Binge Watching Hallmark Channel Is Bad For Your Health…

By Rob McCreary

The last time I went for a physical examination the nurse who was taking blood samples and updating my medical record was shocked when I reported I was not taking any prescription medications other than an oral inhaler for seasonal asthma. Aside from being a medical freak, I got the feeling from her there were many opportunities for improving my health just by getting on a few popular prescription drugs like Lipitor and Coumadin.

The Hallmark Channel

If you think you are healthy all you have to do is start binge watching episodes on The Hallmark Channel. You will quickly discover that your aches and pains may be rheumatoid arthritis or that “frequent urge to go” might be an enlarged prostate. Have trouble sleeping or chasing your grandchildren around the yard?  You may be candidates for Ambien which comes with butterflies and Symbicort for your COPD.

Ironically, our symptoms often aren’t half as bad as the side effects. Here is a list of side effects from some heavily marketed drugs

  • Lyrica – Diabetic Nerve Pain: “Lyrica is not for everyone. It may cause serious allergic reactions or suicidal thoughts or actions.”
  • Abilify – Depression for dementia patients: “Elderly dementia patients taking Abilify have an increased risk of death or stroke.”
  • Bellsomra – Creepy Pet cartoons made out of fuzzy letters- the sleep cat and the wake dog:  “Walking, eating, driving or engaging in other activities while asleep, without remembering it the next day, have been reported.”
  • AstraZeneca drug Movantik – Opioid induced constipation: Drug created to deal with side effects of another drug.  So many people are addicted to opioids AstraZeneca acctually spent the money to play this ad during the Super Bowl.   US Market for drugs treating opioid related constipation expected to be $500 million by 2019.
  • Symbicort – COPD: Grandfather used to huff and puff (big bad wolf cartoon) before he took Symbicort.  “Side effects – increased death in Asthma patients; increase of lung infections etc.”

US Drug Industry Dwarfs The World

Remember this is big business. The Pharmaceutical industry is making a handsome living by supplying endless pharma solutions to any perceived medical condition even when the cure may be worse than the condition:

My Mother’s Little Helpers

My mother resisted the medical industry. She put doctors in the same category as big banks and the IRS. Accordingly, our childhood medicine cabinet was comprised of four solutions to any medical problem. Milk of Magnesia solved any problem of the digestive track. Vicks VapoRub was the go to prescription for the chest congestion and the common cold. Bayer Aspirin took care of everything else internal, and all skin problems were cured with Keri Lotion. If all else failed, there was always a few sips of whiskey which would always have an expected cleansing effect and also made you sleepy.

Today a mere sniffle has an arsenal of cure weapons ranging from a derringer to a howitzer.

Nyquil Theraflu Mucinex
Tamiflu Relenza Rapivab
Peramivir Afrin Zyrtec
Allegra Claritin Chlor-Trimeton

Something more serious like a gastrointestinal problem has thousands of pharmacological solutions. For example, common “gas” which my mother would have treated with Milk of Magnesia now has 56 separate solutions.

Aches and Pains (including mental and emotional versions) have so many different solutions I literally lost count.  For example, “Frozen Shoulder” defined as “an inflammatory condition that restricts motion in the shoulder” alone has 49 separate drugs.  Silly me to think, since old age is creating shoulder tightness, I could alleviate the problem by stretching. Had I known I could get a prescription for Naproxen, Voltaire or Diclofenac (most popular), I would have cancelled the yoga class.

Next time you want to watch The Hallmark Channel just remember how our parents made it through most of their lives with just two or three all purpose medical solutions of which exercise (other than bowling night) was a pretty low priority. Maybe you should abstain from reruns of “Pride and Prejudice” and try 6 months on Bayer aspirin alone?

Rob McCrearyBinge Watching Hallmark Channel Is Bad For Your Health…

Currency Matters- Just Ask The Turks

By Rob McCreary

In the US we rarely think about currency because ours is the reserve currency of the world. Oil is priced in US Dollars. Many loans to emerging countries are denominated in dollars to hedge against currency devaluations. For a long time the Chinese Yuan was pegged to the dollar.

Bretton Woods Established The Dollar

Dollar dominance is mostly the doing of an obscure government employee, Harry Dexter White, who was an Associate Secretary of Treasury. In 1944 Mr. White understood the US position as the world’s banker and largest creditor after World War II. Most of the allies owed us money. Mr. White proposed a new financial order where currencies were pegged to gold. Given we controlled most of the gold and had a stable financial system, the USD (pegged to gold reserves) became the benchmark against which all other currencies traded. No other nation could provide that stability and the UK and Europe, Japan and Germany had no choice but to accept the dollar as the reserve currency after World War II. Only the Russians refused to sign the Bretton Woods accord.

Thirty years later in 1972 the US abandoned the gold standard for currencies and since then the USD has not been backed by actual gold reserves. Nonetheless no other currency or basket of currencies has challenged the USD’s position as the world’s most stable currency.

Turkey Reminds Us About Reserve Currencies

Turkey’s financial implosion reminds us of what it means to have the US Dollar as the reserve currency.  The repayment of more than 35% of Turkey’s debt is denominated in more stable foreign currencies, principally US dollars. In January 2018 it took 200 million Turkish lira to fund repayment of a $50 million dollar denominated note. Today, due to the strong US dollar and the weakening lira, it takes 350 millionLira. The price of a reckless monetary policy is almost a doubling on the cost of funds for 35% of Turkey’s outstanding debt.

Here are four charts from the August 13 edition of The Wall Street Journal (article by Christopher Whittall) that illustrate the Turkish dilemma. Pay special attention to Turkey’s reliance on oil imports and how a weak lira has raised the price of diesel fuel:






While I have written several articles lately about the US debt problem, I am certainly happy that US debt is denominated in US Dollars. We always have the option of becoming Argentina and rendering all that debt worthless by inflating our way out of debtor’s prison. Turkey does not have that option. It will be interesting to see how they handle all their foreign creditors who want repayment in a currency other than Turkish lira.

Rob McCrearyCurrency Matters- Just Ask The Turks

Moon Tides

By Rob McCreary

The moon tides in Maine this summer reminded me about risk in investing. Normal tides can be 8-9 feet but a few days every several months the tides change by 12-13 feet. Your complacency spikes when almost every dangerous shoal and rocky point has 25% more water than during a normal tide. Conversely, ebbing tides reveal a frightening number of rocks and shoals you didn’t even know were there.

For most of us there is also a hypnotic fascination with nature revealing the bottom. You get a short peak at how things really are. Warren Buffet likes low tide because it reveals who has been “swimming naked”.

Equity investors in the stock market and private asset classes like real estate and private equity seem to be underwriting to a perpetual  high moon tide;  the swelling volume of capital for stock buy backs, leveraged loans and mezzanine debt takes care of everything.

Tides and time are coordinated, however. Every six hours gravity insures a low will be followed by a high and then a high by a low. The only variation is the amount of flow. Nature is unfailing in the precision of these repetitions. You can bank on volatility in the ocean as a constant. You will be on the rocks or over the rocks every six hours so vigilance and caution are required.

This is certainly not the popular trade today in financial markets today.

Many astute investors believe we have vanquished volatility. “The CBOE Volatility Index, known by its ticker symbol VIX, is a popular measure of the stock market’s expectation of volatility implied by S&P 500 index options, calculated and published by the Chicago Board Options Exchange” (source:Wikipedia).

Here is a chart from of the VIX (green) and the S&P 500 (black) since September 2015:

Notice there only a few moon tides (circled in red) with the most recent spike in volatility coming in February of 2018 when tariff terror caused the S&P to plummet. Many investors were short the VIX and had to cover as the VIX spiked 3x in several days. They were reminded about swimming without their trunks when that tide rushed out.

Contrary to the enlightened US capital markets, I expect volatility to rise in all US markets for these four reasons:

  • Debt based market liquidity is quietly becoming too expensive
  • For now, the Fed appears serious about removing liquidity
  • Politics may trump business for the first time since Jimmy Carter
  • Deficits will have to be financed with high cost, short term debt

I expect the capital markets outflows to mimic the moon tides for August 10-13 which are predicted to go from a high of 11.83 feet to a low of minus 2 feet. That is a massive flow in one direction and it may be happening soon. Tighten up those bathing suits.


Rob McCrearyMoon Tides

Cash On The Sidelines

By Rob McCreary

In a recent article in Barrons “What To Do With Excess Cash” Abby Schultz points out there is an interesting trend among high net worth investors to hold a high percentage of their investable assets in cash or cash equivalents:

According to Federal Reserve figures, retail investors had about 18% of their assets in money market funds and in U.S. bank deposits, considered cash alternatives, at the height of the financial crisis in 2009. But today, they still have a high percentage in cash—around 14%.

Citi Private Bank’s clients, who have at least US$25 million in investable wealth, had about 25% of their wealth in cash in 2009, but they still have 22% in cash today, says Bailin, global head of investments at the bank.”

This mindset is hard for the wealth management industry to understand when they have so many products to replace that cash, including relatively high yielding money market funds. There is speculation among wealth managers that cash hoarding might portend a stock market top. Possibly, there is discomfort with the derivative nature of most financial products? I think it is much simpler than that.

Your Childhood Cash Stash

Remember in your childhood when you had your paper route or babysitting money in a hiding place in your room? There was an overwhelming sense of financial freedom in holding cash. You could buy Turkish Taffy or baseball cards without parental approval.  However, with time and the growth of your cash hoard, your mother or father insisted you open a bank account. The trick was they had to co-sign any withdrawals.  You quickly found out that your money was not really yours until you turned 18 and, even after that, mom or dad seemed to know what you were doing with your cash- no electric guitars, drums, mini-bikes or record clubs. The intellectual satisfaction of earning interest on your deposits was nothing compared to the financial freedom of cash in hand.

The current fascination with cash might be channeling a familiar urge for financial freedom where you don’t rely on a third party or a product for a portion of your wealth. Without knowing it for sure, I also speculate that the biggest hoarders may be entrepreneurs, small business owners and self-made wealthy, especially those who have sold their source of livelihood. The cash may replace the security of their role as owners and founders?

Design Your Own

The good news for this group is you can manage cash yourself without paying fees thanks to an inverting yield curve where short term duration government bonds are yielding almost the same as long term bonds.

If you have an account at Fidelity or Schwab you can create your own short duration ladder. Simply look for “Trade Fixed Income”, select the range of treasury maturities, and place orders. There is no commission or markup. An example of $1,000,000 spread over the next 12 months might be as follows:

Treasury Bill or Bond Maturity Amount Invested Appx Yield
September 2018 $250,000 1.94%
December 2018 $250,000 2.08%
March 2019 $250,000 2.22%
June 2019 $250,000 2.42%


Significant Tax Advantages

Treasury Bills and Notes are also exempt from state and local income tax so the fully taxable yield equivalent for bank deposits and money market funds would be the approximate yield shown above divided by your state and local income tax rate. For Cleveland, Ohio the combined rate is 7.5%. The tax exemption is a meaningful differentiation in a low return environment.

A short duration treasury ladder also makes sense to me at an interest rate inflexion point like we are seeing right now. Rates may be going up for now, but for how long and how much is completely uncertain. They may also reverse if Fed thinks a recession is imminent or if inflation is tamed. If you look around the world, many developed economies have negative yields. The US is an outlier with a central bank that is raising rates and shrinking its balance sheet. Luckily the almost inverted US yield curve is accommodating short term government investing. You are paid almost as much on a two year T-Note (2.63%) as you are for a 10 Year T-Bond (2.95%)

Managing a short duration treasury program does not require parental supervision of the wealth management industry or the associated fees. It may be as rewarding as your childhood cash hoard and you are free to buy toys without approval.

Rob McCrearyCash On The Sidelines

Retirees Are Broke

By Rob McCreary

You don’t hear much about the financial status of the retiring baby boomers. Maybe that is because the news is pretty scary. I picked up on this by reading Ballmer’s USA Facts.  More recently the Wall Street Journal in an article by Heather Gillers, Anne  Tergesen and Leslie Scism in the June 22 edition suggests it is even worse then we think.

The reasons are numerous:

>Low interest rates have encouraged taking on debt- this is new for retirement agers

>Boomers have had to subsidize their parents who have lived longer

>Self directed 401k plans got hit in 2008 and most have not recovered

>Even though there are penalties, 401k plans are often raided prior to retirement

>Public employee retirement plans are generous but underfunded

>Boomers have underwritten their kids’ student loans

>Wage growth since 2000 has been paltry

The WSJ summaries the prospects as follows:

This prospect is upending decades of progress in financial security among the aging. In the postwar era, for a while, fixed government and company pensions gave millions a guaranteed income on top of Social Security. An improving economy led to increased wages. Many Americans retired in better shape than their parents.

The scorecard now is much different:

Without wages, a retiree has few sources of income. The estimated median annual household income among retirees is $32,000, and more than half of retirees (53%) live on less than $50,000, according to “The Current State of Retirement: A Compendium of Findings about American Retirees.”  The sources of revenue are Social Security ($17,000),Yield on Savings ($4,000), Depletion of Savings ($5,000),Pension/401K ($9,000), Part Time Work ($4,000) .

The average expenses are $35,000 with Healthcare, Food and Shelter comprising 80%

It is also difficult to predict the federal, state and local tax burden but you can see there is not much cash left for Uncle Sam. In any event, the situation for most retiring Americans is bleak as explained by the WSJ authors:

“In total, more than 40% of households headed by people aged 55 through 70 lack sufficient resources to maintain their living standard in retirement. That is around 15 million American households.”

I am surprised the Democrats are not focusing on this horrible ending for so many potential constituents. It shows mainstream politics have surrendered to fringe captors. 15 million votes could swing a lot of state and national elections.


Rob McCrearyRetirees Are Broke

Ballmer’s Antidote For Fake News

By Rob McCreary

USA FACTS is a not for profit organization created by Steve Ballmer, former CEO of Microsoft. As I have written in a prior blog, this is like Joe Friday “just the facts, Maam.” Here is how Mr. Ballmer describes his efforts:

If you’re interested in gaining insight on government by the numbers, look no further. In this year’s annual report, we’ve summarized the most recent data on government finances, outcomes of government activities, and population trends. USAFacts is a not-for-profit, non-partisan resource built for people like you. Red or blue, left or right, or anywhere in between, it doesn’t matter. We believe understanding the numbers is the cornerstone to a healthy and productive democracy. Our goal is to help inform active citizenship and fact-based debate.”

I turned to the 2018 Annual Report ( to look at a number of topics where Ballmer’s numbers are contradicted by fake news, lobbyists,political infighting or downright deception. When I read his report I see much more progress and feel so much more hopeful l than I do when I read or hear the news from mainstream media. Ballmer organizes his Annual Report into four missions of the US Government as laid out in the preamble to the US Constitution:

  1. Establish justice and ensure domestic tranquility:
  2. Provide for the common defense:
  3. Promote the general welfare:
  4. Secure the blessings of liberty to ourselves and our posterity:


More people are living alone, and there are fewer married couples with children. There are huge changes in lifestyles as shown by the 327% increase in other households and a decline in married parents.

Since 1980, increases in government spending have come primarily from payments to individuals and subsidies.

There have been more suicide gun deaths than homicide gun deaths every year since 1981 and 1/3 the number of firearm fatalities from legal intervention.

Of 23.3 million government workers, 83% are state and local employees. Nearly half are in education.

After decreasing until 2011, transportation crashes and fatalities are now increasing.


 Military spending has declined since the height of wars in Iraq and Afghanistan in 2010.

Border apprehensions and drug seizures are declining.


Most of the growth in spending by federal, state and local governments has been transfer payments to citizens.

Infrastructure can impact productivity: Workers in urban areas spend 42 hours in traffic each year

Average spendable income, by income group. The biggest percentage increase is the bottom 20% and the worst is the middle class.


Two thirds of the US Population is overweight or obese.


66% of 8th graders are not proficient in math; 64% are not proficient in reading even though the teacher to student ratio has improved. The number of teachers has increased 44% while students have increased by only 19%.

Poverty rate for the elderly (65+)

How different are key life experiences, by race? The American Indians and African Americans had about the same arrest rate in 1980 but today the African American rate is almost double.


Rob McCrearyBallmer’s Antidote For Fake News

Seignorage May Be Treasury’s Next Profit Center?

By Rob McCreary

Just recently I learned the $100 Bill has a new look. Series 2009A, the new look, was finally issued four years late in 2013 due to printing problems with the new security features. If you look at the new $100 bills, the left face looks like old money and the right half looks like new money. In fact, the bill folds naturally along the blue line that contains a hologram. The old money side lacks almost all the security features that deter counterfeiters like a gold ink well that turns green and a watermark of Ben Franklin’s face. Here is a link to a You Tube Video about the new security features:

Why Has The Fed Doubled The Benjamins?

It is also interesting that the number of $100 bills in circulation has almost doubled from 6.6 billion in 2009 to 12.5 billion in 2017 while other denominations like the $10 and $20 have only grown slightly. Why double the circulation of the biggest denomination when Treasury spokesmen like Peter Sands and Lawrence Summers writing for The Washington Post in the February 25, 2016, edition opine the $100 Bill should be banned to deter criminals?:

“Our advocacy for the elimination of high denomination notes is based on a judgment that any losses in commercial convenience are dwarfed by the gains in combatting criminal activity, not any desire to alter monetary policy or to create a cashless society.”

It is estimated that 75% of the old and new bills are circulating outside the United States. Given the US Dollar’s international status as the world’s reserve currency, these notes are critical foreign reserves. Recently, there have been reports of travelers having difficulty exchanging old $100 bills for local currencies. The reason is fear of counterfeit currency. The department of Treasury estimates that approximately $150 million of counterfeit $100 bills are circulating worldwide.

A Clever Plan May Soon Be Hatched

It is also interesting that there are many reports (maybe self-serving) that 75% of the bills in circulation contain traces of cocaine. The preponderance of those bills are old money, not the 2009A series. These new bills give Treasury a one-time chance to challenge the cash economy of which drug money is a big part.  Allowing a short period where the old bills would be retired and exchanged for the new $100 bills will force criminals and tax evaders either to exchange or forfeit their holdings.  The amount of new bills in circulation would eventually return to 6.6 million. Customers of banks should have no problems, but people living off the banking grid might find the conversion to be painful. For example, if you are a drug lord and have $100.0 million of old bills in a heavily guarded warehouse, it will be difficult to exchange 50 tractor trailers of $100 bills without drawing attention. Simply by presenting them, you open yourself up to tax evasion inquiries. To level the playing field for honest citizens who are too poor to have a bank account, the Treasury may allow a small amount to old bills to be exchanged at banks with no questions asked.

Foreign Exchanges May Be Impractical

If you are a foreign holder, you will also struggle with the conversion. How that exchange process would be handled is the single biggest reason why the exchange might be impractical.  Again, if you are a customer of an international bank, the exchange should be fine. The conversion process would force many people living in a shadow economy into mainstream banking, albeit for a short time, where it is much harder to avoid taxes and where central banks know who you are.  Central banks have always disliked the shadow economy anyway because cash is redeemable at face value and cannot be part of a monetary policy that charges negative interest.

This Is A Money Maker For Treasury Called Seigniorage

I am convinced that the U.S. Treasury has a plan to cause a huge amount of claims on the US Treasury to simply vanish. If you assume that 25% of the old $100 Bills in circulation are dirty money or cannot be redeemed, and if you assume they cannot be converted or laundered to other denominations, that could mean that as $660 Billion of old bills undergo conversion (6.6 Billion old bills in circulation X $100), $165 Billion could become worthless as the period for exchange expires. This has been done with the $1000 bill and bearer bonds, so there is precedent for the retirement playbook. It will also help banks open up new relationships with non-criminals.

If it is successful, the cash economy may be closed forever to criminals and tax evaders. If the Treasury can do it with the 2009A conversion, they can do it again with Series 2020A.

The term for this is called seigniorage. This is the profit the US Treasury keeps when it prints money and then later pays out less than face value for retiring it. So, if I am doing the math correctly, the Treasury may eliminate dirty cash worth $165 Billion at the expense of $12.5 cents for printing each new bill. This is the kind of trade that would make Goldman Sachs partner proud.



Rob McCrearySeignorage May Be Treasury’s Next Profit Center?

One Toke Over The Line

By Rob McCreary

While Bitcoin, Blockchain, Ether, Ripple and endless initial coin offerings dominate the imagination of retail investors, there is an equally appealing, and even more disruptive, agricultural product arriving soon from Amazon on your doorstep. Cannabis will generate EBITDA margins and cash conversion percentages that make online sports gambling paltry by comparison. My prediction is that 48 states will have legalized cannabis in some form by 2021, and the federal government will legalize it soon thereafter.

Right now, the cannabis industry is in its infancy. Nine states and Washington, DC, have legalized marijuana for recreational use — no doctor’s letter required — for adults 21 years of age and older.  Medical marijuana is legal in another 29 states.

This Is A Cash Crop

Unfortunately, the cannabis industry has the same problem Pablo Escobar had with his drug money – it is illegal for national banks to accept cannabis deposits because marijuana is still classified as a Schedule One narcotic, along with heroin and cocaine. A small number of state banks and credit unions have accepted cannabis industry deposits after strict adherence to a checklist of “know thy customer” procedures that inhibit money laundering. However, until last week, they all feared Jeff Sessions who had vowed to prosecute state banks or credit unions that violated federal law. However, by a rare bipartisan vote, the House Appropriations Committee voted to add a rider to legislation funding the Department of Justice through 2019 that would shield providers who complied with state laws. Whether this becomes law soon is uncertain, but I bet tax revenues will prevail.

States Will Legalize For Tax Revenues

States will continue to legalize cannabis because most of them are broke and need another dependable and growing source of revenue. Eventually, you will see the Feds get in line because the Federal Reserve System abhors a cash economy as a matter of monetary control, and it is hard to pay state and federal taxes in cash. For example, Arcview Research predicts that legal cannabis sales will more than double from $9.0 billion today, to more than $21.0 billion by 2021.  If you assume taxable income is 20% of revenues, and the combined federal, state and local rate is 30%, this means $1.2 Billion in tax revenues. That’s a lot of cash to transport. It would probably take a fleet of Brinks and Loomis armored cars just to make each quarterly tax deposits not to mention the crooks who will try to steal the cash?

A Schedule One Narcotic Is Now Healthier Than Liquor

Also, it is now suggested by cannabis proponents that lifetime use of cannabis is healthier than alcohol.   Based on my own experiences from the 1970’s, pot has the half- life of plutonium and the numbing effect of an Easter Sunday sermon. The new and more powerful buds must induce a permanent state of being “stoned” which the Urban Dictionary defines: as a “ state of mind which occurs after smoking enough marijuana to the point where the user stares blankly into whatever catches his/her attention”. “I’m was so stoned I didn’t notice the movie was in French.”

In any event cannabis is here to stay simply because it will be regulated and taxed like liquor and cigarettes and its soporific effect on the electorate will be absolutely fine with every incumbent politician.

8.2 Million Users Did Jail Time Mostly For Mere Possession

This is an amazing reversal given that ACLU reported in 2010 that of the 8.2 million people arrested for marijuana over the prior decade, 82% were simply for possession. Remember in 1971 when Brewer and Shipley released their single “ One Toke Over The Line”? Spiro Agnew called them subversive and got the FTC to ban the song? Luckily, Lawrence Welk thought it was a gospel spiritual and One Toke maintained its top 10 momentum in the bible belt. This is all according to which summarized it as follows:

“One Toke Over The Line” became a Top 10 hit in 1971, and was largely responsible for introducing Brewer & Shipley to the masses.  While the record buying public was casting its vote of approval by buying the single, the (soon to be disgraced) Vice President of the United States, Spiro Agnew, labeled Brewer & Shipley as subversives, and then strong-armed the FCC to ban “One Toke” from the airwaves just as it was peaking on the charts.  Brewer & Shipley landed on Nixon’s Enemies List, a badge of honor they wear proudly to this day.  Even in the midst of all the fuss about the drug related lyrics, Lawrence Welk featured “One Toke Over The Line” on his show in 1971.  Check out this bizarre story and the hysterical “One Toke” video from the Welk show.  As Brewer & Shipley like to say, you couldn’t make this stuff up.”


Rob McCrearyOne Toke Over The Line

Central Bankers Don’t Get Chopped

By Rob McCreary

The spring weather in Cleveland has been pretty awful and, while it is bad for your golf, tennis, biking and hiking, a cold and wet spring has been great for TV.  My wife has been hooked on “Chopped” for several years and I have to admit it is fun to learn something about cooking.  My favorite part is when the 4 chefs find out what is in their baskets. It is inconceivable to me that the contestants can take rattlesnake, fennel, watermelon and peanut butter and come up with anything remotely palatable.

Without A Pantry They’d All Be Chopped

It has taken me a few episodes to understand it is all about the pantry.  There is a stocked refrigerator with eggs, lettuce, nuts, butter, milk, cheese and a pantry complete with staples like flour and sugar, breads, vegetables, pastas, condiments etc.  There is also every conceivable cooking appliance under the sun from a blast chiller and an ice cream machine, to a vacuum sealer and a deep fryer.  It is really no miracle at all that the rattlesnake gets cooked just like chicken and put into a salad containing fennel and watermelon with a dressing using the peanut butter.  The multiplicity of options saves the show and allows chefs to compete on creativity and experience. But they do make mistakes, and often experimental recipes are not successful.

How much different the show would be if there was no pantry and the chefs could only use one appliance- say a blender. Can you think of anything palatable that could come from using the bass o’matic to blend rattlesnake, fennel and watermelon and peanut butter?

Serving Great Meals With Only A Blender

In many ways the Federal Reserve Bank and central banks all over the world are facing the same dilemma and, with the exception of Japan, have been using blenders to apply monetary policy. If you want to lower interest rates you use quantitative easing techniques like the discount rate to banks, buying bonds in the open market and simply printing money.  If you want to raise interest rates, you raise the discount rate, and stop printing money.  These iron chefs have pretty skillfully manufactured prosperity from the depths of the Big Recession using only a blender.

But today their baskets contain some pretty strange ingredients. They have inflationary trends in some commodities but deflationary trends in others. They have pockets of wage inflation, but overall a relatively flat wage picture. They have dramatically rising interest rates but a volatile stock market that is certainly afraid of rising rates and an inflationary environment. On top of that they have a debt based prosperity that is 3x the size of the natural economy whose survival is completely tied to low interest rates. There are massive under-fundings in the state pension system and rampant risk taking to cure those deficits.  The President is imposing tariffs and starting a trade war.  The dollar is strong and rising when the country’s trade deficit begs for a weak currency. Finally, the Fed has created a balance sheet that only Michael Milliken would underwrite.

This is a lot of ingredients when your only tool is a blender.

Japan Invented The Monetary and Fiscal Pantry

Japan waited 20 years to discover that it had to invent a pantry. The psychology of deflation is pernicious. Savers who are not paid any interest at all actually profit in “real” terms if their deposits (or their cash) stay at par and the costs of good and services decline 2 percent each year. You prosper in Japan by sitting on your wallet.

This is what happened in Japan starting in 1991. Just recently Abenomics, named for Shinzo Abe, has started using a whole new set of appliances. Governor Kuroda, the Governor of the Bank of Japan, has come up with some pretty interesting tools for combating deflation. First he is charging depositors to keep their money in the banking system. Second he is trying to move savers into the stock market by causing it to rise by buying it for the BOJ. It is estimated that the Bank of Japan may own as much as 75% of the Nikkei. Third he has instituted a dynamic pricing mechanism for interest rates that allows for quick and dramatic fine tuning. Fourth, he has committed to a 2% inflation target—NO KIDDING THIS TIME! Ben Bernanke writing for the Brookings Institute summarizes BOJ’s QQE strategy as follows:

“Under Governor Kuroda, the Bank has adopted a policy of so-called quantitative and qualitative easing (QQE), including purchases of exchange-traded funds and other private assets as well as of Japanese government bonds. As a result of QQE, the Bank of Japan’s balance sheet has grown to a size equivalent to about 88 percent of Japanese GDP by the end of 2016. For comparison, the analogous figures for the Federal Reserve and the European Central Bank are about 24 percent and 34 percent, respectively.”

Mr. Bernanke clearly admires Kuroda’s pantry and supports its importance in manufacturing inflation to soften the worldwide cost of borrowed money. Remember, like chefs who get chopped, not all central bank recipes succeed.  It would not surprise me at all to see The Federal Reserve System get rid of its solitary blender in favor of a pantry just like Japan. How else can the iron chefs of monetary policy make rattlesnake palatable to the unsuspecting public?


Rob McCrearyCentral Bankers Don’t Get Chopped

Take The Lump Sum?

By Rob McCreary

I have a friend who has been a teacher for more than 20 years in Cuyahoga County. She is counting on her pension to navigate post retirement living for her and her husband who has also recently retired. Given all I have read and learned about the national problem with pension underfundings I asked her if she could take a “lump sum” option. She is inclined to take the longer term payout because of the more generous gross payments and the possibility of cost of living increases. I also believe deferral allows her to continue favorable health coverage.  I have watched the sacrifices she has made to secure this pension, and I was concerned about her options. So I did a little bit of research.

An Independent View

Each year The Pew Charitable Trusts publish a state by state pension funding report card, the latest of which is for 2016. Here is their summary of the funding gap:

In 2016, the state pension funds in this study cumulatively reported a $1.4 trillion deficit—representing a $295 billion jump from 2015, and the 15th annual increase in pension debt since 2000. Overall, state plans disclosed assets of just $2.6 trillion to cover total pension liabilities of $4 trillion.”

Their report confirms many facts we already know, but there is one new analysis that looks at plan investment risk and volatility by calculating what rate of return is needed that year to match net outflows. Pew calculates the annual net inflows (employer and employee contributions) less plan outflows (retirement payments), and divides that number (usually negative) by actuarially valued plan assets. So if a state has net outflows of negative $3 Billion, and the retirement plan assets are $75 Billion, the plan investments would have to generate operating cash flow that year of $3.0 Billion (4%) to cover the deficit.

Liquidity May Be More Important

This “funding as you go” mindset is important because state plans may be overvaluing their plan assets  by assuming they are liquid and stable. By reaching for yield ever since the Big Recession, and abandoning low yield safe and liquid assets (30 Year Treasury Bonds) for higher risk, higher volatility asset classes like private equity and hedge funds ,many state funds have added risk of not being able to fund net outflows. Here are the annual operating deficits for 2016 for 25 states:

So this means that Ohio, for example, had to earn liquid returns in excess of 5 % in 2016 just to cover outflows for that year.

For my friend this has important implications. Her pension is not just underfunded, but its security may also be challenged by liquidity and volatility concerns. If the Fed wants to manage volatility and asset class liquidity it cannot raise interest rates and stop printing money. If it wants to return to “normalcy” (stop printing money), it may remove liquidity underpinning risky pension asset classes and cause their values to plummet. It is one thing for the US government to be insolvent, but to have that insolvency migrate to state retirement systems just as the boomers are retiring is unthinkable.

Ohio State Teachers Retirement System

My friend participates in the Ohio State teachers Retirement System (“STRS”). The recent report card from their outside consultant was not good:

Segal Consulting’s latest calculations show STRS Ohio’s funding period is 57.7 years and STRS Ohio’s funded ratio is 62.6%.”

According to Ohio Law STRS is not permitted to have a funding gap of more than 30 years. Their advisors have told them things need to change.  STERS recently suspended its cost of living adjustment for everyone in the system.  That gives them confidence that they are now only 30 years of funding behind. I would not have that kind of composure when their actual returns since 2007 have been 6.06% against an assumed return of 7.75%.

There is not any set of assumptions that can fully fund STRS other than changing benefits. STRS has already benefited from historic stock market returns.  Their own consultants, Callan Associates, have told them to prepare for a low return environment characterized by increasing volatility and challenged liquidity. Segal Consulting also told STERS it had to reduce benefits by $10 Billion just to get back to a 30 year funding gap! It is not clear in any publication I could find, how eliminating future cost of living assumptions will raise $10 Billion but that is the path they have chosen?

Don’t Trust The Politicians

If I had a choice of trusting Ohio politicians to fund my monthly STRS payment with a 38% funding gap and a 57 year investment hole, or taking a lesser lump sum payment and putting it in a ladder of investment grade securities, I would bet on cash in hand.

This may not end well for a group of Ohio teachers who have been underpaid and underappreciated throughout their careers and now find themselves dramatically underfunded in their retirement and completely reliant on the FED to continue providing liquidity for risky asset classes.


Rob McCrearyTake The Lump Sum?