“There are folks that are saying you know what, I don’t care,
I’m going to lock in my retirement now and get out while I can and
fight it as a retiree if they go and change the retiree benefits,”
he said. – Executive Director for the Kentucky Association of State Employees, Proposed Pension Changes Bring Fears Of State Worker Exodus
The public awareness of the degree to which State pension funds are
underfunded has risen considerably over the past year. It’s a problem
that’s easy to hide as long as the economy is growing and State tax
receipts grow. It’s a catastrophe when the economic conditions
deteriorate and tax revenue flattens or declines, as is occurring now.
The quote above references a report of a 20% jump in Kentucky State
worker retirements in August after it was reported that a consulting
group recommended that the State restructure its State pension system.
I personally know a teacher who left her job in order to cash
completely out of her State employee pension account in Colorado
(Colorado PERA). She knows the truth.
But the problem with under-funding is significantly worse than
reported. Pensions are run like Ponzi schemes. As long as the amount
of cash coming in to the fund is equal to or exceeds beneficiary
payouts, the scheme can continue. But for years, due to poor
investment decisions and Fed monetary policies, beneficiary payouts have
been swamping investment returns and fund contributions.
Pension funds have notoriously over-marked their illiquid risky
investments and understated their projected actuarial investment returns
in order to hide the degree to which they are over-funded. Most funds
currently assume 7% to 8% future rates of return. Unfortunately, the
ability to generate returns like that have been impossible with interest
rates near zero.
In the quest to compensate for low fixed income returns, pension
funds have plowed money into stocks, private equity funds and illiquid
and very risky investments, like subprime auto loan securities and
commercial real estate. Some pension funds have as much as 20% of
their assets in private equity. When the stock market inevitably
cracks, it will wipe pensions out.
As an example of pensions over-estimating their future return calculations, the State of Minnesota
adjusted the net present value of its future liabilities from 8% down
to 4.6% (note: this is the same as lowering its projected ROR from 8%
to 4.6%). The rate of under-funding went from 20% to 47%.
I can guarantee you with my life that if an independent auditor spent
the time required to implement a bona fide market value mark-to-market
on that fund’s illiquid assets, the amount of under-funding would likely
jump up to at least 70%. “Bona fide mark-to-market” means, “at what
price will you buy this from me now with cash upfront?”
For instance, what is the true market price at which the fund could
sell its private equity fund investments? Harvard is trying to sell
$2.5 billion in real estate and private equity investments. The move
was announced in May and there have not been any material updates since
then other than a quick press release in early July that an investment
fund was looking at the assets offered. I would suggest that the bid
for these assets is either lower than expected or non-existent other
than a pennies on the dollar “option value” bid.
At some point current pension fund beneficiaries are going to seek an
upfront cash-out. If enough beneficiaries begin to inquire about this,
it could trigger a run on pensions and drastic measures will be
implemented to prevent this.
Similarly, per the sleuthing of Wolf Richter,
ECB is seeking from the European Commission the authority to implement a
moratorium on cash withdrawals from banks at its discretion. The only
reason for this is concern over the precarious financial condition of
the European banking system. And it’s not just some cavalier Italian
and Spanish banks. I would suggest that Deutsche Bank, at any given
moment, is on the ropes.
But make no mistake. The U.S. banks are in no better condition than
their European counter-parts. If Europe is moving toward enabling the
ECB to close the bank windows ahead of an impending financial crisis,
the Fed is likely already working on a similar proposal.
All it will take is an extended 10-20% draw-down in the stock market
to trigger a massive run on custodial assets – pensions, banks and
brokerages. This includes the IRA’s. I would suggest that one of the
primary motivations behind the Fed/PPT’s no-longer-invisible hand
propping up the stock and fixed income markets is the knowledge of the
pandemonium that will ensue if the stock market were allowed to embark
on a true price discovery mission.
Like every other attempt throughout history to control the laws of
economics and perpetuate Ponzi schemes, the current attempt by Central
Banks globally will end with a spectacular collapse. I would suggest
that this is one of the driving forces underlying the repeated failure
by the western Central Banks to drive the price of gold lower since
mid-December 2015. I would also suggest that it would be a good idea
to keep as little of your wealth as possible tied up in banks and other
financial “custodians.” The financial system is one giant “Roach
Motel” – you check your money in but eventually you’ll never get it out.
|
Dave Kranzler spent many years working in various Wall Street jobs. After business school, he traded junk bonds for a large bank. He has an MBA from the University of Chicago, with a concentration in accounting and finance, and graduated Oberlin College with majors in Economics and English. Dave has nearly thirty years of experience in studying, researching, analyzing and investing in the financial markets. Currently he co-manages a precious metals and mining stock investment fund in Denver and publishes the Mining Stock and Short Seller Journals. Contact Dave at dkranzler62@gmail.com.
|
The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.
