So many catalysts could trigger the next financial crisis but this problem “is really going to be a nightmare.”
By Bill Fleckenstein President Of Fleckenstein Capital
July 31 (King World News) – The market gained about 0.5% pretty much across the board through midday. In the afternoon with an hour to go, when I had to leave, the indices were about 0.75% higher on the day.
Away from stocks, oil lost 1.5%, fixed income was higher, and green paper was stronger, particularly against the yen, while the yuan had been much weaker but firmed up some — not that the recent implosion in both of those currencies has meant much to anything but the gold market. Speaking of which, today both gold and silver were slightly higher after having been a little weaker briefly overnight…
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Tonight we will get Apple’s results, although our focus should be on how the stock trades. Will it join the recent poor performance of other FAANG members, regardless of what it reports, or not? Of course, tomorrow we will find out that the Fed did nothing besides perhaps rearranging its verbiage, but I doubt they will do much of that.
Inflation Is Coming, Pass It On
Turning to two important topics, in the last two days the Wall Street Journal has carried articles on A1 that describe problems that will be in our not-too-distant future. Yesterday, the article headlined, “String of Tariffs Hits Home,” was ostensibly about trade issues, but really was about inflation, and it showed the ease with which price increases are going through.
According to the CEO of Lennox International, a heating and cooling manufacturer, “We haven’t seen any pushbacks…We’ve seen all our competitors announce similar price increases.” The article concludes with a quotation from the CEO of office furniture maker Steelcase, “It’s been a long time, if ever, that we’ve done two price increases back to back as quickly as we did.” The article had previously noted that there wasn’t much pushback on that.
Inflation has been with us for a while, but it is going to increase for a variety of reasons, and at some point psychology about it will change dramatically, which won’t be helpful to financial assets. Once it becomes a problem, it will be impossible for the Fed to fight it given the box it has engineered for itself.
Retiring Minds Want to Know
Another potentially immense problem, and one I have talked about often, are the massive deficits for all state and local pension funds, which will really scare people once times get tougher. In today’s WSJ an article headlined, “State and Local Pension Woes Are Starting to Bite,” describes what happens when the can gets kicked down the road on these long-lived problems. Let’s remember, a lot of large transfer-payment-type liabilities have been ignored because the various bubbles we’ve had made it seem like those troublesome chickens would never come home to roost.
Today’s article describes the extent of the issue, which could be as much as $5 trillion, according to a Moody’s estimate (who knows how large it will be when it actually hits). It also describes the fact that most public pension plans don’t and won’t have enough money to fund their liabilities (and I imagine a lot of private ones that still exist are in the same shape). The article does a nice job of illuminating how we get into this mess, although it is not complicated: “The understanding was employees would accept relatively lower pay in exchange for richer, guaranteed benefits once they retired [but of course over time they wanted both]. When times were flush, politicians made overly generous promises. Public-employee unions made unrealistic demands.”
And now, “Extended lifespans [have] caused costs to soar, as did increasingly expensive medical care, which unions put at the center of contract negotiations, among other benefits.”
Sweet Dreams, Everybody
So basically the situation has been that politicians have overpromised, it was expensive to put away enough money to cover those promises so they skimped on allocating enough capital to fund them, while the bubbles made it seem like the assets they invested in would grow large enough to pay off all the liabilities, but that is not going to be the case. It is going to be a huge problem when the next recession hits and if the Fed loses the printing press at roughly the same time, it is really going to be a nightmare.
Money printing solves nothing, but does create the illusion of prosperity that allows politicians and people in general to think that huge liabilities can be papered over when that is not the case.
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