m always interested in the economics of things, so after the  courteous tow truck driver hooked up my car and started toward the dealership, I asked him whether he had any times of either the day or the year that were particularly busy.

He considered this for a moment, then replied, “February, March and April.”

“Why these months?” I asked.

Because these are the months when most people receive their tax refunds and thus are able to have their vehicles towed to the repair shop – vehicles which had idled away the preceding few months in a shed or on blocks.

Not a subject covered in most MBA courses, I’m sure. 

Why the Occupy Movement Failed

October 7, 2013

In keeping with the theme of why the Tax Donkeys don’t revolt, alert readers will recall that the Tea Party and the Occupy Wall Street movements both originated from popular revulsion against the bank bailouts.

For the spark that set off the Tea Party, see CNBC’s Rick Santelli’s famous February 2009 rant on the floor of the Chicago Board of Trade.  As for the Occupy movement, this piece from is a good summary.

Yet four years later, the Tea Party remains a potent political force while the Occupy movement has virtually disappeared.   Why?

Quite simply, the Occupy movement degenerated from legitimate complaints about modern crony capitalism and the lack of accountability on Wall Street to a movement whose primary objective could be boiled down to “Give Us More Free Stuff

An Occupy web site lists 13 Demands, among which are a “free college education” and a “guaranteed living wage income regardless of employment.”

Though a site purporting to be the “official” Occupy site disclaims some of these demands, its own  demands are scarcely different – notably for the government to provide free education and for housing to be a “right.”

While the Occupy movement correctly protests against using taxpayer dollars to bail out TBTF bankers, why should the hard working Tax Donkeys who prudently refused to take on excessive debt bail out those who did?

Especially when the face of the Occupy movement becomes characters like this:

OWS 03

What do we want?  More free stuff!  Class War with Love!

When do we want it?  Now!

No, thanks.

Why the Tax Donkeys Don’t Revolt – “Change” versus “Improvement”

October 6, 2013

Anyone spending time in Corporate America quickly realizes that senior executives worship at the altar of  “change” – a phenomenon that supports a vast army of charlatans peddling “change management” services.

But the rank and file has good reason to be wary of these efforts.  Despite the blather of the gurus, “change” in itself is not an automatic positive, and the reason many people fear change is not an irrational attachment to the old ways of doing things, but rather a legitimate concern that what will “change” will be their own personal circumstances – for the worse.

Which leads us to the Tax Donkeys, and another reason they have not yet revolted.

One of the more interesting debates among the Founding Fathers took place in Paris, where Thomas Jefferson and John Adams were negotiating French support for the American Revolution.

Both men agreed that total rot infected the ancien regime from top to bottom.  Yet Adams did not share his colleague’s enthusiasm for its overthrow, fearing that what followed could be worse.

As it turns out, Adams was right.  After getting rid of Louis XVI, the French wound up with Robespierre and the Terror, followed by Napoleon and 20 years of continuous war in which 3.5 to 5 million died.

The record of 20th century “change” is even more blood-soaked.  Germany replaced an ineffective group of squabbling politicians with Hitler, who promised this

Hitler propaganda

but delivered this.

Russians Reichstag

The Russians got rid of Nicholas II and an incompetent class of parasitic nobility, but “hope and change” (“bread, peace, and land” as the slogan of the day went) didn’t quite work out the way most of its enthusiastic proponents had in mind.  They expected this,

Soviet propaganda

but got this -

Stalin death camp 2 Stalin death camp

- Stalin’s Siberian death camps and the largest man made famine until Mao eclipsed the record a few decades later.

Mao, of course, promised this,

China propaganda

but delivered this -

Mao famine

- an appalling famine where at least 40 million died, followed by the Cultural Revolution and human suffering on a colossal scale.

And let’s not forget the bloodiest “change” of all – at least in terms of percentage of a country’s population, as Khmer Rouge fanatics tried to reset their country to Year Zero, killing anyone even remotely suspected of standing in the way.

Cambodia terror

And where did each of these countries’ upper-middle class Tax Donkeys end up after the “change?”  The few lucky ones got out with the clothes on their backs.  As for the rest …

Those who worship at the altar of “change” should be careful what they ask for.

Why the Tax Donkeys Don’t Revolt

September 26, 2013

In his excellent essays about America’s 3-1/2 class society, (See or, Charles Hugh Smith uses the term Tax Donkeys to describe the roughly 20% of Americans who are just below the top 0.1% – people who earn most of their income by their labor, and are taxed at the highest rates by multiple levels of government.

Unlike the super-rich, these individuals cannot afford the armies of accountants, tax lawyers and lobbyists to rig the system in their favor.  Smith hints at the possibility that one day the Tax Donkeys might rebel, but the more relevant question is why they have not done so already.

Let’s examine some possible causes

 1. The situation is not yet personal for enough people

Opinion polls show a broad dissatisfaction with the country’s direction, and almost every major institution in our society carries less respect than it once did.

In my own conversations with friends and colleagues, complaints seem to have a harsher edge to them now than in years past – moving beyond normal daily gumbling.

But dissatisfaction is not sufficient to drive major transformations. It is well documented – at least with health/fitness and career moves – that people do not make fundamental life changes on this basis, nor on the basis of logic alone. Instead, the situation must become personal.

Over the past few years, I have run a dozen half marathons, and on race day, the local newspaper invariably highlights a first-time runner. The story is always the same: a year or two before, the new runner was sedentary and grossly overweight, despite years of pressure from family or friends to start exercising and eat better. But then something happened – a diagnosis of diabetes or a friend’s death from a heart attack – to spur the runner to action, to cause him or her to think, “I could be the next one to drop from the roster, and I’m going to do something about this, starting today.”

It wasn’t that these runners were unaware of the facts: they knew they were dangerously obese, and that their food choices were poor. But this wasn’t enough. They needed a personal catalyst to compel them to take that first step, to begin to endure the pain and sacrifice required to make life-altering improvements.

Po Bronson, in his book What Should I Do With My Life, documents this same phenomenon with career transformations. His book covers many people who were dissatisfied with their careers, but until something happened to make it personal, they remained in miserable situations – often for years.

 2. Many of the Tax Donkeys’ careers consist of providing services to the 0.01%.

Many of the upper-income reaches of Tax Donkey-dom are lawyers, accountants, consultants, or other providers of professional services to the Top 0.01%.

A significant number of these people are employed by large national firms, whose web sites are filled with high-sounding blandishments about “values” and “integrity.” But behind the pretty pictures, these organizations operate on a very simple principle: those who rock the boat are tossed overboard.

In every financial disaster of our current Millennium (take your pick: Enron, Arthur Andersen, AIG, Washington Mutual, IndyMac, for starters) lonely voices in the wilderness argued against what their firms or their clients were doing. In each case, these warnings were ignored.

For a lucky few Cassandras – who were either high enough in the organization to have already socked away a secure retirement or lucky in their timing (Sherron Watkins at Enron, for example) – this resulted in no significant personal consequences. For everyone else, the example of Christine Casey at Mattel presents the usual outcome. “The High Risks and Low Rewards of Making Allegations About Your Employer.”

Today’s poor economy only exacerbates this problem. According to the American Bar Association, only half of 2011 and 2012 law school graduates found themselves working in jobs that required a JD. What choice will a big firm associate make when forced to choose between doing something borderline sleazy or joining his classmates behind the counter at Starbucks? Add $100,000 in nondischargeable student loan debt (and perhaps a wife and child) to the mix and the path forward becomes pretty clear.

3. Many aspire to become one of the 0.01% and see a period of Tax Donkey-dom as a necessary step toward achieving that goal.

Last year on an overnight flight, I found myself sitting next to a man who owned an investment firm. As the flight attendants took our plates and dimmed the lights, this man looked at his watch and chuckled that his analysts would be “getting ready to go home about now” (midnight, at his office’s local time).

“But they like it,” he added.

Nonsense. I have worked for managers who thought their teams did their best work at 3:00 a.m. while subsisting on a diet of vending machine donuts – and I did not enjoy it one bit; nor did the people who remained at the firm long after I had departed.

In fact, when such persons answered honestly, they almost always admitted that their primary career goal was to do something else.

So why did they stay? Why did they continue working miserable hours doing useless work for unpleasant bosses when their highest objective was to leave?

Because they wanted money – FU money to be precise – and felt like they needed to stay to learn the game. Any step off the perceived fast-track and their careers – along with their hopes of also owning (like their boss) one of the 100 most expensive houses in town – were finished.

We’ll address other important factors in future posts.

Syria Explained

September 4, 2013

In keeping with the theme of explaining phenomena in the simplest possible terms, we present a map of sectarian divisions within Syria, courtesy of Stratfor (subscription required).

Syria and Lebanon Sectarian Divisions

Two questions should jump out to anyone contemplating deeper involvement in this quagmire:

1.  How can anyone possibly sort out all of these sects (not to mention the sub-sects within each broader grouping) in a satisfactory manner?

2.  How will it be possible to keep the war from spreading, if “narrow” and “surgical” strikes lead to an unexpected enemy response?

Based on calls and emails to Congressional offices, it appears that the American public has figured out that our so-called leadership has no good answer to either of the above.

Washington Explained

August 27, 2013

In one of the most telling, but under-reported statistics, a recent story in The Economist entitled “Something Rotten:  The Hustlers and Parasites Who Make Up Washington’s Political Establishment” noted that in 1974, only 3% of retiring Congress-critters became lobbyists. 

Now, 50% of retiring Senators and 42% of retiring House members join the K-Street crowd in milking the system for all it’s worth.

So who do these people really represent when they’re working on the Hill? 

Hint:  it isn’t you, but rather the interests of their future employers. 

Sometimes it really is that simple.

Your Medical History for Sale

August 16, 2013

One of the points that instructors in any health sciences course emphasize repeatedly is that patient health information is strictly confidential, and that federal regulations – notably HIPAA – impose personal liability on health care workers who breach this duty of confidentiality.

For instance, a paramedic who radios the hospital from the ambulance, reporting that “we’re bringing the mayor’s son, who we found half naked and drunk in the gutter,” will most likely lose his license and face a ruinous lawsuit as well, when this report is overheard by a local busybody with a scanner.

But what happens when the state breaches patient confidentiality by selling medical records to marketing firms?  

Funny you should ask.  As a recent Business Week article notes,

“Exempt from federal health privacy laws, states have long sold medical data to help finance public health studies.  [However], demand for the information – which is relatively cheap – has shifted from university research programs to commercial data miners.” 

The real issue for patients is that this data – supposedly scrubbed of links to individual patients – is not in fact free of such links. 

“States often choose to release extra identifying information such as a patient’s Zip Code to “make the data more useful.”

In the words of one pharma executive, “with that kind of identifier, you might as well have the patient’s electronic medical record number.”

To no one’s surprise, the companies who buy this data include the largest US health insurers and drug firms (“for sales pitches to doctors and consumers”).

By the way it’s not like the states make much money from this egregious violation of patient privacy.

“Twelve of the most populous US states generated $1.91 million from 1,698 data sales in 2011.”

This works out to $1,125 per sale – pocket change under the state’s sofa cushions.

Amazon and the Law of Large Crowds and Small Doors

August 15, 2013

A few weeks ago, we looked at the relative valuation of Amazon vs Walmart (See “Amazon Revisited” July 16, 2013) and concluded that the company’s fundamental economics in no way supported AMZN’s astonishing market cap.

Days later, Amazon released its latest quarterly earnings, reporting that its operating margins had now dropped below 1% (compared to 5.93% for WMT) – deferring the company’s promise of profitability for at least another quarter.

So what did the stock do in response to this disappointing report?

A silly question.  It went up, of course – rocketing from around 298 to 310 and change the next day.

But while the true believers and the trend-following sheeple continue to pile in, one must wonder who is getting out.

AMZN has dropped 8% since it’s one-day post-earnings pop on July 26.  So has some large, and wise, investor looked at the situation and said to him/her self, “I’ve had a good run, but the odds of making 2x, 3x or 4x my money are now pretty slim; therefore, I’ll get out now, while I can.”

For it’s that last bit that could make all the difference.

Normally, a company with a forward P/E of 100 cannot let reality fall short of the estimates for that “E.”  AMZN has done this for the last two quarters with no ill effects – yet.

But when gravity does finally rear its ugly head, the stampede could be fatal for anyone not seated immediately beside the door.

Chipotle (CMG) shows what is possible.

And if you are a retail investor, your chair is by definition nowhere near the exit sign.


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