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Archive for the ‘pensions’ Category

I like it — more recognition of reality…

Last month, I presented to the National Association of State Treasurers. The room had all 50 State Treasurers, lots of Deputy and Asst Treasurers, and staff. I was realistic about how credit crises unwind over long periods of time.

The prior panel had the major ratings agency reps, and they had discussed Pension Return Assumptions. Given their utter incompetency, it was no surprise the Ratings firms were okay with expected blended returns of 8%.

An audience member asked a question to me about this, and I laughed. I told the Treasurers that the consultants who tell them they should have expected 8% blended returns for the past 5-10 years were dead wrong, and the ones who told them they could expect 8% blended returns for the next 5-10 years were probably high. My joke was to get to 8% required bad math — blended expected returns of 8% requires taking 5% gains in equities and adding 3% gains in bonds (5+3=8).  How often do you get to make a wonky accounting joke to a room full of treasurers?

They’re high all right — that is, high on drugs.

This is their set of assumption:

What Barry is missing in his missive, however, is why this appears to have worked up until the last ten years.  The answer is found in my favorite chart, once again:

Let’s look at what the market did as a consequence:

Look closely at those two charts.  What I want you to pay attention to is the overlay.  Here:

Notice anything?

What coincided with the ramp from 1980 forward?  Let’s go back ten more years, because it makes the point much clearer.  We’ll do it with a nice overlay.

So we had a nice stable stock market, with reasonably-stable leverage (growth in debt .vs. growth in GDP.)  Then we started emitting unbacked credit, and lots of it.  The market responded.  We emitted more.  The market responded more.

But then, in 2000, we hit the wall.  The emission of new credit over output no longer worked because it was impossible to service the debt with available economic surplus, and the market collapsed.

The response?  Even easier credit.  Liars loans.  Zero-down mortgages.  Goading people into speculating on property, taking out HELOCs to buy Suburbans and similar.  Frauds were run throughout the financial system in order to prop this up, including issuing CDS and various securities based on claimed credit quality that the writers knew damn well was impossible, as there was at the time a 20 year history that showed credit expansion and thus asset price inflation was the only way it could possibly “work.”

Nobody knew, of course, exactly when the wall would be hit, but that it would happen was inevitable and mathematically certain.

Well now “when” has happened.  Yet the same projections on a forward basis are still being run, despite the fact that further credit creation to maintain this bubble in asset prices is not possible, as there’s no ability to pay higher and higher percentages of income in debt service!

This — basic mathematics — is at the root of the problem with these “forecasts.”  The people who have made them might have been excused if they made them in 1970 if the goal is to get to 2000, since there’s a “time certain” on the end game.  That might have been defensible.

But it’s not defensible on an infinite-forward-horizon basis, which retirement systems always are, since there will always be someone new coming in behind the guy who retires — unless you’re forecasting (and so stating!) the end of the government and/or the company involved on that future “date certain.”

The dynamic that drove this insanity from the mid to late 1970s up until the collapse in 2000 is over.  The “last gasp” of fraud attempted in the 2000s to keep the consequences from coming home to roost not only failed it also doubled the damage we must accept in our economy now from what it was in 2000.

This was not an accident and it was not simple “greed.”  It was an intentional series of actions and inactions.  It was willful in both activity (deficit spending) and blindness (to indefensible acts by financial institutions) by our government acting in concert with The Fed, including the current Chair Ben Bernanke.  May I remind everyone that Ben was with The Fed at the time of Greenspan’s actions in the early part of the 2000 decade prior to assuming the Chair?

Do not kid yourselves folks.  This is literally 5th grade mathematics — the simple story of exponential growth gone mad, and the inevitable mathematical consequence of two compound functions where one has a higher rate of growth (debt, in this case) than the other (economic output.)

Today, as I write this, we have still not recognized and accepted that this path cannot continue as it is mathematically impossible for it to “work” as we are being told and sold.

The Market-Ticker

Discussion below (registration required to post)

It’s for the children….errr…or something.  You guys don’t mind, right?  And you Americans thinking that this can’t happen here – think again.  Consider yourself warned.

* Govt targets pension funds for spending boost

* OECD sees UK economy slipping into recession in 2012

* Series of measures aimed to bolster growth

LONDON, Nov 28 (Reuters) – Britain unveiled plans on Monday to tap pension funds for the lion’s share of an investment of up to 30 billion pounds ($46.5 billion) in big building projects to help to revitalise a stagnant economy forecast to slip back into recession next year.

The measures are the latest in a drip feed of government announcements ahead of Finance Minister George Osborne’s autumn statement on Tuesday when growth forecasts will be cut as the euro zone crisis bites.

The OECD forecast on Monday that Britain would suffer a modest recession next year, urging the Bank of England to expand its asset purchase programme designed at shoring up a faltering economy.

Adding to the gloom, British retail sales fell at their fastest pace in 2-1/2 years in November, a survey by business lobby the CBI showed.

Britain’s Conservative-led coalition has made it its priority to erase a budget deficit that peaked at 11 percent of national output.

It is cutting spending by around a fifth across most government departments, but the domestic squeeze has coincided with plunging demand from continental European markets hit by the eurozone crisis.

The unemployment level has hit a 15-year high and the government is likely to fail to hit a target of wiping out the structural deficit by 2015, when the next election must be held.

Responding to industry calls to help companies to access cash, Osborne announced measures on Sunday to underwrite 20 billion pounds of loans to smaller companies which are struggling to get credit.

Analysts backed the plans but said that they would take time to feed through into the economy.

“Measures to reprioritise capital spending and start the credit easing programme are welcome, but they are coming too late to do much about the impending recession in the UK,” BNP Paribas economist David Tinsley said in a note.

“With the domestic demand in the UK already very weak heading into the crisis, it is hard to see where any growth next year will come from.”

 

NO NEW BORROWING

Treasury Minister Danny Alexander said that the government would reallocate 5 billion pounds of spending to capital projects by 2015 but crucially added that a deficit-cutting coalition would not borrow any more.

“Through working with British pension funds, we’re identifying ways to unlock around 20 billion pounds of pension fund investment to go into privately funded infrastructure,” Alexander told BBC Radio 4.

Osborne said the government could invest up to 30 billion pounds in schools, roads and rail projects, a much needed boost for the country’s creaking infrastructure.

He got a boost on Monday when the head of China’s sovereign wealth fund said the country was keen to invest in the ailing infrastructure of Western countries, especially Britain.

“Britain has got to get away from the quick-fix, debt solutions that got us into this mess,” Osborne said.

“We’ve got to weather the current economic storm but we’ve got to lay the foundation for a stronger economic future.”

Pension funds are looking to ensure better returns after yields on British government bonds or gilts fell following buying by the Bank of England and by investors seeking a haven from eurozone turmoil.

Pension funds saw great potential in the scheme but again its effects would take time to work through.

“This could be a real win-win. The UK desperately needs to update its infrastructure, and pension funds are looking for inflation-linked, long-term investments,” said Joanne Segars, chief executive of the National Association of Pension Funds.

“Pension funds hold over a trillion pounds in assets, but only around 2 percent of that is invested in infrastructure. There’s the potential for that to be much higher.”

Analysts at Panmure Gordon said the additional investment would provide a boost to British construction and engineering firms including Balfour Beatty, WS Atkins, Kier and Costain.

I’m sure this will end well.

I told you so!

U.S. Bancorp was sued by an Oklahoma police pension fund over allegations investors in mortgage bonds were hurt by the bank failing to ensure that securities were backed by loans.

U.S. Bancorp knew mortgage loans underlying the bonds weren’t properly transferred to trusts and caused investors to suffer millions of dollars in losses, Oklahoma Police Pension and Retirement System said in a complaint filed yesterday in federal court in Manhattan.

The argument that US Bancorp will probably raise is that their duties were “merely ministerial” and that they’re not responsible even if they knew or should have known that the securities were defective.

There has been limited success with this argument too.

The point I’ve been raising for more than four years stands: Public-service employee pensions are not going to be paid.  Not only were these people sold unicorn-style rates of return which cannot possibly be sustained the losses that were generated by all the scams and frauds are real and will be recognized — and when they are, you’re going to get a truly ugly surprise.

The police and firefighters should be marching with the Occupy folks, not opposing them.

Pension plans are based on 8% annual growth forever. What happens to these plans in a zero-interest rate world as the global economy and stock markets contract?

I’m afraid it’s time for an intervention.  I don’t enjoy being the bearer of difficult news, but now that Europe has stumbled drunkenly into the pool and been “rescued,” it’s once again tearfully blubbering that this time it’s all going to change, and a new prime minister in each dysfunctional, insolvent EU nation is  going to make the pain and the addiction all go away.

It’s time we face the reality that Europe and the U.S. are full-blown financial alcoholics, addicted to illusion and debt. And what do they turn to as “solutions”?  The very sources of their pain:  illusory “fixes” and more debt.Have you ever seen a  global market as dependent on rumors of “magical fixes” for its “resilience” as this one?

What’s truly remarkable is the psychotic distance between the facts–Europe’s debts are impossible to service, its economy is free-falling into recession, the U.S. is already in recession, China’s real estate bubble has popped and cannot be reinflated– and the heady leap of global markets on every trivial rumor of a magic fix.

Since it runs in our family, I do not use the word “alcoholic” lightly. Those of you who have to deal with alcoholics know the drill: the liquor stashed behind the fridge, as if everyone doesn’t know it’s there; the stumbling into the pool, the humiliating rescue, the tearful promise of change which goes  nowhere, and all the rest.

I seriously suspect the entire global economy is alcoholic–not about liquor, but about debt and the impossibility of paying entitlements which expand by 8% a year in an economy which grows by 2% a year at best.In all the millions of words printed about the subprime meltdown,  the gutting of the U.S. financial and housing markets and  now about Europe’s impossible burden of debt, how often have we seen anyone in the MSM or mainstream financial press confess that “borrowing our way of out  of trouble” is not just financially bankrupt but morally bankrupt as well?

Like a full-blown alcoholic, the people and governments of the U.S. and Europe stagger from  debt source to debt source, weaving drunkenly between “stashes” of new debt in the Fed, Treasury and private sector markets.Despite the abject failure of the magical-thinking “fix” of becoming solvent by exponentially expanding debt, we see the same pathetic pattern repeating in Europe, where the apologists for the alcoholic debt-binge continue to claim the risk of systemic failure and collapse of asset values is low.

While everyone is focused on the drunk being pulled from the pool–Europe’s sovereign debt–another drunk is teetering on the edge: public and private pension plans.Here’s the reality in a nutshell: pension plans only work if they earn average returns of around 8% per year, basically forever.

Gripped by the mono-maniacal desperation of an addict who sees no other path but another hit, central banks have lowered interest rates to near-zero to “spark growth.” Unfortunately the only thing being goosed is the future cost of servicing the additional  debt.

How do you earn 8% on money which yields at best 3%? You can’t. How do you reap a gain on bonds when interest rates have already hit bottom and can’t fall any lower? You can’t.

Which leaves the stock market as the only hope for pension plans.  Since the bottom in March 2009, central banks engineered a “magic solution” that generated fantastic stock market returns: by constantly lowering interest rates and increasing liquidity, central banks force-fed stock markets with demand (there was no other place to get a fat return) and the see-saw of interest rates and “risk-on” equity markets: as rates decline, equities floated ever higher.

Now that rates are near-zero, then the central banks are pushing on a string: there is no “magic” left to juice equity markets.

The equity markets are in effect living on vitamin C and cocaine:rumors of new “magic fixes” and the hit of central bank infusions.

Once rumor is no longer enough to float markets higher, then the consequences of depending on stock market returns will hit pensions with a terminal case of the DTs.

The “magic” of ramping up debt to create the illusion of a healthy economy only works  once.The “fix” “worked” from 2009 to 2011, but now the high is wearing off. The next round of rumor and debt expansion won’t even create the illusion of growth, as the global economy is already careening back into the contraction that trillions in new debt staved off for three years.

I have covered the disconnect between the promises of 8% yields forever built into public pension plans and a slow-growth/no-growth economy many times:

Yes, There Will Be Armageddon: Government Goes Bankrupt  (July 24, 2008)

How the Fed Pushed the Nation’s Pension Plans–and Local Government–into Insolvency   (May 24, 2010)

Public Pension and Healthcare Costs and Financial Common Sense   (February 28, 2011)

Every once in a while an MSM outlet addresses the issue directly, for example:

Pension issue balloons with soaring costs(S.F. Chronicle):

Pension costs  are soaring to $800 million, tripling during the last decade, as Los Angeles faces  years of projected budget deficits even with deep cuts in services and staff.The main driver of higher pension costs is the stock market crash. CalPERS (California’s primary public pension plan) gets  about 75 percent of its revenue from investment earnings. Its portfolio peaked  at $260 billion in 2007, fell to $160 billion last year and now is about $204 billion.

Why economic growth isn’t enough to fix budgets:

But under the laws now dominating government budgets, many expenditures essentially are or will be growing faster than both revenues and the rest of the economy. In fact, in many areas of the budget, automatic expenditure growth matches or outstrips revenue growth under almost any conceivable rate of economic growth.Now, so much spending growth is built into permanent or mandatory programs that they essentially absorb much or all revenue growth. Meanwhile, we’ve also cut taxes, widening the gap between available revenues and growing spending levels.

Consider government retirement programs. Most are effectively “wage-indexed” insofar as a 10 percent higher growth rate of wages doesn’t just raise taxes on those wages, it also raises the annual benefits of all future retirees by 10 percent. Meanwhile, in most retirement systems, employees stop working at fixed ages, even though for decades Americans have been living longer.

Today, so much of government spending is devoted to health and retirement programs that their growing costs tend to swamp gains we might achieve in holding down the ever-smaller portion of the budget devoted to discretionary spending. Still other programs add to the problem, such as tax subsidies for employee benefits, the cost of which grows automatically without any new legislation.

In other words, the entire system of state and local government is now based on the same 8% “permanent high growth” of the 1990s speculative market.Funding increases are wired in, regardless of how much tax revenues fall.  That is a recipe for insolvency.

Now we get to the heart of the matter. Which institution engineered  the heady stock market bubble of the 1990s that created the illusion of “permanent high returns” and growth of tax receipts?  The Federal Reserve.Which institution has made the stock market the proxy for the economy?  The Federal Reserve.  Which institution has engineered a three-year stock market rally to put off the inevitable implosion of pension plans, entitlements and tax revenues that must grow by 8% annually while the real economy is flat-lined? The Federal Reserve.

We can ask the same questions of Europe and get the same answer there, too: the European Central Bank (ECB).

Addiction is a terrible disease, founded on the illusion that the pain of facing reality can be put off forever by dulling the pain of addiction itself with ever-higher doses of self-destruction. We are witnessing the self-destruction of economies and machines of governance that have chosen denial, illusion, rumor and magical thinking over facing reality. The drunk has been pulled from the pool once again, slobbering self-piteously and promising to really, really  change tomorrow, and we believe the lie, at least until morning, because  hope is so much easier than reality.

Charles Hugh Smith – Of Two Minds

In a King World News exclusive interview, the man who brought down Bernie Madoff’s $65 billion Ponzi scheme informed KWN, “Bank of New York is going to go down, Eric.  Between Bank of New York Mellon and State Street, these two institutions have stolen between $6 to $10 billion from tens of millions of Americans retirement savings accounts.  It’s been a hell of a crime spree for the bank, but now they are being brought to justice.”

Harry Markopolos has lead the team that spearheaded this investigation from the beginning. Harry and his team were the first to expose this fraud. Markopolos also told KWN, “The New York Attorney General filed suit on Tuesday (against Bank of New York Mellon) for stealing money from pension funds on currency transactions. This theft has been from tens of millions of Americans, policemen, firemen, librarians, municipal workers, judges and the list goes on and on and they’ve been doing it for decades.

It’s clear that the banks executives, their strategy is we have to lie to maintain the fraud. We can’t admit to our board how much we stole…of course we’d be fired. They are saying the charges are baseless and they are going to defend them vigorously. Well, talk is cheap. If they are going to defend them there is only one place to defend those cases and that is before a jury and they refuse to set trial dates. The government is ready for trial tomorrow. Why won’t the bank agree to trial dates if they are so innocent? The answer is they are not so innocent.

Every day, every time a state pension fund traded, the bank would steel approximately three tenths of one percent from every transaction. As an example, every time a pension fund bought a currency what the Bank of New York would do is look back twenty hours and assign all of the state pension funds purchase transactions at the high of the day.

Every time a state pension fund tried to sell a currency they would assign them a price at the lows of the day and the bank would pocket the difference. The bank has done this for not years, but for decades, every business day for decades. This bank didn’t learn to steel just ten years ago, they’ve been doing it for many decades.

I’m certain that the clients are concerned and calling the bank. If they read the complaints by the Florida Attorney General, by the Virginia Attorney General, by the New York Attorney General and by the United States Attorney for the Southern District of Manhattan, if they read the emails and look at the math and look at how much was stolen, they would realize that they too are victims. They would have cause for concern and pull their accounts from the Bank of New York….

Read the rest at King World News

The bad news just keeps rolling in. Keeping up with it is almost a full-time job. Here’s a recent sample featuring wage slaves, vanishing pensions and soaring health care costs.

1. It’s Not Too Late To Revive Slavery

A recent report notes that it’s not enough to create jobs. You’ve also got to create jobs which pay a living wage. Imagine that! What are these guys? Socialists? From Not getting by on minimum wage (September 27, 2011)—

NEW YORK (CNNMoney) — Most experts agree that to get out of the economic slump, we need more jobs.

But another problem is that millions of Americans already have jobs that don’t pay very much.

Getting the economy going will require more than just creating a large number of low-wage positions, said Paul Osterman, economics professor at MIT. Raising the minimum wage to get more cash to the working poor is just as crucial, he said.

About 20% of American adults who have jobs are earning only $10.65 an hour or less, according to Osterman’s analysis. Even at 40 hours a week, that amounts to less than $22,314, the poverty level for a family of four.

The federal minimum wage currently stands at $7.25 an hour (18 states set their own rates above the federal level, maxing out at $8.67 an hour in Washington State).

Here’s the kicker.

But increases have not kept up with inflation. When adjusted for inflation, the highest federal minimum wage was in 1968, when it was the equivalent of $10.38 in today’s dollars…

With a greater percentage of the nation’s income going to corporate profits than ever before, Osterman argues that businesses can afford a higher minimum wage.

“There needs to be standards in the job market,” he said. “If the object is simply to minimize costs, we can use slaves again.”

2. Your Vanishing Pension

The Daily Ticker recently reported on the Retirement Heist! — U.S. Pensions Plundered By Corporate Greed, Author Says (video below).

As if the average worker didn’t have enough to worry about, Ellen Schultz, an award-winning Wall Street Journal reporter and author of Retirement Heist: How Companies Plunder and Profit from the Nest Eggs of American Workers, says that in some instances the fat paychecks of the top paid executives are coming directly out of the pocket of average workers.

“As recently as a decade ago there was a trillion dollars, a quarter of a trillion in surplus assets,” in corporate funds, Schultz tells The Daily Ticker’s Aaron Task in the accompanying clip. “There was plenty of money in pension plans; there was plenty to pay the benefits but corporations went about taking the money away.”

… Schultz believes this was no accident, claiming corporations have been “exaggerating their retiree burdens” and plundering retirement plans in a variety of ways, including:

• Siphon billions of dollars from their pension plans to finance downsizings and sell the assets in merger deals.
• Overstate the burden of rank-and-file retiree obligations to justify benefits cuts, while simultaneously using the savings to inflate executive pay and pensions.

And so on… Corporate big shots are stealing worker pension funds and then reducing their retirement benefits. It’s really very simple, the opposite of complicated. It’s not a head-scratcher. No need to pore over the details. What did George Carlin say about corporate big shots?

They want obedient workers. Obedient workers. People who are just smart enough to run the machines and do the paperwork, and just dumb enough to passively accept all these increasingly shittier jobs with the lower pay, the longer hours, the reduced benefits, the end of overtime, and the vanishing pension which disappears the minute you go to collect it…

The American Dream, folks. Of course, you’ve got to asleep to believe it.

3. If You Shoot Yourself In The Head…

McClatchy Newspapers reports that job-based health insurance premiums have risen sharply this year.

WASHINGTON — After modest increases last year, the cost of job-based health insurance for families and individuals has jumped sharply this year, even though insurers are paying less in benefits as cash-strapped American workers opt for less medical care.

For the estimated 150 million workers with employer-sponsored coverage, the average cost of family health insurance jumped 9 percent this year to $15,073, while the price of individual coverage rose 8 percent to $5,429.

Both increases are the largest since 2005.

Click to enlarge.

And when McClatchy says this—

Each far outpaced a national 2 percent hike in wages and a 3.2 percent rise in inflation, according to an annual survey of nearly 2,100 businesses that the Kaiser Family Foundation and the Health Research & Educational Trust released Tuesday.

you should bear in mind that it is nearly a certainty that the wages of working Americans have not increased this year, while those of the top wage-earners did.

All is not lost. You can avoid these soaring health care costs. My solution? If you shoot yourself in the head, you won’t have to pay those rising premiums. If you don’t own a gun, be creative!

Bonus Video

Decline of the Empire