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Post by socal on Mar 30, 2009 11:19:17 GMT -6
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Post by NOTTHOR on Mar 30, 2009 16:11:19 GMT -6
You know my take on pensions - they are a giant timebomb that will crush everyone who is under 40 years old with tremendous obligations going forward. Japan is being crushed under a pension bomb, the same thing will happen here, it's only a matter of time if our demographic composition matches theirs (lots of old people, few young people).
As for the substance of the story, I love how the fund is $64 billion, but then the the professor from Boston says, "This has the potential to be another several hundred billion dollars." That is completely unrelated to the change of investment allocations.
I don't think the mix of 45% stocks that they are moving into is per se bad. Sure, the timing was absolutely terrible, but when I look around the bond market right now, I don't see a whole lot of compelling investments out there. Treasuries are in a giant bubble and the US government has become the primary buyer of those, if you buy 10 year Treasuries right now you will almost certainly lose money in real terms. Corporate bonds are getting walloped and there is a strong argument that those have been in a bubble for years (high prices, low yields despite huge credit risks in the banks and many large industrial companies) that is unwinding right now. Municipal bonds have lower yields and are extremely risky, as tax receipts dry up and states and towns are hit with their own pension bombs (like the NYC one I posted the story about a few weeks ago). When you aggregate the possibility of fairly steep inflation, the bubble in Treasuries, the fact that the Japanese are unwilling and unable to lend any more money, the Chinese are becoming skeptical, significant credit risk of many of our largest companies, the possibility of higher taxes (which will harm principal amounts on bonds because holders will demand a higher pre-tax yield to compensate for the higher taxes) and our government's recent willingness to disregard contractual rights in the name of political expediency, it's not hard to see why bonds are damn near as shaky as stocks right now.
What is important to realize is that bonds can go to zero just like stocks can. Bond values can also fluctuate pretty heavily. Ford exchange traded notes have traded in a range of 3 to 18 in the past twelve months. Banks and financials have traded in similarly wide bands. Granted, bonds are marginally less risky in terms of principal repayment, but they are more risky in that they have terrible returns in high inflation rising-rate environments, like the one we will enter when the economic recovery begins. Sure, stocks are riskier, but historically they have yielded a higher return.
As for the decision itself, it seems reasonable to infer that it was driven in significant part by the fact that the rates that PBGC can charge are fixed. No new clients will be coming in to PBGC because company guaranteed pensions are financial suicide so companies without pensions aren't going to start offering them. It also seems reasonable to expect that with recent and coming bond defaults and bankruptcies, more pension liabilities will be pushed onto PBGC. With fixed prices that can't be raised (no more money in on the front end), a deficit and expected increases in outlays (more money going out on the back end), how do you propose curing the problem? The only thing to do is to try to increase the rate of return on the investment fund. Of course when you take on more risk, if that risk is realized to the downside and you get effed in the A you look like a schmuck.
In the name of partisan hacksmanship and since Democrats obviously have a crystal ball indicating future asset prices, I now blame Bill Clinton for failing to put the fund 100% into tech stocks in 1993 and liquidate and move into long term Treasuries the day the NASDAQ hit 5,000. Had he done that, the PBGC would be fully funded for the next 1,000 years. We better look into it. Something tells me there is more to that story.
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Post by HawksStock on Mar 30, 2009 16:14:03 GMT -6
BTR, understand that all of us are pawns.
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Post by iammrhawkeyes on Mar 30, 2009 16:56:45 GMT -6
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