Category: zerohedge

Spot The Sentence That Dooms Pension Funds (Don’t Worry, We Highlighted It)

Authored by John Rubino via DollarCollapse.com,

The “pension crisis” is one of those things – like electric cars and nuclear fusion – that’s definitely coming but never seems to actually arrive.

However, for pension funds the reason a crisis hasn’t yet happened is also the reason that it will happen, and soon:
 

The Risk Pension Funds Can’t Escape

(Wall Street Journal) – Public pension funds that lost hundreds of billions during the last financial crisis still face significant risk from one basic investment: stocks.

That vulnerability came into focus earlier this month as markets descended into correction territory for the first time since February 2016. The California Public Employees’ Retirement System, the largest public pension fund in the U.S., lost $18.5 billion in value over a 10-day trading period ended Feb. 9, according to figures provided by the system.

The sudden drop represented 5% of total assets held by the pension fund, which had roughly half of its portfolio in equities as of late 2017. It gained back $8.1 billion through last Friday as markets recovered.

“It looks like 2018 is likely to be more turbulent than what we have experienced the last couple of years,” the fund’s chief investment officer, Ted Eliopoulos, told his board last Monday at a public meeting.

Retirement systems that manage money for firefighters, police officers, teachers and other public workers are increasingly reliant on stocks for returns as the bull market nears its ninth year. By the end of 2017, equities had surged to an average 53.6% of public pension portfolios from 50.3% one year earlier, according to figures released earlier this month by the Wilshire Trust Universe Comparison Service.

Those average holdings were the highest on a percentage basis since 2010, according to the Wilshire Trust Universe Comparison Service data, and near the 54.6% average these funds held at the end of 2007.

One reason public pensions are so willing to bet on stocks is because of aggressive investment targets designed to fulfill mounting obligations to millions of government workers. The goal of most pension funds is to pay for those future benefits by earning 7% to 8% a year.

“Equities always take up a disproportionate share of the risk budget that any plan has,” said Wilshire Consulting President Andrew Junkin, who advises public pension funds. “You can never get away from it.”

That stance paid off during 2017’s market rally as public pensions had one of their best years of the past decade. They earned 12.4% in the 2017 fiscal year ended June 30, according to Wilshire Trust Universe Comparison Service.

But the risks are sizable losses during market downturns, which then can lead to deeper funding problems. The two largest public pensions in the U.S.—California Public Employees’ Retirement System, known by its abbreviation Calpers, and the California State Teachers’ Retirement System—lost nearly $100 billion in value during the fiscal year ended June 30, 2009. Nearly a decade later, neither fund has enough assets on hand to meet all future obligations to their workers and retirees.

Many funds burned by the 2008-2009 downturn tried to diversify their investment mix. They lowered their holdings of bonds as interest rates dropped and turned to real estate, commodities, hedge funds and private-equity holdings. These so-called alternative investments rose to 26% of holdings at about 150 of the biggest U.S. funds in 2016, according to the Public Plans Database, compared with 7% more than a decade earlier.

At the same time, the amount invested in stocks crept upward as markets roared back—and equities remain the single largest holding among all funds. The $209.1 billion New York State Common Retirement Fund increased its equity holdings to 58.1% as of Dec. 31 as compared with 56% as of June 30. That allocation is now higher than the 54% held as of March 31, 2008.

The $19.9 billion Teachers’ Retirement System of Kentucky now has 62% of its assets in equities, close to the 64% it had in 2007. It sold $303 million in stocks Jan. 19-20 to rebalance its portfolio following gains. From Feb. 6-8, as U.S. markets plunged, the fund bought another $103.5 million of stocks.

“We are definitely a long-term investor and look to volatility as an investing opportunity,” said Beau Barnes, the system’s deputy executive secretary and general counsel.

Calpers had a chance to pull back on stocks in December and decided against it. Directors considered a 34% allocation to equities, down from 50%. They also considered a higher allocation.

In the end, the fund opted to raise its equities target to 50% from 46% as of July 1 and its fixed-income target to 28% from 20%. It had 49.8% of its portfolio in equities as of Oct. 31, according to the fund’s website. That is close to the 51.6% it had in stocks for the fiscal year ended June 30, 2008.

To put the above in historical context:

Thirty or so years ago, state and local politicians and the leaders of their public employee unions had a shared epiphany: If they offered workers hyper-generous pensions they could buy labor peace without having to grant eye-popping and headline-grabbing wage increases. And if they made unrealistically high assumptions about the returns they could generate on pension plan assets they could keep required contributions nice and low, thus making both workers and taxpayers happy. The result: job security for politicians and union leaders and a false sense of affluence for workers and taxpayers.

This scam worked beautifully for as long as it needed to – which is to say until the architects of the over-generous benefits and unrealistic assumptions retired rich and happy.

But now the unworkable math is coming to light and pension funds are responding with two strategies:

1) Roll the dice by loading up on equities – the most volatile asset class available – along with “real estate, commodities, hedge funds and private-equity holdings.”

2) Buy the dips. As the above highlighted quote illustrates, stocks have been going up so steadily for so long that pension fund managers now see “volatility as an investing opportunity.” When the next downturn hits they’ll throw good money after bad, magnifying their losses.

Eventually a real bear market will shred the duct tape and chewing gum that’s holding the public pension machine together. And several trillion dollars of obligations will migrate from state and local governments to Washington, which is to say taxpayers in general, at a time when federal debts are already soaring.

via Zero Hedge http://ift.tt/2GDLKH5 Tyler Durden

Curb Your Expectations

Authored by Lance Roberts via RealInvestmentAdvice.com,

“The great economist John Maynard Keynes once said: ‘Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.’” – John Coumarianos

The whole idea of “efficient markets” and “random walk” theories play out well on paper, they just never have in actual practice. The reality is investors make repeated emotional mistakes which are ultimately driven by the very volatility they are supposed to withstand.

These emotional mistakes, as I have discussed repeatedly in the past, are the biggest reason for underperformance by investors. These behavioral biases can be broadly defined as Loss Aversion, Narrow Framing, Anchoring, Mental Accounting, Lack of Diversification, Herding, Regret, Media Response, and Optimism.

When prices rise on a consistent basis, investors begin viewing stocks as a “no lose proposition“ which simply deliver high-rates of return over the long-term. The reality has actually been quite different. The chart below shows the real, total return, (inflation and dividends included) versus it’s annualized rate of return using a geometric average.

It took nearly 14-years just to break even and 18-years to generate just a 2.93% compounded annual rate of return since 2000. (If you back out dividends, it was virtually zero.) This is a far cry from the 6-8% annualized return assumptions promised to “buy and hold” investors.

But such a low rate of return should not have been surprising.

What drives stock prices (long-term) is the value of what you pay today for a future share of the company’s earnings in the future. Simply put – “it’s valuations, stupid.”  

Instead of magical lottery tickets that automatically and necessarily reward those who wait, stocks are ownership units of businesses. That’s banal, I know, but everyone seems to forget it. And it means equity returns depend on how much you pay for their future profits, not on how much price volatility you can endure.

Stocks are not so efficiently priced that they are always poised to deliver satisfying returns even over a decade or more, as we’ve just witnessed for 18 years. A glance at future 10-year real returns based on the starting Shiller PE (price relative to past 10 years’ average, inflation-adjusted earnings) in the chart above tells the story. Buying high locks in low returns and vice versa.

Generally, if you pay a lot for profits, you’ll lock in lousy returns for a long time.

While volatility is the short-term price dynamics of “fear” and “greed” at play, in the long-term it is simply valuation. Despite the recent correction, valuations are once again pushing more extreme levels which suggest lower future forward returns.

“With valuations at levels that have historically been coincident with the end, rather than the beginning, of bull markets, the expectation of future returns should be adjusted lower. This expectation is supported in the chart below which compares valuations to forward 10-year market returns.”

“The function of math is pretty simple – the more you pay, the less you get.”

As a long-term investor, we experience short-term price volatility as “opportunity,” and high prices as “risk.” With economic growth to remain weak, and valuation expansion elevated, the risk of high prices has risen sharply.

Nothing But “Net”

This brings me to one of the biggest myths perpetrated by Wall Street on investors. Individuals are often shown some variation of the following chart to support the claim that over the “long-term” the stock market has generated a 10% annualized total return.

The statement is not entirely false. Since 1900, stock market appreciation plus dividends have provided investors with an AVERAGE return of 10% per year. Historically, 4%, or 40% of the total return, came from dividends alone. The other 60% came from capital appreciation that averaged 6% and equated to the long-term growth rate of the economy.

However, there are several fallacies with the notion the markets will compound over the long-term at 10% annually.

1) The market does not return 10% every year. There are many years where market returns have been sharply higher and significantly lower.

2) The analysis does not include the real world effects of inflation, taxes, fees and other expenses that subtract from total returns over the long-term.

3) You don’t have 146 years to invest and save.

The chart below shows what happens to a $1000 investment from 1871 to present including the effects of inflation, taxes, and fees. (Assumptions: I have used a 15% tax rate on years the portfolio advanced in value, CPI as the benchmark for inflation and a 1% annual expense ratio. In reality, all of these assumptions are quite likely on the low side.)

As you can see, there is a dramatic difference in outcomes over the long-term.

From 1871 to present the total nominal return was 9.15% versus just 6.93% on a “real” basis. While the percentages may not seem like much, over such a long period the ending value of the original $1000 investment was lower by millions of dollars.

Importantly, the return that investors receive from the financial markets is more dependent on “WHEN” you begin investing with respect to “valuations” and your personal “life-span”.

Curb Your Expectations

Following on with the point above, with valuations currently at one of the highest levels on record, forward returns are very likely going to be substantially lower for an extended period. Yet, listen to the media, and the majority of the bullish analysts, and they are still suggesting that markets should compound at 8% annually going forward as stated by BofA:

“Based on current valuations, a regression analysis suggests compounded annual returns of 8% over the next 10 years with a 90% confidence interval of 4-12%. While this is below the average returns of 10% over the last 50 years, asset allocation is a zero-sum game. Against a backdrop of slow growth and shrinking liquidity, 8% is compelling in our view. With a 2% dividend yield, we think the S&P 500 will reach 3500 over the next 10 years, implying annual price returns of 6% per year.”

However, there are two main problems with that statement:

1) The Markets Have NEVER Returned 8-10% EVERY SINGLE Year.

Annualized rates of return and real rates of return are VASTLY different things. The destruction of capital during market downturns destroys years of previous capital appreciation. Furthermore, while the markets have indeed AVERAGED an 8% return over the last 117 years, you will NOT LIVE LONG ENOUGH to receive the same.

The chart below shows the real return of capital over time versus what was promised.

The shortfall in REAL returns is a very REAL PROBLEM for people planning their retirement.

2) Net, Net, Net Returns Are Even Worse

Okay, for a moment let’s just assume the Wall Street “world of fantasy” actually does exist and you can somehow achieve a stagnant rate of return over the next 10-years.

As discussed above, the “other” problem with the analysis is that it excludes the effects of fees, taxes, and inflation. Here is another way to look at it. Let’s start with the fantastical idea of 8% annualized rates of return.

8% – Inflation (historically 3%) – Taxes (roughly 1.5%) – Fees (avg. 1%) = 3.5%

Wait? What?

Hold on…it gets worse. Let’s look forward rather than backward.

Let’s assume that you started planning your retirement at the turn of the century (this gives us 15 years plus 15 years forward for a total of 30 years)

Based on current valuation levels future expected returns from stocks will be roughly 2% (which is what it has been for the last 17 years as well – which means the math works.)

Let’s also assume that inflation remains constant at 1.5% and include taxes and fees.

2% – Inflation (1.5%) – Taxes (1.5%) – Fees (1%) = -2.0%

A negative rate of real NET, NET return over the next 15 years is a very real problem. If I just held cash, I would, in theory, be better off.

However, this is why capital preservation and portfolio management is so critically important going forward.

There is no doubt that another major market reversion is coming. The only question is the timing of such an event which will wipe out the majority of the gains accrued during the first half of the current full market cycle. Assuming that you agree with that statement, here is the question:

“If you were offered cash for your portfolio today, would you sell it?”

This is the “dilemma” that all investors face today – including me.

Just something to think about.

via Zero Hedge http://ift.tt/2optJEV Tyler Durden

Gartman: “Bloomberg Has Damaged Our Reputation”

One day after we reported that “Dennis Gartman Blows Up With Investment In Riot Blockchain“, Bloomberg followed up with a virtually identical article, titled “Risky crypto bet blows up Dennis Gartman’s retirement account.“

And yet, oddly, despite being one of the most read features on Bloomberg this morning, the title was surprisingly changed, to the more bland “Risky crypto bet dents Dennis Gartman’s retirement account.”

The reason for that quiet change to the title can be found in Dennis Gartman’s latest investor letter, in which he slams Bloomberg’s reporter for “miss-representations” [sic] that “we were materially and dramatically damaged perhaps to the point of insolvency, let us be quite clear: That is far, far from the truth. We did indeed lose money on Friday on a “block-chain” related equity that we had owned for the previous several days. However, the reporter told the story that we would be required to work several more years because of the losses suffered.“

Here Gartman takes offense because the “world-renowned commodity guru”, who two months after saying that “Bitcoin is nonsense and I’ll never buy any!” bought stock in a fake blockchain company that was exposed as a fraud and dropped 33% in a single day, hardly suffered “material losses.”

And while “the reporter in question has indicated in a phone conversation yesterday that she will repair the tenor of the article she wrote” which explains the change in “blows up” to “dents”, Gartman then laments that “that shall not repair the damage done to our reputation. Time only shall do that and we do indeed have time on our side.“

Indeed you do Dennis, and we look forward to observing all the future follies of your “retirement account” for a long, long time.

here is the full section from Gartman’s letter in question:

Regarding our retirement account, and regarding the serious miss-representations made by a reporter for Bloomberg.com yesterday suggesting that we were materially and dramatically damaged perhaps to the point of insolvency, let us be quite clear: That is far, far from the truth. We did indeed lose money on Friday on a “block-chain” related equity that we had owned for the previous several days. However, the reporter told the story that we would be required to work several more years because of the losses suffered.

These comments by the reporter are seriously exaggerated. These were disconcerting losses to be certain, but were they material? No, they were hardly that. Further, the reporter in question has indicated in a phone conversation yesterday that she will repair the tenor of the article she wrote, however, that shall not repair the damage done to our reputation. Time only shall do that and we do indeed have time on our side.

Finally we want to thank our friends who came so quickly to our support yesterday after reading the reports in question. Now, ‘tis time to move on. We’ve other concerns that are material in nature.

Now if only Gartman can tell us if he finally covered his “retirement account” short on which we was stopped out yesterday, so algos will finally stop buying the dip…

via Zero Hedge http://ift.tt/2sT1mob Tyler Durden

Loonie Tumbles As Canadian Retail Sales Crashed In December

But, but, but… it was Christmas!!

Canadian retail sales have come out and they are shockingly low – even after bad weather and higher rates on big ticket items had kept surveys particularly low for December.

The headline print was -0.8% MoM (expectations were for no change)

Worse still, sales ex autos plunged 1.8% MoM (against expectations of a 0.3% gain) – the biggest drop since Jan 2015…

 

As Citi notes, these numbers, while often volatile, were not expected to be a big mover, but the extent of the miss has triggered some activity in USDCAD, which has jumped up to 1.2736 already and may have more to run.

Loonie is at its weakest vs the dollar since 12/21…

via Zero Hedge http://ift.tt/2HDbJ2o Tyler Durden

Trump: “I Never Said Give Teachers Guns”

Left-wing media exploded with fury Wednesday afternoon following reports that, during a meeting with survivors of last week’s school shooting in Parkland, Fla., President Trump had suggested that the most effective method of preventing school shootings would be arming teachers.

“If you had a teacher who was adept at firearms, they could very well end the attack very quickly, and the good thing about a suggestion like that — and we’re going to be looking at it very strongly, and I think a lot of people are going to be opposed to it. I think a lot of people are going to like it. But the good thing is you’re going to have a lot of [armed] people with that,” Trump said during the meeting, which was broadcast live.

But apparently displeased with the tenor of the coverage that his remarks elicited, Trump tweeted this morning that he never said he’d like to “give teachers guns”…what he said was to “looked at the possibility” of giving concealed weapons to teachers with a military background or who are “gun adept” – a group that would include, at max, 20% of teachers…

…Before adding that “gun-adept” teachers would, in fact, be an effective deterrent to “sicko” school shooters who would “NEVER attack that school” knowing that they might face return fire from a host of educators…

 

 

 

 

 

 

 

 

…Before affirming that he will be “strongly pushing” comprehensive background checks with an emphasis on mental health. He’d also like to raise the age requirement for all gun sales to 21 while ending the sale of bump stocks. Trump added that he’s optimistic about the chances of passing his plan because “Congress is finally in a mood to do something on the issue..”

 

 

So, to be clear, Trump isn’t saying “give teachers guns” – he’s saying let teachers bring their own guns to school.

…See the distinction?

via Zero Hedge http://ift.tt/2EIm7Es Tyler Durden

Major Police Operation In Brussels To Block Off Building With Gunman Inside

Armed police, snipers and a helicopter have been deployed in a large scale operation to block off a building in the Brussels commune of Fora where one or more gunmen are allegedly inside, according to local media. Authorities report that at least two men are holed up in the apartment.

“A special operation is being carried out. There may be one or more armed people in the house,” a commune representative told the press.

The incident is taking place near a primary school in the municipality of Forest, on Rue Jean-Baptiste Vanpe. The school is attended by approximately 350 student, and the children have been taken inside as a safety precaution. The mayor of Forest, Marc-Jean Ghyssels, has also confirmed the police operation, citing “suspicion of the presence of an armed man,” RTBF reported.

A security perimeter has been established, with a witness telling RTL Info that police have ordered residents of the neighborhood to stay inside their homes.

Witnesses told RTBF that armed police and snipers are at the scene. Police helicopters are also flying above the area.

via Zero Hedge http://ift.tt/2FluMxJ Tyler Durden

European Stocks Suffer ‘Death Cross’ As Rebound Rolls Over

Following dismal PMIs across Europe yesterday, the region’s equity market rebound is rolling over today and has triggered the dreaded ‘death cross’, last seen in September 2015 before stocks legged notably lower.

The 50-day moving-average has crossed below the 200-day moving-average just as the dead-cat-bounce in European stocks rolls over…

Notably, while US equities managed to retrace around 61.8% of its drop…

European equities only managed around 38.2%…

via Zero Hedge http://ift.tt/2CcVHgu Tyler Durden

ECB Minutes Reveal Fears About Currency Wars, Euro Slides

There were two distinct reactions in the Euro to today’s ECB Minutes, released this morning.

At first, the EUR jumped following initial headlines that the ECB acknowledged that revisiting the guidance would be “part of a the regular reassessment” going forward, but noting that any changes are premature at this stage.

 In this context, it was remarked that communication on monetary policy would continue to develop according to the evolving state of the economy in line with the ECB’s forward guidance, with a view to avoiding abrupt or disorderly adjustments at a later stage. However, changes in communication were generally seen to be premature at this juncture, as inflation developments remained subdued despite the robust pace of economic expansion.

* * *

The language pertaining to the monetary policy stance could be revisited early this year as part of the regular reassessment at the forthcoming monetary policy meetings. In this context, some members expressed a preference for dropping the easing bias regarding the APP from the Governing Council’s communication as a tangible reflection of reinforced confidence in a sustained adjustment of the path of inflation. However, it was concluded that such an adjustment was premature and not yet justified by the stronger confidence.

Predictably, this hawkish take prompted a kneejerk move higher in the EUR as algos bought the EUR.

However, what traders focused on next was a rather explicit ECB concern over the weakness of the dollar, as the statement once again highlighted fears that the US administration was deliberately trying to engage in currency wars, something which Mario Draghi famously remarked on during the Q&A in the last ECB press conference, when asked for his response to Mnuchin’s statement.

Recall that toward the end of Draghi’s Q&A on January 25, the head of the ECB took a direct swipe at recent US dollar jawboning, accusing Mnuchin, Ross, and essentially the entire Trump administration of verbally manipulating the USD, for not “complying” with the “agreed terms” which have led to euro gains due to comments from “someone else.”

As Citi said at the time, it is “fairly remarkable for a central banker of Draghi’s standing to speak out like this to criticize another bloc’s foreign exchange policies or practices.”

Fast forward to today, when the minutes of the January ECB meeting showed Draghi’s fears were widely shared among the bank’s decision makers.

“Concerns were also expressed about recent statements in the international arena about exchange rate developments and, more broadly, the overall state of international relations,” the ECB said. “The importance of adhering to agreed statements on the exchange rate was emphasised.” Those agreements explicitly rule out competitive devaluations.

And then this:

It was also pointed out that the bilateral exchange rate of the euro against the US dollar had changed more than the euro’s nominal effective exchange rate. This had led market participants to attribute recent exchange rate volatility more to the weakness of the US dollar than to the strength of the euro. However, explaining the US dollar weakness was not straightforward, given the strength of recent data releases and the fiscal and monetary policy outlook in the United States. This also had to be taken into account when considering the consequences of the exchange rate appreciation for the euro area economy. In addition, an appreciation relative to an invoicing currency such as the US dollar could be more important for the strength of the pass-through than suggested by its weight in the effective exchange rate.

The volatility in the euro was, the account concluded, “a source of uncertainty which required monitoring”.

And so, after all that, the EUR first spiked, then slumped, and was last seen trading just off session lows.

via Zero Hedge http://ift.tt/2BFJcJf Tyler Durden