Is Fed Pumping Stocks To Keep Pensions Solvent?

The pension crisis is inching closer by the day. @CalPERS just voted to increase the amount cities must pay to the agency. Cities point to possible insolvency if payments keep rising but CalPERS is near insolvency itself. It may be reform or bailout soon. – Steve Westly, former California controller and CalPERS board member.

1.5 MILLION RETIREES AWAIT CONGRESSIONAL FIX FOR A PENSION TIME BOMB

In a story buried in the business section of the February 18th NY Times, it was reported that the spending budget passed by Congress included a provision that creates a 16-member bipartisan congressional committee to craft legislation that would provide for the potential bailout of as many as 200 multi-employer” pension plans. Like most State public pension plans most of these multi-employer plans are about to hit the wall of insolvency. A multi-employer plan is a union pension plan that covers employees of union working at different companies.   This minor little detail was not reported anywhere else.

A good friend of mine who works at a public pension did an internal study of all major State pension plans and determined that a 10% or more decline in the stock market for an extended period of time would blow up every single public pension in the country.  “Extended period of time” was defined as more than 3-4 months.  Every pension fund he studied is a monthly net seller of assets in order to fund beneficiary payouts – i.e. the cash contributions from current payees into the fund plus investment returns on capital is not enough to fund current beneficiary payouts.  Think about that for a moment.

As such, State pensions have dramatically ramped up their risk profile and most now invest at least 40-50% of their assets in stocks.  If you include private equity allocations, the overall exposure to equity investments is 70-80%.  CalPERS allocates 50% of its AUM to the stock market; the State of Kentucky  is now at 60%. Historically, pension stock allocations have typically – and prudently – ranged from 25-35%.

The stock market has now experienced three 9-10% drawdowns since August 2015. Assuming the “V” move  higher from the latest market plunge continues, each drawdown has been aggressively and swiftly negated by obvious Fed intervention.  The Fed does not deny this allegation and even subtly alludes to a non-explicit goal of targeting asset prices.

With pensions now 50% or more invested in stocks, it seems pretty obvious that one way to inflate away the looming pension catastrophe is for the Fed to inflate the stock market.  Two weeks ago the Fed reflated its balance sheet by increasing its SOMA holdings with $11 billion in mortgages. The SOMA account is the Fed’s QE account.  An $11 billion SOMA injection to the banks translates into $100 billion in liquidity – through the magic of the fractional banking system – that can be pumped into the stock market.  Who needs retail stool pigeons to chase extreme valuations even higher?

Most, if not all, pensions are quickly reallocating their equity investments for active to passive funds. “Passive” = indexing.  This means that the Fed only has to worry about inflation the broad indices like the Dow, SPX and Nasdaq.  That’s why an increasingly few number of stocks, like AMZN and Boeing, are driving the indices.  There’s still plenty of stocks that continue to decline – GE, for instance.

I laugh and sometime sneer at those who think new Fed Head Jerome Powell will impose monetary discipline by raising interest rates at least up to the real rate of inflation and reduce the Fed’s balance sheet according the schedule as laid out by Yellen.  After all, Powell is heavily invested in Carlyle Group, which  owns many companies that are covered by union pension plans.  He’s incentivized personally  to keep the monetary gerbil running on the wheel.

And better yet, if the Fed can keep the pensions thinly solvent by pumping up the stock market, Congress and State Governments can defer the inevitable taxpayer bailout of public pension funds – for now.

11 thoughts on “Is Fed Pumping Stocks To Keep Pensions Solvent?

  1. Central Banks own 50% of the equity markets Pension plans will be lifted by the CB manipulations Otherwise it’ll go down like this

    PUMP
    SLUMP
    DUMP
    CHUMP
    We are lodged at #4
    Keep stackin’

  2. There is no doubt in my mind that these frauds are keeping all things afloat. However, the pension funds must be borrowing against stock collateral, as well, to maintain income payout. The income yield on the S&P doesn’t come close to meeting their burn rate. So as usual, the antics of our central planners will always end up making the situation worse.

  3. The system is being constantly reformed so that the need for further reforms is ever increasing. Common sense was long time ago reformed into let’s kick the can! I wander when we will have the FInal Reform?

  4. All hail the mighty printing press also known as,
    “Ctrl P” on the Treasury computer keyboard. As
    long as the U.S. has weapons and can instill fear
    in other nations this sucker ain’t going down.
    If someone can tell me when it all unravels I’m
    ready to go all in. To date every prognosticator
    and crystal ball genius has gotten it wrong, myself
    included.

  5. Answer: “Yes”. Next question.
    More Fed jawboning the markets higher today, as per usual.

    https://www.reuters.com/article/us-usa-fed-bullard/feds-bullard-says-substantially-higher-rates-risk-overly-tight-policy-idUSKCN1GA1UW
    Business News
    February 26, 2018 / 7:40 AM / Updated 5 hours ago
    Fed’s Bullard says ‘substantially’ higher rates risk overly tight policy
    Reuters Staff

    “The current federal funds target of between 1.25 and 1.5 percentage points is “within the range” of policy rule recommendations that account for a neutral rate of interest held down by several slow-to-change factors, he said.”

    ”I have been a little bit concerned that the committee goes too far too fast,“ Bullard said. ”If we are going to do a lot of rate hikes we have to have data that supports that.”

  6. “Powell is heavily invested in Carlyle Group…”

    Jerome Powell is a member of the Rockefeller CFR, along with Janet Yellen, Alan Greenspan and Paul Volcker. Billionaire David Rubenstein, founder of the Carlyle Group, is the new CFR chairman.

    Major banks including Citigroup, JPMorgan, and Goldman Sachs are CFR “founding sponsors” and several of their execs are CFR members (Blankfein, Dimon, Rubin, Paulson, etc). Banker Paul Warburg of Kuhn Loeb, the “architect of the Fed”, was a founding director of the CFR. See lists in the CFR annual report.

  7. After listening to Chris Cole on Townsend’s show, I have to wonder if this short vol trade entails shorting gold miners. I mean when I see AEM get spanked for no good reason day after day… what’s up with that?

  8. Hey Dave,

    If the stock market is a matter of national security, then why would the government ever let it crash again? Also, which politician or CB would ever want that on their tenure. At this point, the stock market is essentially the economy.

  9. I sometimes think there are two other reasons why the stocks. Please let me be a bit conspiratory. Companies like Amazon need a lot of cash to burn to crush small competitors so it can be a control mechanism. The best way to give it (and companies like it) that cash is via the ”markets”. It is good old capitalism you know….. (as the excuse).

    When a group of central banks buys stocks out right (like the swiss do) then you can take this one step further. They can buy up a controlling interest in quite some major corporations for free and thus get even more centralised control on a global level. My bet would be that the collateral for the stock buybacks is them stocks. The and the commercial banks pledge that to the central bank(s). The ECB even had a famous soccer player pledged as collateral (I kid you not)

    A question I have as well Dave. You tend to stick to that 10 times rule. (10 billion injection = 100 billion in liquidity). Banks like Deutsche Bank are known for leverage of over 30 times. Does that not imply there is even more liquidity in the system or do I miss something?

    Regards, Hugo

    1. Yes, credit created and used is the same thing a printed money UNTIL the credit is repaid. It never gets repaid in our system…

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