California Is Teetering On The Edge Of Financial Ruin Again

For years, it had been speculated that California’s state-wide model of heavy regulation, expensive education, high taxes and bloated spending would eventually drive the state into financial ruin, according to a new Bloomberg Opinion piece. Over the last 15 years, the state also has had to deal with widespread blackouts and an unemployment rate that ballooned to 12% after the financial crisis.

After deficits exploded under Governor Schwarzenegger, the state eventually got back on track. Under Governor Jerry Brown, the state raised taxes again (surprise) and bumped up its sales tax. These tax hikes, combined with a recovery in housing and in the stock market, helped swing the state’s budget back into the black.

But now, the symptoms of larger problems in California are bubbling to the surface yet again. For instance, the recent “planned blackouts” by power provider PG&E to try and prevent wildfires are indicative of a crumbling energy infrastructure across the state.

Losses from recent wildfires in California have been “staggering”, totaling upwards of $400 billion in 2018. This figure represents about 1/7th of the state’s total GDP and is comprised of health costs, lost property, lost jobs and asset prices falling. It also takes into account migration out of the state. 

PG&E has said that the “safety” blackouts will continue, which means that the state isn’t going to have reliable year-round electricity. This will inevitably take its toll on property values and slow migration inflows into the state. 

While wildfires rage across the state, another issue is plaguing California: homelessness. The state’s homeless population has increased by 5.3% from 2010 to 2018. California is already home to almost half of the country’s homeless. We have documented, at length, the homelessness issues in areas like San Francisco, where the epidemic is reaching a fever pitch. 

At the same time, government pension costs are rising across the state; faster in California than in the rest of the nation. The cost saving measures being put in place to offset this problem are degrading the state’s education system. 

And so, the inevitable has happened: people are leaving the state.

In fact, a recent paper by economists Joshua Rauh and Ryan Shyu found that out-migration of top-bracket taxpayers accelerated after the state’s 2012 income tax hike. 

“Among top-bracket California taxpayers, outward migration and behavioral responses by stayers together eroded 45.2% of the windfall tax revenues from the reform,” the paper’s abstract says. 

With Democrats back in the saddle, holding a super majority in the state, California seems doomed to repeat its dysfunctional history from the early 2000’s. Making matters worse, an initiative called Proposition 13 is making it difficult for California to alleviate its burdens by raising property taxes, the op-ed notes:

But California’s political system is making it hard to respond to these pressures. Thanks to a 1978 ballot initiative called Proposition 13, California cities have stringent limits on raising revenue from local property taxes. That forces the state to provide many services, financing them with hefty income taxes. Those are inherently more unreliable than property taxes, since wealthy taxpayers can move away (while property can’t move), and since California’s income taxes fluctuate a lot because they depend so much on the profits residents earn on volatile stock prices.

“Proposition 13 must be repealed, and property taxes raised,” the piece continues, in order for the state to avoid what it calls another “dark path”. It also suggests that the state legislature pass bills to allow greater housing density and more construction throughout the state.

Only time will tell whether these proposed solutions, if implemented, would even work. But one thing is for sure: if California doesn’t do something soon, the state could become (further) living proof that creating a liberal utopia by hiking taxes and adding regulation is nothing more than a pipe dream, if not a full blown recipe for exactly how to drive an economy into the ground. 

Contrast with SoCal, early 1950’s…

 

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Office Vacancies In China Hit Decade High Amid Economic Turmoil

A darkening outlook for China’s economy continues to materialize week by week.

New data from commercial property group CBRE warns the country’s office vacancy rate has just surged to the highest since the financial crisis of 2007–2008, first reported by Bloomberg.

CBRE said the vacancy rate for commercial office space in 17 major cities rose to 21.5% in 3Q19, a level not seen since the global economy was melting down in 2008.

Sam Xie, CBRE’s head of research in China, said the recent “spike” in vacancies is one of the worst since the last financial crisis.

Catherine Chen, Cushman & Wakefield’s head of research for Greater China, told Financial Times that soaring commercial office vacancies in China was mainly due to dwindling demand, but not oversupplied conditions.

“Contributing factors included slower expansion of co-working operators and financial services companies, and a general cost-saving strategy adopted by most tenants given ongoing trade tensions and economic growth slowdown,” she added.

Henry Chin, head of research for Asia Pacific at CBRE, told Financial Times that macroeconomic headwinds relating to the trade war between the US and China were also a significant factor in rising office vacancies.

As shown in the Bloomberg chart below, using CBRE data, Shanghai and Shenzhen had the highest office vacancies than any other city, and both had around 20% of office spaces dormant.

And with the global economy in a synchronized slowdown, global growth estimates are now printing at 3%, the slowest pace since the financial crisis. The Chinese economy will likely continue to slow, and could see domestic growth under 6% this year. This suggests that China’s office space vacancies will continue to rise through year-end.Office Vacancies In China Hit Decade High Amid Economic Turmoil

Source: ZeroHedge

Did Something Just Snap? US Policy Uncertainty Unexpectedly Soars Above Lehman, Sept 11 Levels

With US equity markets within one percent of all-time record highs, and US equity risk back near cycle lows, one could be forgiven for ‘believing’ that all is well in the world.

A China trade deal is imminent, right? A Brexit deal is imminent, right? Turkey ceasefire, right?

Well, according to The Baker, Bloom and Davis daily news-based Economic Policy Uncertainty Index (based on newspaper archives from Access World New’s NewsBank service), US economic policy uncertainty has never, ever been higher than it is currently…

All hands are on deck, like never before, to prevent a credit freeze…

National Average Rent Drops For First Time In 2 Years As US Property Market Sags

Here’s the latest sign that the US housing market is in the early phases of a nation-wide retreat: For the first time in two years, average national monthly rents declined on a QoQ basis – even as the national average rent continued to climb (up 3.2%) on a YoY basis.

Corresponding with the summer slowdown (a period when the rental market is at its slowest), the national average rent decreased for the first time since February 2017, declining by 0.1% – or $1 – from last month to $1,471, according to Rent Cafe’s quarterly report on the American market for rental housing.

The decrease might seem insignificant, but combined with the slowest year-over-year hike in the past 13 months – 3.2% ($45) – it suggests a slight wind-down in rent prices against the backdrop of a more volatile financial climate, according to Yardi Matrix.

Apartment rents have seen minor declines since last month in more than half of the cities analyzed by RentCafe, with small and large cities leading the trend (prices dropped 59% in small cities, and 56% in large cities), while 42% of mid-sized cities saw rental rates decline in September.

These cities recorded the biggest declines:

  • Provo (-2.2%)
  • North Charleston(-1.5%)
  • Santa Clara (-1.3%)
  • Portland (-1.2%)
  • Midland (-1.5%)

These cities saw the biggest upticks:

  • Syracuse (2.2%)
  • Moreno Valley (2.1%)
  • Manhattan (1.5%)
  • Torrance (1.4%)
  • Los Angeles (1.2%)

Interestingly enough, changing the time frame slightly presents an entirely different picture. Rents for apartments in more than half of the largest rental hubs in the country have declined between August and September. This includes 65% of the country’s mega hubs (like Manhattan).

Meanwhile, rents decreased in three of the five most expensive large cities in the country since August, during which time only NY hubs recorded an increase. Rents in the Bay Area retreated by -0.1% in San Francisco ($3,703) and -1.1% in San Jose ($2,762) while average rent in Manhattan and Brooklyn ($2,956 for both now) increased by 1.5% and 0.5% on an MoM basis, respectively.

Across the ‘small cities’ category, cities and areas that were already among the cheapest to live in saw their average rents decline, as did the most expensive small cities, like San Mateo, Calif. which saw its average rent decline slightly by 0.5% between August and September. Cambridge, Mass., another one of the most expensive small cities, also saw its average rent decline by 0.6% during the same period..

Meanwhile, after a 0.8% drop, the average rental price in Brownsville, TX, known to Rent Cafe as the cheapest town to rent in, reached $721.

On another tip, Rent Cafe’s data revealed that two-bedroom apartments are the most popular among renters.

As for the survey’s methodology, the company’s researchers analyze data collected across 260 of the largest cities and greater metropolitan areas in the US, while the data on average rents comes directly from competitively-rented (market-rate) large-scale multifamily properties (mostly apartment buildings with at least 50 units). Though it’s different from federal data on the housing market, the study offers some insight into the behavior of people who rent apartments, who are typically younger and without families. All of these data are collected, compiled and analyzed via the Yardi Matrix, a data analysis tool.

Source: ZeroHedge

Global Debt & Liquidity Crisis Update: Repo Locking Up Again As Overnight Fed Operation Oversubscribed, Repo Rate Jumps

‘The Fed is an outpost of a foreign power that controls our economy, most of our politics and our financial future. It’s an instrument of the Rothschild global cabal. It always has been since 1913’

First it was supposed to be just a mid-month tax payment issue coupled with an accelerated cash rebuild by the US Treasury. Then, it was supposed to be just quarter-end pressure. Then, once the Fed rolled out QE4 while keeping both its overnight and term repo operations, the mid-September repo rate fireworks which sent the overnight G/C repo rate as high as 10% was supposed to go away for good as Powell admitted the level of reserves was too low and the Fed launched a $60BN/month Bill POMO to boost the Fed’s balance sheet.

Bottom line: the ongoing repo market pressure – which indicated that one or more banks were severely liquidity constrained – was supposed to be a non-event.

Alas, as of this morning when the Fed’s latest repo operation was once again oversubscribed, it appears that the repo turmoil is not only not going away, but is in fact (to paraphrase Joe Biden) getting worse, because even with both term and overnight repos in play and with the market now expecting the Fed to start injecting copious liquidity tomorrow with the first Bill POMO, banks are still cash starved.

To wit: in its latest overnight operation, the Fed indicated that $80.35BN in collateral ($74.7BN in TSYs, $5.65BN in MBS) had been submitted into an operation that maxed out at $75BN, with a weighted average rate on both TSY and MBS rising to 1.823% and 1.828% respectively.

While it was clear that the repo market was tightening in the past week, with each incremental overnight repo operation rising, today was the first oversubscribed repo operation since September 25, and follows yesterday’s $67.6BN repo and $20.1BN term repo.

But the clearest sign that the repo market is freezing up again came from the overnight general collateral rate itself, which after posting in the 1.80%-1.90% range for much of the past two weeks, spiked as high as 2.275% overnight and was last seen at 2.15%, well above the fed funds upper range…

‘The powers that be would rather us experience a mad max world while they hide in luxury bunkers, than allow a treasury issued gold backed currency, absent a central bank once again’

Source: ZeroHedge

Walmart Nation Continues To Bleed Jobs

Via Global Macro Monitor blog,

An update on this post, Trouble Coming To Walmart Nation? 

Warehouse clubs and supercenter retailers continue to shed workers.   Along with being Amazon’d, the big box retailers are adopting automation at a light-speed pace and have cut over 42k jobs in the last 12 months.

Last Friday, the BLS reported the retail sector lost another 11.4k jobs, the 8th consecutive month of payroll losses. 

Retail is one of the country’s largest employment sectors, ranking 4th behind education & health, professional & business services, and leisure and hospitality.

Moreover, Walmart is not only the world’s largest private employer but the largest employer in many states throughout the United States.

Source: ZeroHedge

***

Job Openings Plunge To 17 Month Low As Slide In Hiring, Quitting Confirms Job Market Slowdown

Payroll Data & Business Surveys Indicate Hiring Slump, Weak Growth And Profit Decline

GE Freezes Pension Benefits For 20,000 Employees To Lower Debt Burden

HSBC To Slash 10,000 More Jobs As Ax Falls On “Project Oak”

Rail Recession: Carloads Tumble To Thee-Year Lows Amid Manufacturing Implosion

US Producer Prices Unexpectedly Plunge In September – Biggest Drop Since 2015

GM Labor Talks Break Down, Set To Ignite US Manufacturing Recession

Student, Car Loans Surge Most In Three Years

Mall Vacancy Rate Hits 8-Year High Amid Record Number Of Store Closures

Where The September Jobs Were: Who Is Hiring And Who Isn’t… And The Retail Apocalypse

Russia’s Largest Oil Company Ditches Dollar In New Oil Deals

And It Begins: Kroger Lays Off Hundreds Amid Failed Turnaround

Iran Is China’s Secret Weapon For Killing Off The US Dollar’s Global Reserve Status

Corporate Buybacks Accelerate To Strongest Weekly Level In History

The Fed’s “Insurance” Rate Cuts Didn’t Work. Now For The Emergency Cuts

Fed Announces QE4 One Day After BIS Warns QE Has Broken The Market

Following Fed Chair Powell’s surprising announcement today that the Fed was resuming Permanent Open Market Operations after a 5 year hiatus, just as we said last month that it would (see “The Fed Will Restart QE In November: This Is How It Will Do It“)…

… there was a brief debate whether the Fed’s soon to be permanent expansion in its balance sheet is QE or not QE. The answer to this semantic debate simple: Powell defined Quantitative Tightening as removing reserves from the system. Thus, by that simple definition, adding reserves to the system on a permanent basis via permanent open market operations, i.e., bond purchases, is Quantitative Easing. Incidentally, the repo market fireworks were just a smokescreen: the real reason why the Fed is resuming QE is far simpler: the US has facing an avalanche of debt issuance and with China and Japan barely able to keep up, someone has to buy this debt. That someone: the Fed.

And just to shut up anyone who still wants to call the upcoming $400BN expansion in the Fed’s balance sheet, as represented in the following chart by Goldman…

… QE-Lite, here is JPMorgan comparing what is coming with what has been: at a $21BN in monthly 10Yr equivalent TSY purchases, the “upcoming” operation is the same size as QE1.

Yet semantic bullshit aside, what is most infuriating about Powell’s “shocking” announcement (which we previewed a few weeks ago) is that it took place just one day after the central banks’ central bank, the Bank of International Settlements, finally caught up with what we first said in 2009 – for economists being only 10 years behind the curve is actually not terrible – and wrote that “the unprecedented growth in central banks’ balance sheets since the financial crisis has had a negative impact on the way in which financial markets function.”

Ignoring the fact that central bank policies are responsible for such phenomena as Brexit and Trump, as it is the flawed monetary policy of the past decade that made the rich richer beyond their wildest dreams by expanding the biggest asset bubble in history, while destroying the middle class…

… it is disgusting that even as the Fed’s own supervisor admits that its balance sheet expanding policies have broken the market – something this “tinfoil” conspiracy blog has been saying since 2008 – the Fed is doing even more of the same, ensuring that the market will be more broken than ever!

So what was this startling epiphany? According to the BIS, while the immediate impact of this massive balance sheet expansion had eased the severe market strains created by the 2008 financial crisis, there had been several negative side-effects. These included a scarcity of bonds available for investors to purchase, squeezed liquidity in some markets, higher levels of bank reserves and fewer market operators actively trading in some areas.

In short: last month’s repo crisis is a direct consequence of central banks’ own actions. as Scott Skyrm explained earlier.

“Lower trading volumes and price volatility, compressed credit spreads and flatter term structures may reduce the attractiveness of investing and dealing in bond markets,” the BIS said in the Monday report. “Some players may leave the market altogether, resulting in a more concentrated and homogenous set of investors and fewer dealers.”

This “could result in market malfunctioning when large central bank balance sheets are eventually unwound”, the BIS warned, adding that “it could make it more difficult for reserves to be redistributed effectively between market participants.” Of course, the BIS was clearly joking because even five-year olds know balance sheets will never be unwound.

Additionally, the BIS went on to point out that negative impacts have been more prevalent when central banks hold a larger share of outstanding assets, as the FT reportedmajor central banks’ holdings of domestic sovereign bonds range from 20% of outstanding paper at the US Fed to over 40% in Japan.

But the BIS said these side-effects had so far only rarely affected financial conditions in such a way as to impede central banks’ monetary policymaking, though it added that the full consequences were unlikely to become clear until major central banks started to shrink their balance sheets.

Worse, the BIS noted that regulations demanding liquidity at large banks might discourage the banks from offering to lend out their reserves — a source of same-day liquidity — into overnight markets. This is similar to what the large banks themselves have said in the last month. But the BIS also noted that since the financial crisis, risk management practices might have changed within the banks themselves.

Sadly, the Fed – which is fully aware of all of this – decided to ignore everything the BIS warned about, and by launching more POMO/QE/”don’t call it QE”, just ensured that the next financial crisis will be the last one.

“So looks like the banks are being re-capitalized, (bailed out) and lower rates are coming, zero or negative.. well.. now the banks can borrow cash for zero, or less directly from the Fed., then shell out loans and credit cards at exorbitant rates to We The People… oh… you are not supposed to know this… (don’t share)…”

Source: ZeroHedge