Pension Funds Start Looking to Gold to Avert Disaster

By Stefan Gleason – Re-Blogged From Headline Wealth

Public and private pension plans face a dual crisis.

The first and most obvious threat to pensioners is that defined-benefit vehicles are severely underfunded. By one estimate, pension systems taken as a whole are $638 billion in the red.

Some are in better shape financially than others. But all pension plans will have to reckon with a second huge challenge going forward.

Namely, they are already entirely unable to meet their stated return objectives by owning conventional “safe” interest-bearing instruments such as Treasury bonds.

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Furious French Protest Climate Policies, Cost of Living, Pension Reforms

By Eric Worrall – Re-Blogged From WUWT

President Emmanuel Macron. By Kremlin.ru, CC BY 4.0, Link. Image modified.

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Public Pensions: An Economic Time Bomb

By Joshua Rauh

Who cares about public pension liability? Well, you should – after all, it’s the reason entire cities and even states are facing bankruptcy. Joshua Rauh, professor of finance at Stanford and Senior Fellow at the Hoover Institution, paints a startling picture of just how broken the public pension system really is, and what will happen if we continue to ignore it.

Please watch the VIDEO.

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Public Pension Funds Falling Short of Needed 7% Returns This Year

By Bloomberg – Re-Blogged From Newsmax

U.S. state and local government pensions, already with about $2 trillion less than they need to cover all the benefits that have been promised, are falling short of their investment-return assumptions this fiscal year — and President Donald Trump’s trade war with China isn’t helping.

The median public fund, which typically has a fiscal year ending June 30, returned 3.25% for the three quarters through March 31, according to Wilshire Associates Trust Universe Comparison Service.

Public Pension Funds Falling Short of Needed 7% Returns This Year

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Financial Sector Calls Gold ‘Shiny Poo.’

By Mike Gleason – Re-Blogged From Silver Phoenix

Mike Gleason: It is my privilege now to welcome in Lawrence Parks, founder and executive director of the Foundation of the Advancement of Monetary Education. Larry has dedicated much of his life towards the study and promotion of sound money, having author articles that have appeared numerous times in publications like The Economist, The Washington Times, National Review, and The Wall Street Journal just to name a few. He even hosts a weekly TV show that airs on cable networks in the Manhattan area called “The Larry Parks Show”. He is given expert testimony in Washington to the United States Congress on monetary policy. He’s a real champion for sound money, and it’s great to have him on with us today.

Larry thanks for the time and welcome. It’s good to talk to you.

Larry Parks: It’s a pleasure. Thank you for hosting this.

Mike Gleason: Well Larry, to set the stage here briefly give us some background about the Foundation of the Advancement of Monetary Education and what motivated you to take the helm of the organization nearly 25 years ago, let’s start there.

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California Is In Great Financial Shape – And Headed For An Epic Crisis

By John Rubino – Re-Blogged From Dollar Collapse

California Governor Jerry Brown inherited a $27 billion deficit from Arnold Schwarzenegger eight years ago. This month he’s leaving his successor a $13.8 billion surplus and a $14.5 billion rainy day fund balance. Pretty good right? Approximately 48 other governors would kill for those numbers.

Unfortunately it’s all a mirage. California, as home to Silicon Valley and Hollywood, lives and dies with capital gains taxes. In bull markets, when lots of stocks are rising and tech startups are going public, the state is flush. But in bear markets capital gains turn into capital losses and Sacramento’s revenues plunge. Put another way, the state’s top 1% highest-income taxpayers generate about half of personal income taxes. When their incomes fall, tax revenues crater.

That’s happening right now, as tech stocks plunge, IPOs are pulled and billion-dollar unicorns endure “down rounds” that shave major bucks from their valuations. So if this is a replay of the 2008-2009 bear market, expect California’s deficits to return to the double-digit billions.

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Pyramids Of Crisis

By John Mauldin – Re-Blogged From Silver Phoenix

In an increasingly divided world, we all share one great desire: self-preservation. Not just humans, either. The survival instinct exists in almost every living thing. Humans simply have greater ability to do something about it.

In fact, we have been doing something about it for many thousands of years. An inverted pyramid of geniuses and giants, modern medicine, nutrition, sanitation, and assorted other innovations has extended our lifespans and helped more of us live to ripe old ages. That’s wonderful… but it’s also a problem many of us still don’t fully understand.

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Public Pensions Could Become Retirement Crisis for Everyone

By Peter Reagan – Re-Blogged From Newsmax

It’s become fairly common knowledge that public pensions are on the verge of either radical overhaul or extinction.

Worldwide, pensions are set to reach a shortfall of $400 trillion. This is a larger amount than 20 of the world’s largest economies, according to Sovereign Man.

It was even reported that Congress is planning for pension fund failure in the U.S. Not to mention, Philadelphia has considered tapping public utility payments to cover their shortfall.

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New York City Joins The “Imminent Bankruptcy” Club

By John Rubino – Re-Blogged From Dollar Collapse

The public pension crisis is the kind of subject that’s easy to over-analyze, in part because there are so many different examples of bad behavior out there and in part because the aggregate damage these entities will do when they start blowing up is immense.

But most people see pensions as essentially an accounting issue – and therefore boring – so it doesn’t pay to go back to this particular well too often. Still, New York City’s missing $100 billion can’t be ignored:

New York City Owes Over $100 Billion for Retiree Health Care

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The Big Pension Grab

It has been quite some time since we last collaborated on an article, opting instead to chase other pursuits and let some of the hysteria going on in the world fade into some type of steady state. It hasn’t happened, but there are pressing matters that need attention regardless. The circus going on all around us makes for great theater and distraction – and that is its intent.

The topic at hand is the failing pension and retirement system. Americans are notorious for spending well in excess of what they make, saving nothing in the process. The only way most save are the deductions from their paychecks for a 401k or IRA. Or perhaps they contribute to an IRA at tax time, when they realize doing so will reduce their tax liability.

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Bankruptcy Soars As The Country Grapples With An Unprecedented Debt Problem

By Michael Snyder – Re-Blogged From Freedom Outpost

America, you officially have a debt problem, and I am not just talking about the national debt.  Consumer bankruptcies are surging, corporate debt has doubled since the last financial crisis, state and local government debt loads have never been higher, and the federal government has been adding more than a trillion dollars a year to the federal debt ever since Barack Obama entered the White House.  We have been on the greatest debt binge in human history, and it has enabled us to enjoy our ridiculously high standard of living for far longer than we deserved.  Many of us have been sounding the alarm about our debt problem for a very long time, but now even the mainstream news is freaking out about it.  I have a feeling that they just want something else to hammer President Trump over the head with, but they are actually speaking the truth when they say that we are facing an unprecedented debt crisis.

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Pensions – A Stealth Mortgage On Your House

By John Rubino – Re-Blogged From http://www.Silver-Phoenix500.com

Money manager Rob Arnott and finance professor Lisa Meulbroek have run the numbers on underfunded pension plans and come up with an interesting – and highly concerning – new angle: That they impose a “stealth mortgage” on homeowners. Here’s how the Wall Street Journal reported it today:

The Stealth Pension Mortgage on Your House

Most cities, counties and states have committed taxpayers to significant future unfunded spending. This mostly takes the form of pension and postretirement health-care obligations for public employees, a burden that averages $75,000 per household but exceeds $100,000 per household in some states. Many states protect public pensions in their constitutions, meaning they cannot be renegotiated. Future pension obligations simply must be paid, either through higher taxes or cuts to public services.

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Stock Plunge Could Hasten State Pension Collapses

By Aaron Brown – Re-Blogged From Newsmax

Warnings about looming public pension disasters have regularly cropped up since the 1950s, pointing to problems 25 years or more down the line. To politicians and union leaders,  the troubles were someone else’s predicament. Then crisis fatigue set in as the big problem remained down the road.

Today, the hard stop is five to 10 years away,  within the career plans of current officials.  In the next decade, and probably within five years, some large states are going to face insolvency due to pensions, absent major changes.

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More Absolutely Crazy Pension News

By John Rubino – Re-Blogged From http://www.Silver-Phoenix500.com

“War” and “pensions” are conceptually about as different as it’s possible to be. But – in a measure of how far into Crazy Town we’ve wandered – they’re both taking the world in the same direction.

If a Middle East (or Asian!) war doesn’t spike oil prices and push the global economy into recession, then pensions will probably produce the same end result. Here’s an excerpt from a much longer New York Times article that should be read in its entirety for a sense of what public finance has become:

A $76,000 Monthly Pension: Why States and Cities Are Short on Cash

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Pew: US State Pension Funding Gap Rises to $1.4 Trillion in 2016

By Thomson/Reuters – Re-Blogged From Newsmax

The funding deficit for U.S. state public pension systems rose to a record-high $1.4 trillion in fiscal 2016, a nearly $300 billion increase from fiscal 2015, according to a Pew Charitable Trusts report released on Thursday.

The public worker retirement funds reported only $2.6 trillion in assets to cover total pension liabilities of $4 trillion, with the report pegging the shortfall on investment returns falling short of assumptions and inadequate state contributions to pension systems, Pew reported.

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Illinois’ Debt Crisis Foreshadows America’s Financial Future

By Clint Siegner – Re-Blogged From http://www.Silver-Phoenix500.com

Those wanting a glimpse into the future of our federal government’s finances should have a gander at Illinois. The state recently “resolved” a high-profile battle over its budget. Taxpayers were clubbed with a 32% hike in income taxes in an effort to shore up massive underfunding in public employee pensions, among other deficiencies.

But, predictably, it isn’t working. People are leaving the state in droves.

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Unsound Money Is Crucifying Pensions

By Alasdair Macleod – Re-Blogged From http://www.Silver-Phoenix500.com

Deficits are mounting in pension obligations. It is a global problem over which pension trustees are helpless. It is also a problem that’s brushed under the carpet, with prospective and current pensioners generally unaware of the threat to their retirement. Investors in companies with defined benefit schemes, schemes which promise an inflation-adjusted entitlement based on final salary, generally ignore this important issue, as do most stock market analysts. Analysts know the deficits are there, but so long as they are buried in the notes to the accounts and not actually represented in-your-face on balance sheets, the assumption appears to be they can ignore them.

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Central Banks Start Major Change

By Mark O’Byrne – Re-Blogged From http://www.Gold-Eagle.com

– Bank of England raised interest rates for the first time in ten years
– President Trump announces Jerome Powell as his choice to lead the U.S. Federal Reserve
– Most investors outside the US Dollar and Euro see gold prices climb after busy week of central bank news
– Inflation now at five-year high of 3%
– Inflation, low-interest rate, debt crises and bail-ins still threaten savers and pensioners

This week has been a significant week for central banks. The Bank of England raised interest rates for the first time in ten years, the Federal Reserve indicated that a December rate hike may happen and President Trump named Powell as his choice for leader of the Federal Reserve.

Gold reacted positively to Trump’s announcement as markets see little change ahead with a Powell-led Federal Reserve.

The interest rate decision is arguably the most interesting at present. Announcements on both sides of the pond suggest that the age of easy money is coming to an end, albeit slowly.

Since the financial crisis central banks have flooded markets with easy money, kept interest rates near zero and bought trillions of dollars in government and corporate bonds. Now most central banks (excluding Japan) have indicated that the party must soon stop.

The problem is, no one is sure how economies will cope when the moreish juice of central bank assistance will be taken away. None of the financial centres have managed to meet inflation targets which they were all so vocal about. Instead, they are suddenly aware that the encouraged financial excesses of the last ten years may well lead to another crash and something must be done to curb their enthusiasm.

Adding to the uncertainty is the issue that three of the world’s four most important central bank chiefs are nearing the end of their terms and may be well replaced. The jump in the gold price and fall in the dollar is just the first indication with how markets feel about such changes.

But is the age of easy money really coming to an end and are interest rate hikes a sign that central bankers have confidence in the economic recovery? Yesterday’s drop in the pound suggests markets aren’t buying it. They weren’t helped by Mark Carney’s dovish comments regarding the UK’s post-Brexit future.

All in all, anyone hoping they might finally earn some interest on their savings, see a slowdown in the devaluation of their wealth or a reduction in the counterparty risk their cash is exposed to, needs to think again. The UK along with the rest of the world remain very vulnerable and will take investors along for the ride.

A Whole New World With Little Hope

Here in the UK a whole generation of homeowners are waking up to a world where interest rate rises can really happen. There are 8 million homeowners, many of whom will have bought in the last ten years and as a result have never experienced a rate rise in their adult lives.

Bloomberg explained how much the world has changed since the Bank of England last increased interest rates:

The world was drastically different the last time the Bank of England hiked interest rates: the iPhone was less than a week old; Gordon Brown was Prime Minister; the average price of a home in London was £261,000 (it’s now  £470,632).

In interest rate terms how much has changed? Very little. The rise merely cancels out the cut that happened following the Brexit referendum.

It’s likely the hike in interest rate could do more harm than good. Previously savers, pensioners and investors suffered as a result of (arguably) negative real interest rates. Now the rate hike makes little difference to their current situation but propels debtors into further issues.

Those on variable mortgages will be facing rate hikes whilst the millions who have personal, unsecured loans will also be facing increased payments. All to contend with against a backdrop of rising inflation, pressure on wages and a slowing economy.

No Change, Nothing To See Here

A decade of damage by easy monetary policy has caused unforeseen damage which cannot be undone by a few quarter-percent hikes over the next two years.

Low rates have created problems for savers and pensioners around the globe. Pension funds are in trouble with rising levels of unfunded liabilities. Consider the 2016 PWC report that found pension fund deficits have expanded by £100bn over the past year to total £700bn. This gives a “debt” of £26,000 per UK household.

Debt levels continue to rise from unsustainable to even more unsustainable. Here in the UK we are facing a £1 trillion crisis as pension deficits and consumer loans snowball out of control.

And lest we forget how low rates have distorted financial markets and created asset price bubbles in shares, property and investments across markets.

Easy monetary policy came at a time when governments should have been implementing policies that dealt with an ageing population. Instead they have increased inflation and discouraged conservative money management –  creating incentives in totally the wrong direction.

The rise in inflation to 3% today also means that even those who have opted to keep cash in the bank have seen its value slowly eaten away. Those who chose to embrace low rates are inevitably in a debt-hole that is increasingly difficult to climb out from.

No Faith In Post-Brexit Britain

Interest rate hikes are ideally supposed to be an indicator that a central bank has faith in the economy’s recovery but the Bank of England statement yesterday suggested this wasn’t the case for post-Brexit Britain.

Carney expressed his concerns over the strength of the UK’s economic recovery heading into and following our departure from the EU. He is also likely to be considering the risks the weak exchange rate poses to Britain’s ability to finance its current account deficit.

So bleak is Carney et al’s outlook that they are only considering a two further rate rises by the end of 2020. Even this might not be guaranteed. Consider the state of the global financial system and where that could drag the UK.  Last time the BoE increased rates, it was soon forced to cut  them by 4.75 percentage points in the following 18 months as the global financial crisis dragged the UK into a recession.

Little Hope For Savers

The EU has already set the precedent of official negative interest rates, but in truth inflation combined with low rates does mean we are already in negative territory. Now, a 0.25% interest rate hike to 0.5% won’t do much to contend with the forces of excess money supply and falling value of the pound.

Add to this the ongoing threat of bail-ins, courtesy of the EU government. Even if interest rates were hiked up to levels of the early 1990s then savers’ cash is still not safe.

Investors need to be prepared for the ongoing threats that exist in our banking system whether thanks to Brexit or our own governments.

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Pensions And Debt Time Bomb

By Mark O’Byrne – Re-Blogged From http://www.Gold-Eagle.com

£1 trillion crisis looms as pensions deficit and consumer loans snowball out of control
– UK pensions deficit soared by £100B to £710B, last month
– £200B unsecured consumer credit “time bomb” warn FCA
– 8.3 million people in UK with debt problems
– 2.2 million people in UK are in financial distress
– ‘President Trump land’ there is a savings gap of $70 trillion
– Global problem as pensions gap of developed countries growing by $28B per day

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General Electric: Another Impending Pension Crisis is Here

By Joe Scudder – Re-Blogged From Eagle Rising

In addition to public unions facing a pension crisis, General Electric may soon be begging for a bailout.

Naturally, the news that reports on the disaster that is heading for General Electric also tries to downplay the news. The company allegedly has years to find a way to solve their pension problem. But financial news always tells the public that they have a long time before it is “time to panic.” But that is the problem: If you wait that long to panic, it is too late.

Bloomberg reports, “The $31 Billion Hole in GE’s Balance Sheet That Keeps Growing.

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Welcome To The Third World, Part 24: Illinois About To Default?

By John Rubino – Re-Blogged From Dollar Collapse

The train wreck that is the state of Illinois has generated a lot of questions lately, including “Will its government ever pass a budget?”, “Will it ever pay its overdue bills?”, and “Is it possible for a state to go bankrupt?”

Looks like we’re about to get some answers to these questions, along with one more: “What happens to the financial markets when people finally realize that Illinois is far from the only impending bankruptcy?”

Today’s Wall Street Journal has an anecdote-filled article illustrating what certainly looks like a case of terminal financial mismanagement (How Bad Is the Crisis in Illinois? It Has $14.6 Billion in Unpaid Bills):

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Falling Rocks In The Promised Land

By Gary Christenson – Re-Blogged From http://www.Gold-Eagle.com

Yes, traumatic market events (falling rocks) occur, even though markets are “managed,” statistics are manipulated, and politicians pretend to care about something besides their next election.

From John P. Hussman, Ph.D. Fair Value and Bubbles: 2017 Edition

“Unfortunately, investors seem to have concluded that central bank easing is omnipotent, despite the fact that the Fed eased persistently and aggressively, to no effect, through the entire course of 2000-2002 and 2007-2009 market collapses.”

From Bill Gross: Bill Gross Says Market Risk is Highest Since Pre-2008 Crisis

“Central bank policies for low-and-negative-interest rates are artificially driving up asset prices while creating little growth in the real economy and punishing individual savers, banks, and insurance companies, according to Gross.”

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How Gold Can Rescue Pensions

By Alasdair Macleod – Re-Blogged From http://www.Gold-Eagle.com

The World Economic Forum, in conjunction with Mercers (the actuaries) recently estimated that the combined pension deficit currently stands at $66.9tr for eight countries, rising to $427.8tr in 2050. The eight countries are Australia, Canada, China, India, Japan, Netherlands, UK and US. Of the 2016 figure, $50.5tr is unfunded government and public employee pension promises. Yes, we are now talking in hundreds of trillions. Other welfare-providing states missing from the list have deficits that are additional to these estimates.

$66.9tr is roughly 1.5 times the GDP of the eight countries combined, and $427.8tr is nearly ten times. Furthermore, if we take out the non-productive government element, the figures relative to the private sector tax-paying base are closer to twice productive GDP today, and thirteen times greater in 2050. That 2050 deficit assumes a 5% compound annual growth rate. This is a linear projection, but the deterioration in finances for unfunded government pensions may turn out to be exponential, in line with the accelerated increase in the broad money quantity since the great financial crisis.

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Government Insolvency Gets Harder to Ignore

By Clint Siegner – Re-Blogged From https://www.moneymetals.com

Several U.S. states and the federal government are hopelessly insolvent. It’s something many bullion investors have known for years.

The real question is when this reality will pierce the mainstream illusion that deficits, and the crushing pile of debt which accompany them, don’t matter. That moment drew closer last week when ratings agencies downgraded Illinois state bonds to one notch above “junk” status.

S&P and Moody’s dropped the state’s creditworthiness rating to BB+/Baa3 – the lowest ever for a U.S. state. Illinois currently has $14.5 billion in unpaid bills and a government deadlocked over forming a new budget.

That stack of bills represents a whopping 40% of the state’s operating budget. At the heart of Illinois’ problems are massive union pension obligations for retired government bureaucrats.

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Pension Crisis In US And Globally Is Unavoidable

By Lance Roberts – Re-Blogged From http://www.Silver-Phoenix500.com

There is a really big crisis coming.

Think about it this way. After 8 years and a 230% stock market advance the pension funds of Dallas, Chicago, and Houston are in severe trouble.

But it isn’t just these municipalities that are in trouble, but also most of the public and private pensions that still operate in the country today.

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Welcome To The Third World, Part 21: This Pension Thing Is About To Get Real

By John Rubino – Re-Blogged From Dollar Collapse

“The problem with police officers and firefighters isn’t a public-sector problem; it isn’t a problem with government; it’s a problem with the entire society. It’s what happened on Wall Street in the run-up to the subprime crisis. It’s a problem of people taking what they can, just because they can, without regard to the larger social consequences. It’s not just a coincidence that the debts of cities and states spun out of control at the same time as the debts of individual Americans. Alone in a dark room with a pile of money, Americans knew exactly what they wanted to do, from the top of the society to the bottom. They’d been conditioned to grab as much as they could, without thinking about the long-term consequences.”

Michael Lewis, Boomerang: Travels in the New Third World

Though it may not be instantly clear, in the above quote Michael Lewis is talking about public sector pensions and how over the course of several decades, mayors and governors across the US have colluded with police, firefighter and teachers unions to promise outrageously-generous benefits and then failed to put aside enough money to pay for them.

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Are You “Living In a Death Spiral”? These 6 States Will Collapse During the Next Recession

By Mac Slavo – Re-Blogged From http://freedomoutpost.com

Being on the hook is not going to be pretty when interest rates are raised back up, and debts come due. At a personal level, it will mean more stress and juggling to make ends meet. For the larger economy, it will mean cities and states unable to meet obligations or balance their budgets – ending in bankruptcy, and bailouts. Meanwhile, millions of people are relying on that money to keep coming in order to survive. Something is going to go very wrong.

Relying upon government to function and send you money is not a secure plan.

The mathematics are terrifying and dismal, and so is being caught up in these collapsing states.

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It’s Not Just Deutsche Bank. The Entire Financial Sector Is Sick

By John Rubino – Re-Blogged From http://www.DollarCollapse.com

These are great times for financial assets — and by implication for finance companies that make and sell them, right?

Alas, no! Just the opposite. Each part of the FIRE (Finance, Insurance, Real Estate) economy is imploding as “modern” finance hits the wall.

Interest rates, for instance, have fallen for three decades…

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The War On Cash Is Good For Gold

By Frank Holmes – Re-Blogged From http://www.Gold-Eagle.com

The consumer price index (CPI), a measure of inflation, came in hotter than expected Friday, registering 2.3 percent year-over-year in August on expectations of 2.0 percent. With the five-year Treasury yielding 1.19 percent, government bond investors are now receiving a negative real rate of return (because 2.3 minus 1.19 comes out to negative 1.11 percent).

This is highly constructive for the price of gold. As I’ve discussed many times before, the yellow metal has benefited when real rates have fallen below zero. This was the case in September 2011 when gold hit its all-time high of $1,900 per ounce. And last year around this time, the opposite was true—positive real rates were a drag on gold.

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Welcome To The Third World, Part 18: Pensions Overwhelm Public Services

By John Rubino – Re-Blogged From Dollar Collapse

Citizens of the developed world are watching Venezuela’s descent into financial and political chaos mostly, it seems, with amused detachment, safe in the assumption that we’ll never end up hunting our cats and dogs for food.

But – since Europe, Japan and the US are making essentially the same mistakes as Venezuela’s past and present governments – we might want to question that certainty. Consider what’s happening in the third biggest US city:

Chicago’s detective force dwindles as murder rate soars

(Reuters) – Every two weeks, Cynthia Lewis contacts the detectives investigating the homicide of her brother on Chicago’s south side almost a year ago.

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We’re All Hedge Funds Now

By John Rubino – Re-Blogged From Dollar Collapse

The most recent batch of economic stats was even more disappointing than usual, resulting in a cliff dive for the Atlanta Fed’s GDPNow US growth report:

It’s the same around the world: With European, Japanese and Chinese numbers coming in below (already lowered) expectations. The implication? Interest rates in major countries will either remain extremely low or fall further from here. With $11 trillion of government bonds already trading with negative yields, that’s a historically unprecedented prospect.

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The Pensions Mess

By Alasdair Macleod – Re-Blogged From GoldMoney

The British have recently seen two unpleasant examples of the cost of pension fund deficits. A deficit at British Steel, estimated to be about £485m, was followed by a deficit at British Home Stores of £571m. In both cases, pension fund deficits have scuppered corporate rescue plans, because understandably no buyer will take on these liabilities.

These two cases are the small tips of a very large iceberg, and reflect problems not just in Britain, but anywhere where pension schemes exist. They have been brewing for some considerable time, but have escalated as a direct consequence of central banking’s monetary policies. They are a crisis whose cause is concealed not only from the pensioners, but from trustees and investment managers as well.

This article lays out the problem and its scale, so far as it is known, and notes that a pension fund that has a holding in gold is a very rare animal. Indeed, one of the best known examples, the Teacher Retirement System of Texas, holds less than 1% of its $130bn assets in gold.

A short recap of the industry’s post-war development will give the pension issue its context, before commenting on the role gold can play. Pensions have existed for some time, but they really took off after the Second World War, driven by tax policy. Corporations were encouraged to set up pension funds for their workers, with employer and employee contributions being tax deductible.

From a government’s point of view, the tax relief granted cost little in terms of current expenditure, because it replaced the tax income forgone from corporations and employees, with deficit funding through bond markets. Furthermore, the demand for government bonds from accumulating pensions meant that there would always be demand for government debt, and interest paid would be less than otherwise. While governments have generally increased taxes on savings, pension schemes have been encouraged. They have become a material component in the financial system, and the only savings channel encouraged by governments.

In setting up a pension fund, the advising actuaries would have taken all variables into account. Of the many variables, the principal ones are the period of employment required for a full pension, the life expectancies of the scheme members, and the expected return on investments.

We are all aware that pensioners live longer, and that life expectancies have generally been underestimated. This has certainly been a problem. Some countries have responded by raising the retirement age. It is also obvious that rising or falling bond and stock markets have a direct impact on portfolio valuations. However, investment returns in the early days were relatively simple to calculate: they would be the average gross yield to redemption of the bonds that comprised the whole fund. These were mostly government and municipal bonds, and therefore unlikely to default. Bond prices didn’t matter, because they were nearly always held to final redemption at par.

That was fine, until portfolio managers began to explore other investment possibilities in the 1960s. Portfolio allocations started to migrate from low-risk government debt and high-quality corporate bonds, into blue-chip equities. This was the era of the nifty-fifty, and diversification was rewarded with enhanced capital returns over the redemption yield on government bonds. The seventies were somewhat different, with portfolio losses mounting on equities in the savage 1972-74 bear market, but compensation was found in the compounding effect of higher bond yields, which still comprised the dominant portfolio allocation. And we still haven’t mentioned on the most significant factor.

Increasing bond yields over the seventies decade benefited pensions because they allowed actuaries to sign off on lower amounts of capital required to cover pension obligations. This is because the capital required to fund a given income stream is lower when interest and dividends accrue at a high rate of interest, compared with when it accrues a lower rate. For example, an annual commitment to pay pensioners $100m from a portfolio yielding 10% requires it to have a minimum invested value of $1,000m. But a portfolio yielding only 5% has to be worth at least $2,000m to cover the same payment obligation. This is why the assessment of future returns is the most volatile component, leading to unexpected surpluses and deficits as reality unfolds.

Obviously, pension funds which are invested in high quality bonds produce a reasonably certain return, because they are held to maturity, so gross redemption yields are what matter. Equities used to be valued on dividend payments, originally yielding more than government bonds, reflecting their credit risk. That changed in the late 1950s, when portfolio managers began to take a different view, attracted by the potential that equities offered for capital gain. And over time, the potential for returns on equity investments even came to be defined as total returns, de-emphasising the dividend element.

Consequently, actuaries were progressively forced to move from the certain world of gross redemption yields into the uncertain world of guessing future returns on equities. By the 1990s many pension funds, faced with declining bond yields, were increasing their allocations in equities, property and even alternative investments such as art, to the point where bonds were often a minor component of pension portfolios. Inherently speculative capital gains on investments were generating valuation surpluses large enough to allow companies to take contribution holidays.

The outperformance of equities drove the shift from bonds to equities. This is illustrated in the chart below, which clearly shows why over the long term, allocations in favour of bonds have decreased, while allocations in favour of equities have increased.

However, the 2000-02 bear market created the first significant set of difficulties for pension funds. Not only did equity markets roughly halve, but bond yields continued their decline as well, when the Fed lowered the Fed funds rate from 6 ½% in December 2000 to only 1% eighteen months later. This created a double problem for the pension fund industry, because the sharp decline in equity markets was accompanied by a record low in interest rates. Unlike the seventies, falling equities were not compensated by rising bond yields.

Faced with triggering a wave of insolvencies of large labour-intensive businesses, pension actuaries in the US came under considerable pressure not to show large valuation deficits. The solution was to endorse incautious long-term estimates of total returns in equities. This at least got corporate America off the hook, and actuarial practice elsewhere followed this example. Fortunately, the stock market performed well, doubling between September 2002 and October 2007.

The Lehman crisis that followed hit the pensions industry hard a second time. In the fifteen months to February 2009 the S&P500 Index more than halved, as did the yield on the long bond. Following this sharp sell-off, valuation problems were partially covered by a stock market recovery, and there was the prospect of higher bond yields when monetary stimulus normalised economic activity. The latter never materialised, and the prop of rising equity markets, after an impressive run, now appears to be stalling. The big problem now, the elephant in the room, is realistic assessments of total return on the amount of capital required to pay existing and future pensioners.

In summary, since the dot-com bubble, we have seen a ratchet effect of declining bond yields, a doubling and then halving of equity markets, leading to alternate periods of deficit reductions followed by deficit increases. This problem has been totally ignored by central banks when setting monetary policy. You could describe the current situation as one of a massive wealth transfer from pension funds to debtors, storing up yet another savings crisis. The idea that monetary policy assists and encourages businesses to grow, ignores the detrimental off-balance sheet effects on the pension liabilities that the same companies now face.

The result is pension fund deficits today stand at record levels, even after a doubling of equity markets over the last five years. A Financial Times article (10 April) reported the deficit on US public pensions at the end of 2015 was $3.4 trillion, and in the UK, the aggregate deficit of some 5,000 pension schemes is estimated at £805bn (FT 27 May). Bear in mind that these numbers are based on total return estimates that are likely to turn out to be far too optimistic, because of the valuation effect described in this article.

Goodness knows how bad it must be for pension funds in countries where negative interest rates have been imposed. The cost in Japan will be reflected in $1.2 trillion of pension assets, and in the Eurozone a further $2.33 trillion. Of particular concern must be the liabilities faced by the banks in these regions, bringing in a direct systemic element into the equation.

Can gold help?

We can see that pension funds have an enormous and accumulating problem of capital shortfalls, which through over-optimistic assessments of future total returns are likely to be understated. The cost will be swallowed by pensioners in all the advanced nations, who have been promised a certain income in their retirement. It amounts to the impoverishment of the elderly, and the prospective insolvency of companies unable to cover their pension deficits. The question we now need to ask ourselves is whether or not an allocation of gold and related investments can help ameliorate the situation.

Essentially, we are now moving our analysis from considering nominal returns to real returns adjusted for price inflation. At the moment, roughly a third of all sovereign debt carries negative interest rates, but adjusted by consumer price indices, this increases to almost half. Furthermore, if we take into account the simple fact that standardised CPI estimates understate true price inflation, negative real yields probably apply to over three quarters of all sovereign debt.

The only salvation for pension funds is for global equities to continue to rise at significant rates, yet this seems unlikely given that equities on an historical basis are already extremely expensive. The Grim Reaper is knocking more insistently on the pension fund door.

In the medium to long term, gold has a track record of enhancing investment returns. The reason is very basic: the economic costs of production tend to be considerably more stable measured in gold than in fiat currencies. Given monetary policies are explicitly designed to reduce the purchasing power fiat currencies over time, the price of gold measured in these depreciating currencies is set to rise. With bonds reflecting negative real yields and stock markets wildly overvalued, gold, along with other tangible non-depreciating assets, is therefore the only game in town.

The explanation why gold performs well in deflation is equally simple. With falling prices, the purchasing power of gold tends to rise. Whether or not this is reflected to the same extent in a fiat currency is mainly a function of the rate of monetary expansion in the currency relative to the expansion of the quantity of gold available for monetary use. No prizes for guessing which can be expected to expand fastest.

Therefore, gold has a place in portfolios irrespective of inflationary or deflationary expectations. There is, however, a problem. Global pension fund assets are estimated to have been valued collectively at over $26 trillion at the end of 2014, and a one per cent increase in allocation into physical gold is the equivalent of 64,000 tonnes at today’s prices, about 40% the estimated above-ground stocks. Investing in gold mines is similarly constrained.

For an investment in gold, a balanced pension fund portfolio would have to consider an allocation closer to 10%, which on an industry-wide basis is impossible at anything like current prices. Furthermore, the average investment manager has difficulty categorising gold as an investment, unsure if it is a commodity, money, or a hedge against future uncertainty. Ironically, the oldest asset class is now being described as the newest asset class by the few managers showing an interest in gold. There is a considerable educational challenge involved.

Nothing educates more rapidly than experience. If bond yields remain low, and equity markets spend some time just consolidating the rises of the last five years by moving sideways, pension fund deficits will continue to increase to new record levels of deficits. That is probably best-case. Anything else is likely to accelerate the crisis, encouraging investment demand for gold, particularly if, as has been the case so far this year, it continues to outperform both equities and bonds.

The best solution for any pension fund will be to get in early, ahead of its peers.

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The Great Illinois Gold Rush!

By Gary Christenson – Re-Blogged From http://www.Gold-Eagle.com

There is no gold rush in Illinois.  The important question is, “Why Not?”

Per Mike Shedlock (Mish) here and here:

  • “Illinois is in serious financial trouble.”
  • “Illinois has no current budget.”
  • “The reality is Illinois is flat-out broke.”

The State Comptroller estimates that the backlog of unpaid bills will exceed $10 Billion by December.  Worse, “In January [2015], Illinois’ total cumulative liability was $159 Billion.”

“Pay-Later Budgeting” has not worked.  “… the state of Illinois has run deficits in every fiscal year since 2001.”  The state borrowed, sold assets, underfunded retirement plans, borrowed even more money to fund retirement plans and yet pretended all was well.

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