Archive for the ‘pensions’ Category

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

I hope you are.

Today (August 22, 2011) proved one thing – oversold doesn’t mean jack.  The ~20 handle pop into the open was sold into immediately, despite the market’s severely-oversold condition.

A condition that is worse than during the height of the 08/09 crash.

Drill that into your head folks: The government doesn’t get it, exactly as they didn’t get it in early 2008.  They are, right now, squandering the opportunity to take effective action.  I know this for a fact because the Republican Caucus has refused to address the issue and I know they’re aware of it.

This weekend I listened to McCain with his condescending bullcrap on talk TV.  Let me remind you, this is the same Senator McCain who I sent this letter to in 2008 predicting what was going to happen in the election if he did not act.  He did not, and he lost.  In fact, today he still claims that he couldn’t see it coming.  Not only did he see it coming, his campaign manager was in receipt of that letter and Governor Ridge personally told me at that campaign event that they knew full well it was all driven from greed and scams.  In short, not only did he lie about what he knew at the time he’s still lying.

This is the GOP.  This is what it has done and is doing.  The GOP is proving time and time again that it will not get in front of these issues because doing so means kneecapping the banksters that have trashed our economy and continue to do so today.

Not that Obama, Pelosi and Reid are any better, of course.

The GOP doesn’t care, the Democrats don’t care, and you’re going to get creamed.

There is no way to avoid what’s coming.  We have added roughly $4.5 trillion in debt to the Federal balance sheet trying to paper it over and have failed.  Even the “good” banks like JP Morgan and Goldman are failing to make progress.  The poorer ones such as Citibank, Morgan Stanley and Bank of America are seeing their market prices collapse.  The XLF, the composite of the large banks, is back to where it was in the summer of 2009.  Should it break below these levels it is likely going for the spring 2009 lows.

All the fraudulent accounting games, shifting Granny’s earnings on her CDs to the banks through zero-interest rates and money printing have been used up as policy tools.  There are few if any weapons left in the arsenal to combat what is coming.

This is where we are, and where we’re going.

I’m sure this will be scoffed at.  We’ll see.  Go have a look at 2000 if you’d like.  It’s pretty similar.  Through the mid-bolinger on the monthly, a bounce back, often off or near the lower bolinger, then a collapse that loses half or more of the market’s value.  Twice, and now we’re setting up for it again.  It’s as clear as day and the reasons for it are just as clear now as they were before.

The time in that chart is probably not quite to scale, but I bet the price move is.

Impossible?  Oh no it’s not.  The Nikkei stood at 40,000 before it collapsed.  It now trades under 10,000 – a 75% loss – decades later.  It has not recovered and neither will we because we refuse as a nation and as a government to force recognition of bogus debt that cannot be paid while destroying capital formation and interest margins with zero interest rates.

400 is roughly where the S&P was before the “great bull market of fraud” began in 1995.  To think we can’t return there when the fraud collapses is utter folly.  We not only can, we probably will.

But instead of putting a stop to the games we choose to allow crazy derivative schemes, balance sheets that do not reflect reality and the repeated asset-stripping from savers and productive members of society, all to protect the “gilded ones” on Wall Street from the just consequences of their own 30-year old foibles and scams.

Now let me explain what happens “down there”, because it is my unbroken opinion, going back to 2007, that’s where we’re headed irrespective of attempts to stop it (and we’ve already seen how fast those attempts unwind when they fail, haven’t we?)

• Every pension fund blows up.  All of them.  Many doubled into the decline and will be utterly destroyed.  Chief among them will be big municipal funds like CALPERs.  If you have a pension of some sort, ask the pension administrator what happens to your pension if the S&P goes to 400 and stays there.  He’ll poo-poo your question – but I bet he won’t answer it.
• Annuities and insurance companies blow up.  You don’t think they can pay when they’re figuring on an 8% annualized return, do you?  Well, no they can’t.  Oh yeah, your state insurance on those is $100,000 in most states – the rest of your principal is “at risk.”  This, of course, assumes the State has the $100,000 too.  Did you know this in advance or are you learning it now (let’s not hope the latter is true!)
• The FDIC has no prayer of covering it.  The good news is that if they act now they can shut the banks that are exposed and cram down debt to equity.  The bad news is that they have a horrible record in doing that in a timely manner and of late the losses have been anywhere from 20-40% of assets, which is both a violation of the law (“Prompt Corrective Action” is supposed to prevent this from happening) and they have no way to cover it should it become a widespread problem.  It will.  Oh yeah, you can’t sue the government either.  Have a nice day.
• The government Ponzi blows up.  Unemployment will reach 20% or more.  Tax receipts will get cut in half.  Deficit spending will be impossible.  Instead of a 40% “draconian” cut in government spending we will have to cut spending by 60% or more.  Entitlements will be decimated; retirement entitlements will go last, but go they will.  Food stamps, Section 8, Medicaid, all gone.  Bet on it.

• All the other things that depend on the government Ponzi blow up.  Medical care as we know it, education, state programs, all gone.  We will return to a simpler time whether we like it or not, and we won’t like it.  That much I’m sure of.
• Best guess on whether civil order is lost.  In some places I’m sure things will be fine in that regard, likely in places where self-defense is recognized as the unalienable right that it is.  In others?  Not so much.  If you live in a big city – or an “unfriendly” place in regards to self-defense, you need to be thinking about this quite-seriously.  Yesterday would have been a good time to consider it and figure out what you’re going to do about it.
• Short-term and minor to moderate disruptions in what would be considered “essential” goods and services are likely.  Go down the list and figure out what you must have and what you can do without.  Be realistic.  Most people won’t be, which will put you one step in front of them.
• The world will recognize the Depression we have tried to cover up.  This is not a US-centric story.  The Eurozone will get the unemployment and tax consequences too.  Germany will be forced to choose between propping up the entire rest of the Euro (which it can’t) and detonating it and going back to the Deutsche Mark (which it will be forced to.)  There is a very high probability of war that comes out of this, although the exact trigger is not something I can forecast.  War is the classical solution to these problems, and it is unlikely to be different this time.

This is going to be a rough time folks.  Our government has refused to deal with the basic mathematical constructs that underlay all economies and debt.  It’s not a matter of competing theoretical ideas – it’s a matter of basic mathematical laws.  We are now running into the end game where entire nations are coming unglued along with their various patrons and parasites, as the cold, hard mathematical facts run into the fantasy conjurations of people like Bernanke, Geithner and Obama, along with the chortling harpies on Wall Street.

If they manage to “sticksave” things once again, and you can bet they’ll try, you’ve lost nothing by being prepared.  But even if they do pull another rabbit from the hat, instead of a burning stick of dynamite, there are a limited number of rabbits, there are sticks of dynamite in the hat, one will eventually be inadvertently selected and the games will end.

The only real choice is whether that option will take place voluntarily and now, or involuntarily and later.

Either way it’s going to suck, but a voluntary acceptance of reality will both suck less and be over sooner, along with being able to be mitigated.  An uncontrolled event – which is what we’re headed for at the present time – will be most unpleasant.

PS: Yes, this is an update to the “What’s Broken” ticker….  The last time they reached into the hat they got a rabbit – and made the problem worse.  How many more pulls do you think they’ll get before the burning stick of dynamite pops out?

Amid all the market volatility and weakness in the financial sector of late, you may have missed this WSJ front page story: “States Go After Big Bank on Forex”.

The story is about growing scandal in the banking industry centered around banks allegedly overcharging pension funds for currency transactions.

“Attorneys general in Virginia and Florida filed civil suits against BNY Mellon alleging that the bank cheated pension funds in those states by choosing improper prices for currency trades the bank processed for the funds,” The WSJ reports. “The Virginia lawsuit, filed in a Fairfax, Va., state court, cites internal bank emails allegedly showing that senior bank officials knew about, and endorsed, a currency-trading method that hurt state pensioners.”

In addition to Virginia and Florida, California and Tennessee are also suing BNY Mellon and State Street Corp. over the alleged fraud.

The man who uncovered the alleged scam, Harry Markopolos, expects all 50 states to eventually join the suit. If the name sounds familiar that’s because Markopolos was a whistleblower on the Madoff Ponzi scheme, only to have his claims ignored by the SEC for the better par of a decade. (See: Harry Markopolos Says Big Banks Worse Than Madoff)

In this case, Markopolos says BNY Mellon and State Street we’re taking about “three tenths of a percent from every forex transaction for pension funds” by back-timing the trade to benefit banks at the detriment of their pension fund clients. “It’s almost the exact same scheme as the market timing scandals of 2003,” he claims.

When and if these cases go to trial is unknown, but Markopolos sure hopes to avoid a settlement. “I want to see them admit guilt,” he tells Aaron Task in the accompanying interview. “If [banks] settle it feel like justice denied because they also will settle without admitting or denying guilt. That’s just too easy. ”

Yahoo TechTicker

Good to see some pressure is being applied to the Tea Party.  I felt like we were the only ones willing to criticize ‘our own’ – but the fact is, the Tea Party is failing miserably on our biggest issue, not only at the federal level, but at the state level: cutting the spending.  The FSA (‘Free Sh*t Army’) has a very loud voice.  Our lawmakers will acquiesce to them if we do not make our voices louder and support lawmakers in any attempts to make the HARD cuts – and this includes supporting cuts that will be painful for everyone.

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