Dear Reader,
"Don't shut down on me now, don't shut down on me.
Don't wait until I drown to save me from it.
Goodnight Chicago, I killed a man to make you love me."
- Good Night Chicago, Rainbow Kitten Surprise
I lived in Chicago for about ten years of my life - off and on. College for four, a year after college, a year during the 2008 financial crisis, and four years after my marriage.
So, I was sad to see the city double down on failed economic and social policies that have made the place dangerous and unaffordable. I won't dabble deep into the crime issue...
Instead, let me talk about the pension system. Because the reckoning that's about to hit Chicago will make the current Paris riots look like a picnic.
There's a serious pension crisis made worse by our commercial real estate problems.
And it's all going to have a serious impact on your money - especially if you're a taxpayer.
Let me explain.
Housing Concerns
Last week, after the Federal Reserve raised rates, I caught something buried in the conversation that really bugged me. Jerome Powell said it will be a while before he thinks about selling mortgage-backed securities again.
That made the hair on my arm stand up.
The Fed hasn't been selling these assets anyway. Remember that the Fed's $95 billion target for monthly balance sheets is just that... a target.
And they regularly miss.
The Fed cut its balance sheet by just $16 billion last week. That was the highest level since April. And the balance sheet is just down $149 billion from its peak... BUT STILL UP for the year.
Remember that the Fed was still buying MBS while inflation was "transitory" and helped propel housing prices higher - while keeping those rates nice and low for Blackrock and other firms to scoop up housing across the Sun Belt.
And we wonder why rent prices surged. And we hope that rent prices stabilize.
We're finally getting some estimates about rent prices stabilizing.
"Defining" A Crisis
Chicago has a pension crisis. For decades, public-sector workers built up their standing within a system that paid them. But there was a big snafu that slipped through pension reform. It's called "Defined benefits."
In the case of a worker in Chicago, imagine they work for 20 years for the city.
Perhaps they make $100,000 per year. And in their final year, the city's system tells them that they'll pay 80% of their final salary - for the rest of their lives... and also for the rest of their spouse's life. But some of these systems are corrupted by gaming. For example, some pensions will include the overtime accrued in the final year as part of the last year on the job. So, incentives matter. If they add another $30,000 in overtime in the final year (which is easy to do if you understand the game), you'll now receive 80% of $130,000 - currently $104,000 a year for the rest of your life.
Now - that's the payment side. The question is what happens when more and more people have these "defined" benefits - and now you need to fund the projects.
Well - that's where Chicago's insane tax and spend platforms align. Take for example, property taxes - which are completely out of hand in the city. Cook County, where Chicago sits, has a 2.19% of the assessed value. That's double the national rate for property taxes. And if you own your home - and pass it through for 50 years - you've paid 100% of your home's value to the tax man. Sounds like a wonderful wealth-building financial scheme.
Now, let's check the math on this. Property taxes are double the national rate - yet they barely put a dent into the pension system. Things are so bad that about 80% of all property taxes in the city go directly to the pension system.
As more people retire - more money will be needed. They'll either have to raise the taxes (detering buying on a city experiencing population decline) or they'll need to find more revenue. Good luck with that.
Chicago's holding a pension shortfall of $111 billion - equal to the GDP of Ukraine.
It's completely unsustainable.
So, where does the real estate crisis come in?
Well, the pension money is managed in portfolios. This money isn't directly transferred into the pockets of the pensioners. It's invested - and money managers attempt to generate returns through a variety of stocks, bonds, and alternative investments.
Here's the problem: These pensions own a lot of real estate funds, or they own a lot of the debt that finances these commercial real estate deals. These pensions might find out that they have even less money than they initially thought.
This all has dramatic ramifications for the U.S. financial system. These bills will come due. And each will have a social and economic cost to everyone involved in this system.
It's all a warmup for the real problem in the United States: A social security system that is beyond broken and will start to crater under the pressure of its obligations within the next ten years.
What do you do to protect yourself? The answer is found in gold. Today on Midday Momentum at 12:30 pm ET, I'll talk about gold ownership and the specific amount that I recommend you own. More importantly, we'll discuss alternative ways to own gold that might fit your budget. (Also, remember that I'm not much of a gold bug. I'm just focused on the importance of this diversification from chaos).
Today's Momentum Reading
WORLD'S BIGGEST INDICATORS
Broad Market: Yellow
S&P 500: Yellow
Recap: The World's Biggest Indicator (Momentum) is Yellow... We start the week in Yellow territory with trending improvement. We'll look for positive confirmation, as the behavior today is starting to look like consolidation at key support levels.
Flashpoints I'm Watching
Flashpoint No. 1: Centralized Digital Currencies
Cato Institute said that a central bank's efforts to create a centralized digital currency would undermine Americans' "core freedoms" ranging from financial privacy to personal liberty. The think tanks say that a CDBC offers "the federal government complete visibility into every financial transaction by establishing a direct link between the government and each citizen's financial activity," Last September, the Biden administration issued a whitepaper that supported the idea of a digital dollar. This is yet another problem: More centralized control.
Flashpoint No. 2: Bankruptcy Nation
The number of U.S. bankruptcies in the United States is picking up. S&P Global Market Intelligence reports that we experienced the largest pace of bankruptcies in the first quarter in more than a decade. Blame inflation. Blame consumer and business spending. Blame politicians. Blame regulations. Just don't forget to especially blame the Federal Reserve and its policies that have badly managed this economy over the last... let's say, 25 years.
Investors looking to take advantage need to watch Midday Momentum this week, as I'll discuss the Zombie stocks with the highest probability of bankruptcy this year. The list of stocks includes Carvana (CVNA), RealReal (REAL), and the rest of the unprofitable junk that trades at nosebleed multiples and wastes a lot of money on television commercials.
Flashpoint No. 3: Attacking the Zombies
The number of companies that aren't profitable and can't afford to keep their interest payments at bay continues to rise. Zombie stocks have dramatically increased over the last two decades. However, we've seen a collapse of these bubble stocks due to the era of cheap credit and excess speculation in the last 25 years.
Today, 41.6% of unprofitable companies comprise the Russell 2000.
As the Federal Reserve struggles to tame inflation, we could see a surge in bankruptcies or a rotation out of these stocks. Over at Hyper Momentum Trader, we specifically target the worst-of-the-worst names. If you want to learn more about how to identify the unprofitable companies with the highest probability of bankruptcy, check out Midday Momentum at 12:30pm.
Hot Long Shot
None. Momentum is Yellow. Let's discuss what that means at noon and what you should be doing in the coming days. (join me in Flashpoint Trader, where we'll drill deep into the top energy merger and acquisition targets)
What You Missed
The Wall Street Journal recently issued an SOS for America's electric grid. (But this company could be the solution.)
The government is currently fast-tracking a solution.
And this one American company is actively working to singlehandedly do it all...
Matter of fact, one of these "robots" could be working beneath you right now.
See, the founders of this company aren't in the business of wasting time.
And neither are savvy investors.
These shares are currently going for a mere $4 and some change.
(But fair warning - this deal is only for investors who act before April 20.)
Understand Uncle Sam is spending BILLIONS to get companies like this one to market faster.
So your timing has never been more critical here.
Wait any longer, and you'll be up against institutional investors who are some of the biggest buyers in the game.
Act now - and you can claim your piece of this American goldmine.
For any further questions, I've attached a full report here.
Stay Liquid,
Garrett
The post Good Night, Chicago appeared first on Midday Momentum.
About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, consultant, and political risk analyst with decades of trading experience and degrees in economics, cybersecurity, and business from Johns Hopkins, Purdue, Indiana University, and Northwestern.