Issues Warning To All Americans 🔴 The World’s Largest Pension Fund Loses $136 Billion

The World’s Largest Pension Fund Loses $136 Billion

There’s a specific reason the world’s largest fund lost so much money, and the United States is in the same predicament. Here are the details… Things keep getting worse for pensions…

If you’ve read Notes

According to the World Economic Forum, pension funds around the world are short around $70 TRILLION. State, federal and local pensions in the US are $7 trillion short… and a recent report by Boston College estimates 25% of private US pensions will go broke in the next decade.

This is all happening because investment returns have been too low.

Pension funds need to earn about 8% per year to meet their obligations. And they traditionally do that with a conservative mix of bonds and stocks.

But with interest rates near the lowest levels ever, it’s impossible for pension funds to achieve that 8% with their usual tools (over the past year, they’ve only been earning around 5.5%).

So they’re getting desperate…

Illinois, one of the brokest states in the US,

And, across the board, pensions are taking on WAY more risk in hopes of breaking even…

Since 2008, public pensions have increased their allocation to risky assets by 10%.

10% may not sound like much, but it’s a huge move by these conservative funds.

It translates into TRILLIONS more invested in exotic speculative investments.

So while the teachers and firefighters of the world are counting on pensions to conservatively invest their retirement savings, they’re trying to flip speculative real estate to juice returns (that strategy has actually increased sixfold).

Pensions are broke. They know that they will not earn enough money to pay their obligations. So they’re swinging for the fences. They don’t have another choice.

Sure, piling into risk assets has juiced returns for the past decade. But we’re now 10 years into the longest bull market in history. And basically everything is expensive today (particularly stocks and real estate).

So pensions can’t count on the same kind of returns into the future…

Ray Dalio, manager of the world’s largest hedge fund Bridgewater Associates, expects 10-year returns for a conservative US portfolio of stocks and bonds to be around 3% per year. Or in his own words, “low returns for a long time.”

(Dalio also warns of higher taxes, something we’ve talked about before).

And GMO, a world-class asset manager with a stellar track record, expects -2% per year…a far stretch from the 8% expected returns pension plans need.

Now, I’m not saying that the markets are going to crash tomorrow, or next week – or even this year – but at this stage of the cycle, taking on substantially more risk is ridiculous.

By the way, the same is true for individual investors.

In fact, about 18 months ago I started recommending our readers consider accumulating cash.

Sitting on cash when the markets hit bottom is a once-in-a-decade opportunity to get really rich.

I’m personally sitting on more cash than I ever have in my life…(and it turns out cash was the best-performing asset of 2018).

But pension plans are doing the exact opposite. They’re going all in on risk assets at the top… because they have no other choice.

 And they are completely unprepared for what’s coming.

Pension plans themselves expect to earn 7.4% per year for the foreseeable future (already a full 60 basis points below what they require).

Their worst-case scenario return is 5.4% a year… I don’t know what their worst case looks like. But considering the potential for trade wars, a global slowdown, political infighting, nuclear war… 5.4% seems outright rosy.

There’s a high probability we see stocks plunge 40-60% this year or next. But pensions are living in some parallel universe where they’ll continue to earn 5% a year.

Of course, gambling the savings of regular working people at market highs will only lead to one thing… catastrophic losses.

If you want proof of that, look at what happened in Japan last week, home to the world’s largest pension fund. Its Government Pension Investment Fund lost $136 billion dollars in just 3 months.

The reason? A massive drop in the value of stocks and other “risky assets”(sounds familiar…?).

That’s the worst rate of decline the fund has ever experienced.

Now, it would be naive not to expect to see similar scenarios in other parts of the world over the next years, because the problems are the same…

Pension fund managers are oblivious to reality… and this is how they gamble the savings of generations of workers.

The authors of the Boston College report conclude that these ludicrous estimates “could yield required contributions that are ultimately inadequate to meet benefit obligations and, thus, threaten the financial stability of public plans”

The contributions workers pay into the system are based on these unrealistic, overly optimistic numbers that have no way in the world of ever happening.

Which means millions of workers counting on that money for retirement will never be paid.

It’s clear as day: pensions are broke. The money they promised simply won’t be there.

That’s why we think it’s critical you take things into your own hands.

As an individual investor, you have options big pension funds don’t have – like investing in loans backed by assets (like wine, gold or real estate).

Or you can simply sit on cash and earn 2% while you wait for the correction to go bargain shopping.

And where things are today, we think these options make a lot of sense.

The State of the American Debt Slaves, Q4 2018

Consumers are doing their job only in a lackadaisical manner. But the student-loan scheme is hot.

It’s a tough job, but someone’s got to do it: Propping up the massive US economy. And consumers are doing it, but in a somewhat lackadaisical manner when it comes to spending money they don’t have. Consumer debt – more enticingly, “consumer credit” similar to “extra credit” – rose 4.7% in the fourth quarter 2018 compared to the fourth quarter last year. In the year 2018, Americans added $179 billion to their balances on their credit cards, auto loans, and student loans. Every dime was spent and added to GDP. It amounted to nearly 1% of GDP. If GDP grew 3.1% in 2018, just under one third of the growth was generated by that additional consumer debt.

Without this additional consumer borrowing, if consumers had just maintained their debt levels, GDP growth might only have been 2.2% in 2018, instead of 3.1%. So, a huge round of applause is due our debt slaves that now owe over $4 trillion for the first time ever, according to the Federal Reserve Thursday afternoon:

Consumer debt includes auto loans, student loans, credit-card debt, and personal loans, but it excludes housing related debt, such as mortgages and HELOCs.

The $4.01 trillion in consumer debt is up 52% from the peak early in the Financial Crisis in Q3 2008. This is not adjusted for inflation. Over the same period, the Consumer Price Index rose 16% and nominal GDP rose 39%. Thus, Americans are sticking to their time-honored plan of out-borrowing both inflation (by a big margin) and economic growth.

Over the past 12 months, consumer debt rose by 4.7% while nominal GDP likely rose just over 5% (due to the government shutdown, Q4 GDP data has not been released yet, so I’m guessing). But nominal GDP outgrowing consumer credit growth is a rare phenomenon. The last time it occurred, and the only time since the Great Recession, was from Q1 through Q3 2015.

Auto loans and leases

Total auto loans and leases outstanding for new and used vehicles in Q4 jumped by $41 billion from a year ago, or by 3.7%, to a record of $1.155 trillion, despite stagnant vehicle sales. The increase was due to rising prices of vehicles, the rising average loan-to-value ratio, and the lengthening average duration of loans:

On a technical note, the green line in the chart above represents the old data before the large adjustment to consumer credit in September 2017. Every five years, consumer credit data is adjusted, based on new Census survey data. This time, it hit auto loans hard. I included the green line to show that in Q3 2015 it wasn’t a collapse of the car business that caused the precipitous drop in auto loans.

Revolving credit

Credit card debt and other revolving credit, such as personal lines of credit, in Q4 rose 2.0% year-over-year to $1.045 trillion (not seasonally adjusted). Given that nominal GDP rose around 5% over the same period, consumers clearly fell short of the job they’re expected to do. Their job is to charge up their credit cards to the max. But they’re stubbornly refusing to do it. Credit card balances in Q4 2018 were only 4% higher than Q4 2008! What are these consumers thinking?!

Baffled economists are scratching their heads, and banks a desperate. Credit card debt is the most profitable activity for banks, with usurious spreads between the rates charged on credit card balances that can go well beyond 20%, and the banks’ cost of funds, which in December was on average 1.06%, according to the San Francisco Fed’s Cost of Funds Index.

The student-loan economy

Student loans jumped by 5.3% year-over-year in Q4, or by $80 billion, to a new record of $1.57 trillion (not seasonally adjusted), having doubled since the beginning of 2010, even as higher-education enrollment declined 7% from 2010 through 2016, according to the latest data from the National Center for Education Statistics. Fewer students, but they each borrow more, to fatten entire industries from Apple and concert-ticket sellers to investors in the hot category of commercial real estate called student housing. They’re all feeding at the big trough of government-guaranteed student debt:

What is systemically wrong with the student loan scheme is that it’s a three-party deal — universities, government, and students – but without any kind of discipline imposed on them by the market or the government. It just ratchets higher quarter after quarter at a ludicrous rate, even as enrollment is declining.

Just to see what consumer debt would look like without the student-loan scheme, here are auto loans and credit card loans combined – and it shows how lackadaisical consumers are in doing their job by borrowing money they don’t have, with the total having increased by 2.9% year-over-year. Since the peak in 2008, the total has risen 22%, while the Consumer Price Index has risen 16% and the US population 7%:

But averages hide where the difficulties are – and they’re always at the margin where people are struggling to make ends meet. Many of these folks have sub-prime rated credit, but there are also plenty of folks with high incomes and excellent credit scores, but who spend too much and borrow too much, and they’re living from paycheck to paycheck. Any shift in the labor market that would cause them to lose their jobs could push them into default in no time. And the averages don’t show the risks buried at the margins.

Debt Trifecta at All-Time Highs – Billionaires Panic.. The “trifecta” of national, corporate, and consumer debt has reached all-time highs, and could prove to be catastrophic if a recession hits.

Let’s start by quickly bringing each part of this debt trifecta up to date as much as possible…

U.S. National Debt

The national debt, ever on the rise, currently sits at around $22 trillion:

In just the short decade since 2008, the debt has jumped from $10.6 trillion to $22 trillion. It also comes with a deficit that’s currently over $1 trillion currently. The interest payments alone may be forming a “black hole” from which the U.S. may never escape.

These facts alone should raise concern in any interested observer.

Corporate Debt

The total amount of corporate debt has never stopped rising since 1950. Corporations have taken on a record level of debt since 2007.

You can see the steady rise in corporate debt liabilities here:

One of the main problems with this type of debt, aside from getting repaid, is that some corporations are using it to buy back shares of stock. Instead of this “sleight of hand,” you’d think that they should be using it to fund growth and create jobs.

But one thing is certain, the piper will need to be paid at some point. When that happens, who knows what can happen to the economy.

Consumer Debt

Total consumer debt is near $4 trillion, and has been rising steadily since 1975. But it has risen a staggering 47%since 2008, and shows no signs of stopping.

The chart below reveals this economic “ATM” at work:

When interest rates rise, as they have been thanks to the Fed’s recent spat of rate hikes, they will eventually get high enough that consumers won’t be able to get loans, or repay them.

Economic growth requires that consumers buy things and obtain credit. If they can’t do either, the consequences could be dire.

Now, this debt-fueled trifecta has caused panic among some billionaires.

Billionaires Sound Big Warning Alarm

Mainstream media almost never hype a financial crisis, so it’s significant when they do. But when billionaires are sounding the alarm, you might want to pay close attention.

At least two billionaires are doing just that, starting with Baupost Group’s Seth Klarman. Baupost Group is a $28 billion hedge fund, and Klarman normally positions himself out of the limelight. His fund is only open to private investors, so he has little incentive to promote his brand to the public.

But recently, he felt the need to write a warning to investors about the global debt, with specific reference to the U.S., according to Sovereign Man:

In a 22-page letter to his investors, Klarman warned that government debt levels, particularly in the US (where debt exceeds GDP), could lead to the next global financial crisis.

“The seeds of the next major financial crisis (or the one after that) may well be found in today’s sovereign debt levels,” he wrote.

In the same letter, Klarman continued…

“There is no way to know how much debt is too much, but America will inevitably reach an inflection point whereupon a suddenly more skeptical debt market will refuse to continue to lend to us at rates we can afford…”

Since the U.S. spends almost a third of its revenue on interest payments alone, it doesn’t seem like it can afford to pay much more.

And Klarman isn’t the only billionaire expressing unease. At the World Economic Forum in Davos, Switzerland, Ray Dalio, founder of the world’s largest hedge fund, said that debt would be to blame for the next downturn, which he believes will be bigger than the Great Depression.

“The biggest issue is that there is only so much one can squeeze out of a debt cycle and most countries are approaching those limits”.

You might think the U.S. government would do everything to curb this problem. But according to the Congressional Budget Office, the debt is projected to skyrocket to $33 trillion by 2029 (emphasis ours):

Uncle Sam’s total debt is rapidly approaching $22 trillion, and according to the Congressional Budget Offices latest ten-year projection, it will be more than $33 trillion by 2029, with $1 trillion annual deficits set to begin again and stay above that for as far as the fiscal eye can see.

Skyrocketing debt, check. Deficit to match, check. Or will it be checkmate?

Time to Prepare Your “Exit Plan”

The debt-fueled “growth” the U.S. has seen in recent years seems to be facing its biggest test.