Wednesday, August 21, 2013

Real Pension Fund Reserves

Click to enlarge.

1. Quite the trend failure!
2. $15 trillion is a lot of money, but is it enough money?
3. Do pension funds still assume unrealistic future returns based on past performance?
4. What will happen when we get another recession?
5. How much will it spur the economy when pension assets are increasingly unleashed?
6. How much damage will it do to the stock and bond markets when pension assets are increasingly unleashed?
7. How much damage will it do to remaining pension assets when pension assets are increasingly unleashed?

Clearly the pension funds would not be worth $15 trillion today if every pension fund manager liquidated assets simultaneously. I'm just curious how much pain the typical pension fund manager (or individual investor for that matter) can expect if the pension assets are unleashed gradually.

August 5, 2013
Pandemic of pension woes is plaguing the nation

Across the nation, cities and states are watching Detroit's largest-ever municipal bankruptcy filing with great trepidation. Years of underfunded retirement promises to public sector workers, which helped lay Detroit low, could plunge them into a similar and terrifying financial hole.

This post inspired by Troy in the comments found here.

Source Data:
FRB: Z.1 Release
St. Louis Fed: CPI


Stagflationary Mark said...

I'm not suggesting that I secretly have answers to all of these questions by the way. I most certainly do not.

Stagflationary Mark said...

Bonus Questions:

8. Would pension fund selling put an end to the death of real yields?

It could. I've got some long-term bonds maturing in a few years. I personally wouldn't mind higher real yields. That's what I'm always rooting for, even as a bond investor.

I'm just not sure our economy would like it much. Sigh.

mab said...

In the new eCONomy, it's to be expected that record corporate profits should lead to massive pension shortfalls.

Massively underfunded pensions are why today's corporate elite get paid the big bucks. Sigh.

Stagflationary Mark said...


Indeed. Very expected.

Big bucks to the elite, yes.

Where do they learn it all though?


The heaviest debt was assumed by graduates of the University of Pennsylvania’s Wharton School, where average debt hit an estimated record of $117,200.

Assumed is such a great word when it comes to Wharton. Wharton's Jeremy Siegel and alumni Mark Zandi both do plenty of that! The latter earned a BS at Wharton and continues to spew it. ;)

Mr Slippery said...

Looking at chart after chart, you could almost conclude that the Y2K disaster did happen, just not in the way everyone expected.

A lot of things got broken that year and have not recovered.

Stagflationary Mark said...

Mr Slippery,

In my opinion, Y2K was a self-fulfilling prophecy. It was also the first straw to break the camel's back.

Real Retail and Food Services Sales per Capita (1996 to 2004)

Note the apparent hoarding/partying behavior heading into 2000.

We were left with a serious hangover as that temporary trend was not sustainable, and that in turn helped trigger other events.

Just a theory.

TJandTheBear said...

We are all Detroit in a few years...
#2 After 90% haircut it'll be $1.5T
#4 We'll see soon enough.
#5 Too little to matter (see #2)
#6 Stock & bond markets will be toast beforehand (leading to the haircuts)
#7 See #5

Stagflationary Mark said...

That's the problem with hoarding of course.

It can temporarily increase spending habits but over the long-term it does the opposite. For example, I probably never need to buy socks again, lol. Sigh.

This temporary increase can trick businesses and investors into thinking times are actually better than they really are.

Stagflationary Mark said...


I'm not at all optimistic, but not to your level of despair.

That said, I think the next decade could definitely be an eye-opener for those who think the worst is behind us.

I hope we're both wrong!

How many think a recession is even possible with ZIRP? I certainly do.

And this is the part that concerns me most. How will investors react if the impossible happens?

That is a rhetorical question of course. I doubt they calmly move to the exits as the music winds down, lol. Sigh.

Gallows humor. *shrug shoulders*

Stagflationary Mark said...

Oh, and one more thing.

We're in ZIRP but the 10-year is now at 2.87%. In my opinion, that's not easy money for an economy as wounded as ours. That's tight.

Time will tell. Just opinions!

TJandTheBear said...

You & I both know those "assets" are marked-to-myth just like bank's. And we all know it's absolutely insane that they're still projecting based upon 8% returns.

Anonymous said...

How can folks move to the exits - there aren't any good exits and money (savings, etc.) have to be parked somewhere. Can everyone buy already overpriced farmland or gold or other commodities - I guess some will try.

One reason so much money moved to the US was that the dollar appeared be the less bad choice. Maybe that's a saving grace - folks won't move to the exits because there's no other place to go, thereby softening a downturn.

dd said...

Wharton best known for the rekindling of the tulip bubble as in the genius of Mikey to create a massive pyramiding Ponzi debt leverage insider trading looting scheme heralded as innovation aka junk bond M&A. So it's good to see it all come home to roost right at their doorstep with no way for the grads to repay as there are no suckers left.

TJandTheBear said...

Move to the exits? No, they'll die in place.

That's the nice thing about hard assets -- they don't just disappear.

TJandTheBear said...

p.s.: Bonds taking a beating tonight.

Stagflationary Mark said...


I wish there was a pension fund reserves index fund so that we could short it.

I'm not saying I'd use my entire nest egg, but I think the odds would make it worth dabbling, lol. Sigh.

Real estate investments disappeared, thanks to investors leveraging up their "sure thing" profits using borrowed money.

Bonds are once again taking a beating. As a long-term bond investor, I honestly hope it continues until 2016. I have a large bond maturing and I would definitely prefer to reinvest at higher rates.

I just don't think we'll make it that far without another recession. Sigh.

Stagflationary Mark said...


Those sitting in cash have done very well recently. I think we all have very serious doubts about it being a great long-term plan though.

I say doubts because those sitting in cash (yen) for the last 20 years in Japan certainly could have done worse! Go figure.

Stagflationary Mark said...


Bumper sticker idea:

Our Economy Makes Wide "No Suckers Left" Turns

Stagflationary Mark said...

Pisani's on CNBC rationalizing Abercrombie & Fitch's poor results by saying that money's being spent on *used* video games at Game Stop!

Fantastic, lol.

I kid you not. The word "used" was said, as if that's supposed to make me turn bullish on our economy.

Forehead. Desk. Whack. Whack. Whack.

Troy said...

Made another chart for DeLong's.

He has this bizarre attachment to "Potential GDP".

FRED has real potential GDP out to 2023 for some reason, so I created:

Solid blue is actual real potential GDP per actual worker.

Dashed blue is projected real GDP / 135m, the workforce we have going forward.

Red is annual consumer borrowing ratio, new debt over wages.

So the answer is if we can get that $20T+ real economy by 2020, no worries.

If not, worries.

But my thesis is LBJ's Great Society is going to rise from the grave around when the median boomer hits 65. That even will be in 2022 -- the year Soylent Green was set in.

Stagflationary Mark said...


You and I differ greatly on what the median boomer will be doing at 65.

I'm in the "worries" camp, since I do not believe that we'll make it to 2020 without another serious recession.

Troy said...

I don't see a recession coming.

Because we're still in the old one.

I don't believe in 'business cycles', that was an artifact of the old industrial economy with long lead times.

I do believe in the 'credit cycle' -- the illusion of prosperity thesis -- of course.

But the Fed's changed the rules in 2009.

I fully expect the Fed to monetize the $2.7T in the SSTF over the next 20 years.

Shows the consumer cycle has been dead for a while.

But it might be coming back. . .

Troy said...

Stagflationary Mark said...


By changing the rules, the Fed has put a stop to future recessions? Is that truly what you believe?

There will be no unintended consequences? Monetary policy has finally been perfected by the same guy (Bernanke) who didn't see the housing bust as it was happening and who has recently uttered the word "taper" in public?

Too bad the Fed didn't change the rules 50 years ago. Think how much more prosperous we'd be now.

In my opinion, 2.9% on the 10-year is "tight" monetary policy and should it get even tighter we'll just have to see what impact that will have on recession odds.

I am very clearly in the minority. Very, very few people think that a recession is possible.

Troy said...

I don't know Bernanke but I do know what people say in public isn't ever what they really think, if they can help it.

Per the above graph, we got out of the dot com recession thanks to the home mortgage bubble.

That bubble was created thanks to falling interest rates, ~8% to ~5% to ~2% ARM, the tax cuts, and removal of industry oversight and resulting widespread industry fraud at all levels.

Incompetence or evil, why pick one??

People don't understand how much power the Fed has. They could make this place Weimar or Zimbabwe if they wanted to, or they could make us Greece and Spain.

What we've got this decade is the generational transition between the boomers age 50-68 and the boomer echo, Gen Y aka the "Millennials".

We're going to have an immense number of old people:

converting their savings into spending.

Gen Y will receive this money as income, and spend it too.

And it will all run into the sea, to be recycled by Big Government, and the Fed, to replace the money lost to rent-seekers and arbitrageurs.

*will* be turning. Main Street and Wall Street aren't going to allow the teapeople to scale things back much more.

Troy said...

real per-capita total government spending.

CBO says $20T real GDP by 2020, why not $20K per capita spending, too??

TJandTheBear said...

The only true real estate hard asset is productive land. Anyone thinking a SFR is a hard asset is kidding themselves.

Oh, and yes, we never left the recession; it's with us until the Fed's "new rules" fail spectacularly.

Stagflationary Mark said...


We're going to have an immense number of old people:

converting their savings into spending.

And how does one convert savings into spending?

Sell stocks? Sell bonds? That seems like an immense amount of selling.

Seeing as how the "old people" are currently fighting over the young people jobs and the young people are racking up student loan debt, where are the buyers going to come from? Japan? Europe? China? I'm not holding my breath.

Just saying.

Stagflationary Mark said...


There's never been a better time to be a landlord!

Just extrapolate that trend into the distant future and we'll hit 100% in no time!

Well, unless other landlords come along and/or wages collapse. Sigh.

Troy said...

Sell stocks? Sell bonds? That seems like an immense amount of selling.

Just takes some money . . .

As for the Fed "failing", I don't see the mechanism.

We're in a competitive devaluation situation. Japan's printing, People's Bank is printing (or whatever they do to maintain the trade deficit), Euro needs to print.

Print print print.

But Weimar and Zimbabwe only happens when the shelves go empty and the funny money has to outbid the next guy for the last stuff for sale.

So far, we're very far from this situation of scarcity.

This could change of course, if we have to cull the beef herd due to drought, or actually have to send all our pork products back to China to pay for our phones and tablets they so kindly make for us.

Stagflationary Mark said...


What's your first chart look like from a median baby boomer standpoint, once you've stripped out the Warren Buffetts of the world?

My "Illusion of Properity" theme isn't just about credit. It also includes income and wealth inequality.

Stagflationary Mark said...

March 22, 2013
Baby Boomers and Seniors Carrying More Debt: Census Bureau

"Those 65 and over became more likely to hold debt against their homes, and their median housing debt increased, as well, which explains a significant portion of the increase in their overall debt between 2000 and 2011," Census Bureau economist Marina Vornovytskyy said in a statement.