Tag Archives: pension crisis

“The System Will Have To Collapse”

The public pension fund system is approaching apocalypse.  Earlier this week teachers who are part of the Colorado public pension system (PERA) staged a walk-out protest over proposed changes to the plan, including raising the percentage contribution to the fund by current payees and raising the retirement age.   PERA backed off but ignoring the obvious problem will not make it go away.

Every public pension fund in the country is catastrophically underfunded, especially if strict mark-to-market of the illiquid assets were applied. Illinois has been playing funding games for a few years to keep its pension fund solvent.  In Kentucky, where the public pension fund is on the verge of collapse, teachers are demanding a State bailout.

If the stock market were sustain a extended decline of more than 10% – “extended” meaning several months in which the stock market falls more than 10% – every public pension in the U.S. would collapse.  This is based on an in-depth study conducted by a good friend of mine who works at a public pension fund.  He has access to better data than “outsiders” and I know his work to be meticulous.   Please note that the three big market declines since August 2015 were stopped at a 10% draw-down followed by big moves higher.  The current draw-down was stopped at 10% but subsequent outcome is to be determined. My friend and I are not the only ones who understand this:

The next phase of public pension reform will likely be touched off by a stock market decline  that creates the real possibility of at least one state fund running out of cash within a couple of years. – Bloomberg

I know a teacher in Denver who left her job that was connected to PERA in order to take a lump-sum payout rather than risk waiting until she retired to bankrupt pension plan. She took a job in the Denver school system, which is not part of the PERA system. She’s actually thinking about teaching in Central America, where there’s high demand for English-speaking teachers and the pay relative to the cost-of-living is much higher:

“Teaching sucks right now.  Teachers are underpaid for the work we’re doing.  After all of these years, I’m making about $60,000. That’s BS! I have a masters. Truthfully, the classroom is burning me out right now. The f#cked up world is spilling into kids’ lives. They’re largely defiant and off-track. I don’t have the energy to try to streamline whole classrooms.”   In reference to the pension system: “When the mother f#cking-f#ck is any of this going to be corrected?!?! I am beyond mad.  Ecuador has become an option, because this country is beyond f#cked up.”

Unfortunately, I was compelled to answer with the truth – a truth she already knows:  “It won’t be corrected. The system will have to collapse and then who knows what will happen. Criminals run everything now and the people who are supposed to enforce Rule of Law are well paid to look the other way. This has been building for at least 2 decades. It doesn’t help when the President is caught shoving a cigar up a staff interns vagina and then a joke is made of it in Congress. “Is oral sex, sex?” Answer: “it depends on what the meaning of the word ‘is,’ is.”

Now the corruption and fraud is out in the open and there’s nothing that can be done about it. The system will have collapse – its the final solution.

America’s Pension Crisis Is About To Detonate

Dr. Paul Craig Roberts sent me an article by Catherine Austin Fitts and asked if I had read it.  The article is titled, “The State of America’s Pension Funds.” The article is worth reading, though I believe Ms. Fitts underestimates significantly the degree to which political and Wall Street criminality – along with money management incompetence – has infected and destroyed the U.S. pension system – both public and private. Furthermore, I believe she errs in her believe that the pension crisis can be fixed.

I’ve re-posted below my view of the looming pension system melt-down that I shared with Dr. Roberts.

“My guestimate for the amount stolen or shifted illegally through these mechanisms is $50 trillion, although I can argue the number higher.” I agree with her assessment there.

Craig, I concluded in 2003 that the elitists would hold up the system with printed money and credit creation until they had swept every last crumb of middle class wealth off the table and into their own pockets. Back then, I said housing was next asset to be drilled and cored. Let’s review: The first bubble removed at least $5-10 trillion of wealth from the public via the bailout of the banks and the wealth lost by people who chased home prices higher and then lost those homes to foreclosure or short-sale. Most of those homes are now sitting in the rental portfolios of large Wall Street investment funds like Black Rock and Colony Capital.

I also concluded that the last remaining middle class asset was retirement funds (Pensions, 401k’s, IRAs) and that looting that asset class would be the elitists coup de grace. Retirement assets are by far the largest middle class asset in aggregate (something like $20 trillion now). Let’s review: Every dollar of under-funding is a dollar of wealth transferred away from the pension plan members to either current beneficiaries or the promoters of the fund investments. A lot of money is also paid to “professionals” who skim huge salaries and benefits to put money to work with hedge funds and private equity funds, most of which will be wiped out in the next big bear market.

I have a close friend who works at a pension fund. It’s an off-shoot of a big State pension plan which happens to be one of the more underfunded pension funds in the country. My friend has to be a member of the pension fund as an employee of the fund he helps manage. He told me that as of Jan 1 he now has to contribute 12% of his pre-tax income to the pension fund. It’s criminal. That’s in addition to the amount his employer has to match. The money helps fund current beneficiary payouts. He needs his salary/job to support his family so he does not have a choice but to keep working at his current position unless he can find something else that pays equally as well. The job market for investment fund analysts is extremely difficult right now. His wife has to work for them to make ends meet (their kids are all under 12)

Based on a detailed study he did internally, he estimates the true underfunding of all public pensions in aggregate is at least $8 trillion. Not the $3.5 trillion referenced by Catherine Austin Fitts. He’s an insider and has access to better data than the outsiders and academics who have done studies that conclude $3-5 trillion of underfunding. THAT’s with the stock AND bond markets at all-time highs. How in the hell is that possible? The difference, or funding gap, is the wealth that is being confiscated.

The under-funding device is a very subtle and brilliant mechanism of wealth transfer. No one thinks about it that way but that’s what it is. A massive wealth transfer  mechanism.

I worked for some of these insiders at Bankers Trust. I can tell you first-hand, for a fact, that these people will do ANYTHING to take money from ANYONE, legally or illegally. I saw this first-hand. They are all very bright, well-educated and completely devoid of morals or ethics.  My direct boss was like that and everyone above him was even worse. They hate nothing more than leaving, literally, even dimes and nickels on the table.

That’s why the system is doomed.

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.

The Coming Run On Banks And Pensions

“There are folks that are saying you know what, I don’t care, I’m going to lock in my retirement now and get out while I can and fight it as a retiree if they go and change the retiree benefits,” he said.  – Executive Director for the Kentucky Association of State Employees,  Proposed Pension Changes Bring Fears Of State Worker Exodus

The public awareness of the degree to which State pension funds are underfunded has risen considerably over the past year.  It’s a problem that’s easy to hide as long as the economy is growing and State tax receipts grow.  It’s a catastrophe when the economic conditions deteriorate and tax revenue flattens or declines, as is occurring now.

The quote above references a report of a 20% jump in Kentucky State worker retirements in August after it was reported that a consulting group recommended that the State restructure its State pension system.   I personally know a teacher who left her job in order to cash completely out of her State employee pension account in Colorado (Colorado PERA).  She knows the truth.

But the problem with under-funding is significantly worse than reported.  Pensions are run like Ponzi schemes.  As long as the amount of cash coming in to the fund is equal to or exceeds beneficiary payouts, the scheme can continue.   But for years, due to poor investment decisions and Fed monetary policies, beneficiary payouts have been swamping investment returns and fund contributions.

Pension funds have notoriously over-marked their illiquid risky investments and understated their projected actuarial investment returns in order to hide the degree to which they are under-funded.  Most funds currently assume 7% to 8% future rates of return. Unfortunately, the ability to generate returns like that have been impossible with interest rates near zero.

In the quest to compensate for low fixed income returns, pension funds have plowed money into stocks, private equity funds and illiquid and very risky investments,  like subprime auto loan securities and commercial real estate.   Some pension funds have as much as 20% of their assets in private equity.  When the stock market inevitably cracks, it will wipe pensions out.

As an example of pensions over-estimating their future return calculations, the State of Minnesota adjusted the net present value of its future liabilities from 8% down to 4.6% (note:  this is the same as lowering its projected ROR from 8% to 4.6%).   The rate of under-funding went from 20% to 47%.

I can guarantee you with my life that if an independent auditor spent the time required to implement a bona fide market value mark-to-market on that fund’s illiquid assets, the amount of under-funding would likely jump up to at least 70%.  “Bona fide mark-to-market” means, “at what price will you buy this from me now with cash upfront?”

For instance, what is the true market price at which the fund could sell its private equity fund investments?   Harvard is trying to sell $2.5 billion in real estate and private equity investments.   The move was announced in May and there have not been any material updates since then other than a quick press release in early July that an investment fund was looking at the assets offered.  I would suggest that the bid for these assets is either lower than expected or non-existent other than a pennies on the dollar  “option value” bid.

At some point current pension fund beneficiaries are going to seek an upfront cash-out. If enough beneficiaries begin to inquire about this, it could trigger a run on pensions and drastic measures will be implemented to prevent this.

Similarly, per the sleuthing of Wolf Richter, ECB is seeking from the European Commission the authority to implement a moratorium on cash withdrawals from banks at its discretion. The only reason for this is concern over the precarious financial condition of the European banking system.  And it’s not just some cavalier Italian and Spanish banks.  I would suggest that Deutsche Bank, at any given moment, is on the ropes.

But make no mistake. The U.S. banks are in no better condition than their European counter-parts.  If Europe is moving toward enabling the ECB to close the bank windows ahead of an impending financial crisis, the Fed is likely already working on a similar proposal.

All it will take is an extended 10-20% draw-down in the stock market to trigger a massive run on custodial assets – pensions, banks and brokerages.  This includes the IRA’s.  I would suggest that one of the primary motivations behind the Fed/PPT’s  no-longer-invisible hand propping up the stock and fixed income markets is the knowledge of the pandemonium that will ensue if the stock market were allowed to embark on a true price discovery mission.

Like every other attempt throughout history to control the laws of economics and perpetuate Ponzi schemes, the current attempt by Central Banks globally will end with a spectacular collapse.   I would suggest that this is one of the driving forces underlying the repeated failure by the western Central Banks to drive the price of gold lower since mid-December 2015.   I would also suggest that it would be a good idea to keep as little of your wealth as possible tied up in banks and other financial “custodians.” The financial system is one giant “Roach Motel” – you check your money in but eventually you’ll never get it out.

Pension Apocalypse Is Coming

“It’s unequivocal now: We are taking money from the new employees and using it to pay off this liability for the old employees,” said Turner, a Gov. John Hickenlooper appointee. “And some might call that a Ponzi scheme.”Denver Post, 6/27/17

The people in Denver who bother to read the news, especially the ones who are or will be dependent on the Colorado public employees pension fund (PERA), were greeted with a shock Tuesday. PERA is now admitting to be 42% underfunded, down from an alleged 38% underfunding last year. How on earth is it possible for the underfunding of a pension to increase during a period of time when the Dow, S&P 500, Nasdaq and fixed income markets are hitting or are near all-time highs?

And what about the valuations of these funds using realistic mark to market prices for the illiquid assets, like private equity, commercial real estate and OTC derivatives?  Harvard University is about to sell its private equity assets.  My bet is that the value received will be covered up as much as possible.  And we’ll never know where the fund was marked on its books.  But judging of the failure vs. expectations of the SNAP and Blue Apron IPOs, private equity investments are likely over-marked on the books by at least 15-20%. A market to market here would devastate the stated funding levels of every pension fund.

It’s not just Illinois, which is de facto bankrupt, and the Connecticut State pension fund, which is also de facto insolvent.  Nearly every State’s pension fund is severely underfunded, as well as most private funds.

That 42% underfunding for PERA, by the way, makes very generous actuarial assumptions about the assumed rate of return on assets vs. the assumed payouts. Those assumptions have been wrong for at least 20 years and will continue to be wrong. That’s why PERA’s – as well as most every other pension fund – has become more underfunded over the last year.

The quote at the top is from Lynn Turner, who was one of the few competent, if not respected, SEC commissioners in my lifetime. In my view, when politicians and public officials are willing to state the truth about a dire situation in public,  it implies that the situation is on the precipice and they want to be disassociated with it – i.e the rats are jumping ship.  Yesterday the Illinois State Senate minority leader resigned…

I would argue that the one of the primary reasons the Fed is working hard to keep the stock market propped up is because, if the Dow/SPX/Nasdaq were to fall 5-10% for an extended period of time – as in more than a month – the entire U.S. pension Ponzi scheme would blow up and decimate the financial system. It’s a literal black swan in full view.

This is explains the “V” rallies in the stock market when the market abruptly drops 1% on a given day – like Tuesday and Thursday this past week. The fact that the market reversed Wednesday’s overt Fed intervention on Thursday signals the possibility that the Fed is losing control.

Meanwhile, the paper price of gold has once again withstood a vicious overnight attack that began in London and continued when the Comex opened by holding up at the $1240 level and bouncing. This is the fourth time since the so-called Fed attack last week disguised by the fake news as the “fat finger” trade.

The Market Has Its Head Buried Deep In The Sand

Several “black swans” are looming which could inflict a financial nuclear accident on the U.S. markets and financial system.   I say “black swans” in quotes because a limited audience is aware of these issues – potentially catastrophic problems that are curiously ignored by the mainstream financial media and financial markets.

The most immediate problem is the Treasury debt ceiling.  The Treasury is now projected to run out of cash by mid-summer.  Of course, in the spurious manner in which the markets evaluate the next trade, July may as well be a decade away.  My best guess is that the “market” assumes that, after drawn out staging of DC’s version of Kabuki Theatre, Congress will raise the debt ceiling, probably up to $22 trillion.  Then the Fed will extend its highly secretive “swap” operations to foreign “ally” Central Banks (hint:  Belgium and Switzerland) in order to fund the onslaught of Treasury issuance that will ensue.  Problem solved…or is it?

(Note:  Plan B would be another one of Trump’s bewildering Executive Orders removing the debt ceiling.  Plan B is another form of “fiat” currency issuance)

The second “black swan” seen by some but invisible to most is the ongoing collapse the shopping mall business model, erroneously blamed on the combative growth of online retailing.  But when I look at the actual numbers, that argument smells foul.

Is Online Retailing Actually The Cause Of Brick/Mortar Retail Apocalypse?

More than 3,500 stores are scheduled to be shuttered in the next few months. JC Penny,
Macy’s, Sears, Kmart, Crocs, BCBC, Bebe, Abercrombie & Fitch and Guess are some of the
marquee retailing names that will be closing down mall and strip mall stores. The Limited is going out of business and closing down all 250 of its stores.

The demise of the mall “brick and mortar” retail store is popularly attributed to the growth in online retail sales. To be sure, online retailing is eating into the traditional retail sales
distribution mechanism – but not as much as the spin-meisters would have have you believe. At the beginning of 2015, e-commerice sales were about 7% of total retail sales. By the end of 2016, that metric rose to 8.3%. However, looking at the overall numbers reveals that nominal retail sales have increased for both brick/mortar stores and online. In Q4 2015, total nominal retail sales were $1.186 trillion. Brick/mortar was $1.096 trillion and online was 89.7 billion, which was 7.6% of total retail sales. In Q4 2016, total sales were $1.235 trillion with brick/mortar $1.133 trillion and online $102.6 billion, which was 8.3% of total retail sales.

As you can see, there was nominal growth for both brick/mortar and online retailers. My point here is that the spin-meisters present the narrative that online retailers are eating alive the brick/mortar retailers. That’s simply not true.   Part of the problem that the total retail sales “pie” is shrinking, especially when analyzing the inflation-adjusted numbers.  I created a graph on from the St. Louis Fed’s “FRED” database that surprised even me (click to enlarge):

The graph above shows the year over year percentage change in nominal (not inflation-adjusted) retail sales on a monthly basis from 1993 (as far back as the retail sales data goes) thru February 2017, ex-restaurant sales, vs. outstanding consumer credit. As you can see, since 1994 the growth in nominal retail sales on a year over year basis has been in a downtrend, while the level of consumer credit outstanding as been in a steady uptrend. Since 2014, the rate of growth in debt has exceeded the rate of growth in retail sales. If we were to adjust the retail sales using just the Government-reported CPI measure of “inflation” retail sales would be outright declining.

The problem with the mall business model is debt.  The mall-anchor retailers who are vacating mall space like cockroaches vacate a kitchen when the light is flipped on have been leveraged to the hilt by the financial engineers who control them who in turn have been enabled by the most permissive Federal Reserve in U.S. history.   Too be sure, online retailing is cutting into the margins of Macy’s, JC Pennies, Sears, Dillards, etc.  But these companies would have no problem “fighting back” if they were not over-leveraged to the eyeballs.

Layer on top of that the leverage employed by the mall REITs and the recipe for a financial crisis larger than the 2008 “big short” mortgage/housing crisis has been created.  To compound this problem, mall owners are now starting to mail in the keys to financially troubled malls:   More mall landlords are choosing to walk away from struggling properties, leaving creditors in the lurch and posing a threat to the values of nearby real estate…[as] some of the largest U.S. landlords are calculating it is more advantageous to hand over ownership to lenders than to attempt to restructure debts on properties with darkening outlooks (LINK).

But it gets worse. I referenced the consumer’s ability to borrow in order to spend money. Economic activity in the United States has relied heavily on an increasing amount of debt issuance for several decades. At some point consumer borrowers reach a point at which they can no longer support taking on more debt, whether in the form of mortgages, auto loans/leases or credit cards. The problem for the U.S. financial system is that there will be widespread defaults on the consumer debt that’s already been issued.   The average U.S. household has “hit a wall” on the amount of debt it can absorb.  This is why restaurant and retail sales are dropping and why auto sales have rolled over.  All three will get worse this year.

This Will Crush The Pensions

Finally, the third “invisible” black swam is the looming pension crisis.  A colleague of mine who works at a pension fund did a study last year in which he concluded that, because of the extreme degree of public pension underfunding, a 10% decline in the stock market for a sustained period – i.e. more than 3 or 4 months – would cause every single public pension fund to blow up.  As he has access to better data than most, he also surmised that the degree of underfunding is 2-3x greater than is publicly acknowledged by the mainstream media (see this article for instance:  Bloomberg claims $1.9 trillion underfunding).

Circling back to the mall/REIT ticking time-bomb, while the Fed can keep the stock market propped up as means of preventing an immediate nuclear melt-down in U.S. pensions (all of which are substantially “maxed-out” in their mandated equities allocation), the collapse of commercial mortgage-back securities (CMBS) will have the affect of launching a nuclear sub-missile directly into the side of the U.S. financial system.

The commercial mortgage market is about $3 trillion, of which about $1 trillion has been packaged into asset-backed securities and stuffed into yield-starved pension funds. Without a doubt, the same degree of fraud of has been used to concoct the various tranches in these CMBS trusts that was employed during the mid-2000’s mortgage/housing bubble, with full cooperation of the ratings agencies then and now.   Just like in 2008, with the derivatives that have been layered into the mix, the embedded leverage in the commercial mortgage/CMBS/REIT model is the financial equivalent of the Fukushima nuclear power plant collapse.

It’s a  matter of time before a lit match hits one of the three lethal powder-kegs described above.  This is why the bank stocks were hit particularly hard last week when the Dow was in the middle of its 8-day losing streak.  Of course, all it took to spike the Dow/SPX higher was a couple of immaterial “consumer confidence” reports in order to reflate the stock market with some “hope.”   Don’t forget, the last time consumer confidence high-ticked was in 1999, right before the tech bubble imploded.

Unfortunately, the next financial catastrophe that is going hit the system, and for which the Fed is helpless to prevent, will make everyone yearn for just the tech bubble or “big short” bubble collapses.   Meanwhile, the stock market and its collective universe of “investors” will continue sticking its head deeper into the sand, oblivious to the sling blade that is swings closer to its neck.

Portions of the above analysis were excerpted from the current Short Seller’s Journal. That issue contained more in-depth data and two short ideas, a mall REIT and retailer that has bubbled up beyond comprehension.   You can learn more about the Short Seller Journal here:   SSJ Weekly Subscription.