Thursday, December 5, 2013
- by New Deal democrat
Yesterday a bankruptcy judge decided that, Michigan's Constitution notwithstanding, the city of Detroit could be admitted into bankruptcy and its pensions attacked.
As an initial matter, the decision is probably correct as far as it goes, i.e., Federal laws are supreme over state laws, so US bankruptcy law trumps Michigan's Constitution. Where I have a real problem is that Michigan, at its most fundamental level, sought to make it ultra vires (outside of their lawful powers) for any actor to file for municipal bankruptcy in that State. You an I can't simply march into US bankruptcy court and put General Electric into bankruptcy. We have to have the lawful right to make the filing. Michigan said that nobody had the right to make a lawful filing as to its municipalities. In my opinion, that should have been enforced against the State-appointed city manager who made the filing.
But there is a deeper problem, and that is the cavalier attitude towards pensions that has been allowed to exist in US bankruptcy courts for 25 years. If you haven't seen it yet, watch the interview with the elderly, retired Detroit municipal worker who worked for his pension for 40 years and now faces having his retirement income severely cut (and remember that many of these workers do not qualify for Social Security). He asked, "What do they expect me to do now?"
Since pensions were allowed to be cut in bankruptcies, Congress - including Democrats - has simply shrugged and said, "Too bad." That doesn't have to be the case, and it shouldn't be the case.
In many cases in private industry, corporate raiders attack a well-functioning company sitting on a pile of cash, including its pension funding. After the corporate treasury is raided, the company files for bankruptcy and the pensions are cut or even entirely negated.
There is simply no justifiable reason for this rule. Pension liabilities are publicly known and quantifiable. In many cases the contractual benefits were earned years, and maybe decades, before. All subsequent contractual liabilities are made (and should be deemed made) with full knowledge of those pre-existing liabilities to employees. If there is a bankruptcy, nobody who became a creditor after the vesting of the pension benefits should be allowed to participate in any distribution until those prior contracts are honored.
This doesn't mean that pensions are sacrosanct. It simply means that creditors who obtain their rights under subsequent contracts have to stand in line behind pensioners who earned their rights in previous contracts. In the case of Detroit, it means that somebody who bought a bond issued by Detroit 5 years ago shouldn't get paid until that retired worker's pension previously earned benefits are honored in full.
There are public entities, and corporations as well, that promised too much in pensions. Further, in the case of a necessarily ongoing entity like a municipality, pensions can't be honored in full at the expense of providing necessary municipal services to current residents. But there is simply no reason to put recent bondholders on the same footing as, let alone ahead of line as, pre-existing pensioners.
Under the rule I am discussing here, if I am a potential new bondholder for a city or company that has huge pension liability, I am either not going to buy their bonds, or else I am going to demand a very high interest rate to hedge against the likelihood that the bond issuer is going to default. The net effect is that profligate municipalities will go into bankruptcy sooner, when their finances are in less dire straits - which is a good thing.
In short, there is a federal legislative fix for this problem. It ought to be on the Democrats' agenda, and applicable prospectively to any contracts entered into subsequent to its enactment.
In the meantime, the last several decades have taught workers a brutal lesson: never trust assurances of future payment. I want the retirement funding up front, hived off in a defined contribution account that belongs to me, not my employer.
Wednesday, December 4, 2013
- by New Deal democrat
The Census Bureau released September and October new home sales and median new house price data this morning, and that gives me a chance to update a post I wrote 6 months ago.
They reported that 444,000 new homes were sold in October, which is just below June's 454,000 for the highest number of sales since the Great Recession. September sales were only 354,000, however, which was the lowest since April of 2012. In general, sales as reported look to be going sideways. I suspect that increased mortgage rates will continue to pressure the housing market, and it will be interesting to see if October's blowout housing permits report is an outlier for a flattening or decreasing trend or not.
The Census Bureau also reports on median new house prices, however, and that gives me the perfect opportunity to finish off the debunking of the "second US housing bubble" claim that raised its head this past spring.
About 90% of all housing sold in the US is from existing sales. Only about 10% of houses sold are new houses. Back in June, I debunked a dishonest Zero Hedge graph that divided nominal increases in house prices by inflation-adjusted disposable income, predictably showing that, so measured, house prices were even higher than at the height of the housing bubble. Of course, it turned out that when you did the honest comparison, i.e., nominal-to-nomial or real-to-real, there was no bubble at all.
But the Political Calculations blog was doing a real-to-real comparison of new homes, and there there had been a run-up in late 2012 to April 2013 in prices to near the 2005-06 peak. I suspected it was a short-term phenomenon and not a real bubble, or at best a "minibubble" that would shortly be reversed.
And indeed we now have confirmation that neither new nor existing median house prices in the US have formed any kind of bubble at all.
First of all, let's look at the Case Shiller 20 city index. In the below graph I have deflated the raw price data by average hourly income (blue) and by consumer inflation (red):
As you can see, existing houses are selling at the price levels they were at in 2001 or 2002, a far cry from the top of the bubble. In fact, since 2009 the general trend is pretty flat. Yes there has been a rebound, and it's certainly possible that the rebound has overshot a little, but this looks nothing like a bubble.
Now let's turn to median new house prices. As measured over 50 years, and once again deflated by average wages (blue) and consumer prices (red) there has been an increase in new home prices:
But it's well to keep in mind that the average square footage of a new house increased by something like 25% from 1600 s/f to 2000 s/f over that period. So on a square-foot basis, the overall trend is probably closer to flat.
Further. in the long graph we can see the bubble forming in the early 2000's and then deflating, before rising again to near its former peak in 2012.
Now here is the same data in close-up, better to show the recent trend (note: this does not include this morning's October report showing a median price of $245,800):
And with this morning's release of new home data we can see that the late 2012/early 2013 run-up in prices has entirely been given back. In fact, the median house price in October 2013 was $1400 lower than October of 2012, even before taking average wage growth of about 2% or inflation of 1% into account.
Keep in mind that the same Doomers who are telling you now that there is a housing bubble are the same Doomers who predicted foreclosure tsunamis that never arrived, and that housing prices wouldn't bottom in early 2012. On the other hand, besides yours truly who called both the top of the bubble as it happened and in summer 2011 that the bottom of the bust would occur in the early months of 2012, three other people who have a, shall we say, pretty decent record in calling the housing market - Bill McBride a/k/a Calculated Risk, Nobel Prize winner Robert Shiller, and Fed Chair nominee Janet Yellen - all agree with me that there is no new US housing bubble now.
Sorry, Doomers. But keep at it, some day things will turn down again.
France and Italy are two of the weaker EU economies, which is reflected in both to their respective ETFs. Although both rallied since mid-summer, they have both traded sideways for the last month as the economic numbers from the EU have weakened. NOw both are trading at their respective support levels, right near the 50 day EMAs. In addition, momentum is weak and the CMF is declining for both.