Retirement? Not Likely
I wanted to write about the trouble that pension funds find themselves in with respect to their retiree investors. As far as I can tell, this problem is uniform across Western nations (especially the most indebted ones).
Where’s The Money Going?
Long-story short, it’s trying to chase enough yield to survive. Pension funds have a luxury on the front end but a curse on the back end of their portfolio management. On the front end, they don’t have the significant marketing and campaigning to sell their fund to sophisticated/experienced investors as they’ll be able to collect a percentage off of individual’s paycheques. Contributions are easier to come by and are steady. On the other hand, redemptions are present whether they perform good or not, and can last just as a long (in some cases) as the number of years contributed. The money has to be paid out regardless of the performance.
Problem of Age
Pension funds are trying to manage a lopsided dynamic. There are not enough contributions vs. the number of redemptions simply due to aging demographics and a lack of performing young population (due to mass migration). The sample size of those retiring is growing larger and larger and the upcoming populations are having less and less children (and employment is sky-rocketing if you overlook the doctored numbers from the government). So it’s not only that at some point you will have redemptions, it’s that the number of redemptions are increasingly in a relative sense.
What does this mean?
For the fund, it’s their job to manage the assets until someone is ready to receive their payout. Due to the number of aging people, the required yield necessary to match the corresponding payout is increasing. In other words, perhaps 10 years ago the fund required an annual return of 3% to match the new number of pension payouts–now that number sits around 7-8%. For instance, the Nova Scotia Teachers Pension require just over a 10% return just to break even [are you beginning to see the ponzi scheme yet?]. You can say they must earn 7% just to break even.
Why They Can’t Hit The Yield
Your portfolio may hold radical volatility in it, in fact i’m sure it has the last 4 years! Look how much money you made on some positions and lost on others; however, these positions were likely in lower market caps with rapid changes in volume trading. Pension funds, even though they have access to absolutely everything, cannot enter everything due to their magnitude. Not all airplanes can’t land at all airports.
Government Debt
Since interest rates are at near zero, government debt has been a terrible return on your capital. Lately, short term debt is interesting, but I believe the Fed will be forced to pivot for the sake of the rest of the world (namely Japan, Germany and Britain)–however, over the last 10-20 years, interest rates are so low that receiving a 7% return is laughable. In Europe and Japan, they’ve even run negative interest rates (you were paid to borrow!). Government debt has mostly been a tool for borrowing rather than getting a significant return. In fact it’s worse than that, as the bonds held on the books have lost a significant amount of value over the last 2 years, if they were forced to sell now they would take a massive haircut.
Corporate Debt
The immensity of the capital going into corporate debt has also done something that is never a good sign–> it has blurred risk. For example, the level of risk for a corporate note that otherwise would assign an 8% coupon in normal circumstances, might be going for 4% in today’s market. This is because of the extreme buying pressure (putting interest rates down) on those notes. Someone may come in and think the level of risk they’re holding corresponds to a 4% return, but this is an illusion, given the distortion created by cheap reserves and RePo markets. Bottom line however, is the 4-5% return here is also beneath replacement.
Stocks
As I said, not all aircrafts can land in all airports even if they have all the bells and whistles on it. This is because of their size and weight behind their positions. A portfolio managing 50B (with a B) cannot expect to buy a company with a market cap of 60M because it will A) purchase all of the outstanding shares in a blink and B) a 10X move here taking the value to 600M is only a 1.2% increase on 50B dollars–it simply does not move the needle enough relative to the risk.
As a result, pension funds have to focus on stocks with two main attributes (that may even overlook the balance sheet or future outlook), companies with huge market caps & huge volumes of trading. This explains why the Mag-7 stocks have literally carried the rest of the 500 stocks in the S&P 500. A 800M allocation to Tesla is only 0.11% of outstanding shares (at todays prices), and since there is so much daily trading they are able to buy/sell rapidly as they need to meet their pensioner obligations. They can only ‘land’ on stocks that everybody else is investing because of the size of their underlying funds.
But, stocks don’t go to the moon–so what happens if their portfolio of growth/tech/pharma stocks run out of any yield (return) at all. How much money can you stuff in an unprofitable company? How much juice can you squeeze? I believe that big funds will be forced to rotate into value stocks at some point and they’ll have to run the risk of not being able to sell when they want, but not before a major market correction.
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Predicament
Eventually, things run out of steam because there’s only so much yield to go around and capital flows to a new home. The level of returns simply run out and to receive the same sort of return you have to extend further outward into the areas of risk. The predicament is therefore, 1) Do I eat a lot more risk to receive the return that’s required or 2) Do I remain content with losing every quarter and every year to kick the can down the road? This is precisely where pension funds find themselves today.
Wild Card
To add insult to injury, there is the wild card of HTM Loans on bank balance sheets (hold to maturity). According to laws written amid the 2008 financial crisis, the accounting of these loans allows banks to put the face value of the loan on their books as opposed to the market value.
This ultimately means that if banks were revalued according to their true assets (and not a phoney accounting glitch), then their risk profile would shoot way up which means that they won’t lend outward nor will they be able to receive collateral from others (viewing them as one giant liability). Charles Schwab is the worst in this category.
BUT this is relevant for Pension Funds who are constantly tapping for overnight loans, funding channels, [Reverse]Repo facilities & others, which is another blow to their resiliency to pay out your hard-earned-savings.
My idea?
Start your own Pension Fund. I suppose I am of the age where this is more practical than others in their 60s and 70s– which is why I am excited to be moving towards launching my own Private Fund for Family and Friends. The strategy of this will be global macro, and interested to gain exposure to not only other markets, but other countries than nobody at your local bank will offer (lest you buy those dirty, dangerous things called coal). I hope to profit from this collapse by being on the right side of the wealth transfer.
Closing
One realization I’ve had in recent years is that the idea of a pension fund is a ponzi scheme & I believe it further corrupts the individual to be less responsible. It is a bad idea to rely on others for something as important as managing your wealth for when you are older and perhaps least resilient to problems in life. After all, who knows more about your desires, motives, goals and wishes than you!
All this aside, the important realization is that the Pension Funds–are toast. There have been many books written on this in recent years, but I believe it’s important to examine one aspect why–> not enough yield to match the number of withdrawals from the fund. This yield is so small because of the level of debt that has been spent into existence and continues (it must) to be serviced; in other words, this situation will NOT improve anytime soon.
Are you still confident your pension will be there?
#StayOnTheBall
