Let the good times roll

Wall Street Bull: What could go wrong?

After a ten year bull run of the financial markets, the Oregon Pension system is still badly underfunded. 

Yikes.

Optimism got us into this mess. The current task in front of the Oregon legislature and the two additional state bodies that administer the Oregon Public Employees Retirement System is to deal with the fact that governments in the past funded public services partly by buying services on credit.

It was easy and pleasant to do. 

It fit the agenda of both Democrats and Republicans. Government spending is a bi-partisan deal, although most pubic employee unions are aligned with Democrats. Still, Republicans liked their police and mandatory prison sentences, and Democrats liked their teachers and safety net programs for the poor. Both parties liked infrastructure projects, Republicans preferring roads for cars and trucks, Democrats wanting light rails and bike lanes. On balance, Democrats liked spending more.

Opposing taxes was bi-partisan, too, but Democrats would talk about service needs and problems to address. Republicans talked about government waste and about thrift, and on balance, Republican hated taxes more. 

There is guilt on both sides.

The easy solution was to vote a level of service, some of which was paid for now as wages and current benefits, and some of which were to be paid later, as a retirement benefit. The employees agreed to that, too. Win-win-win. That is the "buying services on credit" part of the deal.  

Decision makers told themselves they weren't actually stealing from their children. They had data to prove investment returns would pay the bill. The bull market of the 1980s and 1990s assured lawmakers that the magic beans of Wall Street investments would grow the pool of money in the retirement system so quickly and reliably that the future employees would be paid out of investments, not taxes. 

Three quarters of the payment for PERS retirees is supposed to be paid out of investment earnings. Painless.

Except it didn't work. And that is true even now, after a ten year bull market run, with everything up

Bear markets happen. Things average out. In the good years one is supposed to save for the bad years, but that didn't happen and still isn't.

There are warning clouds that current economic expansion is faltering. If not now, or soon, sometime.

Click: Oregon PERS asset allocation

Oregon's five person PERS Board is deciding what investment return to assume for the investment pool going forward. The current level is 7.2% per year. 

There are two problems with that. One is that all of the money cannot be invested "at risk" and some needs to be invested to provide reliable income returns and principal preservation, which means that some is subject to the current low interest rate environment, and that fits into the mix. Currently about 20% is in fixed income. That puts more pressure on the risk portion to perform.

The bigger problem is that they must estimate future returns from this point in the cycle. Indeed, this is a particularly treacherous time to measure investment returns. A ten year track record seems intuitively like a long time, sufficient to even out the ups and downs. Ten years ago was June, 2009, and we had just hit a major market bottom in March, 2009, so measured from there one is measuring from near the bottom of a valley to what may be the top of a mountain. 

Investment returns going forward are unlikely to be 7.2% per year from here, in my opinion. No one knows. It is a guess, based on the reality of markets in the 35 years I have been looking at them.  

Stuff happens. Things even out. In 2000 to 2002 the stock market lost half its value. It did it again in 2007-2009.

But aren't really smart, conscientious people saying 7.2% is reasonable? Yes. But they are operating under a constraint I am not. They have to shudder when facing reality, and I do not. The implication of lower investment returns is politically too awful to contemplate if it is ones actual job. 

What do we need to do? We need taxpayers to pay in more money. Now. And next year and the year after. We have underfunded PERS, and are continuing to do so, even now, in the good times, when there was extra "kicker" money available to sock away. 

Failure to do this now will only make things worse. The money not invested is money that doesn't compound. But this is a democracy and people vote. It is more fun to have money now to spend and pay bills later.  

It is better to hope. Let the good times roll. 



Useful links:  

An Oregonian news story: Click: Oregonlive

Commentary by a citizen who shares my view, referenced in the article above: Click: David Berg

An explanation of "assumed rate": Click: Oregon.gov

It is hard to have a bull market, from this start point: https://www.crestmontresearch.com PE ratios  and https://www.crestmontresearch.com update

The Fed has Trump's back. It may not be enough.

The economic expansion is getting fragile. Trump's tariff talk is messing with the economy.

The Fed can repair what Trump breaks. Or try to.

Fed Chair holds world in his hands

There appears to be no such thing as the "permanently high plateau" that was the famous description of the stock market level in 1929, just before it crashed.  

Recessions happen. 

Capitalism in its search for opportunities creates expansions, then contractions, as entrepreneurs respond to price signals that tell them there is money to be made, some of whom realize that it has already been made and that the opportunity is gone. Greed cycles with fear.

Events like trade wars can trigger an end to opportunity. Booms turn to busts. 

The investment world is full of short true-isms to guide investors trying to navigate the cycles: 

The big one: "Don't fight the Fed."

[Refresher: The Fed regulates financial markets by promulgating rules for banks, by regulating the money supply by buying and selling government bonds to banks and setting reserve requirements, and by creating currency. The Fed can set the rate at which they will buy and sell short term government bonds, and thereby influence all interest rates, including those for governments, businesses, and personal transactions.]

Federal Reserve Chairman Jerome Powell just sent a signal. He has Trump's back. The expansion is getting old, and Trump is making trouble. China tariffs are disrupting agricultural markets. Costco and Walmart announced that prices would be going up. Mexico tariffs would severely disrupt supply chains, especially the intertwined automobile one. 

The Fed announced it is "closely monitoring" the ecoomy and will "act as appropriate", i.e. lower rates again. That is how messages are sent. The future is uncertain and the Fed needs to maintain flexibility so they describe intention, based on concerns, not definitive plans. Bankers and investment managers interpret those signals. Their uncertainty over the signal makes buyers and sellers and therefore an orderly market.

The Fed is an archetypal example of one of the themes of this blog, that political actors communicate primarily through implication, not denotation. The Fed is not supposed to be a political actor, but it is, and this current Fed is unusually obvious about it. The Fed is supposed to be independent, and earlier Fed chairs maintained a fig leaf of it. Not this one.

The Fed reversing itself on interest rates is a big deal. They had been in a process of normalizing interest rates, which had been, by intention, set artificially very low in the aftermath of the financial meltdown of 2008-09. Low interest rates re-capitalized the banks--they borrowed money to re-lend virtually for free. Low rates made it very inexpensive for business people to crawl out of their fox holes and start taking new risks.

Low interest rates had some dangerous corollary effects. There was no yield for safe money. Pension funds--including ones like Public Employee Retirement System pools of money--need to have a significant portion of their money at low risk and volatility because if their pool of money fell too dramatically then actuarial professionals would say that the pool is badly underfunded--which they already are. Those investment pools target returns of about 7.2%, not zero.

Moreover, the general shift from defined benefit plans to 401-k type programs means that the risk of getting income out of a pool of money has been transferred to individuals, i.e. voters. They were unhappy. A retiree who had expected a 5% or 6% return on their money to pay bills, got zero instead.

Investment managers and the individuals had no choice but to take more risk than they wanted in the search for yield. That was, in fact, the Fed intention--to get people with money to take risks--but policy makers understood they had injected danger into the system. 

People were taking unwanted, possibly desperate risks seeking yield, buying junk bonds, speculating in real estate construction, buying stocks instead of holding cash. Misplaced investments are a classic cause of financial panics.

Click: April, 2019. Not so independent Fed

So in 2018 the Fed was returning investment returns back toward normal. Then Trump sent two signals of his own. One was publicly telling the Fed to lower interest rates, at least until after the 2020 election, and the more subtle one of nominating two people with minimal financial expertise to the Fed board who were openly supportive of Trump's political agenda. 

Message received. 

The Fed reversed itself and in December announced that they were not going to raise interest rates after all. The stock market, which had fallen almost exactly 20%, reversed itself immediately. 

That, too, sent a signal to the world. The Fed has power not just over interest rates but over the stock market.

The bad news for Trump is that the Fed is realizes that aggressive repairs may be necessary, which signals political people that Trump's strong economy may not last until election day. Dislocations are piling up, and it may be time for a contraction that voters will blame on Trump.

The Fed has Trump's back, but it may not matter. Recessions happen.

Yes, Trump could shoot someone on 5th Avenue.

     “America’s enemies are on notice. The president is no longer an eloquent pushover professor-president but a ruthless real estate developer and television network brawler-president whose principle weapons are blunt candor and walking away from the table.”

                        Hugh Hewitt, conservative talk radio host, defending Trump

Trump could shoot someone on 5th Avenue and get away with it. 

Trump was the "remedy" to Obama.

Back in January, 2016, David Axelrod gave the oscillation theory of presidential politics. Trump was barely on the national radar back then, but I had seen his up close twice in New Hampshire and I had already predicted that he was going to be big trouble for Democrats. Axelrod was the former senior strategist for Obama. Here is how Axelrod described his theory:

    

    "Open-seat presidential elections are shaped by perceptions of the style and personality of the outgoing incumbent. Voters rarely seek the replica of what they have. They almost always seek the remedy, the candidate who has the personal qualities the public finds lacking in the departing executive."

Trump picked up and ran with a theme that had dominated Republican and Fox News descriptors of Obama. Weak. Irresolute. A pushover. McCain said that the "kindest work I can use for Obama's foreign policy is 'feckless.'" For a time in 2016 "feckless" was the talking point word of all sixteen presidential candidates. 

The charge had currency in part by Obama's manner. He sounded self controlled and thoughtful. Obama didn't shout. He prided himself on being "No-drama-Obama." At the time most voters thought that was a good thing. He was "presidential."

Click. Very funny five minutes.

Obama mocked himself over that characteristic at a White House Correspondents event, doing a bit with an "anger translator," a voice who repeated what Obama said, but in a tone of angry outrage.

Trump was the oscillation. Trump "fixed" what some thought was missing in Obama. 

Trump is a rule breaking bully. He communicates a you-can't-stop-me attitude. He is a bull in a china shop, and has communicated that he is a rule breaking bully on issues that many Republicans really care about: abortion judges, support for Israel, control of the southern border, and disdain for liberal political correctness. He is persuasive as a change agent for issues GOP voters want.

Trump is consistent, and GOP voters take the bad with the good. Sure the Access Hollywood video is embarrassing  Sure, he tweets too much. Sure, he was heavy handed in trying to stop investigations. Sure he wheeled and dealed and went bankrupt and underpaid his taxes. He is, as Hewitt put it, a ruthless brawler, so he does stuff GOP voters and officeholders ignore or dismiss because he is simultaneously a ruthless brawler on the stuff they like. That is who Trump is. He gets away with murder, as the saying goes.

Democrats think--hope--that an impeachment inquiry will show Trump's misbehavior in such detail that the public will be turned off by it. I suspect the opposite will happen. People won't be shocked and they will see it as Trump being someone unconstrained by rules of political sportsmanship, and will feel positively about it, thinking "We need someone who will shake things up."

Trump-the-bad-boy-rule-breaker is a schtick that still has legs. 

Democrats are talking about the "rule of law," the reverse of Trump-ism. Every candidate presents him or her self as the antidote to Trump, with Sanders and Warren emphasizing new progressive policy, and candidates like Biden and Buttigieg emphasizing mature, no-drama temperament.

For the past 120 years it has typically taken a full eight to twelve years--not four--for a theme to play itself out, and to oscillate back. A majority of people may want things shaken up, and if so, Trump has the credibility as a guy who won't let laws, rules, norms, conventions, manners, sportsmanship, or politeness stand in his way.

Here is a hypothetical:

If Trump really have a Secret Service agent kill some Democrat on Fifth Avenue, Nancy Pelosi for example, or one of the FBI staff members on the Mueller team--and if Trump defended it vigorously and proudly as necessary to protect America because Trump said the person was plotting treason, a capital crime, wouldn't Fox News support him?   

Of course it would.

Making PERS more affordable.

"Coward!"  "Sell-out!" "Wall Street Lackey!" "Corporate!"

Circulating on Social Media

Democrats in Salem pass a contentious vote. 

Firefighters Union: "Now we will continue fighting these unfair, undeserved, and illegal cuts in court.”

Guest Post observation by Kevin Stine

Medford City Council Member Kevin Stine is a close observer of local, state, and national politics. He was re-elected to the non-partisan Medford City Council, and was a Democratic candidate for State Senate in 2018 and US Senate candidate in a primary challenge against Ron Wyden, running to Wyden's left and getting 78,000 votes.

Stine shares observations on the political fallout from a difficult vote for Democrats on Oregon SB 1049--a measure taking a small step toward reducing the $27 billion in unfunded pension liability of Oregon's Public Employees Retirement System. It is a complicated bill, linked to a corporate tax bill. Among other provisions it would require employees making more than $30,000 a year to pay a portion of their income toward the PERS liability, thus reducing the amount of money going into an employee's "side account" with the net result that the employee's eventual retirement benefit would be reduced by one to two percent.  Click: OPB news story

Measures that cut income or benefits draw virulent and organized opposition.

Boycott!! For example, locally some Democrats were urging other precinct committee members via mass e-mails to boycott a planned Party fundraiser because one of the planned Democratic speakers had voted for the bill. The Democrats stand for nothing, a writer said.

Facebook commentary.

Some posts on Oregon-based progressive groups on Facebook express similar outrage, and the issue falls neatly into the Bernie vs. Hillary, "progressive" vs. "neo-liberal" divide that roils the Democratic party past and still. Within the framework of leftist political discussion "neo-liberal" is a very dirty word.

The vote is being defined as a litmus test: good vs. bad; progressive vs. "neo-liberal," worthy of support vs worthy of being challenged in a primary.

Kevin Stine's Observations:

Kevin Stine

On Thursday, May 30^ththe Oregon House Democrats failed to pass SB 1049, bill that would have made changes to the Public Employees Retirement System (PERS). In a shocker, the vote tally was 29 for, and 31 against. House Speaker Tina Kotek then had some work to do.

She put the House “at ease”, and after 30 minutes returned with the two vote changes she needed. House Representatives Mitch Greenlick and Andrea Salinas were “whipped”. A reporter from Oregon Public Broadcasting noted that Representative Salinas was crying after changing her vote.

A reading of legislators vote explanations give us the following reasons why a Democratic legislator, would vote to negatively impact public employees:

·      This was negotiated to get the votes needed for the Student Success Act, which is a modified corporate activities tax (MCAT), that raises $1B a year for education.

·      This was negotiated with business groups to stave off a ballot referral of the Student Success Act. It may end up getting referred anyway.

·      The continued growth of PERS costs is unsustainable and leads to decreasing services across every governmental agency in Oregon.

·      That it isn’t that bad, and there are potential ballot measures that are much worse.

·      That SB 1049 isn’t permanent, as once PERS in 90% funded, the soon-to-be law is essentially no longer in effect.

There are of course more reasons out there, and not every Democratic legislator that voted for it, believes all of the above. Regardless, it was a tough vote, as many have explained that voted for it.

Online progressives have had some choice words and created a widely-shared Certificate of Cowardice.

“Primary them all.”

“This is what a supermajority gets us?”
“So many corporate Dems!”

“It’s time to stop supporting these traitors.”
“It’s a betrayal.”

PERS has a long history of legislative changes, with many attempts to immediately reign in the cost, failing in the courts after reforms in 1995, 2003, and 2013. All of these generated outrage from labor groups, but I couldn’t identify any Democratic legislator that was primaried out due to their vote. Despite the concerns, I find it highly doubtful that any legislator pays a political price for the vote they took in 2019.

The greater interest may be for those seeking a different office. Greg Macpherson led the charge to reform PERS in 2003. In 2008 he ran for Oregon Attorney General and labor unions spent heavily in the Democratic primary for his opponent, John Kroger. He lost, and his other attempts to attain political office have been unsuccessful.

There is no lack of politically ambitious legislators that voted for SB 1049, including Speaker Tina Kotek, who is likely to run for Governor in 2022. She has an exhaustive list of progressive achievements leading the House Democrats, but stay tuned to whether she pays a political price for getting this bill passed.

Democratic Warning. We have been here before.

McGovern

Life experiences shape the narratives that inform each generation. 

History doesn't repeat itself, but it rhymes. I hear the rhyme with "McGovern, 1972"

My parents were shaped by the Depression. Their families were broke. A job was a glorious thing. Then they experienced World War Two, with its new lesson: the country with the best firepower wins. 

So of course the military-industrial complex grew in postwar America. It was the lesson of World War Two.

I am a Baby Boomer, and experienced postwar prosperity, the Civil Rights revolution, Medicare and the Great Society, youth counterculture, the anti-Vietnam War protests, and women's liberation.

And then the backlash to it. 

The backlash was huge.

Nixon had his "southern strategy," and in the 1968 election George Wallace, an overt racist segregationist, won the electoral votes in the South. Nixon and Wallace combined won 41 million votes to Humphrey's 31 million. It was a one-two message, if people were paying attention, but Democrats were paying attention to other things, important things: the injustice to blacks, the right-ness of women's equality, and Nixon's corruption. 

Prelude: 1968

The political environment leading up to the 1972 election will sound familiar to readers.

   1. There had been a liberal president who passed controversial health legislation, LBJ and Medicare/Obama and the ACA.

   2. The liberal president was perceived as being friendly with black people. 

   3. The Republican was embroiled in corruption charges. Nixon/Trump.

   4. The progressive wing of the Democratic Party was angry about the way the Democrats had handled the previous nomination, feeling that their candidate was too moderate and "establishment": the Chicago Convention/the Bernie-Hillary struggle.

   5. The motivated progressive wing took charge and nominated the most liberal and outspoken of the large scrum of candidates, the one overwhelmingly popular among the young generation in college towns (including me): McGovern.

   6. He was crushed, losing every state but Massachusetts. He was condemned for being weak on American security, weak on law and order, and for being a socialist. 

   7. The incumbent Republican won by making it a culture war between the Silent Majority of white, Christian, "normal" people, who were assailed by advocates of social change.

That is my experience. 

McGovern wipeout: 1972

I realize this is not the experience of young progressive activists today. After all, I did not care about the election defeats of Eugene Debs or Henry Wallace. 

McGovern, I thought in 1972, was exactly what America needed and wanted. It was high time for a progressive. Everyone I knew agreed with me. I was in New Haven, Connecticut.

What was going on across the country was resistance and backlash to change that was coming faster than a majority of Americans were comfortable with. 

Which Americans were those?  Same as now: White working people. Less educated people. Church-goers. Married people. Rural people. Socially conservative people. Anti-abortion people. Anti-tax people. Republicans. 

The culture was changing too fast for many Trump voters. Too much immigration, too much transgender talk, too many blacks and women getting power, too many kids with Chinese and Indian names as valedictorians, and worrisome disruption of the health care system.

Click: Nation Magazine look back at attacks on McGovern

I personally am comfortable with the pace of social and political change today, but a great many are not. They vote, too. 

I was born just before 1950 and that is my experience. So I am worried.

Up Close with John Hickenlooper

     

If former Colorado Governor John Hickenlooper walked into the Starbucks nobody would know who is is--or care.

                                   San Francisco, Chronicle

John Hickenlooper

Presidential candidate John Hickenlooper spoke in Berkeley, California yesterday.  

Tony Farrell is a member of the Berkeley Tennis Club and was in the room yesterday when John Hickenlooper spoke. 

Hickenlooper addressed about 200 members.

Hickenlooper got his start in business as the founder of a successful brew pub in Denver, which he sold for six million dollars. He then turned to public service and served two terms as Mayor of Denver and then two terms as Governor of Colorado. 

Farrell is a college classmate. He had a highly successful career as a branding expert, doing strategic branding and product positioning work on behalf of the Gap, Banana Republic, The Sharper Image, and, most famously, Trump Steaks.

Farrell filed this report.

Guest Post by Tony Farrell

Berkeley, Calif., Friday, May 31, 2019

Tony Farrell

John Hickenlooper was introduced by his half-brother, Sydney Kennedy, a Berkeley Tennis Club member. The Club is a certified bastion of left-coast liberalism. This was a friendly gathering that normally would not be on Hickenlooper’s agenda. 

In his introduction, Kennedy told a childhood story of young John Hickenlooper. During the Suez Canal crises, then 4½ years old John was playing war games with toy soldiers, calling one side the English, the other the Egyptians; Kennedy said that he, age 11, had no idea what he was talking about but their mother said, “Don’t worry about it. John is already an expert in international affairs.” 

That got a big laugh.

John Hickenlooper then started his standard stump speech, which begins with a very strong anti-Trump message, saying he is dividing the country and taking it backwards. But he goes on the say that while beating Trump is necessary, it is far from sufficient. 

He described his background and then political accomplishments as Denver mayor and Colorado governor, and those stories are quite convincing: Securing the agreement of all 31 mayors in the Denver metro area to add 120 miles of light-rail transit; bringing broad-band to all of the state, a sort of rural electrification for the 21^st century; getting strict background checks for all gun purchases in the face of strong NRA opposition; cutting methane gasses.

.

His message, which comes across as honest and convincing, is that he is the only candidate who has actually done what others are merely promising.

Positioned as a moderate. He got some of the left-coast audience animated when he positioned himself strongly against the “socialist” messages of some of his opponents. He accepts that the Republicans have weaponized the “socialist” label, and while perhaps not merited, they will succeed in that. Moreover, Hickenlooper comes across more like an old-fashioned, small-business Republican of an earlier era, and has little patience for ideas like guaranteed federal jobs or easy forgiveness of student loans. 

Hickenlooper at the Berkeley Tennis Club

Practical. Incremental. He’s all practical in his approaches to solving problems without attaching labels or being grand in his ambitions. Sure, it’s okay to have a goal of universal healthcare; it’s okay to regard healthcare as a right and not a privilege; but, given that, how practical or necessary is it to push 140 million people off of their current private health-insurance plans just to quickly achieve a single-payer program? He would argue, you don’t have to go that far; the public doesn’t want to go that far; just take the first steps toward your goal and succeed with each step.

An Iowa strategy. He joked about his astounding rise from 1% to 2% in polling. But he is laser-focused on winning Iowa, which does not seem impossible. For one thing, his name recognition (at least among anyone over 60 in the state) is astoundingly high because his great-uncle, Bourke Hickenlooper, was an Iowa Congressman, Lt. Governor, Governor, and three-term Senator, retiring from the Senate in 1969 (died in 1971). Moreover, John sees tremendous similarities between Colorado and Iowa, and his Colorado story is a good one, especially in building bridges between urban and rural, conservative and progressive, etc.

So, while Governor Hickenlooper may not command the national stage, he is as well-positioned as anyone to succeed in Iowa, and to build on his “retail” political skills that had him winning “un-winnable” contests for mayor and governor in his home state. 

Plus, he said, “they” always say you should vote for someone you’d like to sit down and have a beer with…and he’s that guy!

Tony Farrell