Fund Manager: Debt Toxicity Plus Debt Toxicity Does Not Equal Debt Purification

Dave Kranzler says “The stock market is impervious to the accelerating level of debt at all levels of the U.S. financial system – at least for now…”

by Dave Kranzler of Investment Research Dynamics

Paper is a check drawn by legal looters upon an account which is not theirs: upon the virtue of the victims. Watch for the day when it bounces, marked, ‘Account overdrawn.’ – Francisco’s “Money” Speech – from “Atlas Shrugged”

You have to love it – the City of Houston issues $1.01 billion  “pension obligation” bonds to “ease” the underfunding of the underfunded public pension fund.  “Pension underfunding”  is the politically acceptable euphemism for “debt obligation.”  Underfunding occurs when a pension investment returns PLUS future beneficiary contributions are not enough to cover current beneficiary payments.

Some might say it’s the difference between the NPV of future payouts and the current value of the fund. But that’s horse-hooey. Houston had a cash flow deficit it had to address and it did that by issuing taxpayer obligation debt – $1.01 billion dollars of taxpayer debt.  Furthermore, let’s use a realistic NPV and ROR assumption on any pension fund plus throw-in a real mark to market of illiquid assets like PE fund investments.  Every pension fund in the U.S. is tragically underfunded.

The rational remedy would be to cut beneficiary payments or force larger contributions from current working stakeholder or both.  The problem is that implementing either or both of those remedies might cost elected officials their jobs in the next election.

Instead, the proverbial can is kicked further into the sewage ditch by issuing more debt and using the the proceeds to help the pension fund cover current cash outflows to beneficiaries.  Regardless of what you call it, an underfunded pension liability is simply “debt”.  This bond issue might ensure that Houston’s retired public employees will continue, for now, to receive their expected flow of monthly pension payment, but this bond deal in no way whatsoever “eases” the debt burden of the pension fund.  Rather, it shifts wealth from the taxpayers to the retired public employees.

Similarly, the Trump Tax Cut does nothing more than shift the distribution of wealth from 99.5%’ers to the 0.5%’ers plus big corporations.  In this case, it’s not wealth per se.  Rather, it’s shifting the burden of supporting the Government’s spending deficit from the tax cut beneficiaries (billionaires and big corporations) to the rest of the population.

I could care less what CBO projections show – CBO forecasts are always appallingly inaccurate – the Government’s spending deficit is going to accelerate next year.   Between the cut in tax revenues from Trump’s Tax Cut and the big jump in spending built into the budget for defense and re-paving the roads that were paved during the Obama era, total spending will soar.  The gap between inflows and outflows will be bridged with more Treasury bond issuance.

Remember the narrative about systemic “deleveraging” after the great financial collapsecrisis? Turns out that story-line was a fairy-tale.  Treasury debt hits a new all-time everyday  and has more than doubled since the end of 2008.  Non-financial corporate debt hits a new all-time high every and is 71.4% higher than it was at the end of 2008.  Auto debt hits an all-time high every day;  credit card debt is close to an all-time high and student loan debt hits an all-time high every day.  Household debt not including mortgage debt hits an all-time everyday and is 43% higher than at the end of 2008.   The household numbers do not include NYSE margin debt, which is at at all-time high and an all-time high as percent of GDP.

The stock market is impervious to the accelerating level of debt at all levels of the U.S. financial system – at least for now.  At least until enough households and businesses get a message that says “account overdrawn,” like this person received directly from the bank teller last week (from a reader):

Great post Dave, Had a bit of a real world experience on this yesterday. Heading out to make the last biz deposit yesterday and met the mailman end of driveway and got another check. No deposit slip so asked the drive-in teller to just use my account number on the checks to deposit this. He left the intercom on. In rolls one of those massive bubba-mobiles big enough to blot out the sun..it looked like a pretty/very new one but could be wrong. I hate these loud diesel stinking machines. Anyway Bubba was trying to make a withdrawal out of his home equity credit line for $300. The teller came on and told him he was maxed. He fumed how can it be maxed?…”Well” he said “there have been 3 withdrawals in the last 2 weeks for $2200.” He whips out his phone and calls his wife (?) Raises his voice, guns the engine and off he goes…..with no cash. How often is this being repeated around the country every day…