You get an idea how the struggle between bondholders and pensions quickly turns into a political nightmare, as reported in the WSJ: San Juan, Puerto Rico—One of the thorniest tasks awaiting a seven-member board charged by Washington with cleaning up Puerto Rico’s debt crisis is deciding how to balance a $70 billion debt load with nearly $43 billion in unfunded pension liabilities. The issue is coming to a head now because the White House is set to name as soon as next week the members of that oversight board, drawn from lists of candidates submitted by congressional leaders in both … [Read more...]
Pension Survival Increases Risks
"The public dispute over accounting standards is a signal to taxpayers, retirees and political reformers that fundamental flaws remain in how pensions measure their finances,” writes Steve Malanga in the WSJ. At issue, as he correctly points out, is the delusion that government pensions “on average estimate they will earn 7.6% a year on their portfolios.” Using a more realistic riskless rate (as if that exists!) increases the unfunded liability from about $1 trillion to $3 trillion. It’s all funny money. I’ve looked at the numbers in Newport, RI and it’s ugly. The stock market will not come to … [Read more...]
Low Interest Rates Threaten Insurers and Baby Boomers
Here you get a glimpse at the problems facing insurers and baby boomers thanks to the Fed’s zero percent interest rate policy as reported earlier this month in the WSJ. Insurers reported a messy second quarter plagued by low interest rates and catastrophe claims, highlighted by a $2 billion charge at MetLife Inc. tied to a savings product popular with baby boomers. Life insurers MetLife, Prudential Financial Inc. and Lincoln Financial Group booked lower premiums and fees, while property-and-casualty insurer Allstate Corp. faced elevated levels of claims for severe weather, including a … [Read more...]
How to Survive the Calm before the Storm
Central banks are running this market. It’s not real. It feels like a ghost town. But what are investors to do? Well, you may be aware that pensions are writing puts on volatility. In other words they’re offering downside protection to investors. Nice business in calm markets, but if the markets do go down, pensions will be on the hook. It’s yet another short-sighted view on the part of the so called fiduciaries. Yes, markets are calm. But as we enter the heart of hurricane season New Englanders and those who live on the Eastern Seaboard know it’s better to be wary of the calm and to be ready … [Read more...]
Pensions Should be Fearful
This has a bad feel to me as Ben Eisen and Aaron Kuriloff report on pensions at the WSJ: Some pension funds are seeking to profit from others’ fear. Pension funds in Hawaii and South Carolina are plying an arcane options strategy called cash-secured put writing. In a typical trade, the investor sells a contract, known as a put, to someone who owns stocks and is willing to pay up for protection in case they decline. If, within a certain time, the shares fall below a given price, the investor buys the stocks at that price, or covers their lost value. The upside for the pension funds, … [Read more...]
RIP Roger Enrico
From the WSJ: Born in the small town of Chisholm to Italian immigrants, Mr. Enrico won a scholarship to Babson College in Massachusetts, studying business administration, before enlisting in the Navy. He served in Vietnam, whereas a lowly ensign he said he convinced an admiral to build a fuel pipeline instead of flying in supplies, only for the pipeline to be repeatedly blown up. After a stint as assistant brand manager for Wheaties at General Mills Inc., Mr. Enrico joined chips-and-soda giant PepsiCo in 1971, initially helping market Funyans, an onion-flavored snack. He quickly was … [Read more...]
Is a Correction in the Cards?
U.S. markets had a nice bounce yesterday and they look poised for another bounce today, barring any hawkish comments from the Fed in today’s policy announcement. But all may not be fine and well as market internals have a real troubling look. The chart below shows the NYSE cumulative advance-decline line for stocks compared to the S&P 500. The advance-decline line measures market breadth. The YTD trading range of the headline indices may be masking underlying weakness in the market that is evident in the downtrend in the A/D line. Narrowing markets are often a sign that stocks are … [Read more...]
Economic Misfire
For as long as the economy has been crawling its way out of the last recession, economists and policymakers have been puzzled by the lackluster rate of economic growth. In past economic cycles, deeper recessions were usually followed by stronger recoveries. Coming out of prior recessions, growth rates of 4%, 5%, and even 7% were not uncommon. During this cycle, annual GDP growth hasn't broken 3.25% once. What explains the lackluster growth during this cycle? Aside from the many policy missteps that have held back growth, the chart below explains why the economy still hasn’t hit its … [Read more...]
Tiny Bubbles
Originally posted January 21, 2014. Imagine outgoing Chairman Ben Bernanke joyfully wrapping things up at the Fed while humming “tiny bubbles make me feel happy” from Don Ho’s song Tiny Bubbles. Creating bubbles seems to be a job requirement for a Fed Chair. The Fed is putting on an air of solidarity for incoming Chair Janet Yellen. The broad show of support for Mini “Tapering” is part I. Any concerns about the stock market are cloaked in Fed speak. Take the recent Fed meeting minutes for example. "Several [Fed officials] commented on the rise in forward price-to-earnings ratios for some … [Read more...]
Assets Are Booming
With the Fed creating money out of thin air, real estate prices such as commercial and condos are going up like crazy especially in places like New York City and Miami. My family was in Key West in March and I can tell you restaurants aren’t lowering their prices. And there’s a ton of money in certain pockets. I’ll use the boat racing teams in Key West back in November as an example. There’s no shortage of spending power on toys here. Check out Miss Geico, which won the event. But again there’s deflation too. For retirees it’s a brutal deflationary environment for interest bearing … [Read more...]
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