The big financial crisis draws nearer: Is Fed Pumping Stocks To Keep Pensions Solvent? By Dave Kranzler. The world is heavily loaded with debt, as a result of the huge increase in money manufacture since 1982. To return to “normal” will take a crisis, but so far the central banks have kept the system going along without major discontinuities. This article is about one of the approaching problems that could shatter the picture, the US pension crisis. CalPERS is the biggest fund, for 1.6 million Californian retirees.
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. …
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%.
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. …
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 inflating 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.
The world’s other stock markets, including the Australian stock market, follow the US markets — which are being manipulated upward by the US central bank to, among other things, keep US retirees from becoming destitute. If markets cannot correct, they fail in their job of efficiently allocating resources. Stagnation and inflation follow, like night follows day.
Having bureaucrats rather than the markets set interest rates is a poor idea, and led us into this mess in the first place. Having them also override other markets is inviting disaster.