Congress, for some reason, has agreed to use U.S. Taxpayer money to bailout Puerto Rico. That’s mighty generous of Congress to use Citizens’ money for that, especially when most Congressmen have their money tax-sheltered in the Rothschild Trust Company in Reno. But it begs the question: Why is Puerto Rico even part of the United States?
An article in the Wall Street Journal reports that Puerto Rico’s pension fund is underfunded by $43 billion, which is on top of $70 billion in various forms of Government debt. Puerto Rico is an “unincorporated territory of the U.S., which means that it probably harbors a lot of U.S. money hiding from the IRS. That explains why Congress is using other people’s money to bailout their own money plus the money of those who fund Congressional seats.
Puerto Rico, for all intents and purposes, has financially collapsed. Your tax dollars are keeping it solvent and paying out pension beneficiaries. But the State of Illinois would love to have the size of PR’s problems. The State pension fund in Illinois is underfunded by over $111 billion. That’s based on a lot of assets like commercial real estate, junk bonds and private equity investments that are marked to fantasy. Mark ’em to market and I bet the pension fund is underfunded by closer to $200 billion.
That’s just Illinois. If we were to do a rigorous mark to market assessment of the State pension funds in California, Texas, New Jersey, New York and Florida, I’d bet my last roll of silver eagles that combined the pensions in those States – not including Illinois – are underfunded by over $1 trillion.
The graph above shows a 60-minute intra-day chart of the S&P 500 going back to late June. I’ve been featuring this chart in my Short Seller’s Journal every week. The S&P 500 has basically flat-lined since July 7. If you overlaid a bollinger-band width indicator, it would show a horizontal line since July 7. The Fed has temporarily achieved the remarkable feat of removing volatility from the stock market.
The Fed has keyed the stock market to minimizing VaR. “VaR” stands for “Value at Risk.” It’s essentially a fancy-sounding term that measures how much an investment portfolio – or bank asset portfolio – might lose given certain volatility assumptions over time. That’s it in a nutshell though I’m sure quant-geeks will get picky with that summary.
But the bottom line is that if market volatility shoots up for some reason, VaR will shoot up and that will incinerate every single big bank and pension fund in this country. Puerto Rico’s predicament will look like a feel-good Broadway musical by comparison.
A friend of mine did a comprehensive of study of public pension funds and concluded that a 10% or more drop in the S&P 500 over a sustained period of time would induce the collapse of all public pension funds. I think he assumed the best case in terms of how pensions currently mark their assets. If you notice, the 10%-plus sell-offs last August and January were followed by sharp “V” bounces – both time. That was undoubtedly the work of the Fed and my friend’s quantitative work explains why.
I would be surprised if there’s ever been a 7-week period of time when the volatility in the stock market has been as low as it has been since July 7. Especially considering the high volume of economic, political and geopolitical events that are occurring simultaneously, each of which individually has caused sharp market sell-offs historically.
Another friend/colleague of mine told me today that one of clients stated that he thought the Fed could hold up the market forever. My response to that is, if that were the case the whole world would be speaking German right now.
The U.S. collapse will happen either now or later. For the latter outcome, at some point the Fed will need to print 10’s of trillions of dollars to prevent that horizontal line on the graph above from turning into a downward-pointing near-vertical line. Of course, please review the history of Germany circa 1923 to see how the money printing alternative worked out…
Off topic a bit, but over in Mexico another bailout is going on. See article from Wolfstreet today. Everywhere you look, the ship is listing, going down into the deep. What will we find in those deep dark waters? Sharks? Or just a seemingly endless abyss until we hit bottom?
You sound like you write books! LOL
A short while ago (maybe couple of weeks, can’t recall exact date), I burst out in sarcastic laughter after seeing daily price charts of both “paper gold” & “paper silver”. They looked like bizarre inverted trapezoid patterns that day. And I thought such absurdity couldn’t possible be outdone.
But today’s paper price charts for both “metals” have outdone it!!! They look cones. They’re literally conical in shape. I can’t believe what my eyes are seeing! If it keeps up like this, we’re soon going to run out possibly the most ridiculous geometric shapes for these price charts.
Dave. Finally got out of Illannoy. In CO as of early August. Long story but what I feel is like s bag of hammers has been lifted from my shoulders.
Agree on the debt. There just aren’t enough productive citizens anymore to continue to pay the burden of all these unfounded liabilities. Illannoy is already toast. Mayor rahmmy now wants to exact an increased sewer and water tax on the denizens of Chitown. Trib Article two days ago outlined same.
As for the democratic repukes they are nothing but the political equivalent of drug cartels and traffickers.
Enjoy your day. Keep up the good work.
Seven years I have waited, sitting on cash of diminishing value…waiting for the collapse. Could have doubled my money in most any index fund. Please someone give me a date when I can expect this to occur…or stop saying anything. You see, I’ll die some day too. But lying down in the coffin a few years ahead of time kind of renders the issue moot.
Fair enough but if you had invested in an index ETF, you would most likely have sold out after 2-3 years. Nobody could have anticipated the market going up and up for 7 straight years despite weakening profitability. And if you are staying in the market only because of central banker shenanigans, you are not an investor – you are a speculator.
The markets have become a tragic comedy. Problem is the 401k
holders and pension fund recipients will not be laughing at the end.
Fund managers have been piling into the FANGS and H.Y. Bonds.
Insurance company’s that were traditionally conservative are mimicking
the equity fund managers. Everyone is chasing yield and everyone will
be crushed when the fed can no longer print. The old saying “when everyone
is thinking the same way, nobody is thinking” definitely applies in this case.
Can you adequately compare Weimar Germany to the present day USA money printing scheme? Back then Germany had just finished fighting a war of attrition on two fronts and if I remember correctly it was the Treaty of Versailles that indebted Germany to the Western Powers war repriations that they could never repay. But they weren’t the world’s reserve currency and had their entire manufacturing base destroyed or shipped out to neighboring countries.
Some of that sounds very familiar to today. Our manufacturing base has been gutted and shipped over seas for cheap labor and we are also in debt more then can ever be repaid without serious devaluation of the currency.
Somethings got to give in our present day situation and you’ve outlined that very well on your blog. What’s going on today is unprecedented and will fail in a much bigger way. I’m just afraid of how bad it will get before sanity comes back to our monetary policy makers. Adam Smith’s ‘Invisible Hand’ is hard at work behind the scenes and the end result is unavoidable. It’s just a matter of time.
Hello Dave, Looks like your call on real estate is coming to
fruition. Too bad Zero Hedge did not off you some street cred
for your accurate prognostication.
For futures options on gold and silver so that I can discern the number of puts and calls at various strike prices (and so reach my own conclusions regarding short term price swings in the underlying commodity), which site do you recommend, Dave? Anyone?