Tag Archives: black swans

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.

A Flock Of Black Swans Hovers Over This Bear Market Bounce

The Dow has spiked up nearly 1,000 points in six trading sessions.  Similarly, the S&P 500 has shot up 6.4% in the last six trading sessions. Nothwithstanding the continued flow of increasingly bearish economic data, stock market moves like this do not occur in a bull market.  The economic indicators continue to get worse – much worse.  Maybe the markets are giddy because they are anticipating more money printing – I don’t know.

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.  – Ludwig Von Mises,  “Human Action”

I don’t care what so-called Wall Street scam artists, financial media imbeciles and the  charts are saying.  The basic underlying economic, financial and geopolitical fundamentals continue to show two developments brewing:   the onset of a Greater Depression and war.

The black swans are right in front of our eyes in the form of debt at every level of our system:  Energy industry, student loans, auto debt, personal and credit card debt, corporate debt and real estate/commercial property/housing debt.

The energy debt crack-up boom is here and now. The Government can somewhat hide the SLMA debt problem but I’ve seen estimates that as much as 40% of the $1.3 trillion is in technical default. The Government lets people go into deferment or enables as little as no monthly payments with a new income based test that Obama initiated. But the Government still has to make payments on the debt as a the pass-thru guarantor to entities that hold the student debt.

The auto debt will become a problem this year:  More Subprime Borrowers Are Falling Behind On Their Auto Loans.   Repo rates are already at historically high levels.  The enormous glut of new cars will begin to push down the resale value of repo’d vehicles, forcing big losses on banks and auto loan-backed asset-trust investors.

The rate of delinquency on all of the new 3/3.5% down payment  mortgages issued over the last 5 years will begin to move up quickly this year as well.  In fact, the banks are still sitting on defaulted mortgages from the last housing market collapse.  But the liquidity pushed on to the banks by the Fed has enabled them to endure non-performing loans on their balance sheet.

And then there’s the tragically underfunded pensions…the State of Illinois has openly admitted to a $111 billion underfunding problem.  Several other States have disclosed 40-50% underfunding of their State-employee pension plans.  The problem with these estimates is that they rely on projected future rates of return that are too high.  Most funds assume a 7.5-8.5% ROR in perpetuity.   Last year most funds were flat to negative. YTD pension funds are quite negative.

How is it even remotely possible that any pension fund is underfunded given that, since the 2009 low, the stock market has tripled in value and the bond yields have fallen to record lows, which means bond portfolios should have soared in value?   Pension funds should be, if anything, over-funded right now.

Furthermore, those underfunding estimates assume bona fide, realistic mark to market marks on illiquid investments such as CLO’s, CDO’s, Bespoke Tranche Opportunites (think “The Big Short”), private equity fund investments, real estate, etc. – you get the idea.  I would bet most pension funds, public and private, are fraudulently over-marked on at least 20% of their holdings.   I know many pensions have allocated  in the neighborhood of 20% of their investments to private equity funds.  Most of these funds are in the early stages of becoming little more than toxic waste.

Pension underfunding is no different from a brokerage account that is using margin.   “Underfunded” is a politically acceptable term for “we are using debt to make current payments.”   The “debt” incurred will be owed to future beneficiaries.   But here’s the rub: with assumed rates of return too high and investments already overvalued for political purposes, it is highly likely that future pension fund beneficiaries – private and public – will be left holding little more than an “IOU.”

In other words, the pension underfunding problem is, in reality, another massive chunk of debt has been cleverly disguised and layered into our system.  It has been yet another mechanism by which the Wall Street racketeers have sucked wealth from the middle class.

By all appearances, this recent dead-cat bounce in the stock market is quickly losing steam.  Macy’s stock is up 1% because it “beat” estimates using “adjusted” EPS. “Adjusted” is a euphemism for “recurring non-recurring expenses that we strip out of our reported net income calculation to make the headline earnings report look better.”  Of course, hidden in between the lines is the fact that Macy’s revenues and net income (any way you want to calculate it) has dropped precipitously year over year.


It’s impossible to know for sure how much longer this parabolic spike up can last. It might even run up to the 200 dma (red line). But inevitably the market take another parachute-less base jump off a tall building and remove another chunk of money from daytraders, retail investors and their moronic advisors and, of course, pension funds.

If you want ideas on how to take advantage of a market that is inevitably headed much lower, please visit the  Short Seller’s Journal.

The State Of Illinois Is Bankrupt

There seems to be no limit to the amount of relevant news about the U.S. economic and financial system that the mainstream media keeps off the radar screen.  I truly believe the technically insolvent status of the country’s fifth largest State is a lot more relevant to our collective lives than is the latest episode of The Jerry Springer Show Trump vs. Rubio vs. Cruz vs. Clinton “reality” TV show.

Illinois sports a $111 billion unfunded State pension, it has $8 billion in unpaid bills, tax revenues are declining, spending is accelerating and it has yet to approve a FY 2017 budget. If this were a private corporation, it would have been taken through bankruptcy court and emerged with new owners at this point.

But the true financial condition is even worse than advertised.   Let’s examine that underfunded pension estimate for a moment.  That number would be based on the existing actuarial assumed liabilities vs. the allegedly marked to market value of the assets.   I can say with 110% certainty that the total value of the assets are over-estimated by at least 10% and probably more.  Included in its cesspool of investments would be items like private equity tech investments, high yield-turned-distressed bonds, overvalued real estate and energy investments and, of course, derivatives.   There’s no way that the people running the fund have properly marked to market any of the above toxic assets.

The now-Senator and supremely corrupt Michael Bennett plugged the Denver Public Employee pension fund for a cool $250 million of losses on interest rate derivatives that he bought from his former colleagues at JP Morgan.   Denver’s pension fund is tiny compared to Illinois’ grotesque public employee entitlement monstrosity.

I don’t rely on the mainstream media for updates on the Illinois financial saga.  But every time I run across updates on the situation it has become worse.

I wonder if Obama will avoid the State of Illinois’ funeral the way he’s avoiding SCOTUS Justice Scalia’s funeral:  LINK.  Obama is a real class act…

Will Puerto Rico Cause An Inadvertent “Black Swan” Derivatives Melt-Down?

I really had not been paying much attention to the Puerto Rico debt situation.  After all, $72 billion in debt that might go bad – big deal.  The Fed can print up $72 billion in credit lines with the push of a button.

But a friend of mine happened to mention to me today (Monday) that MBIA’s stock was down over 23% and Assured Guaranty’s stock was down over 13%.  That woke me up.

MBIAMBI guarantees $4.5 billion in par amount of Puerto Rico muni paper.  As of it’s latest 10-Q (March 31, 2015), MBI showed a book value of $3.9 billion. Puerto Rico alone could more than wipe out MBI’s net worth.  But that’s only a portion of the story. The bigger part of the story is buried off-balance sheet in the footnotes in opaque financial structures called Variable Interest Entities (VIE’s). Remember those from 2008?  I remember them vividly.

The VIEs are the off-balance sheet vehicles that triggered the massive chain of counterparty defaults which de facto collapsed the U.S. financial system in 2008.  The VIEs are where the credit default swaps and other nebulous forms of OTC derivatives bet slither around.

Companies like MBI and AMBAC underwrite  credit “enhancement” guarantees on these massive cesspools of debt – and the associated derivatives that are “wrapped around” the debt structures – and stick them in VIEs.  MBI’s 10-K has several pages of footnotes which vaguely describe the contents of its VIEs.   The problem is that MBI and its ilk are thinly capitalized relative to the potential size of the liabilities they face if the credit markets become volatile to the downside.


Toxicity plus toxicity does not equal purification.  But VIEs that contain off-balance sheet debt and derivative guaranteed equals toxicity cubed, at least.   In other words, whatever MBI lists as its “net” credit exposure in its financials, take that number and, at the very least, triple it.

But wait, the story gets even better.  As it turns out Warburg Pincus, one of the loftiest private equity firms on Wall Street,  is by far MBI’s largest shareholder.  Warburg announced a little over five weeks ago that it was going to unload 60% of its stake via over the counter negotiated sales – LINK.   The firm has been unloading these shares since May 18th.  We won’t know how successful this effort has been until the selling is completed.

Does Warburg Pincus sound recently familiar?   It’s the firm that hired “Turbo Tax” Tim Geithner shortly after he left his post as Treasury Secretary.   Remember, Geithner was head of the NY Fed at the time of the 2008 financial collapse.  In other words, he knows where a lot of the bodies in the financial system are buried.  I have no doubt that Geithner has played a significant role in advising Warburg on the need to unload its exposure to MBIA.  Anyone who takes the other side of this trade is a complete idiot.  

But this story isn’t just about MBI.  It’s about the companies that, along with MBIA, provide “insurance” for bonds and derivatives.  These firms have assumed potential liabilities that dwarf their ability to cover them.  Not just in the worst case scenario.  I believe Puerto Rico’s financial demise could trigger the dreaded financial nuclear daisy chain of counterparty defaults.

The problem with creating “actuarial” payout models for insurance guarantees on financial assets, and this especially true for derivatives, is that the outcome is pretty much binomial.  Either the assets pay off or they become worthless or near worthless.  Furthermore, with the extreme degree of Central Bank intervention, which has enabled literal financial zombies to continue living and has enveloped the entire financial system with opacity, it’s impossible to model in expectations on, and potential sources of, counterparty default risk.  It’s like lightening.  It can unexpectedly strike anywhere – just ask Hank Paulson and Goldman Sachs…

This is exactly what occurred in 2008.  Only this time around the problem is significantly greater than it was in 2008.  Global debt and gross derivatives outstanding are much bigger than in 2008.   And, except for the Plan B hyperinflation of the money supply, Central Banks are out of bullets.

I believe it is highly probable that the crashing stocks of MBIA, AMBAC and AGO are the alarm bells of a black swan landing.  And, of course, no one has been talking about them until today.  Although these firms are somewhat obscure and small compared to the size of the majority of financial companies, they are highly leveraged with massive off-balance-sheet liabilities for which they have zero hope of covering in the event of even relatively small bond defaults.   In other words, these firms are the ones most likely to set off the next financial collapse triggered by their counterparty defaults.

The Brown Stuff Is Flying Closer To The Fan Blades – Derivatives Problem At Deutsche Bank

Before I start in on subject matter of the title, I wanted to post a comment someone sent me about the Martin Armstrong assertion that the decline in Swiss exports to Asia signals a decline in demand from China.  An assertion that I said was invalid and that – by design – the Chinese Government has made it impossible to track the amount of gold imported to China.    Here’s the remark from a very well-respected market analyst:

The decline of gold shipments from Switzerland to China can be due to a declining supply of gold at current prices.  And for a guy [Armstrong] who’s smart, he should be able to figure out the LBMA paper market fraud in a second but he just can’t seem to get it.

The co-CEOs of Deutsche Bank unexpectedly stepped down.  Recall that Deutsche Bank is now the largest holder of derivatives in the world.  LINK

The ONLY reason these resignations would have been unexpectedly coerced like this is if Deutsche Bank was have a potentially uncontrollable problem in its OTC derivatives holdings.  Because of accounting rules, we have no possible way of knowing what DB’s OTC derivatives book looks like.  Although Jain oversaw the build-up of the book, it’s likely that not only does he not know where all the bodies are buried, he has lied to the board of directors and shareholders about the riskiness of the bank’s holdings.

I know Jain from personal experience with him right after Deutsche Bank acquired Bankers Trust for BT’s derivatives capabilities.  It instantly put Deutsche Bank in the forefront of the fraud-based OTC derivatives business.   Jain has lost money wherever he worked .  He was brought over to DB from Merrill when Edson Mitchell assumed the reigns at Deutsche Bank’s US unit.

I just remember thinking Jain was about as sleazy as they come.   His sole charge was to build Deutsche’s derivatives book of business into the biggest in the world.   From there he sleazed his way into the CEO position, a few years after Mitchell went down in plane accident.  He then proceeded to climb to the top of Deutsche Bank by conspiring to “shoot” then-CEO Josef Ackerman in the back.

Deutsche Bank is sitting on a powderkeg of derivatives dynamite.  DB is also the entity that has leased out most of Germany’s sovereign gold.   From a good friend of mine who worked at DB and still keeps in touch with former colleagues:   “Deutsche Bank is sitting on a lethal amount of derivatives and everyone at the bank knows it.”

This is the quote from the person who sent me the article linked above:

Like I said many times over the past 6 months…the derivatives in Europe have gone SIDEWAYS and there is blood in the back rooms of the world’s biggest derivative traders! News yesterday that $6B in derivatives were being “internally investigated” at the world’s largest derivative holder, Deutsche Bank, is followed today by the resignation of BOTH of it’s CEO’s!!

Anshu Jain has thus overseen the world’s largest arsenal of deadly financial derivatives. When Deutsche Bank goes down in flames, the Jain’s bank account should be the first source of funding the losses.  May whatever Higher Power there may be up above help us all when the derivatives financial nuclear daisy-chain starts to blow…


Black Swan Sighting: Sub-$50 Oil Prices Seen In Bakken Shale Region

I opined the other day that perhaps the crashing price of oil would be the “black swan” that no one saw coming.  Bloomberg is now reporting that Bakken region well-head oil is being sold for under $50:  Sub-$50 Oil Surfaces In North Dakota.   Too be sure, shale-derived oil sells at a discount to standard West Texas Crude for a few reasons.  But the shale-oil model rests on $100 oil.

Wall Street has pump and dumped the shale oil/fracking industry onto the public in a major way.  Of course, now that the Justice Department new enforcement policy – spearheaded by Obama and his corrupted clan of Covington Burling attorneys (see Eric Holder’s resume) – is that Wall Street is too big to prosecute, we’ll never know the true degree of the fraud-laced hot air pumped into the oil shale bubble.

But rest assured, your pension funds and IRAs will suffer the consequences, as semi-retarded institutional money managers herded investor money into these deals.   The fall-out from this will resemble the collapse of the mortgage/housing bubble.  But this time the big Wall Street banks are protected – for now – by the $2.5 trillion in cash (excess reserves) pumped into their balance sheets by Helicopter Ben and Grandma Yellen.

Most of the oil shale/fracking stocks that went  public over the past few years have come crashing down – even harder than junior mining companies.  The difference between the two sectors:  gold is real money, shale oil is fool’s gold.   Gold mining stocks will do a moonshot once the Fed loses it’s ability to suppress the price of real with gold with paper gold.  If you have any exposure in your investment portfolios to oil shale/fracking – any exposure whatsoever – get out now before it all goes to zero.